UPDATE 2-Bayer buys Dihon to add traditional Chinese medicine
* Declines to give financial terms
* Analyst says deal may be worth 500 mln euros
* Part of Bayer's goal to become No. 1 in over-the-counter market
* Dihon has 123 mln euros in annual sales
FRANKFURT, Feb 27 (Reuters) - Bayer said it would buy privately held Dihon Pharmaceutical Group Co, a maker of traditional herbal Chinese medicines (TCM), as the German drugmaker pushes to become the world's largest non-prescription medicines group.
With China's healthcare spending forecast to nearly triple to $1 trillion by 2020 from $357 billion in 2011, according to consulting firm McKinsey, the country is a magnet for makers of medicines and medical equipment, but many patients remain strongly attached to traditional approaches.
"What's growing the most within Chinese healthcare is traditional medicine. It's a strong part of their culture," said Lilian Montero, a healthcare analyst at Swiss bank Julius Baer.
"Local companies tend to show superior growth in emerging markets. It's a good move from that point of view."
Dihon has about 2,400 employees and generated sales of 123 million euros ($168 million) in 2013, Bayer said on Thursday.
It declined to provide the financial terms of the deal but brokerage M.M. Warburg estimated it was worth about 500 million euros ($680 million).
Even though TCM is winning a following in some urban communities in the West, Bayer said it was too early to say whether Dihon products would be exported to Germany or Europe.
"It's less likely that these products will move to the West," said Julius Baer's Montero. "You would need a lot more medical training and education, otherwise it will stay a niche market like homeopathy."
Dihon's products include dandruff treatments, antifungal creams and medicine against gynaecological conditions such as endometriosis.
The deal, which could help Bayer challenge Johnson & Johnson to the No. 1 spot in the over-the-counter (OTC) market, underscores its push into herbal medicine after it bought smaller German supplier Steigerwald last year.
The fragmented OTC market is gearing up for more consolidation, with Merck & Co Inc's consumer healthcare business drawing interest from Bayer and Novartis .
China is of particular focus for deal-hungry international healthcare firms. Pharmacy chain Alliance Boots plans to take a 12 percent stake in distributor Nanjing Pharmaceutical Co Ltd , while Medtronic Inc purchased China Kanghui Holdings in 2012.
But doing business in the world's most populous country is not without risk. China's regulators have been investigating several foreign and domestic drug companies on suspicion of bribery, with the most high-profile investigation involving Britain's GlaxoSmithKline.
The country's consumer health and wellness market is expect to hit almost $70 billion by 2020 as increasing numbers of consumers turn to health supplements and OTC health treatments, according to a recent report from Boston Consulting Group.
The OTC market alone was worth $18 billion and is estimated to grow at a rate of around 8 percent per year, the report said.
The Dihon deal is to close in the second half of 2014, Bayer said.