This morning, Cardinal Health (NYSE:CAH) continued its growth-by-acquisition strategy by entering the Chinese distribution market. See Cardinal Health Acquires Leading Pharmaceutical Distributor in China. Click here to view Cardinal's slide deck describing the deal.
The era of global wholesale is dawning. The acquisition represents the first major distribution investment outside of North America by one of the Big Three U.S. wholesalers. I've long pointed to China as a logical growth platform for U.S. wholesalers as in my January 2007 post 3 Ways for Drug Wholesalers to Grow. See below for my initial thoughts on this deal and what it means.
The 2010-11 Economic Report on Pharmaceutical Wholesalers has details on Cardinal's economics and strategy. As always, Pembroke Consulting and Gerson Lehrman Group clients can schedule phone calls with me for additional insights.
Why China? China, which is predicted to grow 25-27 percent to more than $50 billion in 2011, is now the world’s third-largest pharmaceutical market. (source) That growth rate is just a wee bit faster than the U.S. market. IMS Health projects that China will be the world's second-biggest pharmaceuticals market after the United States in 2015. (source) 'nuff said.
Cardinal bought a major—but not the biggest—wholesaler. BTW, Swiss-based Zuellig Pharma has long been a major player in Asia and established a Chinese presence before the distribution industry was open to direct foreign investment. Current revenues exceed $1 billion, although it is apparently only the ninth-largest wholesaler in the fragmented Chinese market. Click here to see Zuellig Pharma's China Profile & Services web page.
China needs foreign know-how. The Chinese drug distribution system is fragmented and inefficient, which is one reason that the Chinese authorities have been encouraging consolidation and outside investment. I recently read a report stating that pharmaceutical distributors in China are "still learning how to be proficient," although Zuellig's business is more advanced given its heritage.
Asian acquisition activity is heating up. European wholesalers are shopping, too. Read Alliance Boots plans major push into China, which states that Alliance Boots is "considering a number of acquisitions of wholesale pharmaceutical companies in the country." Sanofi-Aventis recently acquired BMP Sunstone, a Chinese wholesaler with its own portfolio of branded pharmaceutical and healthcare products. BTW, Cardinal mentioned that the sale of Yong Yu was a "competitive process," so we can reasonably assume that Alliance Boots was among the bidders.
Cardinal has already been working in Asia. In September 2008, I pointed out that Cardinal was reportedly growing its Chinese drug distribution business. See Cardinal Goes to China from the Drug Channels archives. The Chinese market is still hospital-based (70%+), which plays to Cardinal's strengths.
How will multinational manufacturers work with global wholesalers? Global wholesalers have an opportunity to gain more negotiating power against both brand-name and generic manufacturers. Time will tell whether and how this will occur, but Cardinal will surely be looking for "synergies." Keep in mind that wholesale margins in China are primarily from the buy side, just like in the U.S.
Cardinal has a lot to digest. Since missing out on US Oncology, Cardinal has purchased regional wholesaler Kinray in New York and now Yong Yu in China. Hmmm.
What's next? Cardinal just made itself a 10X more attractive target to Stefano Pessina and KKR-backed Alliance Boots. Stay tuned in 2013?