With Cardinal Health Inc. (NYSE:CAH) buying a Chinese pharmaceuticals distributor, the Ohio company has become the first of the three major U.S. drug distributors to make a big investment outside North America.
But it likely won’t be the last time one of the Big Three — McKesson Corp. (NYSE:MCK), AmerisourceBergen Corp. (NYSE:ABC) and Cardinal — look across the world’s oceans in search of growth opportunities.
“The era of global wholesale is dawning,” Adam Fein, a pharmaceuticals industry consultant with Pembroke Consulting Inc., wrote on his blog.
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On Monday, Cardinal announced it had purchased Swiss-owned Zuellig Pharma China, known to the Chinese as Yong Yu, for $470 million.
For distributors like Cardinal, going global likely will mean more scale, and with it, more pricing power with drug makers, according to Fein. “Global wholesalers have an opportunity to gain more negotiating power against both brand-name and generic manufacturers,” he wrote. “Time will tell whether and how this will occur.”
For the big distributors, China makes sense for a number of reasons. Most importantly, the market is growing at a compound annual rate of 20 percent through 2014, according to Cardinal. In addition, the Chinese drug distribution system is “extremely fragmented” and inefficient, with the top 10 distributors claiming less than 35 percent of combined market share, Cardinal executives said.
That’s a big opportunity for large distributors, and why one of Cardinal’s international competitors is planning a major push into China. U.K.-based Alliance Boots, which was taken private in a $22 billion sale to private equity behemoth Kohlberg Kravis Roberts & Co. in 2007, is considering “a number” of acquisitions of Chinese drug wholesalers, the Telegraph reported. Fein speculated that Alliance Boots bid against Cardinal for Yong Yu, but failed to win the bid.
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Fein also speculated that Cardinal’s purchase of the Chinese distributor makes the Ohio company 10 times more attractive as an acquisition target to Alliance Boots and its deep-pocketed investors, a prospect that’s likely thrilling to Cardinal shareholders.
