Ercang Pharmaceutical Acquires Kaina Network for RMB 50 Million, Signaling Potential Shake-up in Pharma E-commerce O2O Sector

On April 14, Hunan Er-Kang Pharmaceutical Co., Ltd. (hereinafter referred to as the “Company”) announced that its wholly-owned subsidiary, Hunan Er-Kang Pharmaceutical Trading Co., Ltd., intends to enter into the Equity Transfer Agreement of Changsha Kaina Network Technology Co., Ltd. with Hunan Kaichuang Investment Management Co., Ltd. Er-Kang Pharmaceutical Trading plans to use RMB 50 million of its own funds to acquire 100% equity interest in Kaina Network.

Introduction to the Parties Involved:

Erlkang Pharmaceutical:Hunan Erkang Pharmaceutical Co., Ltd. (hereinafter referred to as “Erkang Pharma”), the parent company of Hunan Erkang Pharmaceutical Trading Co., Ltd., was established in October 2003 and listed on the Shenzhen Stock Exchange in September 2011. As a leading enterprise in China with a comprehensive range of pharmaceutical excipients, it is also one of the few domestic companies holding registration approvals for both the active pharmaceutical ingredient (API) and finished drug products of sulbenicillin sodium, a novel penicillin-class antibiotic. Erkang Pharma currently possesses 120 excipient varieties, 43 API varieties, and 148 finished drug product approvals, forming a comprehensive development pattern characterized by the parallel advancement of its three major product series: pharmaceutical excipients, APIs, and finished drugs. Meanwhile, the company has developed Yaofu Wang, a third-party trading platform for raw materials, excipients, and packaging materials, which has onboarded 2,700 purchasers and achieved a daily transaction volume of RMB 800,000.

Kaina Network:Kaina Network Technology Co., Ltd. is an enterprise focused on the internet e-commerce industry. Its core business, “Yao Pifa” (Shi’er Yao Wang), is a third-party pharmaceutical wholesale platform independently developed and operated by the company. As the lifeline and core value product of Kaina Network, the company invested over RMB 6 million within one year to develop a proprietary network system and pioneer a novel third-party B2B2C (Business-to-Business-to-Consumer) e-commerce model for pharmaceuticals. “Yao Pifa” (Shi’er Yao Wang) is the tangible outcome of this e-commerce model, integrating the innovative concept of B2B2C+O2O (Online-to-Offline) third-party pharmaceutical guidance. This model combines online wholesale transactions among manufacturers, pharmaceutical companies, and chain pharmacies on the B2B platform with retail transactions between chain pharmacies and individual consumers on the B2C platform, while also incorporating the O2O model of online reservation and offline transaction. The platform covers essential medicines and OTC (Over-the-Counter) drugs. It employs a user-friendly order management system featuring unique functions such as rapid order placement, one-click procurement, procurement plan bidding, manufacturer crowdfunding, and batch sales control.



In December 2015, “Yao Pifa” (Shier Yao Wang) obtained the Class A Certificate for Internet Drug Transaction Services (hereinafter referred to as the “Class A Certificate”) issued by the China Food and Drug Administration (CFDA) after passing review. This was the fifteenth Class A Certificate issued by the CFDA since Hebei Huiyan Pharmaceutical Technology Co., Ltd.’s “95095 Pharmaceutical Platform” received the first such certificate on November 12, 2013.



Previous Cases of Kaina Network:



Projects Currently in Operation and Trial Operation:



Kaina Network Milestones:









Profitability:

According to the "Erykang Pharmaceutical: Valuation Report on the Equity Investment Value of Changsha Kaina Network Technology Co., Ltd. Proposed for Integration by Hunan Erykang Pharmaceutical Trading Co., Ltd.," Kaina Network incurred consecutive losses in 2014 and 2015, amounting to RMB 1.38 million and RMB 3.12 million, respectively. The analysis attributes these losses to the company being in its start-up phase, with limited brand recognition, which hindered its ability to rapidly capture market share, develop business operations, and expand scale. Furthermore, capital constraints impeded the initiation and implementation of numerous plans and strategies, thereby adversely affecting business development and revenue generation.

Transaction Purpose:

By acquiring Kaina Network, Erkang Pharmaceutical will obtain the “Certificate for Internet Drug Transaction Services” and the “Certificate for Internet Drug Information Services,” which will facilitate the company’s establishment of a pharmaceutical excipients trading platform. Following the completion of the acquisition, the company will progressively enhance its e-commerce platform for pharmaceuticals in terms of both hardware and software. Leveraging this platform, the company will collaborate with more medical institutions, enterprises, and pharmacies (including but not limited to models such as deploying relevant products to pharmacies, utilizing them as entry-point resources and continuous service terminals), thereby constructing a comprehensive and seamless closed loop encompassing data flow, capital flow, and logistics. In this context, Kaina Network’s technology platform will provide a favorable early-mover advantage for the company’s strategic layout.

Luo Lang, Secretary of the Board of Directors of Erkang Pharmaceutical, stated that the acquisition of Kaina Network would not only grant Erkang Pharmaceutical an internet pharmaceutical license and an e-commerce team with independent intellectual property rights, but also hold profound strategic significance for building a complete closed loop of data flow, capital flow, and logistics within the pharmaceutical industry.

Transaction Risks:

Internet-based pharmaceutical services have received strong support from national industrial policies, such as the deepening of healthcare system reforms and the promotion of the health service industry. However, national industrial policies and the economic landscape are influenced by multiple factors. Should there be any adverse changes in the state’s planning policies or regulatory frameworks for pharmaceutical e-commerce, it could negatively impact post-acquisition operations.

VCBeat Analysis:

The surge in the number of pharmaceutical e-commerce platforms has created a hyper-competitive “red ocean” market. As the saying goes, one’s loss is another’s gain: declining profits for smaller-brand platforms have translated into profit growth for major brands, intensifying the Pareto principle within pharmaceutical e-commerce. Uncertainty surrounding national pharmaceutical industrial policies has rendered the market increasingly complex and unpredictable. While entering the market before the industry landscape fully takes shape presents an opportune moment, capturing a share of the trillion-yuan pharmaceutical market through a few single-brand entities is no easy feat. More importantly, consumer mindshare has yet to be firmly established. The acquisition of internet pharmaceutical platforms by traditional pharmaceutical companies may merely be the prelude to a larger battle, with a new round of industry consolidation likely to follow closely behind.