Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

More consolidation ahead China’s pharmaceutical distribution sector – Shanghai Pharma in focus

 By Sisi Yang, GBI Analyst


As far back as 2009, the transfer of responsibility for supervision of the drug distribution system from the SFDA to Ministry of Commerce (MOFCOM) served as a catalyst to accelerate industry concentration. In August of 2010 MOFCOM completed the national pharmaceutical distribution industry development plan for 2010-2015 (draft). According to the draft, MOFCOM aims to cultivate 1-2 multi-regional large distribution conglomerates with an annual turnover of over RMB 100 billion and 20 regional large distributors with an annual turnover of over RMB 10 billion by encouraging mergers and acquisitions and supporting complete market competition. Although the final version has not been released, there has already been a fair amount of consolidation in the sector.

Additionally, according to an MOH (Ministry of Health) meeting held earlier this year, the MOH will explore a procurement policy of “one product - one formulation - one manufacturer - one distributor” on both EDL and non-EDL drugs in order to reduce drug prices and solve the issue of secondary markets and bargaining by medical institutions. The policy model originated in Shanghai’s Minhang District was then introduced by the Anhui government and supported by MOH. This move may bring drug tendering back to basics and favor larger scale manufacturers and distributors in the sector.

In January 2011, the board of directors of Shanghai Pharmaceutical unanimously approved acquisition of the remaining 34.76% shares of ChinaHealth System Ltd., giving Shanghai Pharmaceutical full control of ChinaHealth. After the completion of that deal, Shanghai Pharmaceutical will gain full control of CHS. This RMB 3.6 billion deal would be China’s largest transaction in the pharmaceutical distribution sector. Shanghai Pharmaceutical has already acquired several top distributors in Guangzhou, Shandong, Changzhou and Fujian, along with the acquisition of the third-largest drug distributor in Beijing. Traditionally a strong player in East China, Shanghai Pharma has been moving forward to expand its business to more regions. The company’s expansion will be a major step to compete with its rival – Sinopharm – which is moving ahead to complete its national sales network.

Consolidation in China’s pharmaceutical industry will continue to occur in the still fragments distribution sector where the top 3 enterprises only account for about 20% of total market share. According to GBI SOURCE, there are 7,000+ manufacturers and 14,000+ distributors in China’s pharmaceutical industry. The downstream pharmaceutical industry is more fragmented than the upstream counterpart, which results in low bargaining power of distributors over manufacturers. Looking forward, profit margins may begin to rise in the pharmaceutical distribution space with increasing industry concentration due to governmental efforts and market forces.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.