(Reuters) - State-owned Shanghai Pharmaceuticals Holding Co (>> Shanghai Pharmaceuticals Holding Co Ltd) has agreed to acquire Cardinal Health Inc's (>> Cardinal Health Inc) China drug distribution business for $557 million (423.93 million pounds), as it seeks to expand its distribution and retail network nationwide.

The acquisition will also help Shanghai Pharma, China's third largest drug distributor, become a leading importer of foreign medicine into the world's second-largest drug market.

The deal, which includes shareholder loans, gives Cardinal's business in mainland China and Hong Kong an enterprise value of $1.2 billion, equivalent to about 15 times its adjusted earnings before interest, taxes, depreciation and amortisation (EBITDA) for the year ended June, Shanghai Pharma said in a statement.

Cardinal Health put its China business up for sale in July over worries that the country's upcoming drug distribution reform could slow its growth.

The sale drew keen interest from state-backed Chinese pharmaceuticals companies and private equity firms such as Warburg Pincus and Hong Kong-based FountainVest, sources with knowledge of the matter have said.

Beijing introduced a so-called "two-invoice" procurement system in January on a trial basis as part of an overhaul of the country's fragmented healthcare sector aimed at streamling the distribution chain.

Under the new system, expected to be fully implemented in 2018, drug manufacturers can only work with a single distributor that directly supplies products to healthcare facilities such as hospitals.

Morgan Stanley and China Merchants Securities advised Shanghai Pharma on the deal, which is subject to an anti-monopoly review by China's Ministry of Commerce.

(Reporting by Julie Zhu; Editing by Edwina Gibbs)

By Julie Zhu