HONG KONG - China's second-largest drug distributor plans to issue shares in Hong Kong in less than a year as it builds up its acquisitions war chest.

Shanghai Pharmaceuticals, the Chinese partner of multinational drug maker Roche, plans to offer new shares that would complement its existing listed shares in Shanghai.

Shanghai Pharmaceuticals is involved in the development, production and distribution of novel pharmaceuticals. For Roche, it manufactures Tamiflu (oseltamivir) under a sublicense as part of the Swiss pharma's global manufacturing network for the influenza therapy.

Shanghai Pharmaceuticals plans to sell up to 667 million shares at about HKD 20.15 each to raise HKD 1.2 billion (about $150 million) by June of next year, company chairman Lu Mingfang told local media Sept. 8.

"The share offering is an important strategic step, rather than merely a fundraising activity," Lu told the media.

In a statement handed out to reporters, the company said it plans to use the proceeds for acquisitions of domestic competitors and sales networks domestically and internationally.

In the first half of the year, the company saw its revenue from drug distribution and retail sales increase 24 percent over the January-June period a year earlier. Its net profit in 2009 jumped 111 percent.

Shanghai Pharmaceuticals trails Hong Kong-listed Sinopharm in terms of market share in China (Also see "Chinese Drug Distributor Sinopharm Continues Acquisition Spree" - Scrip, 30 August, 2010.). Both companies are state-owned.

Shanghai Pharmaceuticals is controlled by the Shanghai government. Its controlling shareholder is the Shanghai Pharmaceutical Group, with the Shanghai State-owned Assets Supervision and Administration Commission and Shenergy Group also holding significant stakes.

Last March, Shanghai Pharmaceuticals acquired and merged with Shanghai Industrial Pharmaceutical Investment and Shanghai Zhongxi Pharmaceutical, two Shanghai-listed companies, to become the largest pharmaceutical company listed in China.

In April, Shanghai Pharmaceuticals announced it would purchase a 26 percent stake in Qingdao Guofeng Pharmaceutical for RMB 150 million, adding to the 51 percent stake it had bought in 2004.

In the last quarter of 2009, Shanghai Pharmaceuticals acquired four regional drug distributors, including Guangzhou Z.S.Y. Pharmaceutical, Shandong Shanglian Biochemical Pharmaceutical, and Changzhou Yabang Pharmaceutical Group.

Improving China's Drug Distribution

China's drug distribution sector is actively working to improve its reach across the country, yet faces two major obstacles.

The first is fragmentation. Although large, the top three drug distributors - Sinopharm, Shanghai Pharmaceuticals and Jointown Pharmaceutical - account for only 20 percent of the drug distribution market.

Jointown, whose operating revenue in 2009 was $2.8 billion, also plans to issue shares in Shanghai. The company announced in August that it will sell a 10 percent stake, or 150 million shares, to raise funds for new logistics facilities, including drug storage in Shanghai and a new distribution center in Hangzhou

The second issue is reach. The distribution networks of the three companies have improved drastically in the past few years, yet reaching the country's rural areas remains a challenge.

Analysts have predicted that new government policies related to bribery and drug pricing will benefit large Chinese drug distributors at the expense of smaller players, which could fuel additional consolidation (Also see "China's New Drug Price Policies Will Favor Big Distributors, Restrict Smaller Ones" - Scrip, 20 July, 2010.).

This month, an industry group plans to issue its own plan for drug distribution to go alongside China's 12th Five Year Plan covering 2011-2015.

Economic growth, urbanization and a government push to improve access to health care across China have resulted in massive growth for the industry and attracted an ever-larger number of multinational pharmaceutical companies.

Last year, some 223 new foreign-invested enterprises were set up in China, according to the Ministry of Commerce. Actual foreign investment in the sector jumped 33 percent to $1.111 billion.

In August, authorities said the former president of Shanghai Pharmaceutical Group, Wu Jianwen, was under investigation for bribery and illicit sales of antibiotics while he was in charge of New Asiatic Pharmaceuticals and Asia Pioneer Pharmaceuticals.

- Alfred Romann (pharmasia@elsevier.com)

Drug Distributor Shanghai Pharmaceuticals Plans New Share Offering In Hong Kong

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