Jinren Pharmaceutical's Massive Advertising Fees Under Scrutiny

Recently, Anhui Jinren Pharmaceutical Co., Ltd. (hereinafter referred to as Jinren Pharmaceutical) updated its financial report and continued to push forward with the listing process on the Shanghai Stock Exchange.

Jinren Pharmaceutical is a Chinese medicine company that mainly engages in the business of Chinese patent medicines, herbal extracts, and formula granules, with well-known products such as Wind-Dispersing Capsules.

Knockout Products Face Risk of Being Targeted for Sampling

In 2019-2021, Jinren Pharmaceutical's income from Chinese patent medicine business was RMB 3.81 billion, RMB 3.29 billion, and RMB 3.16 billion, accounting for 48.34%, 45.05%, and 39.24% respectively; while the income from herbal extracts was RMB 3.77 billion, RMB 3.45 billion, and RMB 4.04 billion, accounting for 47.75%, 47.19%, and 50.13% respectively.

The Chinese patent medicine business mainly generates revenue from Wind-Dispersing Capsules. During the reporting period, the sales revenue was approximately RMB 3.55 billion, RMB 3.06 billion, and RMB 2.99 billion, accounting for around 95% each year.

Data from MIU network shows that in recent years, among various healthcare terminal brands of Chinese patent medicines, Jinren Pharmaceutical's Wind-Dispersing Capsules had a market share ranking second only to Yiling Pharmaceutical Co., Ltd.'s (002603) Huanglian Capsules and Granules.

However, it is worth noting that in recent years, the quantity and price of Wind-Dispersing Capsules have been declining. In 2019, the average single price was RMB 7,807.99 per million pieces, with total sales volume reaching approximately 455 million pieces, generating revenue of RMB 3.55 billion. By 2021, the average single price had dropped to RMB 7,687.55 per million pieces, with sales volume reaching approximately 389 million pieces, generating revenue of less than RMB 3 billion.

In addition, with the expansion of Chinese patent medicine sampling, Wind-Dispersing Capsules also face a higher risk of being targeted for sampling. The prospectus shows that as of September 2021, there have been four instances of centralized procurement of Chinese patent medicines nationwide, with average price reductions ranging from 23% to 56%. Although considering Wind-Dispersing Capsules is Jinren Pharmaceutical's exclusive product, only Guangdong and Beijing involved in the sampling, with a price reduction rate of 17%.

Jinren Pharmaceutical's Massive Advertising Fees Unclear

Despite Wind-Dispersing Capsules' market share ranking second only to Huanglian Capsules and Granules, Jinren Pharmaceutical still needs to spend massive advertising fees.

The prospectus shows that from 2019 to 2020, Jinren Pharmaceutical's sales expenses were RMB 2.48 billion, RMB 2.27 billion, and RMB 2.18 billion, accounting for 31.5%, 31%, and 27.01% respectively of total revenue.

Sales expenses mainly include academic promotion fees, which account for a large proportion of the company's overall promotional expenses during the reporting period.

Jinren Pharmaceutical stated that the company's Chinese patent medicine business and formula granule business primarily adopt an academic promotion model. The company's main products subject to one-on-one visits are Wind-Dispersing Capsules, which have a more targeted approach.

From 2019 to 2021, Jinren Pharmaceutical's academic promotion fees for Chinese patent medicine business were RMB 1.74 billion, RMB 1.58 billion, and RMB 1.45 billion, accounting for 70.16%, 69.6%, and 66.51% respectively of total sales expenses.

Moreover, the data shows that there is a positive correlation between Wind-Dispersing Capsules' sales revenue and academic promotion fees. From 2019 to 2020, as academic promotion fees decreased, sales revenue also showed a downward trend.

The prospectus does not provide detailed information on the specific services provided by promotional service providers or their customers.

This has raised concerns from regulators, with the Shanghai Stock Exchange requiring Jinren Pharmaceutical to explain various types of promotional businesses, including the main process, responsibilities, and outcomes of each type of business, as well as the use of promotion fees and the acceptance methods used by the issuer.

Jinren Pharmaceutical's GMP Certificate Revoked

Public information shows that Jinren Pharmaceutical's subsidiary company, Anhui Puren Chinese Medicine Extract Co., Ltd. (full-owned subsidiary), has been punished twice for producing and selling substandard products.

In 2019, the subsidiary was fined RMB 1,828.9 million in penalties and had its unqualified products seized and destroyed, with a total value of RMB 2,113.65 million, as well as being subject to administrative punishment.

The prospectus does not reveal that Jinren Pharmaceutical once had its GMP certificate revoked by the government due to illegal production, and related products were recalled, involving suspected violations of regulations and procedures.

According to the National Medical Products Administration's report, Jinren Pharmaceutical was found to have made unauthorized changes to the production process and formula for Huanglian Capsules, as well as having unqualified material management, accounting, and other issues.

Regarding these illegal behaviors, the National Medical Products Administration required Anhui Province's Food and Drug Administration to revoke Jinren Pharmaceutical's GMP certificate and recall related products, and further investigate the company's alleged illegal production activities.