Cardinal Health Inc. (NYSE:CAH) has purchased a Chinese pharmaceuticals distributor, giving the Dublin, Ohio, company an important entry to what’s expected to become the world’s second-largest drug distribution market.
Zuellig Pharma China, known to the Chinese as Yong Yu, has annual sales of $1 billion and was established in 1993, according to a statement from Cardinal. The company is China’s largest importer of pharmaceuticals.
Cardinal views Yong Yu as a “platform” for further growth in China, a word Cardinal executives used repeatedly during a conference call with analysts to discuss the acquisition. The pharmaceuticals distribution market in China is “extremely fragmented” with the top 10 distributors claiming less than 35 percent of combined market share, CEO George Barrett said.
That fragmentation is a huge opportunity for Cardinal because the market is expected to go through lots of consolidation in the coming years as distributors look to increase scale and become more efficient, executives said. Yong Yu ranks No. 9 in market share.
Cardinal said the Chinese pharmaceuticals distribution market is expected to grow at a compound annual rate of 20 percent through 2014. Like in the United States, health spending in China has been outpacing overall growth of the economy, Barrett said.
Within about five years, China is expected to become the world’s second-largest market for prescription drugs, Barrett said.
One notable difference between the U.S. and Chinese markets: In China, about 70 percent of prescription drugs are distributed through hospitals, as opposed to retail pharmacies and mail order, which are more common in the United States, Cardinal executives said.
Cardinal expects the purchase to slightly boost non-GAAP earnings in fiscal 2011 with bigger gains to follow in subsequent years. Under the terms of the deal, Cardinal assumes about $60 million in debt. The remainder of the purchase was funded with cash.
Yong Yu operates seven distribution facilities in China and has about 700 employees.
Investors didn’t seem to share Cardinal’s enthusiasm for the deal, sending the Dublin, Ohio company’s shares down a little more than 1 percent to $35.45 in mid-afternoon trading, though the overall market also fell slightly.
One problem facing Cardinal could be that while Yong Yu makes most of its sales on branded medications, generics dominate the Chinese market, Reuters reported.
“As more drugs go generic, it is a long-term headwind for Cardinal’s China business,” Susquehanna Financial Group analyst A.J. Rice wrote in a research note.
The Yong Yu purchase marks Cardinal’s second major acquisition of the month. It earlier reached an agreement to buy New York-based pharmaceuticals distributor Kinray Inc. for $1.3 billion.