Zuoli Pharma to Become Second-Largest Shareholder in Lingyi Bio, Accelerating Innovative Drug Pipeline as Core Product Surpasses RMB 1.2 Billion in Annual Sales

Image source: Tuchong Creatives

Zhejiang Jolly Pharmaceutical Co., Ltd. (300181.SZ) recently announced that it has signed a "Strategic Cooperation Framework Agreement" with Lingyi Biotech Co., Ltd. ("Lingyi Biotech"). The cooperation between the two parties mainly focuses on four aspects: equity, research and development, products, and sales.

Among the cooperation aspects, in terms of equity collaboration, Zhejiang Jolly Pharmaceutical Co., Ltd. will invest in Lingyi Biotech (A+ round) through capital increase, becoming its second-largest shareholder. Furthermore, after Lingyi Biotech obtains clinical trial approval for its neurology-related pipelines (including but not limited to Parkinson’s disease), both parties may negotiate for Zhejiang Jolly Pharmaceutical Co., Ltd. to acquire a controlling stake or full equity of Lingyi Biotech at market price, in a manner compliant with regulatory and legal requirements. On the basis of reaching the equity cooperation, Zhejiang Jolly Pharmaceutical Co., Ltd. will assist Lingyi Biotech in establishing a marketing system that meets market demands and obtain the distribution rights or sales agency rights for Lingyi Biotech's neurology products in mainland China.

In terms of research and development cooperation, the two parties will jointly explore business collaboration for the development of Zhejiang Jolly Pharmaceutical Co., Ltd.'s intended products based on their technical platforms, assisting in its innovative drug development. In addition, the two parties will also engage in in-depth cooperation in R&D, establishing a neurological drug research and development center to jointly develop innovative drugs for neurological diseases such as Parkinson's disease and Alzheimer's Disease (AD).

Zhejiang Jolly Pharmaceutical Co., Ltd. was established in 1995. It is a company that focuses on the development, production, and sales of traditional Chinese medicine products based on medicinal fungi bio-fermentation technology. The company's main business products currently include the Wuling series (Wuling Capsules, Lingze Tablets, Linglian Flower Granules), the Bailing series (Bailing Tablets, Bailing Capsules), traditional Chinese medicine decoction pieces, and traditional Chinese medicine formula granules. Among them, Wuling Capsules, as a sedative traditional Chinese medicine product, achieve annual sales of over 1.2 billion yuan. Zhejiang Jolly Pharmaceutical Co., Ltd. is thus known as the "top player" in the anti-insomnia traditional Chinese medicine market in East China.

Lingyi Biotech, established in 2021, is an innovative drug development company focused on monogenic hereditary diseases. It is committed to the research and industrialization of First-in-Class gene therapy pipelines, with a focus on areas of urgent clinical need such as the central nervous system and metabolic diseases.

Reporters from the Times Weekly noticed that this is not the first time Zhejiang Jolly Pharmaceutical Co., Ltd. has laid out in the innovative drug field. In February 2016, Jolly Pharmaceutical, through its subsidiary Jolly Innovative Medical, increased its investment in CARsgen Therapeutics (Shanghai) Co., Ltd., which mainly focuses on innovative chimeric antigen receptor T-cell (CAR-T) therapies for treating solid tumors and hematologic malignancies. In 2021, when CARsgen Therapeutics went public, Jolly Pharmaceutical disclosed that it held 28,385,000 ordinary shares of CARsgen Therapeutics through its subsidiary Jolly Innovative Medical, accounting for 5.00% of the total share capital.

Moreover, it is worth mentioning that Zhejiang Jolly Pharmaceutical Co., Ltd. is currently conducting secondary development of Wuling Capsules in the AD direction, including research on Mild Cognitive Impairment (MCI). Therefore, to a certain extent, Jolly Pharmaceutical's investment in Lingyi Biotech can still be regarded as an extension around its core business.

On November 22, regarding more details of this investment in Lingyi Biotech and the research progress of Wuling Capsules in the AD direction, reporters from the Times Weekly repeatedly called the secretary's office of Zhejiang Jolly Pharmaceutical Co., Ltd. and sent an interview letter, but as of press time, no response was received.

From Village Director to Actual Controller of a Listed Pharmaceutical Company

The predecessor of Zhejiang Jolly Pharmaceutical Co., Ltd. was Zhejiang Jolly Medicine and Health Products Company. The company's founder, Yu Youqiang, aged 62, is the controlling shareholder, actual controller, and chairman. Yu Youqiang’s journey from being a village director to becoming the actual controller of a hundred-billion-yuan listed company is nothing short of legendary.

In 1987, Yu Youqiang, aged 25, was elected as the village director by the residents of Dongfeng Village, Wukang Town, Deqing County, Huzhou City. According to media reports, Yu Youqiang overcame opposition to re-collectivize the scattered tea plantations, which increased the village's income by 30,000 yuan that year, tripling the previous amount. After witnessing the benefits of scaled production, Yu Youqiang subsequently founded Dongfeng Bamboo Shoots Factory, established the Sino-Japanese joint venture Zhejiang Shengfeng Food Co., Ltd., and Huilian Supermarket. He also set up Shengfeng Real Estate Development Company, Beihu Construction Company, and Zhejiang Beihu Group, among other enterprises and entities.

Image Source: Zhejiang Jolly Pharmaceutical Co., Ltd. Official Website

The connection with medicine began in 1995, when a rare "Wuling菌" developed by Zhejiang University after nearly two decades of research caught the attention of Yu Youqiang. According to an article on the official WeChat account of Zhejiang Jolly Pharmaceutical Co., Ltd., Wuling菌, also known as "Wuling参", is a medicinal fungus that grows deep underground in abandoned termite nests, possessing high nourishing and medicinal value.

Yu Youqiang recognized the potential medicinal value of "Wuling Jun" and, in July 1995, purchased the intellectual property rights for "Wuling Jun" from the Wukang Town Government for 5 million yuan. At the same time, based on the advice of a group of experts, Yu Youqiang decided to transition the company from a health product ("Jian") designation to a pharmaceutical ("Zhun") designation. In 1998, Zhejiang Jolly Medicine Health Products Company was renamed Zhejiang Jolly Pharmaceutical Co., Ltd., marking the beginning of its journey into the pharmaceutical industry.

In April 1998, the company's "Wuling Capsule" and "Wuling Powder" obtained a Class I New Drug Certificate from the state. It is reported that the main raw material of Wuling Capsule is Wuling Powder, and the production technology of Wuling Powder is classified as a state secret technology, exclusively possessed by Zhejiang Jolly Pharmaceutical Co., Ltd. in China. In 1999, Jolly Pharmaceutical began formal production of "Wuling Capsule" and "Wuling Powder." Data shows that with the Wuling series products, Jolly Pharmaceutical achieved sales revenue of 50 million yuan and a profit of 15 million yuan in 2000.

In February 2011, Zhejiang Jolly Pharmaceutical Co., Ltd. was listed on the ChiNext Board of the Shenzhen Stock Exchange, becoming the first company in Huzhou City to be listed on the ChiNext market. However, in the fifth year after its listing, affected by industry policy changes such as drug bidding, medical insurance cost control, and the two-invoice system, Jolly Pharmaceutical's profitability began to decline year by year. Net profit attributable to shareholders dropped from RMB 103 million in 2014 to RMB 21 million in 2018.

In the following two years, Yu Youqiang attempted several times to transfer most of his shares in Zhejiang Jolly Pharmaceutical Co., Ltd., but failed twice.

In May 2019, Zhejiang Jolly Pharmaceutical Co., Ltd. announced that Yu Youqiang and Deqing County Wuling Equity Investment Partnership planned to transfer a total of 18.6% of their shares to Huadong Medicine. However, the acquisition failed due to a 70% premium on the purchase price sparking controversy and the presence of competition between the two parties. In March 2020, Yu Youqiang again attempted to transfer 15% of his shares to Zhejiang Medical Health Group Co., Ltd., but this plan ultimately fell through as it did not receive approval from the Zhejiang Provincial State-owned Assets Supervision and Administration Commission.

In September 2020, Yu Youqiang successfully transferred his 7.11% equity stake to Deqing County Culture and Tourism Development Group. His shareholding ratio decreased from 28.46% to 21.34%, and Deqing County Culture and Tourism Development Group became the second-largest shareholder of the company.

Wuling Capsules Sold Over 1.2 Billion Last Year

Surprisingly, with the help of the "986" policy dividend period, the performance of Zhejiang Jolly Pharmaceutical Co., Ltd. began to improve gradually.

In October 2019, the General Office of the State Council issued the "Opinions of the General Office of the State Council on Further Ensuring Supply and Stabilizing Prices of Shortage Drugs." It mentioned that the proportion of essential drug varieties equipped at grassroots healthcare institutions, secondary public hospitals, and tertiary public hospitals should be no less than 90%, 80%, and 60%, respectively. This policy has thus been referred to in the industry as the "986 Policy." Industry insiders have pointed out that the requirements of the "986 Policy" significantly lower the threshold for exclusive traditional Chinese medicine (TCM) products entering hospitals, benefiting the growth of exclusive essential drug varieties structurally.

Zhejiang Jolly Pharmaceutical Co., Ltd.'s "Wuling Series" products are considered a typical case benefiting from this policy. Financial report data shows that the sales revenue of the Wuling Series has reversed its previous decline. In 2021, the sales revenue of the Wuling Series reached 850 million yuan, increasing by over 40.22% year-on-year.

In 2022, as Wuling Capsules were gradually included in the traditional Chinese medicine procurement programs of multiple regions, the product's revenue growth slowed temporarily amid price reductions. Financial reports show that from 2022 to 2023, the sales revenue of the Wuling series was 1.092 billion yuan and 1.228 billion yuan respectively, representing year-on-year growth of 28.45% and12.42%。

However, as the number of provinces involved in bulk procurement increases, and Zhejiang Jolly Pharmaceutical Co., Ltd. chooses to replace large packaging specifications in bulk procurement areas, Wuling capsules have now achieved volume growth through price reductions. Financial reports show that in the first three quarters of 2024, revenue from the Wuling series increased by 24.88% year-on-year. Among them, the sales volume of Wuling capsules increased by 30.24%, and sales revenue increased by 22.67% year-on-year; Lingze tablets sales volume increased by 37.05% year-on-year, entering a rapid growth phase.

Apart from the Wuling series, Zhejiang Jolly Pharmaceutical Co., Ltd. is also striving to expand its second growth curve. Financial reports show that in the first three quarters of 2024, the sales volume of the Bailing series increased by 22.14% year-on-year, with the sales revenue decline narrowing to 4.89%; the sales revenue of the traditional Chinese medicine decoction pieces series increased by 51.24% year-on-year; and the sales revenue of the traditional Chinese medicine formula granules increased by 175.96% year-on-year.

On October 30, Zhejiang Jolly Pharmaceutical Co., Ltd. disclosed in its investor activity record that the company's Bailing Capsules have completed the listing process in 29 provinces, autonomous regions, and municipalities across China. The current centralized procurement in the Hubei Alliance region represents a significant window of opportunity. The company will seize this opportunity to expand its market reach. Additionally, the company plans to implement an all-channel sales strategy through hospitals, OTC channels, and online platforms. In the hospital sector, it will focus on entering relatively accessible markets such as county-level regions and grassroots healthcare institutions. For the non-hospital sector, the company will actively expand into retail pharmacies and e-commerce platforms.

Reporters from the Times Weekly noticed that Yu Youqiang's shareholding percentage has slightly decreased in recent years, and the pledge ratio has also drawn public attention. According to the 2024 interim report of Zhejiang Jolly Pharmaceutical Co., Ltd., as of June 30, Yu Youqiang’s shareholding ratio was 18.52%, with the cumulative pledged shares reaching 90 million at one point, accounting for 69.29% of his total shares and 12.83% of the company’s total equity.

On July 25, Zhejiang Jolly Pharmaceutical Co., Ltd. disclosed the "Announcement on the Release and Pledge of Part of the Shares by the Controlling Shareholder and Actual Controller." The announcement showed that on July 23, Yu Youqiang released 43 million shares from pledge, but pledged them again the next day. As of the date of the announcement, the cumulative number of pledged shares by Yu Youqiang had become 64.5 million, with a pledge ratio of 49.66%.

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