HONG KONG – In a move that could mark the culmination of Sinopharm Group Co. Ltd.'s efforts to build a national network for its med-tech business, China's largest retailer of pharmaceutical products is set to merge with China National Scientific Instruments and Materials Co. Ltd. (CSIMC) by acquiring a 60 percent stake of the medical distributor for ¥5.11 billion (US$765.4 million).

Both companies are subsidiaries of the state-owned enterprise China National Pharmaceutical Group Corp., which reached the Top 200 of the list of Fortune Global 500 companies in 2017.

Expanding the medical device segment is part of the strategy of Hong Kong-listed Sinopharm Group.

"The Chinese medical device industry is in a period of rapid development that offers plenty of opportunities," a Sinopharm Group spokesperson told BioWorld MedTech.

"The acquisition will further enhance Sinopharm Group's competitiveness in the medical device industry, as well as combine CSIMC's superior product structure and business models with our national distribution network."

Sinopharm Group was founded in 2003 and went public in 2009. It now reaches more than 14,000 hospitals, over 112,000 primary health care institutions and more than 74,000 retail pharmacies.

CSIMC will become the latest addition to the company's list of 62 subsidiary companies.

CSIMC was founded in 1962. It was reorganized and became part of China National Pharmaceutical Group in 2009. A year later, it acquired a medical equipment sales firm, China National Medical Equipment Industry Corp. (CMIC), which claims to have more than 6,000 clients.

In February, CMIC entered Biolake, an industry base in Optics Valley in Wuhan Province that houses many high-tech and R&D firms. The company has become Sinopharm's key pillar in its efforts to develop medical devices.

CSIMC's rapid growth is another important motivator for Sinopharm Group. From 2015 to 2017, the distributor's sales revenue doubled from ¥16.26 billion (US$2.4 billion) to ¥30.71 billion (US$4.54 billion). Its net income also surged drastically from ¥287 million (US$42.41 million) in 2015 to ¥489 million (US$72.26 million) in 2017.

And the companies could become much more integrated after the transaction, according to the spokesperson, who said such integration could "improve management efficiency, while rapidly grow its footprint to the whole country."

David Li, a health care analyst at capital markets and investment group CLSA Ltd., said the consolidation could be to be completed in October and believed it will benefit both Sinopharm Group and Sinopharm.

"The leading players are likely to benefit from the market consolidation," Li said in a report. "The medical devices segment will become the fastest growing among the [units] in Sinopharm, when it leverages the resources from Sinopharm and the national distribution network from Sinopharm Group."

Li said there are currently around 180,000 players in China's medical devices distribution market. Sinopharm Group can account for 20 percent market share after the consolidation, according to Li. China's medical device market is growing 20 percent each year and could be worth ¥700 billion (US$103 billion) by 2020.

The potential for growth has attracted global players.

Global pharmacy and health care giant Walgreens Boots Alliance, for example, has invested into the market by acquiring a 40 percent stake into Sinopharm Group's subsidiary, Sinopharm Holding Guoda Drugstores Co. Ltd., as part of a deal worth ¥2.76 billion (US$417 million) last December.

And also last year, U.S. financial investment company Century Management also bought stock in Sinopharm Group.

In a review of China's medical devices sector in 2017, global accounting and consultancy firm Pricewaterhousecoopers, found that the volume of mergers and acquisitions (M&A) in the sector in China had increased 19 percent from the previous year and reached $89 million. The volume of M&A for companies in surgical, consumables and imaging equipment also rose.

The country's "Made in China 2025" plan includes goals of increasing domestic device use in high tier hospitals to 50 percent by 2020, 70 percent by 2025 and 95 percent by 2030.

And Li expects more industry consolidation in China in the future. Such consolidation might eventually wipe out the smaller players, thanks to the new supply requirements and inspections from the China National Drug Administration.

Li also predicted that Sinopharm Group will turn its attention from M&A to other businesses.

"As Sinopharm Group has already completed its national network penetration . . . it is seeking collaboration with upstream and downstream players on new businesses such as e-commerce and academic marketing," he said.