Cardinal Health unloads China business to Shanghai Pharma for $557M

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Cardinal Health has agreed to sell its China drug distribution business to Shanghai Pharma for $557 million in cash. (Getty/Gti337)

China’s government-owned Shanghai Pharma is shelling out more than $550 million to buy the China operations of U.S.-based Cardinal Health, a move that will make Shanghai the largest foreign drug distributor in the country.

The $557 million deal, which includes Cardinal China’s pharmaceutical and medical products distribution business, will expand Shanghai Pharma’s distribution network nationwide. Cardinal is holding on to its recently acquired patient recovery business, Cordis, and a medical sourcing team.

The $557 million is calculated after deduction of debt and other adjustments from the base payment that values the unit at $1.2 billion, the Shanghai Pharma said in a disclosure (Chinese, PDF).

Cardinal Health got its start in China in 2010 with its $470 million acquisition of Zuellig Pharma China but has struggled to make headway there. Though it is one of the Big 3 drug distributors dominating the U.S. market, it has managed to rank only eighth in the China market, a sector that returned 25.5 billion Chinese yuan ($3.85 billion) in revenue for Cardinal in the fiscal year ended June 30, 2017.

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“We recognize that significant scale is required to be a market leader in China,” Cardinal Health chairman and CEO George Barrett said in a statement.

By comparison, Shanghai Pharma is a top pharmaceutical company and drug distributor in China. Its total revenue grew to 120.8 billion Chinese yuan in 2016. The new deal will give it Cardinal China’s 17 distribution centers that cover 322 cities and about 11,000 healthcare facilities, plus 30 DTP pharmacies in 22 cities. Shanghai Pharma already has 40-plus DTP pharmacies.

Citing recent national healthcare and pharmaceutical industry reform, Shanghai Pharma Chairman Zhou Jun said in a statement that the buy will further strengthen its leadership in the distribution and retail pharmacy network.

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The deal comes as China’s FDA is reforming its drug regulations that aim to loosen up additional restraints on foreign drugs and speed up approvals. The changes will likely see more foreign drugs enter the Chinese market, a situation that will benefit Shanghai Pharma, the soon-to-be No.1 foreign drug importer in China.

China is also currently testing a new procurement policy that aims at streamlining the distribution system by allowing only one distributor middleman between drug manufacturers and healthcare facilities. Once fully implemented next year, it is expected to eliminate smaller drug distributors in the country. It is also a new way of doing business that a large state-run drugmaker like Shanghai Pharma might be more agile to adapt to.

Eric Zwisler, chairman of Cardinal Health China, will retire immediately as part of the sale, which is pending government approval, but the unit’s 2,300 employees are expected to stay on.