Pharmaceutical Frenzy

Shanghai Pharma expands while medical companies throughout China adapt to industrial development and healthcare reform

By LAN XINZHEN

When shares of Shanghai Pharmaceutical (Group) Co. Ltd.(Shanghai Pharma) resumed normal transactions on March 9, 2010, the biggest listed pharmaceutical company on China’s stock market was born. By the time the closing bell rang at the end of the trading day, the market value of Shanghai Pharma had reached 32.28 billion yuan ($4.73 billion).

Yunnan Baiyao (Group) Co. Ltd. was the second largest that day with a market value of 31.27 billion yuan ($4.58 billion), while Jiangsu Hengrui Medicine Co. Ltd. ranked third with 29.58 billion yuan ($4.33 billion).

When trading in the company’s shares was paused on June 18, 2009, Shanghai Pharma had a market value of 14.5 billion yuan ($2.12 billion). During its trading hiatus, Shanghai Pharma was able to double its market value through company reorganization efforts and by acquiring another two listed pharmaceutical companies—Shanghai Industrial Pharmaceutical Investment Co. Ltd. (SIPH) and Shanghai Zhongxi Pharmaceutical Co. Ltd. (Zhongxi).

Local acquisitions

Listed on March 24, 1994, on the Shanghai Stock Exchange, Shanghai Pharma is a stateowned company under the authority of the Shanghai State-Owned Assets Supervision and Administration Commission. With 30,000 employees and 3.16 billion yuan ($462.66 million) in registered capital, it is now the country’s largest pharmaceutical company with the most complete industrial chains and marketing networks.

Shanghai Pharma, which ranks among China’s top 500 companies, is also the pharmaceutical global partner of the World Expo 2010 in Shanghai.

The Shanghai United Textile Industrial Co. Ltd., predecessor of SIPH, is the first joint venture in Shanghai and also the first joint venture listed on the Shanghai Stock Exchange. In June 1997, the Shanghai Industrial Investment(Holdings) Co. Ltd. became the controlling shareholder of the Shanghai United Textile Industrial Co. Ltd. which was renamed Shanghai Industrial Pharmaceutical Investment Co. Ltd. on November 2, 2006. By 2008,SIPH’s net assets had surpassed 2 billion yuan($292.83 million).

Zhongxi, a company with a history of more than 100 years, became listed on March 11, 1994.In June 2009, its total assets surpassed 700 million yuan($102.49 million).

Shanghai Pharma,SIPH and Zhongxi were all individually listed.According to information from Shanghai Pharma, the reorganization of the three pharmaceutical companies was aimed at improving the quality of their assets and strengthening their competitiveness in the whole industry.

SIPH and Zhongxi share transactions were stopped on February 12,2010, and Shanghai Pharma has taken over all their assets, debts, business, personnel and relevant rights and obligations.

By acquiring SIPH and Zhongxi, as well as the unlisted assets of Shanghai Pharma and SIPH,the reorganized Shanghai Pharma has become the only listed pharmaceutical company of the Shanghai State-Owned Assets Supervision and Administration Commission.

PHARMA GIANT: Shanghai Pharmaceutical (Group) Co.Ltd., after acquiring two other pharmaceutical companies in Shanghai, becomes the biggest listed pharmaceutical company in China

A research report released by Guosen Securities Co. Ltd. states that the reorganization will promote growth in the new Shanghai Pharma, whose revenue is expected to reach 1.13 billion yuan ($165.45 million) and 1.43 billion yuan ($209.37 million)in 2010 and 2011, with earnings per share rising to 0.57 yuan($0.08) and 0.72 yuan ($0.11),respectively. In 2009, the earnings per share of Shanghai Pharma stood at 0.13 yuan($0.02).

Global competition

Substantial reform of China’s healthcare system will be carried out later this year.Since all basic medicines will be covered by medical insurance reimbursement, producers will face fi erce competition among them. Currently, China has more than 4,700 pharmaceutical companies, most of which are involved in the production of basic medicines.

The Guosen Securities report said healthcare reform is a systematic and long-term project, and will inevitably change the competitive behaviors and structure of pharmaceutical companies and medicine traders. It will also optimize the competition order of the whole industrial chain of pharmaceutical and healthcare industries.

But more signi fi cant competition may come from the international market. A report from the Chamber of Commerce for Import and Export of Medicines and Health Products of China said at present, foreign investors are expanding in the medicine and healthcare fi elds.

In 2009, five major international pharmaceutical companies began expanding their markets in China. In the early months of 2009,Bayer Schering Pharma AG invested 100 million euros ($70 million) to establish a global research and development center in Beijing,making it its fourth largest research and development base; in March, Eli Lilly and Co. from the United States carried out a large-scale expansion at its Suzhou plant; in August, Novartis AG began to focus on the grass-roots healthcare market of China; in September, AstraZeneca,headquartered in Britain, established its China branch in Shanghai, researching and developing innovative medicines; in October, Boehringer Ingelheim from Germany announced to expand its investment in China by 100 million euros to develop its production capacity and establish a research and development center in the country;France-based Sano fi-aventis has so far invested 1.3 billion yuan ($190.37 million) in China,breaking a record of investment by transnational pharmaceutical companies in the country; and Sandoz, the world’s second-largest producer of generic medicines, also said in 2009 it would race to seize the Chinese market in the generics fi eld.

According to statistics released by the Ministry of Commerce, 223 foreign-invested companies involved in pharmaceutical and healthcare industries were approved in 2009, a year-on-year decline of 15.21 percent. However,the paid-in capital surged 33.66 percent, hitting$1.11 billion. At present, joint ventures and exclusively foreign-owned companies account for 30 percent of the total number of Chinese pharmaceutical companies, while their sales volume makes up 27 percent of the total of medical products in the country.

According to the China Association of Pharmaceutical Commerce, the output value of China’s medical industry in 2009 totaled 940.3 billion yuan ($137.67 billion), growing 21 percent year on year—higher than the average industrial growth of the rest of the country in the same period. The industry’s overall economic returns have been markedly improved, and the Chinese medical market has become a platform seized by companies both from home and abroad.

Another goal of China’s healthcare system reform is to strengthen domestic pharmaceutical companies to allow them to compete with international pharmaceutical businesses, and Shanghai has listed the pharmaceutical industry as one of the pillar industries to its economic development. An enormous amount of pressure has been placed on the pharmaceutical industry in Shanghai to reach this goal—hence, to expand through reorganization has become one of the ways to further its development. ■