Lingrui Pharmaceutical Announces Intent to Acquire Yinggu Pharma for Up to RMB 7.82 Billion

Following Northeast Pharmaceutical’s acquisition of a 70% stake in Beijing Dingcheng Peptide Source for RMB 187 million, another M&A deal involving a pharmaceutical company has emerged in the A-share market.

On December 4, Henan Lingrui Pharmaceutical Co.,Ltd. (Lingrui Pharmaceutical), the leading A-share listed company in traditional Chinese medicine patches and plasters, announced that it plans to use its own funds to acquire 100% equity of Beijing Jiashitang Biological Medicine Co.,Ltd. (hereinafter referred to as “Jiashitang Pharma”). The letter of intent signed this time represents a preliminary agreement on the cooperative intentions of all parties involved, with the comprehensive valuation of Jiashitang Pharma tentatively set at no more than RMB 782 million. Compared to the book value of total shareholders’ equity of RMB 135 million reported by Jiashitang Pharma’s parent company, the appreciation rate is 469.98%. In comparison to the book value of shareholders’ equity attributable to the parent company of RMB 122 million under the consolidated financial statements, the appreciation rate reaches 530.05%.

However, the market reaction to this event was not positive. After the morning opening on December 5, the share price of Henan Lingrui Pharmaceutical Co.,Ltd. plummeted by more than 6%, closing at noon at RMB 22.66 per share, a decrease of 3.98%. The company’s current total market capitalization stands at RMB 12.9 billion.

Since the fourth quarter of this year, there has been a frequent stream of news regarding mergers and acquisitions in the pharmaceutical sector. Notable examples include Northeast Pharmaceutical’s acquisition of a 70% equity stake in Beijing Dingcheng Peptide Source for RMB 187 million; Shinova Pharma’s RMB 7.6 billion acquisition of Shijiazhuang Pharma Group Baikai; and Keyuan Pharmaceutical’s announcement of its intention to acquire control of Hongjitang through methods such as issuing A-shares.

Yingu Pharmaceutical, established in 2007, is an innovative pharmaceutical enterprise integrating R&D of novel drugs, synthesis of active pharmaceutical ingredients (APIs), formulation manufacturing, and product sales.

Yingu Pharmaceutical currently operates a modern patented active pharmaceutical ingredient (API) manufacturing plant, which includes peptide API synthesis, and a brand-new finished dosage form manufacturing facility. The latter comprises multiple GMP-certified workshops for various injectables and nasal sprays, featuring four production lines: two lines for small-volume parenterals without terminal sterilization and two spray formulation lines.

Leveraging its breakthroughs in innovative technologies, Yingu Pharmaceutical holds multiple Chinese patents and PCT patent applications, having obtained eight Chinese invention patent certificates as well as numerous invention patent certificates in the United States, Japan, Europe, and other countries.

Its core product is a benzene ring quinuclidinium bromide nasal spray, a Class 1.1 new drug approved by the NMPA for the treatment of post-cold rhinitis symptoms and persistent allergic rhinitis. The drug was approved for marketing on March 31, 2020, to improve symptoms such as runny nose, nasal congestion, nasal itching, and sneezing caused by allergic rhinitis.

Last year, A-share listed company Seto Bio announced its intention to acquire a 60% equity stake in Yingu Pharmaceutical for RMB 458.1 million in cash, implying an overall valuation of RMB 763.5 million for 100% of Yingu Pharmaceutical’s equity at that time. This move immediately drew skepticism from investors regarding the source of acquisition funds. According to financial reports, Seto Bio’s “cash and cash equivalents” amounted to only RMB 183 million in the third quarter of last year.

The acquisition was announced to have fallen through in August of this year.

Just three months later, Beijing Jiashitang Biological Medicine Co., Ltd. once again garnered the favor of Henan Lingrui Pharmaceutical Co., Ltd., with its overall valuation increasing by more than RMB 18 million. Based on Henan Lingrui Pharmaceutical’s financial position, funding for this acquisition is no longer a concern. According to its financial reports, driven by the accelerating aging population, the company maintained revenue and net profit attributable to shareholders’ growth rates of over 10% and 20%, respectively, in 2022, 2023, and the first three quarters of 2024. On November 29 this year, the company also reviewed and approved the “Proposal on Authorizing the Use of Idle Own Funds for Cash Management,” agreeing to utilize idle own funds not exceeding RMB 2.2 billion for cash management purposes.

Henan Lingrui Pharmaceutical Co.,Ltd. will pay RMB 10 million as a good-faith deposit for this transaction to the bank accounts designated by both Yingu Group, the parent company of Beijing Jiashitang Biological Medicine Co.,Ltd., and its actual controller, Wang Wenjun, after the signing of this letter of intent.

Henan Lingrui Pharmaceutical Co.,Ltd. is a well-known domestic enterprise specializing in traditional Chinese medicine (TCM) patches and plasters. The company’s core business involves the research and development, manufacturing, and sales of proprietary Chinese medicines and chemical pharmaceutical preparations, with its product portfolio covering therapeutic areas such as bone diseases, cardiovascular and cerebrovascular disorders, pediatrics, antifungal treatments, and cancer-related pain.

In recent years, Henan Lingrui Pharmaceutical Co., Ltd. has demonstrated outstanding performance in the market for traditional Chinese medicine (TCM) plasters and patches. Among its portfolio, Tongluo Qutong Plaster and Huoxue Xiaotong Tincture are exclusive products of the company. The "Two Tigers" series achieves annual sales exceeding 1 billion patches, holding a significant market share among products with the same brand name.

According to its financial reports, Henan Lingrui Pharmaceutical Co.,Ltd. generated approximately RMB 3.311 billion in revenue and achieved a net profit attributable to shareholders of approximately RMB 568 million in 2023. In the first three quarters of this year, the company recorded revenue of approximately RMB 2.759 billion, representing a year-on-year increase of 10.07%; the corresponding net profit attributable to shareholders amounted to approximately RMB 574 million, up by 23.1% year on year.

Nevertheless, despite its performance growth, Henan Lingrui Pharmaceutical Co.,Ltd. still faces numerous challenges. Industry-wide difficulties are becoming increasingly prominent, including high product homogenization, the impending expiration of patents for exclusive products, and downward price pressure driven by centralized procurement. According to data from Yaozhi.com, there are over 200 manufacturers producing similar products such as Musk Zhuanggu Plaster, Joint Analgesic Plaster, Dampness-Dispelling Analgesic Plaster, Goupi Plaster, and Dampness-Dispelling Pain-Relieving Plaster.

In addition, the patent protection for Lingrui Pharmaceutical’s Tongluo Qutong Plaster and Peiyuan Tongnao Capsules is set to expire in 2026. As a flagship product of Henan Lingrui Pharmaceutical Co., Ltd., Tongluo Qutong Plaster generated sales revenue exceeding RMB 1 billion in 2023; thus, the expiration of its patent rights will undoubtedly have a significant impact on the company.

Lingrui Pharmaceutical stated that upon completion of the transaction, Jiashitang Pharmaceutical will be included in Lingrui Pharmaceutical’s consolidated financial statements, which will help enhance Lingrui Pharmaceutical’s sustained profitability, risk resistance, and overall competitiveness.

However, in its 2024 semi-annual report, Henan Lingrui Pharmaceutical Co.,Ltd. noted that new drug development is characterized by high investment, high risk, and long cycles, making it susceptible to various factors such as technology, regulatory approval, and policy. The process from product development and clinical trial approval to commercial production involves a long timeline and multiple stages, with many uncertainties. Furthermore, there is uncertainty regarding whether the product will achieve favorable market prospects and economic returns after launch.

According to a review by The Economic Observer, seven of the top ten traditional Chinese medicine (TCM) companies by market capitalization—excluding Tongrentang (600085.SH), Dong-E-E-Jiao (000423.SZ), and Darentang (600329.SH)—have already ventured into the research and development of biochemical innovative drugs.

Since 2020, traditional Chinese medicine (TCM) enterprises have embarked on a path of transformation, adopting a dual strategy of “in-house R&D plus external introduction” to shift towards the development of innovative drugs. According to incomplete statistics, seven TCM companies involved in innovative drugs have more than 50 biochemical innovative drug candidates under development. Among them, Tasly Group (600535.SH) has over 30 related projects; Yunnan Baiyao, Pien Tze Huang, and Yiling Pharmaceutical (002603.SZ) each have five; while China Resources Sanjiu (000999.SZ), Baiyunshan (600332.SH/00874.HK), and Jichuan Pharmaceutical (600566.SH) each have three.

Innovation has become an irresistible trend in the pharmaceutical industry. In addition to pipeline transactions and independent R&D, traditional Chinese medicine enterprises such as Tongrentang, Pien Tze Huang, and Yunnan Baiyao have also begun to act as limited partners (LPs), actively investing in the healthcare sector and directly positioning themselves in the innovative drug arena.

In recent developments, in November, Guangshengtang announced that its controlling shareholder, Fujian Aohua Group (“Aohua Group”), had transferred its 5.02% equity stake in the company to Zhangzhou Yuanshan Health Industry Investment Fund Partnership (Limited Partnership) (“Yuanshan Fund”) for a total consideration of RMB 196 million. It is reported that Yuanshan Fund was established in July this year with a total capital commitment of RMB 500 million, primarily investing in traditional Chinese medicine (TCM), biopharmaceuticals, medical devices, healthcare services, and health and elderly care. Pien Tze Huang Investment, a wholly-owned subsidiary of the multi-billion-dollar TCM giant Pien Tze Huang, is the largest limited partner in the fund, holding a committed capital contribution ratio of 40%.

In early December, Yunnan Baiyao announced that it plans to jointly establish the Yunnan Province Traditional Chinese Medicine Big Health Innovation Fund with BOC International Investment, a professional investment institution. The fund will have a scale of RMB 7 billion. As a limited partner, Yunnan Baiyao intends to subscribe for a capital contribution of RMB 5 billion using its own funds.

The announcement specifies that the industrial fund will primarily focus on enterprises within Yunnan Province’s traditional Chinese medicine (TCM) industry chain, while also expanding its coverage to include various companies across China operating in the TCM big health and biopharmaceutical sectors.

References:

1. New Buyer Found: Yingu Pharmaceutical Seeks Backdoor Listing Again — Beijing Business Today

2. Situo Biotech Terminates High-Premium Acquisition of Yingu Pharmaceutical; Billion-Yuan Lingrui Pharmaceutical Plans to Step In as “White Knight”. Radar Finance

3. “Old TCM Practitioners” Challenge Innovative Drugs. The Economic Observer