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Our reporter Su Hao and Cao Xueping reported from Beijing

Recently, Weican Pharmaceutical (300878.SZ) issued an announcement stating that it plans to transfer 100% of the equity of its two wholly-owned subsidiaries, Zhejiang Weican Pharmaceutical Retail Co., Ltd. (hereinafter referred to as "Weican Retail") and Zhejiang Weican Pharmacy Co., Ltd. (hereinafter referred to as "Weican Pharmacy").

After negotiation, the transfer price of Weikang Retail held by Weikang Pharmaceutical is RMB 95 million, and the transfer price of Weikang Pharmacy is RMB 8 million, with a total equity consideration of RMB 103 million. After the completion of this transaction, Weikang Pharmaceutical will no longer hold shares in Weikang Retail and Weikang Pharmacy.

China Business News reporter noted that Weikang Pharmaceutical's sale of its two subsidiary companies' equity marks its complete withdrawal from the pharmaceutical retail business, which once accounted for nearly 40% of the company's total revenue. In addition, the operating performance of the two subsidiary companies has continued to decline in recent years, so the industry also speculates that Weikang Pharmaceutical's equity transfer was intentional.

On July 31, Weican Pharmaceuticals said in an interview with reporters that since its establishment, the company's main business has been pharmaceutical manufacturing. The divestiture of the pharmaceutical retail business is aimed at better optimizing the business structure, concentrating superior resources on the pharmaceutical manufacturing industry, continuing to promote the coordinated development of modern Chinese and Western medicines, and enhancing the company's sustainable operating capabilities and profitability. At the same time, it is also conducive to improving the company's asset quality and core competitiveness and achieving high-quality development of the company.

Sell ​​all retail business

Public information shows that Weikang Pharmaceutical is a pharmaceutical company that integrates the research and development, manufacturing and sales of finished medicines. Its main business is the research and development, production and sales of modern Chinese and Western medicines.

As early as 2010, Weikang Pharmaceuticals began to develop its pharmaceutical retail business. The company established Weikang Retail and Weikang Pharmacy in that year. Among them, Weikang Retail mainly engages in pharmaceutical retail chain business in Lishui, while Weikang Pharmacy mainly engages in pharmaceutical retail chain business in Hangzhou.

In 2018, Weikang Pharmaceutical increased its investment in pharmaceutical retail business. The prospectus shows that in 2018, Weikang Pharmaceutical added 33 pharmaceutical retail chain stores. By the end of the year, the company had a total of 113 retail chain stores. Before and after this, Weikang Pharmaceutical added 21 retail chain stores in 2017; in 2019, only 8 retail chain stores increased.

According to Weican Pharmaceutical's annual report, the company's pharmaceutical wholesale and retail business revenue accounted for 41.50% and 39.28% in 2022 and 2023 respectively. Although it stated in the announcement that "this equity sale is conducive to the company's concentration of superior resources to focus on the pharmaceutical manufacturing industry", from an operational perspective, the performance of the two subsidiaries to be transferred is not optimistic.

According to the asset appraisal report disclosed by Weican Pharmaceuticals, Weican Retail's operating income and net profit both showed signs of decline. Specifically, from 2022 to the first four months of 2024, Weican Retail's operating income was 126 million yuan, 125 million yuan, and 49.41 million yuan, respectively; net profit was 7.2061 million yuan, 2.8467 million yuan, and 2.6696 million yuan, respectively. In 2023, net profit fell sharply, down about 60.5% year-on-year, and maintained a relatively low profit level overall.

The financial situation of Weican Pharmacy is even more worrying. From 2022 to the first four months of 2024, its operating income was 13.5362 million yuan, 11.4572 million yuan, and 3.8753 million yuan respectively; its net profit was in continuous loss, and it has not made a profit in recent years, which was -879,500 yuan, -330,500 yuan, and -687,600 yuan respectively.

At the same time, with the extremely strict supervision of pharmacy medical insurance and the slowdown in the growth of market sales, a number of companies with pharmaceutical retail chain businesses are also affected.

According to Zhongkang CMH data, the sales volume of medicines in China's pharmaceutical retail market will reach 501.5 billion yuan in 2023, a year-on-year increase of 3.25%. From January to May 2024, the cumulative scale of the national retail pharmacy market will reach 217.8 billion yuan, a year-on-year decrease of 3.7%.

In addition, according to the 2024 semi-annual forecast released by Yixintang, the net profit attributable to shareholders of the listed company in the first half of 2024 is approximately 262 million yuan to 340 million yuan, a year-on-year decrease of 32.63% to 48.04%. The leading chain drugstore companies are also facing great growth pressure in 2024.

Did the decline in performance of the two subsidiaries and industry factors become the main reason for Weikang Pharmaceutical to divest its pharmaceutical retail business? In this regard, Weikang Pharmaceutical did not directly tell reporters. It pointed out that as the value of the pharmaceutical retail chain industry has been gradually recognized by the market, the company has established Weikang Pharmacy and Weikang Retail since 2010. The pharmaceutical retail business is a supplement to the main business and is also one of the company's development directions. In recent years, with the development of the company's business and the adjustment of strategic planning, the company intends to concentrate its superior resources on the pharmaceutical manufacturing industry and continue to promote the coordinated development of modern Chinese and Western medicines, so it divested its pharmaceutical retail business this time.

As for the company's next work priorities after the divestiture of pharmaceutical retail-related businesses, Weican Pharmaceuticals told reporters that in 2024, the company will continue to maintain and develop its own advantages, actively respond to policy changes in the pharmaceutical industry, adhere to its main business direction, comprehensively improve its business management level, strengthen marketing network construction, and promote the smooth achievement of various performance indicators.

"At the same time, the company will continue to deepen its roots in the pharmaceutical and health industry, and actively cultivate various businesses that are in line with the development strategy, incubate new growth points, and empower the company's accelerated development. This includes vigorously promoting the progress of core R&D projects, continuously developing medium- and short-term R&D projects, striving to get existing core products into the national medical insurance catalog, increasing the production capacity of existing products and the industrialization capabilities of new products, expanding and improving the marketing network, and strengthening human resource management and the introduction of high-level talents," said Weican Pharmaceuticals.

Net profit has been declining year after year

In fact, in addition to operating a pharmaceutical retail chain business, Weikang Pharmaceuticals derives 60% of its revenue from modern Chinese medicine, Western medicine, and pharmaceutical industry. The company's main products include Chinese patent medicines such as Yinhuang Drop Pills and Motherwort Soft Capsules, as well as Western medicine products such as Roxithromycin Soft Capsules.

In August 2020, Weican Pharmaceutical was listed on the ChiNext, but the company's performance began to deteriorate after its listing.

The financial report shows that in 2020, Weican Pharmaceutical achieved operating income of 623 million yuan, a year-on-year decrease of 297%; net profit attributable to shareholders of the parent was 136 million yuan, a year-on-year increase of 7.78%.

The company's net profit began to decline continuously in 2021. During the reporting period, the company's operating income reached 633 million yuan, a year-on-year increase of 1.64%; the net profit attributable to the parent company was 96.4954 million yuan, a year-on-year decrease of 28.95%.

In 2022, Weican Pharmaceutical's revenue and net profit both declined, with net profit being "halved". Specifically, in 2022, the company's operating income was 531 million yuan, a year-on-year decrease of 16.06%; net profit attributable to the parent was 44.4443 million yuan, a year-on-year decrease of 53.94%.

By 2023, Weican Pharmaceuticals even recorded a net loss of 8.0386 million yuan. On May 23, 2024, Weican Pharmaceuticals received an annual report inquiry letter from the Shenzhen Stock Exchange due to the continuous decline in net profit in recent years.

Weican Pharmaceutical attributed the decline in performance to changes in medical insurance policies and market environment leading to a decline in demand and affecting operating income, increasingly fierce market competition leading to a decline in gross profit margin, changes in product promotion strategies leading to fluctuations in sales expenses, and the fact that new drug research and development has not yet generated benefits.

It is understood that in 2021, affected by market demand, sales of Weican Pharmaceutical's Yinhuang Drops Pills, Roxithromycin Soft Capsules and other drugs in OTC channels such as chain pharmacies declined, resulting in a significant decline in its direct supply model sales revenue. In addition, Weican Pharmaceutical's high-gross-margin prescription drugs are mainly sold through distribution channels. The company's distribution channel revenue share has dropped from 62.74% in 2021 to 33.65% in 2022 and 23.47% in 2023. As the sales share of high-gross-margin prescription drugs has declined, Weican Pharmaceutical's gross profit margin has dropped from 72.41% in 2020 to 50.39% in 2023.

According to Weican Pharmaceuticals' 2023 annual report, during the reporting period, the gross profit margins of Weican Pharmaceuticals' Chinese and Western patent medicines and Chinese herbal medicine slices products declined. Among them, the gross profit margin of Chinese and Western patent medicines decreased by 1.04 percentage points compared with the same period last year; the gross profit margin of Chinese herbal medicine slices decreased by 16.19 percentage points compared with the same period last year.

Faced with continued decline in performance, although Weican Pharmaceuticals is actively seeking change, the results seem to be less than ideal.

In May 2024, when asked "how to improve the decline in revenue and net profit" during an investigation, Weican Pharmaceuticals stated that the company will continue to deepen its roots in the pharmaceutical and health industry, actively cultivate various businesses that are in line with its development strategy, incubate new growth points, and empower the company's accelerated development.

However, the company disclosed in its annual report that Weican Pharmaceutical's health food business achieved revenue of 20.1424 million yuan in 2023, accounting for only 3.88% of the company's total revenue, which also shows that the contribution of this business to the company's overall performance is relatively small.

In addition, some projects in the big health industry park that Weican Pharmaceutical raised funds for during its IPO began to be converted into fixed assets and put into production at the end of 2021. In 2022 and 2023, the big health industry park had new depreciation provisions of 13.7827 million yuan and 19.5737 million yuan, respectively. The depreciation amount increased significantly, resulting in insufficient capacity utilization and the depreciation of fixed assets was not effectively allocated.

(Editor: Cao Xueping, Reviewer: Tong Haihua, Proofreader: Yan Jingning)