China Medical System Holdings Limited ("CMS" or the "Company", SEHK: 867), a leading China-based pharmaceutical services company focusing on the marketing, promotion and sale of prescription drugs, announced today it has entered into a Share Purchase Agreement to acquire 100% of Tianjin Precede Medical Trade Development Co., Ltd ("Tianjin Precede"). Tianjin Precede is a pharmaceutical services company focusing on the marketing, promotion and sales of prescription pharmaceutical products manufactured by domestic pharmaceutical companies in China. This is a significant acquisition that will help the Company achieve synergies in sales model, network coverage, and the selection and range of products.
CMS will pay for the acquisition with a consideration of HK$1,402.5 million, of which HK$341.7 million is to be satisfied in cash and HK$1,060.8 million to be satisfied by the issuance of 130,000,000 Consideration Shares by the Company at an issue price of HK$8.16 per share. The Consideration Shares represent approximately 11.2% of the existing issued share capital of the Company as at the date of this announcement and approximately 10.1% of the enlarged share capital of the Company following the issuance of the Consideration Shares. In addition, the Company will make a payment of RMB122,921,100 to Generous Wealth Limited, a wholly-owned subsidiary of Tianjin Precede, before 20 May 2011. As a result the total consideration of the acquisition is HK$1,548.9 million. Furthermore, the seller guarantees that its 2011 net profit shall not be less than HK$150 million.
Tianjin Precede currently promotes and sells nine main prescription pharmaceutical products manufactured by domestic pharmaceutical companies in the PRC, which include two key products. Yinuoshu (Ambroxol Hydrochloride for Injection) is used for respiratory system diseases, while Shaduolika (Potassium Sodium Dehydroandroan drographolide Succinate for Injection; or "Yanhuning Injection"), is an antiviral drug. According to the 2010 Chinese Pharmaceutical Market Development Blue Book published by SFDA Southern Medical Economic Institute Guangzhou Biaodian Medical Information Co., Ltd., Ambroxol was the top selling respiratory drug in PRC hospitals in 2008 and 2009, with a market share of 28.0% and 27.1% in the respective year. Yanhuning Injection ranked first among all Chinese medicines for the treatment of respiratory illnesses in PRC hospitals in 2008 and 2009, with a market share of 9.7% and 9.5% respectively.
Tianjin Precede's network comprises more than 960 independent third party sales representatives and distributors, covering 30 provinces or autonomous regions in the PRC. Tianjin Precede's nationwide promotion and sales network covers more than 6,600 hospitals in the PRC, half of which are not directly covered by CMS's own promotion network. Tianjin Precede's have an excellent track record of sustained growth. Its revenue grew toRMB300.3 million in 2010 from RMB 169.8 million in 2008, representing a CAGR of 33.0% over the three-year period. Net profit increased to RMB 69.7 million in 2010 from RMB 35.0 million in 2008, representing a three-year CAGR of 41.0%.
Mr. Lam Kong, Chairman, Chief Executive Officer and Executive Director of CMS, said, "CMS focuses on the marketing, promotion and sales of prescription drugs of both overseas and domestic pharmaceutical companies, while Tianjin Precede focuses on domestic pharmaceutical companies in China. The acquisition will complement each other's strengths. We believe it will not only further expand the Group's product portfolio, the synergies will also enhance CMS's overall strength and core competencies. "
The integration of CMS and Tianjin Precede's marketing and promotion models is expected to unleash synergies. CMS adopts a Direct Marketing and Promotion Model through conducting where CMS's marketing and promotion agents conduct one-on-one visits, and through organizing symposiums and sponsoring industry conferences to educate physicians on the characteristics of its pharmaceutical products as a way to generate demand for the products. Based on the current marketing and promotion model, CMS initially focused only on first-tier cities and the largest and most established hospitals due to limited resources. With Tianjin Precede's Agency Marketing and Promotion Model, the Group's national and extensive network will be further enhanced by Tianjin Precede's promotion and sales network. With the acquisition CMS will also be able to expand its business to second- and third-tier cities, which will further increase the market share of CMS given the increased investment as a result of the China's ongoing Healthcare Reform.
On product mix, CMS emphasizes the exclusivity of products to ensure they are not easily imitated, which is a strong competitive advantage of CMS in the market. Tianjin Precedes is well-known to physicians given the existence of competing products in the market and there are strong demands for its products. Following the completion of the acquisition, the mix of CMS's product portfolio will be enhanced and further diversified, making stronger contribution to the Group's total sales. CMS will be able to select the appropriate marketing and promotion model based on the specific characteristics of each product. Through the integration of the two different marketing models, the Group's resource allocation and cost efficiency will be largely enhanced.
The acquisition will unite CMS's knowledge in foreign pharmaceutical companies with Tianjin Precede's expertise in Chinese pharmaceutical products. This integration will not only enrich CMS's product portfolio, it will also enhance the Company's ability to obtain exclusive rights to pharmaceutical products, which will ensure the long term growth of the Group.
Leveraging Tianjin Precede's outstanding track record and sustainable growth, and taking into consideration the company's profit guarantee of generating no less than HK$150 million in net profit in 2011, this acquisition is expected to increase the profitability of CMS. Meanwhile, given Tianjin Precede's cost of sales are lower than CMS's due to its Agency Marketing and Promotion Model, CMS's overall marketing and promotion activities will become more cost-effective upon the completion of the acquisition. Leveraging the strengths of both marketing models, CMS will be able to build a stronger foundation for further merger and strategic cooperation opportunities.
Mr. Lam Kong, concluded, "The combination of Tianjin Precede's strengths and our extensive business network, diversified product portfolio and Chinese pharmaceutical market experience will make for a powerful platform for business growth. Looking forward, we will continue to expand our product portfolio and seek M&A opportunities in order to consolidate our position as a leader in the marketing, promotion and sales services of prescription drugs in China."
