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Morningstar | Sinopharm: Market Leader in China's Drug Distribution Enjoys Fast Growth, Faces Near-Term Challenges

Sinopharm is well positioned in the fast-growing and rapidly consolidating Chinese drug distribution industry. Like most healthcare sectors in China, drug distribution has grown faster than GDP, and will continue to grow quickly due to aging demographics, increased urbanization, a larger middle class, and rising disease rates.Additionally, the government is pushing the industry to consolidate. It recognizes that larger distributors are more efficient and professional than smaller distributors, who often rely on preferential treatment from local governments and hospitals to stay viable. Currently, the government’s plan is to allow the top 3 pharmaceutical distributors to increase their market share from 36% to 50%-60% over the next 5-10 years, and it is implementing policies designed to push out local players and allow larger players to take over their business.Sinopharm is by far the largest drug distributor in China, and the only distributor with a presence in all 31 provinces. It has approximately 20% market share, while its two closest peers CR Pharma and Shanghai Pharmaceuticals trail with 8% each. As discussed in the “Economic Moat” section of this report, Sinopharm is one of the most efficient operators in the industry when measured by SG&A costs and inventory turnover, and it enjoys substantial bargaining power and operating efficiencies. This makes it well positioned to compete in this consolidating environment.Finally, while it is not Sinopharm’s main business, it is worth noting that Sinopharm also owns China’s largest retail pharmacy chain. This segment only constitutes approximately 4% of revenue, but has averaged 25% growth of the past five years. The business is a strategic investment for Sinopharm, and should be beneficial in the long term when pharmacies eventually replace hospitals as the main seller of drugs.