Nov. 16 (NBD) -- Shanghai Pharmaceuticals Holding Co., Ltd. (Shanghai Pharma) announced Wednesday that it is buying the U.S.-based Cardinal Health's China business for around 557 million U.S. dollars, in order to expand its distribution network, accelerate its presence nationwide, and speed up its innovation and transformation. 

Shanghai Pharma to expand presence nationwide

Shanghai Pharma said in the statement that it will buy the distribution business of Cardinal Health in China for a base payment of 1.2 billion U.S. dollars, yet the final purchasing price is estimated to stand at approximately 557 million U.S. dollars, after taking into consideration the estimated adjustments related to working capital and shareholder loans.

The Shanghai-based company said to NBD on Wednesday that it eyes Cardinal Health China's direct-to-pharmacy (DTP) distribution scheme, imported drugs and its wide coverage. The company also revealed the deal goes in line with the "two-invoice" drug procurement system announced by eight Chinese ministries on a trial basis in January.

Under the system, at most two invoices can be issued throughout the distribution chain, with one from the drug manufacturer and another from the drug distributor to the end hospital. Drug manufacturers with complex, multilayer distribution chains will likely be required to revamp their distribution models to comply with this change.

Zhou Jun, chairman of Shanghai Pharma, noted that against the background of the ongoing reform in China's medical and pharmaceutical industry, this deal will further enhance the company's leading position in drug distribution and promote its transformation and upgrading towards modern healthcare services.

Cardinal Health China is the 8th largest drug distributor in China, operating 14 direct sales units and 17 distribution centers that cover 322 cities and 11,000 medical institutions, Shanghai Pharma said in a statement. It generated 25.5 billion yuan (3.8 billion U.S. dollars) in revenue for the last financial year ended June 30, compared with 22.6 billion yuan (3.4 billion U.S. dollars) a year earlier.

According to Shanghai Pharma, the deal is yet to be approved by the Ministry of Commerce.

Drug distribution enters the integration period

Shanghai Pharma's board secretary Liu Dawei told NBD that the company wants to complete its nationwide network construction and innovative business transformation. After taking in Cardinal Health's China business, Shanghai Pharma get the access into Tianjin, Chongqing and Guizhou, where the company hasn't built a presence.

Li Yongzhong, the executive director of Shanghai Pharma, said that the company aims to expand its distribution network to cover all provinces, municipalities, and autonomous regions. Cardinal Health China leads in drug distribution with its DTP scheme, which coordinates with Shanghai Pharma's focus on distribution of prescription drugs.

It is noticed that China's drug distribution industry has a low concentration rate, hence low efficiency. As of the end of 2015, there were 13,500 distribution enterprises, with the top 3 accounting for 33.5 percent of the entire market share, whereas in the U.S., the leading three distribution companies take up over 90 percent of total market share. China's pharmaceutical industry is expected to enter the integration era, with the implementation of the "two-invoice" procurement system.

Liu Dawei echoed the idea, saying to NBD that with the launch of the "two-invoice" procurement system, the government encourages the business concentration in this industry. The deal between Shanghai Pharma and Cardinal Health China is the first merger between two of the top 10 players in the medical distribution area in China, he added.

Email: gaohan@nbd.com.cn