Keyuan Pharma to Acquire Centennial Chinese Medicine Brand Hongjitang for RMB 3.581 Billion

On April 21, chemical pharmaceutical company KEYUAN PHARM (301281.SZ) disclosed its restructuring report. The company plans to acquire a 99.42% equity stake in Hongjitang from 38 counterparties, including Linuo Investment Holding Group Co., Ltd. (which holds 34.39% of KEYUAN PHARM’s shares) and Linuo Group, by issuing shares, with the transaction valued at approximately RMB 3.581 billion.

In addition, the Company plans to issue shares to no more than 35 specific investors to raise matching funds, with the total amount not exceeding RMB 700 million. Upon completion of the transaction, Linuo Investment Holding Group Co., Ltd. will remain the controlling shareholder, and Mr. Gao Yuankun will continue to serve as the actual controller without change.

It is reported that on October 8, 2024, KEYUAN PHARM disclosed its acquisition intention for the first time, announcing its plan to purchase a 39.68% stake in Hongjitang, which is under the same actual controller, through methods such as issuing shares. As both KEYUAN PHARM and Hongjitang are companies under the “Linuo Group,” this transaction constitutes a related-party transaction and a major asset restructuring.

In this acquisition, Hongjitang’s revenue and net profit significantly exceeded those of KEYUAN PHARM, creating a typical scenario of a smaller entity acquiring a larger one.

Hongjitang, founded in 1907, is a renowned century-old traditional Chinese medicine (TCM) enterprise in Shandong Province. In 2006, it was recognized by the Ministry of Commerce as one of the first batches of “China Time-Honored Brands.” The company offers a diverse product portfolio with 151 approval numbers, covering proprietary Chinese medicines, formula granules, TCM decoction pieces, active pharmaceutical ingredients (APIs), donkey-hide gelatin (Ejiao), and health foods. It holds exclusive rights to 10 products/specifications, including Jinming Tablets, Qianliexin Capsules, and Shexiang Xintongning Tablets.

As a century-old enterprise, Hongjitang holds a pivotal position in the industry. It is not only the sole supplier of muscone, the upstream raw material for artificial musk—a former state-secret formula and a Class I new drug in China—but also holds a 24% equity stake in Beijing Lianxin, the exclusive producer of artificial musk. Additionally, its Angong Niuhuang Wan ranks among the top in market share nationwide.

According to data from Menet, Hongjitang’s Ejiao (Donkey-Hide Gelatin) and Angong Niuhuang Wan (Angong Bezoar Pill) ranked third in market share in 2023. Data from physical pharmacy terminals in the first half of 2024 showed that Hongjitang had three brands with annual sales exceeding RMB 100 million, placing it among the leading companies in its peer group.

From a financial perspective, Hongjitang reported operating revenues of RMB 1.412 billion and RMB 1.284 billion in 2023 and 2024, respectively, with net profits of RMB 109 million and RMB 96 million.

However, Hongjitang’s path to going public has been fraught with difficulties. The company made multiple unsuccessful attempts to list independently, experiencing numerous setbacks such as delisting from the National Equities Exchange and Quotations (NEEQ), a failed backdoor listing, and unfruitful IPO tutoring. As early as September 2016, Hongjitang was listed on the NEEQ, but it announced the termination of its listing less than a year later.

In January 2020, the “Linuo Group” planned to list Hongjitang and KEYUAN PHARM on the A-share market through a backdoor listing. According to disclosures by ST Yaxing, the company intended to acquire 100% of the shares of Hongjitang and KEYUAN PHARM by issuing new shares. Had the transaction been completed, Hongjitang and KEYUAN PHARM would have become wholly-owned subsidiaries of ST Yaxing, and the controlling shareholder of the company would have changed to Linuo Investment. However, as the parties failed to reach consensus on core issues such as transaction price, performance commitments, and compensation, the transaction was ultimately terminated.

In September 2021, Hongjitang signed a tutoring agreement with Huatai United Securities, formally launching its IPO campaign; however, even after KEYUAN PHARM successfully listed on the ChiNext board, Hongjitang had still not achieved an independent listing.

Through this acquisition by KEYUAN PHARM, Hongjitang is poised to achieve a backdoor listing. Regarding the transaction, KEYUAN PHARM stated that upon completion, its core business will expand into areas such as traditional Chinese medicine (TCM) proprietary medicines, health products, and muscone. This move will help build a pharmaceutical and healthcare platform with both scale advantages and industry recognition. Furthermore, the acquisition will enrich the listed company’s product portfolio, enhancing its risk resilience and market competitiveness.

KEYUAN PHARM is a company deeply engaged in the research and development, production, and sales of chemical active pharmaceutical ingredients (APIs) and formulations. Its core products include the antidiabetic drug gliclazide and the anesthetic ropivacaine hydrochloride. Leveraging its in-depth expertise in chemical drug R&D and mature manufacturing processes, the company has achieved consecutive revenue growth in recent years; however, its annual revenue remained below RMB 500 million as of 2024.

Furthermore, impacted by the volume-based procurement policy, prices of chemical drugs have continued to decline, constraining KEYUAN PHARM’s performance growth in recent years and creating an urgent need to expand its business scope. Since its listing in 2023, the company’s net profit has shown a downward trend. Specifically, net profit decreased by 15.6% year-on-year in 2023, and fell further by 21.5% in 2024, amounting to only RMB 60 million.

For KEYUAN PHARM, the acquisition of Hongjitang is expected to facilitate its rapid entry into the traditional Chinese medicine (TCM) sector, establishing a dual-drive strategy of “chemical drugs + TCM.” This will help diversify policy risks and enhance the company’s profitability and core competitiveness.

In addition to extending its core business, this transaction will help KEYUAN PHARM build a large-scale, well-known pharmaceutical and healthcare platform, thereby enhancing the company’s comprehensive strength and overall value. On one hand, KEYUAN PHARM’s chemical formulation business started relatively late, and its market recognition and sales channels need further strengthening. Hongjitang, with its extensive network coverage in retail pharmacies, pharmaceutical distribution, and hospitals, as well as an experienced sales team, will help improve KEYUAN PHARM’s sales capabilities.

On the other hand, through this transaction, both parties can achieve synergistic complementarity in R&D, production, procurement, and other areas—such as sharing R&D platforms and optimizing procurement channels—thereby enhancing R&D and production efficiency while reducing operational costs.

Both KEYUAN PHARM and Hongjitang are assets under the “Linuo Group” umbrella. For Linuo Group, this merger represents a critical step in internal resource integration. It not only resolves Hongjitang’s listing impasse through capital operations and boosts KEYUAN PHARM’s performance, but also helps optimize the group’s resource allocation, address historical related-party transactions and horizontal competition issues, and complete the consolidation of its big health sector.

In the short term, financial consolidation will help improve KEYUAN PHARM’s financial performance. In the long run, however, challenges in areas such as business integration and capacity utilization must still be overcome.