Cardinal Eyeing Further Acquisitions In China

Cardinal Health's recent acquisition of Zuellig Pharma China (Yong Yu in Chinese) likely will not be the last China-based distributor the U.S. wholesaler will pick up, according to company CFO Jeff Henderson.

Speaking Jan. 11 at the J.P. Morgan Healthcare Conference, Henderson told attendees that he expects that over time, "we will be making a number of small to mid-sized acquisitions and rolling them up" (Also see "Emerging Markets Round Up From JP Morgan Healthcare Conference (Part 2 of 2)" - Scrip, 19 Jan, 2011.).

Henderson described what he called a "big opportunity to bring supply chain efficiency" to a health care market that is "growing at 20%-plus a year" and "very fragmented." This conclusion came after the company spent more than a year examining international opportunities to assess where Cardinal could conduct its operations. "China clearly fit that filter very well."

"I think we've heard from our business partners, the global pharma companies and even some of the medical device companies, that having a secure and reliable supply chain through the Chinese market has become increasingly important," Cardinal Health CFO Jeff Henderson said.

And its acquisition of Yong Yu as the starting point "was almost a match made in heaven," Henderson added, noting the company previously had foreign ownership that had successfully done business for more than 20 years with a management team of both Western and Asian personnel.

"It was almost a perfect entry point for us, it really was, and now provides a platform to continue to grow in the country."

A Market Ripe For Consolidation

Cardinal announced Nov. 29, 2010, that it closed the deal for Yong Yu for $470 million. The acquisition could be a signal that the Chinese government is becoming more open to foreign ownership in some health care industries, like drug distribution, in an effort to drive innovation and spur consolidation (Also see "Cardinal Health's Acquisition Of Zuellig Pharma Signal Of China's Intent To Allow More Foreign Investment?" - Scrip, 30 Nov, 2010.).

Consolidation of the Chinese drug distribution market could help make that industry more efficient.

"There are 10,000 distributors in the country," Henderson noted. He said that while many of those will not be acquisition targets for Cardinal, "we think selectively there will be certain targets, probably more Western-leaning type management teams that would be attracted to being associated with Cardinal Health."

And Henderson does not necessarily see the fact that many Chinese distributors are state-owned as a disadvantage, given the kinds of firms Cardinal will be targeting.

Of all the distributors, some "really operate like pseudo state-owned enterprises and some really are aggressively trying to pursue another path," Henderson noted. "And I think what we're going to find is sort of a natural dividing line among business partners for us in China."

Henderson continued: "And we think that there is going to be a real opportunity ... to be able to work with companies that see a different kind of model in working with a private enterprise." He added that Cardinal has had "wonderful government meetings at this point."

Manufacturers Like The Move

Cardinal's manufacturing partners also are on board with this expansion.

"We have had terrific discussions with our global partners upstream," Henderson stated. "I think we've heard from our business partners, the global pharma companies and even some of the medical device companies, that having a secure and reliable supply chain through the Chinese market has become increasingly important. So we think that this is really a unique opportunity, a unique time and a unique company and we're really excited about it."

While China represents an international growth opportunity, the company recently expanded its domestic footprint as well with the acquisition of the privately held regional wholesaler Kinray Inc. (Also see "Cardinal Health Boosts Generics Wholesale Business With $1.3 Billion Kinray Acquisition" - Pink Sheet, 18 Nov, 2010.).

- Gregory Twachtman ([email protected])

[Editor's note: This story also appeared in the Jan. 24, 2011, edition of "The Pink Sheet." Not a subscriber? For a free trial, click here .]