Hansoh Pharma Outpaces Hengrui in 'From Generic to Innovative' Transition: A Power Couple Rivalry in China's Pharma Industry

Produced by | Bullet Finance

Author | Meng Xiangna

Editor | Hu Fangjie

Art Editor | Qianqian

Review | Songwen

Hansoh Pharma, which started with generic drugs, has taken the lead in transitioning to innovative drugs.

Recently, Hansoh Pharma released its 2023 financial report. In 2023, Hansoh Pharma achieved a revenue of 10.1 billion yuan, representing a year-on-year increase of 7.7%; the net profit attributable to shareholders was 3.28 billion yuan, marking a year-on-year increase of 27%.

In 2023, Hansoh Pharma made new progress in its transition from generics to innovation, with revenue from innovative drugs and collaborative products reaching RMB 6.865 billion, a year-on-year increase of 37%, accounting for 68% of total revenue. The speed of this transition even surpassed that of "innovative drug leader" Hengrui Pharma. In the first half of 2023, innovative drugs accounted for 44% of Hengrui Pharma's revenue.

In the pharmaceutical industry, Hansoh Pharma and Hengrui Pharma are known as the "power couple." Zhong Hujuan, the actual controller of Hansoh Pharma, is the wife of Sun Piaoyang, the founder of Hengrui Pharma. Hengrui Pharma is the leading innovative drug company in China's A-share market, and Hansoh Pharma is not far behind.

Why Can Hansoh Pharma Take the Lead in Transforming to Innovative Drugs, and What Unsolved Challenges Remain?

1. "Copy to Innovation" Acceleration

Hansoh Pharma's key subsidiary, Hansoh Pharma, was established in 1995. The following year, Zhong Huijuan left her position at the Lianyungang Pharmaceutical Supervision Bureau to join Hansoh Pharma as a founder.

Since then, Hansoh Pharma has continuously improved the dosage forms of traditional products or imitated varieties whose patent protection periods have expired abroad, following a path that combines imitation with innovation and gradually shifts towards independent innovation.

Hansoh Pharma, which started with generic drugs, has developed over the past two decades to currently possess a range of marketed drugs covering various fields. These products are mainly used for treating central nervous system diseases, anti-tumor, anti-infection, diabetes, gastrointestinal, and cardiovascular diseases.

Products include generic drugs with annual sales exceeding 1 billion yuan, such as Olanzapine Tablets, Pemetrexed Disodium for Injection, and Gemcitabine Hydrochloride for Injection, as well as seven innovative drugs like Almonertinib (Ameile), Flumatinib (Hansoh Xinfu), and Pegfilgrastim (Fulaimi), all of which have been included in the National Medical Insurance Catalog.

In terms of corporate strategy, Hansoh Pharma once became a leading player in China's generic drug industry by adopting a "fast-follow" approach. Its product "Xinwei" is the first generic version of the blockbuster drug "Gleevec" (referred to as "Glini" in the movie), which was featured in the film *Dying to Survive*.

According to 2018 data, among the drugs contributing to revenue for Hansoh Pharma, only one drug, MaiLingDa, is a Class 1.1 innovative drug, while the remaining drugs are first-to-market generics.

For Hansoh Pharma, the past revenue was mainly contributed by generic drugs, but due to the impact of the centralized procurement of generic drugs, its performance has declined. In 2022, Hansoh Pharma's revenue decreased by 5.56% year-on-year to 9.383 billion yuan, and its net profit attributable to shareholders decreased by 4.76% year-on-year to 2.584 billion yuan.

Hengrui Pharma was no exception, with revenue of 21.28 billion yuan in 2022, a year-on-year decrease of 18%; net profit was 3.815 billion yuan, a year-on-year decrease of 15%.

However, compared to Hengrui Pharma, Hansoh Pharma's performance decline was smaller. Hengrui Pharma's performance had already entered a downward trend in 2021, with revenue and net profit decreasing by 6.6% and 29% year-on-year, respectively.

In recent years, both Hansoh Pharma and Hengrui Pharma have transitioned towards innovative drug development. Compared to Hengrui Pharma, Hansoh Pharma has achieved a faster pace in transitioning from generic drugs to innovative ones.

Currently, Hansoh Pharma has a total of 7 innovative drugs. In the field of anti-tumor treatment, Hansoh Pharma has two marketed products: Almonertinib Mesylate Tablets (Ameile) and Flumatinib Mesylate Tablets (Haosen Xinfu). In the anti-infective field, Hansoh Pharma owns two new drugs: Tenofovir Amibufenamide Tablets (Hengmu) and Morinidazole Sodium Chloride Injection (Mailingda).

In 2023, the revenue from Hansoh Pharma's innovative drugs reached RMB 6.865 billion, increasing by 37.1% year-on-year, and accounting for 67.9% of the total revenue, up from 18% in 2020.

Currently, Hengrui Pharma has not yet announced its 2023 performance. However, looking at the first half of 2023, the proportion of its innovative drugs was 44.43%. Clearly, Hansoh Pharma's transition to innovative drugs is faster than that of Hengrui Pharma.

Breaking it down, in 2023, Hansoh Pharma's oncology product portfolio made the largest contribution to its performance, generating revenue of 6.169 billion yuan, accounting for 61% of total revenue.

As is known to all, the R&D process of innovative drugs is extremely complex, involving multiple stages and requiring a substantial amount of capital investment. Hansoh Pharma has also incurred significant financial costs as a result.

2. High Sales Expenses

In the pharmaceutical industry, there is a famous "Double Ten Rule," which means that the introduction of an innovative drug often takes 10 years and requires an investment of at least 1 billion US dollars, with a long cycle and high risk.

In addition, the sales expenses of innovative drug companies remain high. Pharmaceutical companies often face fierce market competition. In order to maintain market share and expand brand influence, companies need to invest substantial funds in marketing, product promotion, and sales team development. Hansoh Pharma's sales expenses were once higher than its R&D expenses.

In 2023, Hansoh Pharma's gross profit margin reached a high of 89.8%, but its net profit margin was only 32.44%. This is mainly due to the company’s expenses in research and development and sales consuming most of the profits.

In 2023, Hansoh Pharma's R&D expenses were RMB 2.097 billion, a year-on-year increase of 24%, with an R&D expense ratio of 21%; sales expenses were RMB 3.53 billion, a slight year-on-year decrease of 1%, with a sales expense ratio of 35%.

In other words, for every 100 yuan of income achieved, Hansoh Pharma needs to spend 21 yuan on R&D expenses and 35 yuan on sales expenses.

Hengrui Pharma is no exception. In the first three quarters of 2023, Hengrui Pharma's R&D expenses were 3.725 billion yuan, with an R&D expense ratio of 22%; sales expenses were 5.409 billion yuan, with a sales expense ratio of 32%. For every 100 yuan of income Hengrui Pharma generates, it spends 22 yuan on R&D and 32 yuan on sales expenses.

High sales expenses may lead to an increased risk of improper practices such as "bribery sales."

In 2021, the Ministry of Finance issued the "Bulletin of the Ministry of Finance of the People's Republic of China on the Quality Inspection of Accounting Information (No. 40)", which showed that Hansoh Pharma and Hengrui Pharma, the main operating entities of Hansoh Pharmaceutical Group, were fined 50,000 yuan each for falsifying expenses.

Among the issues, the Ministry of Finance found that Hengrui Pharma had three types of problems: First, in 2018, it used non-company-related airfare invoices to reimburse expert lecture fees, review fees, and hosting fees, involving an amount of 1.088 million yuan; second, in 2018, it used non-company-related airfare, tolls, consulting fees, advertising expenses, and other invoices to account for employee welfare and reward expenditures, involving an amount of 2.1491 million yuan; third, the Lianyungang Comprehensive Office II under the company used non-unit-related bridge and road toll invoices in 2018 to reimburse subsidies for sales personnel at the office, gifts for clients, and meal expenses for academic activities, involving an amount of 961,900 yuan.

(Figure / Ministry of Finance website)

Hansoh Pharma was found by the Ministry of Finance to have four types of issues: First, in 2018, consulting and review fees as well as advertising and promotion expenses were recorded, but upon checking some of the attached invoices on the National VAT Invoice Verification Platform of China's State Taxation Administration, the results showed "no such invoice" or "inconsistencies," involving an amount of 129 million yuan; Second, in 2018, consulting and review fees of 16 million yuan were falsely recorded for 27 information consulting service departments; Third, some of the supporting documents for meeting expenses recorded in 2018 were found to be false, involving an amount of 2.7406 million yuan; Fourth, in 2018, office supply expenses were overstated by 4.8171 million yuan, with the attached invoices showing purchases of products such as pens and notebooks, but investigations revealed that no actual purchases were made.

(Figure / Ministry of Finance website)

This also shows that pharmaceutical companies need to strengthen supervision and self-discipline during their development process to ensure long-term growth. For Hansoh Pharma, which is developing at an accelerated pace, risk control in this aspect is equally important.

3. In 1987, the "second-generation pharmaceutical" was worth billions.

However, Hansoh Pharma's huge expenditure in R&D has brought considerable returns to the company.

As of the end of 2023, Hansoh Pharma had more than 50 ongoing clinical trials for innovative drugs, belonging to over 30 innovative drug products. During the reporting period, Hansoh Pharma added 8 innovative drugs that entered the clinical stage for the first time.

(Figure / Shutterstock, based on VRF protocol)

In addition to self-research, Hansoh Pharma is also open to external collaborations. The company expands its cooperation through BD (Business Development) introductions or technology platforms.

As of the end of 2023, Hansoh Pharma has cumulatively introduced nine collaborative projects in clinical stages, all of which have been approved for clinical trials in China, along with two commercial-stage projects. In terms of out-licensing pipeline products under research, Hansoh Pharma completed two out-licensing agreements in 2023.

Among them, the most notable is Hansoh Pharma's collaboration with multinational pharmaceutical company GSK (GlaxoSmithKline) in the field of ADC (Antibody-Drug Conjugates). In the second half of 2023, GSK successively licensed two antibody-drug conjugates from Hansoh Pharma. The total value of the two deals amounted to a staggering $3.28 billion, including an upfront payment of $270 million.

The company's innovative drug development is proceeding rapidly, with research projects underway in an orderly manner. From the arrangement of Hansoh Pharma's management personnel, Zhong Huijuan has shown consideration for cultivating a successor.

Public information shows that Sun Piaoyang and Zhong Huishan's daughter, Sun Yuan, was born in 1987 and graduated from the University of Cambridge in the UK. As a beneficiary of the family trust, after working as an analyst at Hongyi Capital for two years, Sun Yuan joined Hansoh Pharma in October 2011. She currently serves as an executive director, mainly responsible for R&D strategy, and providing guidance for business development and investment strategies.

In terms of equity structure, Zhong Huishan and her daughter Sun Yuan hold 65.85% of the company's shares through a family trust, making them the controlling shareholder and actual controller of Hansoh Pharma.

Currently, Sun Piaoyang and Zhong Huijuan, as a couple, control two pharmaceutical listed companies, "Hengrui Pharma" and "Hansoh Pharma," with a combined market value exceeding 360 billion yuan. Among them, the market value of Hansoh Pharma exceeds 95 billion Hong Kong dollars (approximately 87.7 billion yuan), while the market value of Hengrui Pharma surpasses 280 billion yuan.

When Will Sun Yuan, the "Second-Generation Pharmacist" Backed by a Billion-Dollar Family Fortune, Take Over? Can He Drive Better Company Development? "Jiemian News·Bullet Finance" Will Continue to Monitor.

*The image in the article is from: Shutterstock, based on the VRF protocol.

       Title: Pharmaceutical Industry Power Couples Face Off: Hansoh Pharma's "Generic-to-Innovative" Transition Speeds Ahead of Hengrui Pharma