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Shanghai Pharmaceuticals moving ahead with cross listing and industrial consolidation

By Frank Chen, GBI Analyst

 Following receipt of China Securities Regulatory Commission approval, Shanghai Pharmaceuticals Holding Company Ltd. (CH: 601607) announced it will issue an initial public offering of up to 764 million H-shares to raise a minimum RMB 8 billion (USD 1.2 billion) on the Hong Kong stock exchange. In 2009, the parent company Shanghai Pharmaceutical Group Corporation (SH:SPGC:600849) acquired three Shanghai-based listed entities- Shanghai Industrial Pharmaceutical Investment Co. Ltd., Shanghai Zhongxi Pharmaceutical Co. Ltd. and Shanghai Pharmaceutical Co. Ltd. With the approval for a Hong Kong IPO, SPGC has completed the cross listing and now seeks a new market of investors and liquidity.

 

Despite an increasing cost of raw materials, Shanghai Pharmaceuticals gross profit margin of 46.6% has dropped by 0.7% only- thanks to the centralized procurement of bulk drugs. The company’s operating and selling expenses have also decreased dramatically, which is indicative of success in reducing operating costs as well as optimizing corporate structure (via narrowing down managerial hierarchy and closure of small subsidiaries). In its latest quarterly report (Q1 2011), Shanghai Pharmaceuticals reported a gross revenue of RMB 11.87 billion, an approximately 27% increase over the same period last year; it achieved a total profit of RMB 1.24 and net profit of RMB 849 million, up 26.17% and 25.80%, respectively, over Q1 2010.

 

In April this year, SPGC completed a full takeover of China Health System Ltd. (NYSE:CHS), the third-largest drug distributor in Beijing with 70% of company revenues stemming from direct sales to hospitals and 30% from wholesaling activity. The acquisition of CHS has long been regarded as an important step for SPGC to expand its market to Beijing, Tianjin and Hebei. According to SPGC, market shares of the company in Beijing’s drug distribution sector may exceed Sinopharm’s ranking (which is second to Beijing Pharmaceutical Company Ltd.) when its M&A deals with CHS and Aixin Weiyi Medical are taken into account. This year, the company also intends to procure more than RMB 20 billion worth of drugs and medical devices from 69 multinational drug companies currently operating in China (including Pfizer, Merck and Johnson & Johnson); these contracts are estimated to account for approximately 60% of the company’s total procurement of drugs and medical devices. Shanghai Pharma Vice President Ge Jianqiu has also indicated that half of the proceeds from the IPO will be used to execute planned mergers and acquisitions of pharmaceutical enterprises.

At present, there are more than 16,000 pharmaceutical distributors in China, with Sinopharm, SPGC, and Wuhan Jointown as the top three leading entities. (Sinopharm Group began trading on the Hong Kong Stock Exchange Market in September of 2009 and issued a total of 545,679,150 H-shares to the public and raised USD 1.13 billion.) When combined, the market share of these three companies will only constitute 20% of the total drug distribution market share in China, as opposed to the 70%+ market share contributed by the top 3 leading drug distributors in developed countries (e.g. the U.S, the U.K). Given such industry statistics, the Chinese Ministry of Commerce aims to encourage M&A of pharmaceutical distributors in the country to foster national/regional leading enterprises as part of its Twelfth Five-Year Plan (2011-2015).