Guoda Pharmacy Raises RMB 2.767 Billion, Selling 40% Stake to Global Retail Giant Walgreens Boots Alliance

VCBeat (WeChat ID: vcbeat) has learned that Sinopharm Group Co., Ltd. (000028.SZ) announced on November 30 that its subsidiary, Sinopharm Holding Guoda Pharmacy Co., Ltd., had introduced a strategic investor—Walgreens Boots Alliance (Hong Kong) Investments Limited—with an investment amount of RMB 2.767 billion in exchange for a 40% equity stake.

This news instantly sent shockwaves through the pharmaceutical industry. It is worth noting that Sinopharm Group Holdings is the largest pharmaceutical distributor in South China. Its subsidiary, Guoda Drugstore, operates a nationwide retail network with more than 3,700 stores and annual sales exceeding RMB 10 billion.

And the newly introduced strategic investor is none other than Walgreens Boots Alliance, the world’s largest pharmaceutical retailer. Under its umbrella are pharmacy distribution and retail brands such as Walgreens, Duane Reade, Boots, and United Drug, with annual revenue reaching $118.2 billion.

The strong alliance has also filled the industry with anticipation for the future development potential of Guoda Pharmacy.

According to the announcement, as early as September 4, 2017, Sinopharm Accord approved a board resolution agreeing to increase the capital and expand the shareholding of Guoda Drugstore by introducing a strategic investor. On September 18 of the same month, the Board of Directors reviewed and approved the relevant proposals. On September 20, the capital increase project was publicly listed on the Shanghai United Assets and Equity Exchange, with a listing announcement period of 40 working days, expiring on November 20.

As of November 30, Sinopharm Group disclosed the latest developments: Walgreens Boots Alliance’s wholly-owned Hong Kong subsidiary, as the actual controller, subscribed to equity in Sinopharm Consistency Pharmacy through a capital increase. The capital injection amounted to RMB 2.767 billion, resulting in a 40% stake in Sinopharm Consistency Pharmacy post-investment.

According to the asset appraisal report, Guoda Drugstore’s total assets had a book value of RMB 2.305 billion and an appraised value of RMB 4.528 billion, representing an increase of RMB 2.22 billion and an appreciation rate of 96.45%.

So, did Walgreens Boots Alliance incur a loss by acquiring a 40% stake in Guoda Drugstore for RMB 2.767 billion? Based on the most straightforward P/E ratio (market capitalization divided by prior year’s earnings), the corresponding P/E is 31x.

According to China National Accord Medicines’ semi-annual report for this year, its pharmaceutical retail business achieved revenue of RMB 4.888 billion, a year-on-year increase of 12%, with a net profit of RMB 99 million, up 30.08% year on year.

Based on this calculation, given a market capitalization of RMB 4.528 billion, Walgreens Boots Alliance’s entry P/E ratio should be approximately 22–24x, significantly lower than the pharmaceutical industry’s average P/E ratio of around 50x.

Relevant information indicates that Walgreens Boots Alliance (NASDAQ: WBA) is the world’s first pharmacy-led, world-class healthcare enterprise, formed through the merger of Walgreens in the United States and Alliance Boots in Europe. It is the largest retail pharmacy and health-and-wellbeing retailer in the United States and Europe. Walgreens Boots Alliance and its equity-invested affiliates operate in more than 25 countries worldwide, with over 13,200 stores across 11 countries.

Walgreens Boots Alliance operates more than 390 distribution centers, delivering annually to over 230,000 pharmacies, physicians, healthcare centers, and hospitals across more than 20 countries. Its portfolio of retail and business brands includes Walgreens, Duane Reade, Boots, and Alliance Healthcare, as well as increasingly global health and beauty product brands such as No7, Liz Earle, Sleek MakeUP, and Botanics.

Walgreens Boots Alliance operates the largest number of pharmacies in the United States, with more than 8,100 Walgreens stores across all 50 states. Seventy-six percent of Americans live within five kilometers of a Walgreens or Duane Reade pharmacy.

Financial reports show that Walgreens Boots Alliance achieved a revenue of $118.214 billion and a net profit of $4.078 billion in the fiscal year from September 1, 2016, to August 31, 2017.

In fact, this is not the first time Walgreens Boots Alliance has participated in investments in China’s pharmaceutical distribution and retail sector.

As early as 2014, Alliance Boots partnered with Nanjing Pharmaceutical, acquiring a 12% stake in the company for RMB 560 million. Prior to that, Alliance Boots’ controlled subsidiary, Alliance Sinopharm, formed a joint venture with Guangzhou Pharmaceutical at a price of RMB 545 million, a deal then hailed as “the largest investment in the pharmaceutical distribution sector.”

A securities analyst pointed out that after Nanjing Pharmaceutical introduced Alliance Boots, its average net profit from 2013 to 2016 increased by more than 60%, and the net profit margin rose from 0.3% in 2014 to over 1% in the third quarter of 2017, demonstrating a significant boost to performance.

The securities analyst also pointed out that the collaboration between Sinopharm Consistency and Walgreens Boots Alliance will focus on the following areas: 1) Expanded product portfolio. The partnership is expected to introduce Walgreens Boots Alliance’s global health and beauty brands, further optimizing the product mix, enhancing revenue and gross profit margins, and achieving a strong alliance between industry leaders; 2) Advanced management models. As the leading retail pharmacy chain in the United States, Walgreens Boots Alliance possesses extensive experience in managing large-scale chain pharmacies and operating DTP (Direct-to-Patient) pharmacies. It also operates one of the largest pharmaceutical wholesale distribution networks globally, offering valuable insights for Sinopharm Consistency’s wholesale business and its integrated wholesale-retail operations.

The aforementioned collaboration is expected to improve the company’s profitability. Based on Guoda Drugstore’s current gross profit margin, a level of approximately 25% still leaves considerable room for improvement compared with other retail pharmacy chains. We are optimistic about the company’s performance in 2018 and beyond, driven by the synergies from this strategic alliance between two industry leaders.