SHANGHAI - To compete with the country's largest drug distributor SinoPharm, China's third-ranked Jointown recently filed for an initial public offering in Shanghai to raise roughly RMB 899.8 million ($135.4 million) to expand a distribution network in seven key regions across China.

In 2009, SinoPharm was far ahead, leading the industry with RMB 65 billion in sales income, followed by Shanghai Pharmaceutical Group, with RMB 34.8 billion. Jointown, as China's biggest private distributor, was in third place with RMB 22 billion, according to China Investment Consulting.

Jointown will offer 150 million shares in the IPO. Money raised will be invested in eight projects, which include building seven distribution centers in the coastal cities of Shanghai and Tianjin and in the provinces of Hubei, Fujian, Zhejiang, Hebei and Heilongjiang. Aside from an RMB 579.8 million investment in these centers, the company plans to funnel RMB 320 million in proceeds into its cash flow.

According to the prospectus, the company has obtained distribution rights for essential drugs in Chongqing municipality, Hubei, Henan, Xinjiang, Fujian, Jiangsu, Liaoning, Gansu, Inner Mongolia, Zhejiang, Sichuan and Anhui Province.

Essential Drug List Key To Winning Strategy

Under China's new healthcare system, only one drug distributor per region should be allowed to handle China's essential drug list. However, policies vary among provinces. As of Sept. 10, there were 26 provinces that released policies for distributing essential drugs.

Jointown and 20 other companies have rights to distribute essential drugs in Henan province and Sichuan has 499 distributors. Meanwhile, all qualified distributors can deliver essential drugs in Anhui and Guizhou provinces.

"The central government gives out a general requirement for distributing essential drugs and the provincial governments will set up detailed policies in their regions... Local protectionism is one of the reasons why the policies are much different from province to province," Guo Fanli, an analyst from a research center under CIC, said in an interview with PharmAsia News.

To protect local companies, some provinces are restricting distributors from other provinces in terms of entry into local essential drug distribution networks, according to Guo. In Beijing there are more than 200 local distributors, but in Sichuan there may be over 500 distributors in the province.

Obtaining the distribution rights for essential drugs will help Jointown to enter the market in these provinces, the prospectus states.

Promising Future Growth

According to the China Association of Pharmaceutical Commerce, the pharmaceutical distribution market in China increased 16.7 percent in 2008 to RMB 470 billion ($70 billion), and is expected to be the third-largest pharmaceutical market with growth of 25-27 percent, or about $50 billion, next year ('Also see "Global Pharmaceutical Sales Expected To Reach $880 Billion In 2011 With China Fueling Growth" - Scrip, 7 October, 2010.).

China's drug distribution market remains quite fragmented, with more than 13,000 companies, and the top three companies accounted for 20 percent of the total market in 2008.

"Jointown's IPO will give them a fair platform to compete with SinoPharm," CIC's Guo said.

Guo also said SinoPharm and Jointown are the only companies in China to have established nationwide distribution networks. Jointown has expanded its coverage to 70 percent of the cities and towns in China, while SinoPharm covers almost 90 percent of the territory in China.

Jointown aims to establish 20 provincial logistics centers to increase its revenue to RMB 26 billion in the next two to three years. The ongoing healthcare reforms will create a solid opportunity for big distributors such as Jointown, said the company.

In China, nationally owned distributors including SinoPharm and Shanghai Pharmaceutical Group, which have a close relationship with the government, usually focus on distributing high-priced drugs to the top hospitals. Jointown is more focused on distributing low-priced Rx drugs and OTC drugs to pharmacies, private hospitals, clinics and other small and mid-size medical institutes.

Drug sales in hospital channels account for 70 percent of total drug sales in China. Key features of the healthcare reforms include changes in the public hospital system, implementation of the essential drug system and expansion of basic medical insurance in rural areas. All of these new measures will benefit the company, according to the prospectus.

China is releasing a series of new policies to fight bribery in the pharmaceutical industry and reduce drug prices, which will benefit large distributors, Niu Zhenqian, Jointown's vice general manager, noted during a Citi research conference call ('Also see "China's New Drug Price Policies Will Favor Big Distributors, Restrict Smaller Ones" - Scrip, 20 July, 2010.).

The goal of the healthcare reforms to provide affordable medical services to the public fits well with Jointown's business of providing low-priced drugs on a large scale, Guo noted.

The analyst also stated that the government will issue a new scheme on drug distribution by the end of this year. Under this scheme, China plans to foster one or two distribution giants with over RMB 100 billion in annual revenue and 20 local large-scale distributors by 2015.

He said that Jointown may expand to distribute to top hospitals after the IPO, which would enrich the company's business model.

As more Chinese drug makers seek IPOs in China and the U.S., the giants in drug distribution are raising money from IPOs in Hong Kong and Shanghai to seize the opportunity to expand their operations.

Sinopharm was 30 times oversubscribed in a public offering last year in Hong Kong and Shanghai ('Also see "The Year Of The Tiger Looking Strong For IPOs In China Following Sinopharm Success" - Scrip, 4 December, 2009.).

Shanghai Pharmaceutical plans a new share offering in Hong Kong to raise $150 million. The company plans to use the proceeds to acquire domestic competitors and sales networks domestically and internationally ('Also see "Drug Distributor Shanghai Pharmaceuticals Plans New Share Offering In Hong Kong" - Scrip, 9 September, 2010.).

- Dai Jialing (j.dai@elsevier.com)

China's Largest Private Drug Distributor, Jointown, Seeks Initial Public Offering In Shanghai

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