Drug kings

He’s part of a $50 billion market

“May lead to weight gain” is a warning common to plenty of prescription drugs.

But in the case of China’s leading pharmaceutical firms, the advice is less of a concern. In fact, the opposite: it may even prompt a bout of self-medication. For an industry with a clear reform agenda, this is an opportune time to start bulking up.

Earlier this month, the Ministry of Commerce published its National Drug Distribution Industry Development Plan for the next five year period. It calls for an industry landscape of just three major pharmaceutical distributors by 2015, each with revenues of over Rmb100 billion ($15.4 billion).

Admittedly, the big US pharma firms are still much larger by comparison (Pfizer had revenues of $16.5 billion in the first quarter, for instance). But the race is now on among the Chinese companies to secure a top three position at home.

Plans for an industry consolidation have set off a battle royale, which is likely to get very political, not least because the major players are all ultimately owned by the state.

Who looks most likely to succeed? Sinopharm, Shanghai Pharma and China Resources Medications are the front-runners (for more on China Resources, see last week’s issue). Their prize is the third largest market for medicine globally, which is expected to grow at least 25% to $50 billion this year (according to industry consultants IMS Health).

The high stakes seem to be focusing attention in the boardroom, with the sector’s number two, Shanghai Pharma, planning a $2.2 billion Hong Kong IPO next week.

The company ­– which manufactures and distributes both Chinese and ‘Western’ medicines – is controlled by the Shanghai government and reportedly bought up 24 of its smaller rivals last year.

In January this year, a further 12 firms were purchased and the IPO prospectus says that 30% of the money raised next week will go towards acquiring more minnows. Another 40% of the proceeds will be spent on boosting Shanghai Pharma’s existing distribution network.

Absorbing all of those new acquisitions will be a challenge. But an M&A strategy presents the fastest route to growth in a fragmented market, Lv Mingfang, Shanghai Pharma’s chairman told CBN. The top three players have only a combined 21% share.

Hence the race to consolidate quickly. Shanghai Pharma, which took in Rmb37 billion in revenues last year, has catching up to do on industry leader Sinopharm, which reached Rmb69 billion in sales.

But Hong Kong-listed Sinopharm has also been bolstering its war chest recently, tapping the market at the beginning of the month with a $440 million issuance.

There was a time when it was unusual for two state-owned companies in the same industry to go to the financial markets in such close proximity. Such civilities now seem to be a thing of the past – and the rush-to-market occasionally leads to moments of financial mishap (in December last year WiC wrote about wind power firm Huaneng being forced to pull its IPO after being preempted by rival Datang).

In the case of the two Chinese pharma giants, the Wall Street Journal also sees some skulduggery at work, and that Sinopharm’s offering may have been designed – at least in part – to make things a little more difficult for its rival.

Whether the tactic has had any impact will become clearer next week, when final pricing for Shanghai Pharma’s IPO is announced. Company executives will probably have laughed off any suggestion, focusing more on presenting their own prospects as aggressively as possible, and marketing their firm as one of the likely winners in the coming industry shake-up.

Perhaps that helped in attracting four cornerstone investors which have signed up for a quarter of the shares on offer (they include Pfizer, although Singapore sovereign wealth fund Temasek is the biggest single contributor).

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