Shanghai Pharmaceuticals buys out Cardinal Health in China to become top distributor of imported drugs
All-cash offer for 100 per cent stake in subsidiary is worth US$557 million
Shanghai Pharmaceuticals Holding, one of China’s biggest pharmaceutical companies, said on Wednesday it had acquired US pharmaceutical company Cardinal Health’s China operations for about US$557 million, a move that will help it become the top distributor of imported drugs by type on the mainland.
The company said the transaction would be conducted through its wholly owned subsidiary Shanghai Pharma Century Global, which will purchase a 100 per cent stake in the wholly owned subsidiary of Cardinal Health in an all-cash offer. The total value of Cardinal is US$1.2 billion. After deducting amounts owed to its original shareholders and debt holders, and other accounting adjustments, the amount Shanghai Pharmaceuticals Holding will pay to fully buyout Cardinal’s China business is US$557 million.
The acquisition will help expand the company’s product line with an increase in the number of drugs and non-drug products.
“The acquisition of Cardinal Health’s China business will further strengthen our leadership in the distribution and retail pharmacy network, and expedite our transformation into a modern global health care provider,” said Zhou Jun, the chairman of Shanghai Pharmaceuticals Holding.
“This will also facilitate the growth of our pharmaceutical manufacturing business, enabling us to play a significant role in the government’s ‘Healthy China’ initiative.”
Shanghai Pharmaceuticals Holding’s company secretary, Liu Dawei, said the acquisition of Dublin, Ohio-based Cardinal Health’s subsidiary will increase its distribution network coverage from 21 to 24 provinces in China.
Shanghai Pharmaceuticals Holding was the third-largest pharmaceutical distributor in China by revenue last year, while Cardinal ranked eighth with 25 billion yuan (US$3.7 billion) in sales.
“We have a three-year plan to expand to all of China’s 28 provinces, through expansion of existing operations, new business and acquisitions,” Liu said.
“In the US, the top 3 pharmaceutical distributors have a combined market share of 90 per cent, but in China, out of a total 13,500 players, the top three together only amass a share of just under 40 per cent. So there is huge opportunity for industry consolidation,” he said. There has not been any consolidation among China’s top 10 players in the past three years, and no merger and acquisition deal exceeding 10 billion yuan, he added.
He said Cardinal was a rare acquisition target as it is the only foreign player among the top 20 in China, and Cardinal’s big presence in China’s imported drugs and medical equipment distribution market complements Shanghai Pharmaceuticals Holding’s predominantly domestic product portfolio.
Liu expects Shanghai Pharmaceuticals Holding’s investment in Cardinal to reap a return in eight to nine years.
With a rapidly ageing population, the Chinese government has issued several new industry policies in an attempt to reform and improve the pharmaceutical industry. For instance, adoption of the “two invoice system” aims to reduce intermediary links, and the “zero price mark-up” policy limits public hospitals from profiting from drug sales.
Such policies have prompted distributors to improve a number of services, including distribution network coverage, operational efficiency, capital sufficiency and logistic capabilities, which have resulted in accelerated sector consolidation and a change of business model.
Shanghai Pharmaceuticals Holding and one of its strongest rivals, Fosun Pharma, which is owned by billionaire Guo Guangchang’s Fosun Group, took part in the bidding process for a stake in US speciality drug maker Arbor Pharmaceuticals in August.
The two companies are behind the most number of acquisitions in China’s health care industry, as the country pushes for Chines companies to invest more in areas such as health care and agriculture and less in overseas property and the entertainment sector.
Shares of Shanghai Pharmaceuticals Holding rose 0.2 per cent to HK$19.26 in morning trade.