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(Bloomberg) -- Shanghai Pharmaceuticals Holding Co. is exploring further acquisitions after it beat out global buyout firms to buy Cardinal Health Inc.’s Chinese distribution business in a $1.2 billion deal. 

The state-owned drugmaker is scouting for purchases of pharmaceutical manufacturing assets overseas, David Liu, head of mergers and acquisitions at Shanghai Pharma, said in an interview Wednesday. Shanghai Pharma is interested in deals related to specialty drugs, including treatments for cancer and cardiovascular conditions, as well as branded generics, Liu said. 

Shanghai Pharma said Wednesday it agreed to purchase Cardinal Health’s pharmaceutical and medical products distribution business in China. With the deal, Shanghai Pharma said it will become one of the largest importers of foreign drugs in China, as demand for medicines surges with an aging population where chronic diseases such as cancer and diabetes are commonplace. 

“Shanghai Pharma has been proactive in building itself to be a global health-care provider,” Liu said by phone. “For an asset like this to be available is very rare in the current market. It was a rare opportunity.”

The company rose 1.3 percent in Shanghai at 10:55 a.m. Thursday to 25.02 yuan, the highest intraday level in more than a week.

Germany, Switzerland

Shanghai Pharma is looking for further acquisitions in the U.S., as well as some European countries including Germany and Switzerland, he said. The company would like to sell Shanghai Pharma products overseas and also wants to bring in more foreign pharmaceutical products to sell in China, according to Liu.

“After the 19th Party Congress, President Xi has put in place a lot of attention on health care. There’s a lot of support from the central government and Shanghai government,” he said. “This can be an advantage against private enterprises.”

Shanghai Pharma said Wednesday it expects its final cash outlay for the Cardinal China deal, excluding any debt assumption, will be about $557 million. That price values the target at about 28 times its net income for the year ended June, according to a Hong Kong exchange filing. Shanghai Pharma also plans to create a new direct-to-pharmacy chain, combining its own outlets with Cardinal China’s, to distribute imported drugs. 

In addition, Shanghai Pharma and Cardinal Health have reached a strategic cooperation agreement to explore business development in the U.S., as well as collaborate in developing the global market for medical equipment and service innovation, according to the statement.

Fragmented System

The Cardinal China purchase comes as distributors prepare for a government rule change that looks to streamline the highly fragmented supply chain and cut the price of medicines in the country’s largely state-run health-care system. Shanghai Pharma beat out private equity firms FountainVest Partners Co., Warburg Pincus and PAG Asia Capital for the target, people with knowledge of the matter told Bloomberg earlier.

Cardinal’s China business is the 8th largest pharmaceutical distributor in China, with a network covering 322 cities and 11,000 medical institutions, the filing shows. Cardinal China also controls 14 direct sale companies, 17 distribution and operation centers and 30 direct-to-pharmacy outlets.

The sale does not include Cardinal Health’s remaining businesses in China, such as its medical sourcing team and Cordis business, according to a separate Cardinal Health statement.

(Updates with share movement in fifth paragraph.)

To contact Bloomberg News staff for this story: Jonathan Browning in Hong Kong at jbrowning9@bloomberg.net, Rachel Chang in Shanghai at wchang98@bloomberg.net.

To contact the editors responsible for this story: Ben Scent at bscent@bloomberg.net, K. Oanh Ha at oha3@bloomberg.net, Timothy Sifert

©2017 Bloomberg L.P.

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