The price of the deal, which has yet to be officially revealed, may rise as high as 4 billion yuan ($603 million) according to the Shanghai-based Oriental Morning Post, which cited anonymous company sources. If so, it would become the country's largest transaction in the pharmaceutical sector.

Triggered by the announcement, the drugmaker's shares jumped 10 percent in Shanghai trading to a record high of 26.19 yuan during Tuesday's morning session. They ended the day 7.94 percent higher at 25.7 yuan, when compared with the major index's 1.61 percent retreat.

The State-owned company said in a statement released to the Shanghai Stock Exchange on Tuesday that it has already granted 20 million yuan to its subsidiary, SIIC Medical Science and Technology (Group) Ltd, to fund the upfront payment of the deal

Shanghai Pharmaceutical, the biggest drug distributor in East China whose drug distribution business reached 23.5 billion yuan in 2009, has targeted North and South China as prime areas for the development of its business. Those three regions account for more than half of all the medicines consumed in the country.

The deal, if successful, will prove a "historic breakthrough" for the company's expansion in North China, including the capital city. "Beijing has been one of the core areas for our development. A deal would effectively boost the company's sales and market share, setting up a framework for the national strategy," the company said.

China Health System is the third-largest drug distributor in Beijing. The company realized 4.3 billion yuan in sales and 100 million yuan profit in 2009, with sales this year expected to reach 6 billion. Direct sales to hospitals account for 70 percent of the company's business, with wholesale making up the remainder.

China International Capital Corporation, the country's biggest investment bank, said on Tuesday that the potential acquisition would be the biggest in China's pharmaceutical distribution industry, and also a landmark in Shanghai Pharmaceutical's accelerating market operations.

Shanghai Pharmaceutical has been actively striking deals this year as it seeks to accelerate expansion.

The announcement on Tuesday came after the company bought a controlling stake earlier this year in Beijing Aixin Weiye Pharmaceutical Co Ltd, another major drug distributor in the capital.

It follows a deal in April when the company paid 26 million yuan to raise its stake in Guangzhou ZSY Pharmaceutical to 51 percent from 35 percent.

In September, the company said it will sell as much as a 25 percent stake in a Hong Kong IPO in the second quarter of 2011, and plans to use most of the proceeds to acquire rival companies and sales networks at home and abroad.