HONG KONG – Looking to position itself as the biggest player in the rapidly growing traditional Chinese medicine (TCM) market in China, the TCM arm of Chinese state-owned Sinopharm Group is planning on a $1.3 billion acquisition of an industry rival and the sale of a biotech subsidiary to channel resources to the development of its TCM business, a move that will help consolidate the market.

Hong Kong-listed China Traditional Chinese Medicine Co. Ltd. (HK:0570) recently announced the acquisition of an 81 percent stake in rival TCM manufacturer Jiangyin Tianjiang Pharmaceutical Co. Ltd. for between ¥7.6 billion (US$1.2 billion) and ¥8.3 billion.

Tianjiang and one of its six member companies, Guangdong Yifang Pharmaceutical Co. Ltd., are two of the six enterprises approved by the CDFA to manufacture concentrated TCM granules.

After the acquisition of Tianjiang, China TCM will be the largest concentrated TCM granules manufacturer in China in terms of revenue.

"In view of the growing prospects of the concentrated TCM granules industry, the directors believe that the acquisition allows the group to gain access to the concentrated TCM granules market in the [People's Republic of China] and take advantage of the expected industry growth," noted the company in its stock market notice.

"China's pharma market is growing at 13 to 14 percent year on year, but the TCM sector is growing even faster than that," Carol Dou, research analyst at investment banking company UOB-Kay Hian, told BioWorld Asia. "TCM is a government-backed business."

"There has been a wave of M&A since the new China Good Manufacturing Practices qualification test at the end of last year," said Dou. "Some small companies that were not able to upgrade their manufacturing facilities are actively seeking M&A opportunities."

According to Chinese information provider Askci Corp.'s 2013-2018 PRC Concentrated TCM Granules Industry Trends and Investment Forecast Report, the market for concentrated TCM granules is expected to grow at 30 percent annually, and the market size is expected to exceed ¥11 billion and ¥19 billion, respectively, in 2016 and 2018.

"We believe that the acquisition allows the company to gain access to this alluring market and take advantage of such industry growth," said Wu Xian, chairman of China TCM. "The acquisition is in line with our development strategy to grow our business, and Tianjiang Pharmaceutical impressively meets our strict criteria of M&A targets."

With that acquisition, China TCM will be able to share resources in management, R&D, raw materials and production, marketing, sales and distribution with Tianjiang. It will also benefit by cross-selling to the two companies' customer bases, expanding management expertise and gaining additional negotiating power with both customers and suppliers.

"In the future, we will continually adopt an M&A strategy, which we believe is the most cost-effective way to further expand our business on a fast track for profit contribution," Wu added.

EXITING BLOOD PRODUCTS MARKET

Just after the billion-dollar acquisition announcement, China TCM said it had made plans to shed its biotech subsidiary Guizhou Zhongtai Biological Technology Co. Ltd.

Zhongtai focuses the R&D, production and sales of plasma-based biopharmaceutical products. It also owns two licensed plasma-collecting companies in Jiangxi Province. The company's products are mainly used in hospitals and inoculation centers in China.

China TCM will sell the 31 percent stake of Zhongtai it owns and exit the blood products market. Another subsidiary of the Sinopharm Group, China National Biotec Group Cp. Ltd., will purchase the shares from China TCM and another shareholder for 80 percent of Zhongtai at the price of ¥360 million.

"As the principal products of the target group are not in line with those of the group which are traditional Chinese medicine and pharmaceutical products, the directors consider it an opportune time to dispose" of Zhongtai stake, "thus allowing the group to dedicate more resources to and focus on the development of traditional Chinese medicine and pharmaceutical products business," noted China TCM.

China TCM operates in the R&D, manufacturing and distribution of TCM products with a focus on respiratory system drugs, nasal preparations, cerebro-cardiovascular drugs, rheumatic diseases and bone injury drugs, and orthopedic drugs. The company is the TCM arm of China's largest health care group under the State-owned Assets Supervision and Administration Commission of the State Council, China National Pharmaceutical Group Corporation (Sinopharm). Sinopharm owns approximately 40 percent of China TCM. The best-known product lines of China TCM are Xianling, Tongjitang. Dezhong and Feng Liao Xing. The company has been granted production approvals for more than 500 specifications of medicine products. Many of those products are listed on the new edition of National Essential Drugs List.

China TCM's stock price rose 10.7 percent to HK$5.17 upon resumption of trading on Jan. 28. It closed at HK$5.17 on Tuesday.