SINOPHARM Group Co, China's biggest drugs distributor, is planning its largest bond sale to repay more-expensive loans and fund expansion in a health-care market forecast to triple this decade.

The issue of as much as 8 billion yuan (US$1.3 billion) of debt maturing in up to 10 years follows an 80 basis points drop in the Shanghai-based company's 2014 notes this year to 4.13 percent, according to Chinabond.

While that's less than the central bank's 6 percent benchmark rate for one-year loans, it's more than the 2.22 percent average for US pharmaceutical bonds, according to a Bank of America Merill Lynch index.

Health-care spending in China will almost triple to US$1 trillion a year by 2020, driven by an aging population and government efforts to broaden insurance coverage, according to a McKinsey & Co report.

The government has pushed Sinopharm, Shanghai Pharmaceuticals Holding Co and Jointown Pharmaceutical Group to expand by buying smaller competitors, part of steps designed to reduce the price of drugs for China's 1.36 billion people.

Financing costs

"Sinopharm is benefiting as an industry leader in China's health-care industry and has one of the best credit ratings, so it's taking advantage of this to issue bonds and help lower its financing costs," said Gideon Lo, an analyst with Nomura Holdings Inc in Hong Kong. Sinopharm is rated AAA by China's Chengxin International Credit Rating Co, one of the nation's main credit ratings companies.

Sinopharm plans to issue at least 4 billion yuan before the end of 2012, and the remainder within two years, at an interest rate of about 4.5 percent. About 80 percent of proceeds will be used to repay bank loans, and the remainder to replenish cash flow.

"When the bonds are fully issued, we expect to reduce interest expense by more than 100 million yuan," a company statement said.

The drugs distributor posted a 22 percent increase in first-half profit on August 23 to 959 million yuan as broader health insurance coverage and higher subsidies spurred demand. Sales jumped 39 percent to 66.6 billion yuan.

A measure of the company's operating earnings is now 4.23 times its interest expenses, down from 6.1 times a year ago, data compiled by Bloomberg News show. It raised about 4.95 billion yuan after expenses last summer from two tranches of three-year bonds, issuing 2 billion yuan in May 2011 at a 4.89 percent coupon, and 3 billion yuan in August at 5.53 percent, according to its annual report in April.

A rising appetite for higher-yielding debt has spurred a 56 percent surge in corporate bond sales this year to 2.4 trillion yuan, data compiled by Bloomberg News show.

The average yield for AAA corporate debt tracked by Chinabond fell 12 basis points this year to 5.06 percent. The benchmark yield on 10-year government debt fell 2 basis points to 3.40 percent, narrowing the gap between the rates to 167 basis points. The spread was as wide as 236 basis points on October 11, last year.

The yuan fell 0.1 percent to close at 6.3473 per dollar in Shanghai yesterday, according to the China Foreign Exchange Trade System. It rose to 6.3310 earlier, the strongest level since May 23. The People's Bank of China raised the yuan's reference rate by 0.02 percent yesterday to 6.3402 against the greenback.

Delays in payment

The Wuhan-based Jointown, China's third-biggest distributor, received approval to sell as much as 1.6 billion yuan of debt, the company said in an August 21 statement to the Shanghai Stock Exchange. It sold a 700 million yuan one-year bond last month at a 4.23 percent coupon.

Delays in payment by hospitals means drug distributors will need to bolster finances, according to Johnson Sun, a health-care analyst at Guotai Junan Securities HK Ltd. Public hospitals have been ordered to stop marking up the price of drugs to lower costs for patients, with the government making up the difference.

"Sinopharm needs to strengthen its finances as public hospitals are taking longer and longer to pay for drugs," Hong Kong-based Sun said. Hospitals are taking about 100 days to settle bills, while Sinopharm needs to repay manufacturers in 80, he said.

Sinopharm's stock has risen 29 percent in Hong Kong this year, compared with a more than 5 percent gain for the benchmark Hang Seng Index.

"The pharmaceutical industry had a good performance this year, as government policy is less strict and the demand for medicines keeps increasing," said Wu Bin, a Beijing-based analyst at Bocom International Holdings. The demand, he said, mainly comes from the nation's aging society and growth in medical insurance.

Basic medical insurance in China covered 95 percent of citizens at the end of last year, up from 87 percent in 2008, spurring demand for pharmaceutical products.

Favorable government policies, such as the China's 12th Five-Year Plan designating the biomedical sector as a "strategic industry" for the 2011-2015 period, will aid growth, said Franck Le Deu, a Shanghai-based McKinsey partner.

"They want to see local companies emerge and take their rightful place in the market," he said.

Some other domestic health-care companies have tapped international funding. Shanghai Fosun Pharmaceutical (Group) Co received a 300 million yuan loan from the International Finance Corp.

Sinopharm spent 3.28 billion yuan buying majority stakes in or fully acquiring 35 Chinese companies in 2011, mainly smaller distributors and pharmacy chains, according to its 2011 annual report.

The company takes a cut of sales from medicines distributed in 178 cities, including selling directly to 9,993 hospitals and more than 120,000 retailers, clinics and other customers.

"Most of Sinopharm's large acquisitions were completed in the past three years, and for the next two years the company will be concentrating on integration and improving operating cash flow," Nomura's Lo said. The amount spent buying other companies in the first half fell to about a third of the year-earlier period, he said.