China Resources Pharma Completes RMB 1.791 Billion Internal Restructuring to Consolidate Xuesaitong Product Line

On November 21, CR SANJIU (stock code: 3320) announced that it had entered into an equity transfer agreement with Kpc Pharmaceuticals, Inc. (securities code: 600422),CR SANJIU has conditionally agreed to sell, and Kpc Pharmaceuticals, Inc. has conditionally agreed to acquire, a 51% equity interest in China Resources Kunming Shenghuo Pharmaceutical Co., Ltd. (“CR Shenghuo”) for a total consideration of RMB 1.791 billion (equivalent to approximately HKD 1.938 billion). CR SANJIU is expected to use the proceeds from the disposal of the 51% equity interest in CR Shenghuo to supplement its working capital.

Both Kunming Pharmaceutical Group (KPC) and China Resources Shenghuo, the target of this transaction, are subsidiaries of CR SANJIU, with CR SANJIU holding 100% equity in China Resources Shenghuo. According to the asset valuation report announced in June this year, upon completion of the acquisition, CR SANJIU’s shareholding in China Resources Shenghuo will decrease from 100% to 49%, while KPC will hold a 51% stake in China Resources Shenghuo.The announcement stated that, upon completion of the proposed internal restructuring, CR SANJIU’s equity interest in China Resources Kunming Shenghuo Pharmaceutical Co., Ltd. is expected to be diluted from approximately 63.02% to approximately 39.90%, while China Resources Kunming Shenghuo Pharmaceutical Co., Ltd. will remain a non-wholly-owned subsidiary of CR SANJIU.

The transaction price was determined based on the appraisal value, with the valuation reference date being July 31, 2023. The income approach was ultimately adopted as the basis for the appraisal conclusion, confirming the appraised value of 100% equity interest in China Resources Kunming Shenghuo Pharmaceutical Co., Ltd. at RMB 3.512 billion. The transfer price for the 51% equity interest in China Resources Kunming Shenghuo Pharmaceutical Co., Ltd. was RMB 1.791 billion.Representing a 277.65% premium over the book value of net assets of RMB 930 million as reported in its financial statements.

The key to this internal merger and restructuring lies in CR SANJIU’s strategic adjustment of its Panax notoginseng industry layout—This restructuring will address the horizontal competition between China Resources Kunming Shenghuo Pharmaceutical Co., Ltd. and Kpc Pharmaceuticals, Inc. regarding their Xuesaitong soft capsule products. It will fully leverage the complementary strengths of CR SANJIU and Kpc in areas such as product portfolios, sales and distribution networks, branding, and supply chains to create synergistic value. This move is expected to accelerate the integration of the Panax notoginseng industrial chain and establish an industry benchmark for the traditional Chinese medicine sector.

With this acquisition, China Resources has further consolidated its control over the blockbuster product Xuesaitong.

Xuesaitong is a traditional Chinese medicine (TCM) preparation commonly used for cardiovascular and cerebrovascular diseases. Its main active ingredient is Panax notoginseng total saponins, an effective fraction extracted from Panax notoginseng. It is indicated for obstruction of cerebral collaterals, stroke with hemiplegia, obstruction of cardiac vessels, chest bi syndrome with heart pain; as well as sequelae of cerebrovascular disease, coronary heart disease, and angina pectoris.

According to statistics from Menet, Xuesaitong Soft Capsules and Xuesaitong Tablets ranked 7th and 9th, respectively, in sales of Chinese proprietary medicines for cardiovascular and cerebrovascular diseases in China’s retail pharmacies in 2021, with sales reaching RMB 300 million and RMB 220 million, respectively. In 2022, among Chinese proprietary medicines for cardiovascular and cerebrovascular diseases sold in brick-and-mortar pharmacies in Chinese cities, Xuesaitong Soft Capsules achieved sales exceeding RMB 500 million, ranking 5th, with a growth rate surpassing 50%.

In the national market, only Kpc Pharmaceuticals, Inc. and China Resources Kunming Shenghuo Pharmaceutical Co., Ltd. manufacture Xuesaitong soft capsules. The “Lixuwang” brand Xuesaitong soft capsules produced by China Resources Kunming Shenghuo are designated as a National Key New Product. Kpc Pharmaceuticals reported revenue of RMB 2.078 billion in its cardiovascular and cerebrovascular segment, representing a year-on-year increase of 13.67%, with the Xuesaitong product series being the primary driver of this growth.

Expectations have long existed for the internal consolidation of the Panax notoginseng industry, particularly targeting Xuesaitong, a major blockbuster traditional Chinese medicine product.

According to an analysis by Soochow Securities, CR SANJIU made a commitment at the time of its acquisition of Kpc Pharmaceuticals, Inc. that it wouldAddressing Horizontal Competition Issues, the business-level integration between Kpc Pharmaceuticals, Inc. and China Resources Kunming Shenghuo Pharmaceutical Co., Ltd. is continuously advancing, with the potential to achieve a synergistic effect where 1+1>2 for the flagship product, Xuesaitong Soft Capsules.

On the one hand, Kpc Pharmaceuticals, Inc. is expected to draw on the experience of China Resources Kunming Shenghuo Pharmaceutical Co., Ltd. to improve the net profit margin of its Xuesaitong Soft Capsules; on the other hand, leveraging Kpc Pharmaceuticals’ sales network, brand promotion, and academic marketing, the integrated Xuesaitong Soft Capsules are poised to further expand their market share in the cardiovascular sector across China.

Kpc Pharmaceuticals, Inc. originated from Kunming Pharmaceutical Factory. Following shareholding system reform, it was established as Kunming Pharmaceutical Co., Ltd. in 1995 and listed on the Shanghai Stock Exchange in December 2000. Leveraging its four major brands—Kpc, Kunzhongyao, Beckerton, and Kpc Commercial—the company has developed a group structure focused on cardiovascular and cerebrovascular diseases, positioning itself as an innovative, international pharmaceutical provider specializing in chronic disease treatment.

After years of deep cultivation in the field of cardiovascular and cerebrovascular treatment, Kpc Pharmaceuticals, Inc. has successfully created its flagship product line—the Xuesaitong series—which once ranked first in sales share within the Chinese market for proprietary Chinese medicines treating cardiovascular and cerebrovascular diseases. However, since 2019, against the backdrop of centralized procurement and intensifying industry competition, Kpc Pharmaceuticals has encountered a growth bottleneck, culminating in a significant decline in net profit attributable to shareholders in 2022.

Meanwhile, China Resources, in its phase of continuous expansion, is extending its “China Resources” pharmaceutical portfolio. In May 2022, CR SANJIU announced a major asset restructuring plan to acquire a 28% stake in Kpc Pharmaceuticals, Inc. In January 2023, CR SANJIU completed the merger and integration with Kpc Pharmaceuticals, becoming its controlling shareholder. Consequently, Kpc Pharmaceuticals has become a subsidiary controlled by CR SANJIU, transitioning from private-sector control to state-owned control.

Following CR SANJIU’s acquisition of controlling interest in Kpc Pharmaceuticals, Inc., the company implemented business adjustments, optimized its product structure, and reallocated resources: it gradually divested its pharmaceutical distribution business, which had a gross profit margin of only 14.49% and overlapped with China Resources Pharmaceutical Commercial Group; it also reduced its equity stakes in Fuda Pharmaceutical and Tian’an Pharmaceutical, among other measures.Overall, the long-term strategy of concentrating resources on developing the core business of cardiovascular and cerebrovascular diseases was established when CR SANJIU took control of Kpc Pharmaceuticals, Inc.

Furthermore, with the support of China Resources, Kpc Pharmaceuticals, Inc. has clarified its future strategic development core as “the Leading Listed Company in Health for the Silver Economy,” focusing on serving the health needs of the elderly population and deeply penetrating the silver economy, with the aim of providing more health products and services in an aging society.

“With its bold reforms as the ‘leading health stock in the silver economy,’ coupled with support from China Resources, Kpc Pharmaceuticals, Inc. has attracted the attention of pension funds that prioritize long-term stability and security.”

In 2015, the State Council issued the Measures for the Investment and Administration of Basic Old-Age Insurance Funds, stipulating that provincial-level old-age insurance funds may entrust the National Council for Social Security Fund (NCSSF) with market-oriented investments after retaining necessary payment reserves. Consequently, pension funds active in the secondary market are referred to as the “National Team.” Given their greater emphasis on safety and long-term horizons, the investment activities of these pension funds serve as a meaningful reference for the market.

According to Yuanhui Media, data disclosed for the third quarter of 2024 shows that pension funds increased their holdings in four pharmaceutical stocks by more than RMB 100 million each.Among them, Kpc Pharmaceuticals, Inc. was the only company whose revenue declined in the first three quarters.—Revenue for the first three quarters reached RMB 5.457 billion, a year-on-year decrease of 2.73%; net profit attributable to shareholders of the parent company was RMB 387 million, a slight year-on-year increase of 0.36%; net profit after deducting non-recurring gains and losses was RMB 289 million, a year-on-year decrease of 6.81%.Even so, in the latest disclosed third-quarter report, Basic Pension Insurance Fund Portfolio 16032 has become one of the top ten shareholders of Kpc Pharmaceuticals, Inc. for the first time, holding 8 million shares.

Furthermore, pension funds may have observed an overall improvement in profitability and trend-based changes.A research report by Founder Securities pointed out that Kpc Pharmaceuticals, Inc. has improved its profitability after CR SANJIU took control. On the revenue side, Kpc Pharmaceuticals’ overall revenue growth was steady from 2018 to 2022; in 2023, it decreased by 6.99% year-on-year due to the optimization of the business structure in the commercial segment and a reduction in foreign aid-related businesses. On the profit side, net profit attributable to shareholders of the parent company dropped significantly in 2022 due to asset impairment provisions and a high base in 2021 caused by investment income. In 2023, it quickly rebounded to RMB 445 million, representing a year-on-year increase of 16.05%, mainly driven by continuous optimization of its product structure and efforts to reduce costs and improve efficiency.

With increased investment from pension funds, Kpc Pharmaceuticals, Inc. is also implementing a series of strategic initiatives: establishing three major business units—the “Kunzhongyao 1381” Business Unit, the “KPC·1951” Business Unit, and the Notoginseng Oral “777” Business Unit; clarifying its strategic direction centered on the notoginseng industry chain, focused on elderly health, and expanding into chronic disease management; and integrating channels, such as adopting China Resources’ commercial distribution system, to enhance brand influence and market penetration.

Furthermore, positioning itself as the “leading listed company in health within the silver economy,” Kpc Pharmaceuticals, Inc. is actively seeking new business growth drivers—its next blockbuster product. In early September, Colchicine Tablets produced by Xishuangbanna Pharmaceutical, a subsidiary of Kpc Pharmaceuticals (originally developed by Takada Pharmaceutical Co., Ltd. of Japan for the indication of gouty arthritis), received the “Notice of Approval for Supplementary Drug Application” issued by the National Medical Products Administration (NMPA). This made Kpc Pharmaceuticals the first company in China to pass the consistency evaluation of quality and efficacy for generic drugs for this variety, thereby adding a key product to its portfolio in the silver economy sector.

References:

Yuanhui Media: “With CR’s Endorsement, Kpc Pharmaceuticals Receives ‘Transfusion’ from the National Team”

21st Century Business Herald: “China Resources Group Sees Another Major Integration and M&A”