Shanghai Pharmaceutical Holdings Co, China's largest listed drug maker by revenue, has been given the green light to raise as much as 13 billion yuan (US$2 billion) in an initial public offering in Hong Kong as early as next month.

More than half of the new capital is expected to be used for merger and acquisitions to improve the company's distribution channels across the Chinese mainland.

Shanghai Pharma already has set up three major distribution systems in east, north and south China. More acquisitions are expected to further consolidate its dominant market position.

Earlier reports also said it may even be eying a controlling stake in German drug retailer Celesio. Shanghai Pharma has declined to comment on specifics of its acquisition plans.

"Expanding distribution channels is expected to accelerate the company's pace of growth faster than that of its domestic counterparts in the next few years," Guotai Junan Securities analyst Yi Jingming said.

As a pharmaceutical group headquartered in Shanghai, business operations of Shanghai Pharma range from research and development of over-the-counter as well as prescription drugs, manufacturing and retailing of medicines and health care products. It currently operates and franchises a network of retail pharmacies across nine provinces, municipalities and autonomous regions.

The company plans to issue up to 763.85 million shares in Hong Kong at a minimum HK$14.70 (US$1.89) apiece.

In early April, Shanghai Pharma completed acquisition of a 100 percent stake in China Health System, giving it control of Citic Pharmaceutical Co, a drug retailer with estimated 2010 sales of 6 billion yuan that focuses on north China's market. Lu Mingfang, chairman of Shanghai Pharma, said the company's strategy is to expand nationwide from its base in the Yangtze River Delta region.

"The acquisition of China Health System, following that of Beijing Aixin Weiye Medicine Co, has laid down a basic framework for Shanghai Pharma to move nationwide," China International Capital Corp's Sun Liang wrote in a research report.

Further acquisitions will be made through these units, a Shanghai Pharma official said.

Shanghai Pharma paid 225 million yuan for a 52.24 percent stake of Aixin Weiye in a deal completed in November.

Shanghai, Beijing and Zhejiang Province rank as the top three drug markets in China in terms of sales volume, according to data compiled by China International Capital. Picking up subsidiaries in those areas makes perfect sense in Shanghai Pharma's expansion plans, analysts said.

Shanghai Pharma expects revenue from the takeovers of China Health and Aixin Weiye to contribute a combined 10 billion yuan from Beijing alone this year, while overall revenue from distribution channels could reach 45 billion yuan.

China was ranked the world's third-largest pharmaceutical market by consultancy firm IMS Health Inc. National sales are estimated at US$50 billion this year.