Beijing Med-Pharm JV With Alliance Boots Should Add Further Upside

Jan.29.07 | About: BMP Sunstone (BJGP)

Beijing Med-Pharm (NASDAQ: BJGP) and Alliance Boots Plc [AB.LSE] formed a joint venture, Alliance BMP Limited, to acquire 50% of Guangzhou Pharmaceutical Corporation. Details:

* Alliance Boots is an international pharmacy-led health and beauty group that has a wholesale and distribution network the serves over 125,000 pharmacies, operates in more than 15 countries and generated approximately $27 billion in revenue over the last 12 months.
* Beijing Med-Pharm is the leading pharmaceutical marketing and distribution company that offers the following services in China; pre-market entry analysis, market research; pharmaceutical distribution to hospitals and pharmaceutical marketing to physicians.
* Guangzhou Pharmaceutical Corporation (“GPC”) is the 3rd largest pharmaceutical wholesaler in China.

Alliance Boots owns 80% of Alliance BMP Limited and Beijing Med-Pharm owns 20% of Alliance BMP Limited. David Gao, the CEO of Beijing Med-Pharm, will be the Chairman of Alliance BMP Limited. The purchase price for the 50% interest in GPC is $69M. Beijing Med-Pharm will pay approximately $15M for its 20% of the joint venture.

Guangzhou Pharmaceutical Corporation is experiencing rapid growth with annual revenues increasing from $565M in 2003 to $820M in 2005 and is expected to surpass $1 billion in 2006!

GPC is the leader in its home province of Guangdong with a market share of approximately16%. Guangdong has a population of approximately 78M and has one of the fastest growing GDP per capita in China. Guangzhou Pharmaceutical Corporation serves more than 12,000 hospitals, pharmacies and other wholesalers throughout the Guangdong Province and Southeast Asia.

Key Benefits for Beijing Med-Pharm:

* This joint venture provides the 3rd major component of Beijing Med-Pharm’s national distribution network in China. With distribution operations in Beijing, Shanghai and now Guangzhou, Beijing Med-Pharm will have direct access to markets representing the majority of demand for western drugs in China. The com!
pleted distribution network should attract additional Western partners.
* Establishes a relationship with a massive Western healthcare company. Alliance Boots has global reach and world class capabilities in pharmaceutical distribution.
* Likely that Alliance Boots will refer several of their European customers to Beijing Med-Pharm for product entry, sales, marketing and distribution into China.
* The formation of the JV anticipates the prospect of additional joint investments by Beijing Med-Pharm and Alliance Boots in China.
* Beijing Med-Pharm will distribute products carried by Guangzhou Pharmaceutical Corporation to new customers in Shanghai and Beijing.
* Beijing Med-Pharm will own 20% of the joint venture and earn significant net income from its ownership position.

Key Benefits for Alliance Boots:

* Alliance Boots gains sales and marketing expertise and presence in China via Beijing Med-Pharm and a Chairman for the JV that is an established in-country executive and is well-connected in China.
* Provides Alliance Boots with a low risk strategy to gain entry to the rapidly growing Chinese market for Western pharma drugs.
* Provides a scalable platform for further investment in China.

China’s appetite for Western pharma drugs is currently at approximately $17B annually and is expected to grow over 20% annually for the foreseeable future. 85% of prescriptions are sold via hospitals (not in pharmacies). Beijing Med-Pharm is a one-stop national sales, marketing and distribution company for Western pharma companies that desire to gain access to the Chinese market.

We believe that the Alliance Boots joint venture and the Guangzhou acquisition is a game changer for Beijing Med-Pharm, and that we are in the early stages of a compelling and far-reaching opportunity.

Disclosure: Author manages a hedge fund that is long Beijing Med-Pharm.

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