How Sihuan Pharmaceutical Navigates Compliance Amid Expansion: Integrating Sales, Service, and Regulatory Requirements under the 'Two-Invoice System' and VAT Reform

When it comes to major domestic pharmaceutical companies specializing in cardiovascular and cerebrovascular diseases, SihuanPharm (00460.HK) is inevitably on the list.

However, since the establishment of Hainan Sihuan Pharmaceutical Co., Ltd. in 2001, SihuanPharm’s product portfolio has expanded to cover numerous therapeutic areas, including cardiovascular and cerebrovascular diseases, the digestive system, anti-infectives, metabolism, respiratory conditions, and neurology. Its industrial chain has also diversified from a sole focus on pharmaceutical sales to encompass R&D, pharmaceutical manufacturing, medical aesthetics, foods for special medical purposes (FSMP), and healthcare services.

SihuanPharm’s rapid growth inevitably entails substantial changes across multiple dimensions, including corporate scale, business segmentation, talent teams, and financial management.

So, over the past two decades, amid dual transformations in marketing models and industry regulation, how has SihuanPharm achieved steady growth and completed its compliance transition? VCBeat recently interviewed Zhang Yongyan, former head of marketing finance at SihuanPharm, as well as Beiyi Technology, a provider of digital products and compliance services that has been instrumental in helping SihuanPharm comprehensively optimize its compliant marketing management capabilities.

The establishment of Hainan Sihuan Pharmaceutical Co., Ltd. in 2001 marked the beginning of Sihuan Pharmaceutical Holdings Group Ltd.’s entrepreneurial development. In its early stages, the company prioritized marketing and subsequently established the Hainan Sihuan Institute for Cardiovascular and Cerebrovascular Drug Research, enabling simultaneous progress in market development and new product R&D, which drove rapid corporate growth. Later, through capital operations such as acquisitions and mergers, the company further perfected its industrial chain by incorporating enterprises like Beijing Sihuan Pharmaceutical and Shenzhen Sihuan Pharmaceutical under the Sihuan Pharmaceutical umbrella, evolving into a integrated pharmaceutical group specializing in R&D, production, and sales.

Sihuan Pharmaceutical Holdings Group Ltd. was incorporated in Bermuda in April 2006 and successfully listed in Singapore in March 2007. In 2009, to accommodate further growth, the company completed its privatization and delisted from the Singapore Exchange. It was subsequently relisted on the Main Board of The Stock Exchange of Hong Kong (China) in 2010.

Nowadays, Sihuan Pharmaceutical Holdings Group Ltd. continues to deepen its presence in the Chinese cardiovascular and cerebrovascular drug market, while successively expanding into the fields of gastroenterology, anti-infectives, metabolism, respiratory diseases, neurology, and other areas. In 2022, the Group further focused on two major sectors: medical aesthetics and biopharmaceuticals. In the field of medical aesthetics, the company achieved significant progress in products such as injectable hyaluronic acid, botulinum toxin, skin boosters, PHA microspheres, regenerative materials, gold microneedling devices, and wound care dressings. In the area of innovative drugs, breakthroughs were made in pipelines targeting non-small cell lung cancer, hematologic malignancies, anti-infective agents, and insulin injections.

SihuanPharm boasts robust R&D capabilities, a high-quality product portfolio, and a comprehensive production management system. Leveraging its unique marketing model and specialized services, the company is gradually transitioning from its deep-rooted focus on generic chemical drugs to concentrating on the development of innovative drugs and biologics.

Throughout its development, SihuanPharm’s marketing model has undergone diverse transformations and enhancements.

In the early stages of its establishment, China’s pharmaceutical industry was still in a market development phase. While traditional pharmaceutical companies generally adopted the model of building in-house marketing teams to sell their over-the-counter (OTC) drugs, SihuanPharm took a more proactive approach by boldly implementing an agency distribution model, which enabled it to rapidly secure a dominant market position. In addition to swiftly refining its marketing model and establishing sales operations, SihuanPharm also acquired and built several manufacturing facilities, thereby enriching its product pipeline and rapidly expanding its corporate scale, ultimately achieving a leading advantage in the cardiovascular sector.

As the company transitions its business from generic drugs to innovative medicines, a series of R&D pipelines led by therapeutic areas such as metabolism, oncology, and gastroenterology have begun to rapidly consume a significant portion of the company’s R&D budget. In terms of marketing costs, the company initially relied primarily on expenditures associated with the distribution model. However, under the influence of the “Two-Invoice System,” the company has increased its direct-sales operations to strengthen market control. For example, Beijing Meiyankongjian Technology Co., Ltd., a subsidiary of Sihuan Pharmaceutical Holdings Group Ltd., currently serves as the exclusive national distributor for Letybo (botulinum toxin type A for injection), produced by the South Korean biopharmaceutical company Hugel, Inc. As the “master distributor,” the company has shifted its costs, resources, and team-building efforts toward overall marketing initiatives.

This is merely a microcosm of the industry’s development. With the gradual implementation of policies such as the “Two-Invoice System” and the replacement of business tax with value-added tax (VAT), pharmaceutical distributors have progressively transformed into service providers offering marketing services, thereby shifting the sales expenses originally borne by distributors to pharmaceutical manufacturers. Consequently, risks such as irregular operational management among market service providers, heightened fiscal and tax risks, and inadequate measures to prevent commercial bribery have begun to emerge.

Consequently, “penetrative” regulation in the pharmaceutical industry is being intensified, with the National Medical Products Administration (NMPA) and other authorities conducting large-scale inspections into the authenticity and compliance of pharmaceutical companies’ marketing expenses and the service practices of their marketing service providers. In response to violations such as fiscal and tax irregularities and commercial bribery, relevant authorities are empowered to impose severe penalties, including credit score deductions, reductions in medical insurance reimbursement quotas, public warnings, and orders to pay back taxes and fines. These measures are compelling pharmaceutical companies to strengthen their internal compliance capabilities and prioritize the establishment of compliant marketing management systems.

Emphasizing compliant marketing by pharmaceutical companies is tantamount to emphasizing compliance across the entire sales system, which specifically involves budget management, target design, compliance standard development, process optimization, compliance of marketing activities, and fiscal and tax compliance. This encompasses two aspects: compliance related to proprietary sales activities and compliance related to market service activities.

Against this backdrop, SihuanPharm responded swiftly by deciding to establish a compliant marketing management system that integrates expense management with sales conduct. This initiative aims to ensure compliance within the sales framework while enhancing service providers’ engagement and satisfaction. Beiyi Technology, an innovative enterprise specializing in digital compliant marketing management for the life sciences sector, has successfully established a partnership with SihuanPharm.

At the recommendation of Beiyi Information Technology, both parties initiated project collaboration following the workflow of “Compliance Consultation – Needs Assessment and Solution Design – System Adaptation and Launch – Routine Operational Services.” During the initial phase, Beiyi Information Technology provided professional compliance consulting services and developed a tailored, actionable solution based on thorough business needs assessment and a comprehensive review of compliance requirements.

During project implementation, Beiyi Information Technology (Shanghai) Co., Ltd. helped SihuanPharm successfully launch an integrated compliance marketing solution that spans the entire sales activity process and combines “internal management + external service providers.” This solution enhances digital control over service provider onboarding, processes, settlements, standardization, and risk allocation. Operating as a “Shared Finance Center” and leveraging software tools, the system covers all workflows from budgeting to settlement, including accountability for invoice-related issues. Following implementation, Beiyi also provided support for promoting the compliance system within the marketing framework, ensuring sustainable business operations.

Based on actual research, Beiyi Information Technology established the architecture for its Marketing and Finance Center. Originally, over 200 employees were responsible for sales, shipment, data collection, verification, and settlement. Guided by the initial objective of standardizing service processes, the company comprehensively optimized these workflows and refined compliance procedures. By leveraging information systems as a supplement and human oversight as the primary control mechanism, Beiyi consolidated and streamlined relevant work processes, ultimately reducing the specialized team size to approximately 50 personnel. As costs associated with advancing innovative drug pipelines increase and profits are compressed under volume-based procurement policies, Beiyi continues to provide SihuanPharm with platform-level upgrades featuring intelligent marketing management, streamlined personnel workflows, and efficient collaboration among “business and finance functions, as well as internal and external service providers.” The team size is projected to be further optimized to around 30 employees.

Beiyi Technology, established in 2015, operates across three core business segments: solution consulting and design, compliance management of sales expenses in finance and taxation, and compliant marketing efficiency enhancement.

Through a comprehensive service system centered on “data-driven compliance and process-oriented management,” we have helped nearly 100 pharmaceutical companies achieve digital compliance upgrades, spanning from budgeting to expense settlement management and from visit management to evidence chain services, significantly improving capital efficiency and reducing operational costs.

At present, Beiyi Technology’s end-to-end compliant marketing solution has been widely adopted within SihuanPharm’s service provider ecosystem, delivering significant business value in standardizing compliant marketing management and enhancing expense settlement efficiency. Moving forward, the two companies will continue to deepen their collaboration, jointly exploring innovative directions for compliant marketing products to further elevate the value of compliant marketing management.