Cardinal Health Makes Major Foray Into China Pharma Distribution Business

| About: Cardinal Health (CAH)

Cardinal Health (NYSE: CAH) made a major foray into the China pharma distribution business by paying $470 to acquire privately held Zuellig Pharma China, a China drug distribution company with annual revenues of over $1 billion. Cardinal said that almost all of the multinational pharmas work with Zuellig in China.

Zuellig China is a subsidiary of Zuellig Pharma, a Hong Kong company that distributes drugs in 17 Asian countries. Known locally as Yong Yu, Zuellig Pharma is the largest importer of drugs in China.

Cardinal Health, a major US-based drug distributor with revenues approaching $100 billion per year, said the acquisition would be mildly accretive to earnings in 2011. Its contributions in 2012 are expected to be “meaningful.” Cardinal positioned the acquisition as an entry into a pharma market that will be the second largest in the world by 2014.

Cardinal will not be the first western company to enter China's drug distribution sector, but it will be the largest. In October, Sanofi-Aventis (NYSE: SNY) paid $521 million to acquire BMP Sunstone (NSDQ: BJGP). The transaction gave Sanofi two recognized consumer healthcare brands in China along with Sunstone’s well-established distribution network.

Zuellig Pharma, the parent company, was first established in the Philipines in the early 1900s by Dr. Frederick Zuellig, a Swiss immigrant. It is now headquartered in Hong Kong.

Zuellig Pharma China was founded in 1993. Its reach extends to 31 of the 34 provincial-level administrative units in China with a direct-to-customer distribution center network and network of wholesalers. Yong Yu's offerings including importation, national supply chain management and direct distribution to 49,000 hospitals and clinics as well as 123,000 pharmacies. It also distributes medical-surgical products.

On its website, Zuellig claims it offers companies complete transparency in its supply chain, including pricing, which can be an issue in China. The headquarters of Zuellig Pharma China are in Shanghai.

Eric Zwisler, president of Yong Yu, will stay on to run the company under Cardinal Health’s guidance along with the entire Yong Yu management team. Zwisler has 23 years of experience in China and 19 years in the pharmaceutical industry.

Cardinal Health said the purchase price includes $60 million in net debt. The remainder was funded with cash, much of which came from Cardinal Health funds held overseas.

China’s pharma distribution system remains highly fragmented, with the top three players responsible for less than 20% of the market as recently as 2005. Sinopharm Group (HK: 01099), the largest player, reported 2009 revenues of $7 billion in 2009. In the US, the top three distributors (Cardinal Health is one of the three) control 90% of the market.

Disclosure: none.