Cardinal buys distributor

NEW YORK - The United States-based drug wholesaler Cardinal Health Inc has bought a Chinese distributor in a $470 million deal, establishing a foothold in the booming pharmaceutical market.

Cardinal announced the completion of the transaction on Monday for privately held Zuellig Pharma China, known locally as Yong Yu. Cardinal assumed about $60 million in net debt under the terms of the deal and funded the remainder with cash.

"Cardinal has done quite a few deals lately and the market is apprehending that maybe their appetite is bigger than their capability," said Sanford Bernstein analyst Helene Wolk.

Cardinal earlier this month said it planned to buy Kinray Inc for $1.3 billion to diversify its customer base, while in June it announced the purchase of Healthcare Solutions Holding LLC for more than $500 million to expand in the fast-growing area of specialty medicines.

China is set to overtake Japan as the world's second-largest pharmaceutical market behind the US in 2015, the pharmaceutical market information company IMS Health said earlier this month.

Yong Yu has annual sales of more than $1 billion and its goods supply about 49,000 hospitals and clinics, and more than 123,000 pharmacies, according to Cardinal.

While the deal was viewed by analysts as a positive over the long term, they were less confident about the more immediate impact of the transaction, given the completely different nature of the Chinese market and regulatory issues.

"Given the ability of China's government to dictate prices for drugs and reimbursement for healthcare providers, there is some more risk here on how these changes could affect drug distributors longer-term," said Susquehanna Financial Group analyst A.J. Rice in a research note.

Rice also said that while Yong Yu gets the majority of its sales from branded drugs, about two-thirds of the Chinese market is dominated by generics.

"As more drugs go generic, it is a long-term headwind for Cardinal's China business," Rice said.

The analyst also noted that the acquisition marked the first move by one of the big US drug wholesalers, including McKesson Corp and AmerisourceBergen Corp, outside of North America.

On a conference call with analysts, Cardinal said Yong Yu's operating margin compares "very favorably" with the typically low-margin US drug distribution market.

Ohio-based Cardinal expects the transaction to slightly add to earnings in its fiscal 2011 year.

Reuters

(China Daily 12/01/2010 page14)