Shanghai Pharma swallows Cardinal Health’s China unit

The state-owned Chinese company enters new markets while US firm Cardinal Health retreats as new government rules spur consolidation.

China's Shanghai Pharmaceuticals Holding has agreed to buy the Chinese business of NYSE-listed Cardinal Health for $557 million in cash, potentially making it the largest distributor of imported drugs in the country.

Cardinal Health was the eighth largest drug distributor in China in 2016 across 13 cities and supplying 11,000 medical institutions. The US firm’s sales in China have grown 12.8% year-on-year in 2017 but its earnings slipped 13.2%.

The acquisition boosts Shanghai Pharma’s market share in pharma distribution by about 1%, based on data from Ministry of Commerce. The deal also bolsters its geographical network and broadens its product mix.

Consolidating Cardinal China could boost Shanghai Pharma’s sales base by 15% to 20%, and earnings by less than 5% according to analysts.

"Amid the national healthcare reform, the acquisition of Cardinal Health China business will further strengthen our leadership in distribution and retail pharmacy network,” said Zhou Jun, chairman of Shanghai Pharma in a statement on Wednesday.

The Chinese government has issued several new industry policies, in particular, the adoption of a "two invoice system" that is intended to reduce intermediary links, and the "zero price markup" policy that restrictis public hospitals from profiting from drug sales.

In a highly frgmented industry, these policies are driving distributors to upgrade their distribution network coverage, operational efficiency, capital sufficiency and logistic capabilities. By the end of 2015, there were 13,500 distributors in China, with the top 3 boasting a combined market share of 33.5%, according to an Industrial Securities research report dated March 20.

“We recognize that significant scale is required to be a market leader in China and with that in mind we are delighted to announce that Shanghai Pharma has agreed to purchase our distribution business in China,” said George Barrett, chairman and CEO of Cardinal Health.

The acquisition will give Shanghai Pharma access to previously untapped markets such as Tianjin, Chongqing and Guizhou, as well as deeper penetration in core areas such as Shanghai, Beijing and Zhejiang.

In addition, the acquisition will expand the company’s product line to include Cardinal China’s 16,000 drugs and 24,000 non-drug products. 

Shanghai Pharma intends to combine its 40 logistics stores with Cardinal Health’s 30 stores across China.

Top 3 distributors' market share by country Source: Industrial Securities

The acquisition places an enterprise value of $1.2 billion on Cardinal Health. According to Goldman Sachs equity analysts the price implies 28.2 times price to earnings ratio, based on Cardinal Health China’s fiscal year 2017 ended June 30 net profit.

Shanghai Pharma said it had placed a bid for Cardinal Health's China business on July 21 and October 15 in a stock exchange filing.

Morgan Stanley and China Merchants Securities acted as the financial advisers to Shanghai Pharma, and Weil, Gotshal & Manges LLP and Zhonglun Law Firm are the legal counsels. Lazard advised Cardinal Health.


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