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Breakingviews - Walgreens gets in early on healthy growth in China
December 7, 2017 / 4:54 AM / 4 days ago

Breakingviews - Walgreens gets in early on healthy growth in China

HONG KONG (Reuters Breakingviews) - Walgreens Boots Alliance is positioning itself for future healthy growth in China. On Wednesday, the U.S. drugstore chain said it would pay $416 million for 40 percent of Shanghai-headquartered peer GuoDa. A sensible shake-up of drug distribution and sales by Beijing is spurring consolidation and giving pharmacies a stronger hand. This deal gives Walgreens market insight and could be a springboard for more investment.

An elderly man uses a magnifiying glass to see the description on a pack of medicine at a pharmacy in Dandong, Liaoning province, China, March 30, 2011. REUTERS/Jacky Chen/File Photo

The $70 billion Walgreens already owns minority stakes in two Chinese drug distributors. This investment into GuoDa, known formally as Sinopharm Holding GuoDa Drugstores, will be the Illinois-based group’s first major bet on China’s fast-growing retail pharmacies.

GuoDa is a good partner. It is the biggest player in an extremely fragmented market, with 2.7 percent market share in 2015, according to analysts at Guotai Junan International. It is also growing fast: as of June it boasted 3,693 stores, up 13 percent in a year. And it is backed by China’s leading distributor, the $11 billion Sinopharm Group, which is state-controlled but listed in Hong Kong.

A raft of new policies will probably spur consolidation and growth. Hospitals dominate drug sales in China, accounting for some 94 percent of total value, reckons Bernstein’s Laura Nelson Carney. These in-house pharmacies have charged mark-ups of up to 15 percent on wholesale prices, but to lower drug prices, Beijing recently banned this practice. So hospitals have little incentive to keep selling medicines, while drugstores, which have more freedom on prices, should gain customers.

Beijing is also overhauling an inefficient drug procurement system which was mainly good for intermediaries. A new policy requires drugmakers and hospitals to use only one middleman, squeezing smaller players among the country’s 13,000-plus distributors. That benefits the biggest players, like Walgreens’ new partner Sinopharm.

A minority investment limits the control Walgreens can exercise, but also limits its risk upfront. It should be able to share Western best practice with its new partner too. And this could be a stepping stone towards buying control later, if market growth is as healthy as hoped.

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