Alliance Boots (United Kingdom), Europe's largest pharma retailer, and part of the world's largest pharmacy chain following the USD6.7-billion merger with United States firm Walgreens in June, has announced it has spent GBP53 million (USD90.79 million) on a stake in Chinese distributor Nanjing Pharmaceutical.
IHS Global Insight Perspective | |
Significance | Alliance Boots' decision to acquire a stake in Nanjing Pharmaceutical means that the firm now has a stake in China's fourth and fifth largest wholesalers; Nanjing achieved sales of around CNY20 billion (USD3.15 billion) in 2011. |
Implications | This may be the most opportune time to enter China's pharma distribution market, given the slowing global economy and the Chinese government's commitment to ongoing health reforms. |
Outlook | Alliance Boots sees the deal as related to developing a truly global presence, following the USD6.7-billion merger with the United States' largest drug retailer, Walgreens Co. |
United Kingdom-based drug wholesaler Alliance Boots has announced the acquisition of a 12% stake in Nanjing Pharmaceutical Co. Ltd, China's fifth largest drug distributor, according to a press release from Boots. The UK firm will pay GBP53 million (USD90.79 million) for the stake in Nanjing Pharma, which has operations in 12 cities and eight provinces centred in east China's Jiangsu province, achieving sales of around CNY20 billion (USD3.15 billion) in 2011. On completion of the transaction, which is subject to regulatory clearance, Alliance Boots will become the Chinese firm's second largest shareholder, and have operational management and board representation.
The relationship between the two firms has been developing since last year, when plans to form a strategic alliance were announced (see China - United Kingdom: 15 July 2011: Nanjing Pharma Signs Letter of Intent with Alliance Boots for Co-Operation). The latest deal comes alongside a joint-venture (JV) operation with Guangzhou Pharmaceuticals set up in 2007 (see China - United Kingdom: 29 January 2007: Alliance Boots Walk Into China and China - United Kingdom: 27 February 2008: Alliance Boots' Chinese Distribution Partner Expects Market Share Gains). Alliance Boots has now bought into China's fourth and fifth largest drug distributors, Guangzhou Pharma and Nanjing Pharma, respectively.
Alliance Boots' chief executive Stefano Pessina has stated that he expects the deal to lead to a 20% or 30% share of China's pharma distribution market, as Reuters quotes: "In 10 years, I hope we will be one of the major players in China or we will be, together with other companies, part of one of the major players in China." Pessina identifies building a truly global footprint as one of the firm's strategic aims, and connected to Alliance Boots' ongoing relationship with the United States' largest drug retailer Walgreens (see United States - United Kingdom: 22 June 2012: Global Pharmacy Industry Set for Realignment Following Walgreens/Boots Merger).
Outlook and Implications
Joining the Market at an Opportune Time
Alliance Boots' stepping up of activity in China could be particularly well-timed, given the current determination by the government to drive consolidation in the pharma distribution industry.
The hugely atomised nature of the market has been blamed for contributing to high drug prices in the country: of around 7,000 distributors in China, 80% are considered small-scale. The top-three—Sinopharm, Shanghai Pharmaceutical and Jointown—accounted for only about 20% of the market in 2010, compared with over 95% for the three biggest firms in the US. Distributors often require mark-ups as high as 8% from pharmaceutical companies, but margins hover between 1–2%. The retail market is similarly fragmented, with no major dominant players; 70% of prescription drugs are sold through hospital pharmacies, a situation which has also contributed to pushing up drug prices as mark-ups on drug sales as a source of revenues have encouraged hospitals to prescribe expensive and unnecessary treatments.
The government's determination to bring down drug prices will see the pharma distribution sector firmly in the sites of coming health reforms: the central government's 12th Five-Year Plan (2011–15) has implemented policies encouraging further consolidation, with the government calling for the development of one to three major national distributors with sales over CNY100 billion, and 20 regional distributors with sales over CNY1 billion. Similarly, the government's focus on breaking the monopoly of hospitals over pharmaceutical sales could see hospital pharmacies separated and managed by distribution firms in future, and retail outlets potentially seeing much more business (see China: 14 August 2012: China's Shenzhen City Pilots Hospital Reforms, Sees 12.4% Fall in Patient Drug Fees).
Currently, Nanjing Pharma's and Guangzhou Pharma's operations have a more regional focus, but Alliance Boots will be hopeful that its advanced supply-chain management technology and experience will help boost Nanjing Pharmaceutical's performance levels to reach global standards. The Chinese government has also been keen to experiment with pharmaceutical firms adopting direct-to-pharmacy or direct-to-hospital models of distribution, using a select, reduced number of national distributors—Alliance Boots has experience of this model in the UK, and is already positioning itself to capitalise in China. The UK firm has also established a presence in China's growing online direct-to-consumer retail market (see China - United Kingdom: 19 August 2011: Boots JV Opens Online Drug Outlet in China). Alliance Boots' commitment to building a global presence will see the firm benefit from economies of scale and international sourcing capabilities, and contribute to better cash margins, although establishing synergies with its Chinese counterpart may take some time initially.