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Did Poinsettia breach the contract because it was “cheated” by the agent?

Author | Zhao Pu

Editor: Gao Yan

Source | Yema Finance

I can’t believe that there are actually pharmaceutical companies that dare to “collude on quotes” in centralized drug procurement in order to obtain procurement qualifications!

Recently, Guangzhou Yipinhong Pharmaceutical Co., Ltd. (hereinafter referred to as "Yipinhong Pharmaceutical") was exposed to have participated in the national drug procurement bidding.Due to "contract in centralized procurement" and collusion in bidding, the company needs to pay back about 266 million yuan, setting a new record for similar compensation.

It is understood that Yipinhong Pharmaceutical is a wholly-owned subsidiary of the listed company Yipinhong Pharmaceutical (300723.SZ).The actual controller is Li Hanxiong, who was awarded the title of "Outstanding Economic Figure" in the pharmaceutical industry of Guangdong Province.。

Before the announcement, the share price of Yipinhong was 18.75 yuan per share (the closing price on July 26). After the news was made public, the share price of Yipinhong plummeted by 17.33% on July 29, closing at 15.5 yuan per share. As of the close of August 2, the share price of Yipinhong was 15.97 yuan per share, with a total market value of 7.253 billion yuan, which has not yet recovered to the level before the announcement.

According to the 21st Century Business Herald, an insider said:The breach of contract involving Yipinhong Pharmaceuticals was caused by improper operation of its agents.Currently, Yipinhong has initiated civil recovery and liability investigation procedures against the agent.

What is puzzling is that participating in pharmaceutical procurement bidding is a very important corporate event for pharmaceutical companies. Whether it is the actual controller Li Hanxiong or the company's senior executives, control of compliance should be the top priority. How could they be "cheated" by the agent?

In addition, the above-mentioned breach of contract compensation amount far exceeds the net profit of Ipomoea Pharmaceuticals last year, which is also a major challenge to the company's cash flow.

What is more serious is that according to relevant regulations,The enterprises or products that trigger the above-mentioned breach of contract will be disqualified from centralized procurement for up to two years depending on the severity of the case.. Yipinhong Pharmaceutical is an important subsidiary that contributes to the performance of Yipinhong Pharmaceutical. Will the future performance of Yipinhong Pharmaceutical be affected by the default of its subsidiary?

Cash pressure on Poinsettia:

576 million in funds vs. 266 million in compensation

According to the contents of the "Notice of Breach of Contract" disclosed by Ipomoea Pharmaceuticals, Ipomoea Pharmaceuticals (including Ipomoea Pharmaceuticals' licensors) breached the contract as stipulated in Article 17.4 of the "National Drug Centralized Procurement Document" (Document No.: GY-YD2022-1) (referred to as the "Centralized Procurement Document") in the bidding for the seventh batch of national centralized procurement of bromhexine hydrochloride injection.

According to the inquiry of "Yema Finance", the "collective procurement documents" listed a total of 16 breach of contract behaviors, including providing kickbacks, bribes, false certificates, etc.The breach of contract stipulated in Article 17.4 is: "collusion in declarations and negotiation of quotations, exclusion of fair competition from other declaring companies, and damage to the legitimate interests of the purchaser or other declaring companies."

Source: "National Drug Centralized Procurement Document" (Document No.: GY-YD2022-1)

According to 21st Century Business Herald,The 266 million yuan that Yipinhong Pharmaceutical had to pay back due to breach of contract set a new record for the amount of compensation for breach of contract in public procurement.

The impact of this compensation on Poinsettia cannot be underestimated.

Data shows that Yipinhong's revenue in 2022 and 2023 will be approximately 2.28 billion yuan and 2.503 billion yuan respectively, and its net profit will be approximately 290 million yuan and 185 million yuan respectively.

In comparison, the 266 million yuan refunded by Yipinhong Pharmaceutical far exceeds the full-year net profit of its parent company Yipinhong in 2023. In addition,As of the first quarter of 2024, Yipinhong Pharmaceutical's cash and cash equivalents were only about 576 million yuan, and 266 million yuan accounted for about 46% of its cash and cash equivalents.。

In addition, some investors are concerned about whether previous financial report results need to be corrected due to the impact of the above-mentioned refunds?

In this regard, Yipinhong said, "The impact on the company's relevant annual financial statements is still uncertain. The company will actively communicate and confirm with the accountants, and the final result will be based on the audited results."

Behind the competition to enter the "centralized procurement list":

Both volume and price increase

According to the inquiry of "Wild Horse Finance", the bromhexine hydrochloride injection of Ipomoea Pharmaceutical won the bid for the seventh batch of national centralized drug procurement qualifications for the first time in July 2022. Also winning the bid were oseltamivir phosphate capsules and nifedipine controlled-release tablets of Ipomoea Pharmaceutical.

According to a report compiled by the new financial media "Xinkangjie" of the pharmaceutical and health industry, in the centralized procurement plan implemented in November 2022,The number of bromhexine hydrochloride injections selected by Yipinhong Pharmaceutical is 7.5 million, with a bid price of about 17.88 yuan per piece, and an amount of about 130 million yuan.。

According to the rules of the above batches of centralized procurement, the procurement cycle of the above-mentioned drugs to be selected is three years. Roughly estimated, the procurement cycle of bromhexine hydrochloride injection of Yipinhong Pharmaceutical is from July 2022 to 2025.

After the above-mentioned breach of contract, can Yipinhong Pharmaceutical's Bromhexine Hydrochloride Injection continue to be included in the centralized procurement list?

The 2022 financial report of Yipinhong Pharmaceutical also shows that the company's bromhexine hydrochloride injection has won honorary qualifications such as Guangdong Province's Famous and High-tech Products in 2022.

According to a new financial media "Xinkangjie" in the pharmaceutical and health industry, after the epidemic,Bromhexine, a commonly used cough and phlegm-relieving drug, was included in the "Reference List of Commonly Used Drugs for Home Treatment of COVID-19 Infected Patients" issued by the Joint Prevention and Control Mechanism of the State Council, becoming an officially certified recommended drug for COVID-19 treatment, and its sales have increased significantly.。

"Xinkangjie" also published an article saying that as of now,The sales of bromhexine hydrochloride injection in graded hospitals have been climbing for three consecutive years. In 2023, it achieved a year-on-year growth rate of 409.4%, reaching 1.724 billion yuan.。

Image source: Canned Image Library

During 2017-2022, the average price of bromhexine hydrochloride injection in graded hospitals continued to rise from 8.7 yuan to 28.9 yuan. In particular, after multiple manufacturers passed the consistency evaluation in 2021, the overall average price quickly rose to 27.7 yuan, an increase of 50.3%. Until 2023, under the influence of centralized procurement, the price fell back to 21.5 yuan per vial.

However, some pharmaceutical industry media said that even if the price has fallen, the profit of bromhexine hydrochloride injection is still very high compared to its cost.

The above prices and profits have also attracted the attention of centralized procurement agencies. According to the Shanghai Sunshine Pharmaceutical Procurement Network on April 29, 2024, the winning price of bromhexine injection has been significantly reduced.The price of bromhexine injection from Poinsettia Pharmaceuticals has been reduced to 8.27 yuan per vial.。

Image source: Shanghai Sunshine Pharmaceutical Procurement Network

or face the risk of disqualification.

Previously, 1.6 billion yuan of funds had been illegally embezzled!

It is understood that Poinsettia Pharmaceutical mainly deals in children's medicines, innovative chronic disease medicines and biological vaccines. The number of newly approved registration certificates continues to grow rapidly. Among the newly approved generic names of products by domestic pharmaceutical companies in 2022, Poinsettia ranked 10th among domestic companies in the number of new approvals, and has ranked first in the same industry in Guangdong Province for two consecutive years.

It is worth noting that after entering the centralized procurement, Yippin Pharmaceutical’s products brought a significant increase in the company’s revenue.

According to the 2023 annual report, Yipinhong Pharmaceutical has participated in three batches of national drug centralized procurement, with a total of 7 varieties qualified for the bid.The revenue of centralized procurement products increased by 244.34% year-on-yearIn addition, the company also actively participates in centralized procurement projects in various provinces, cities and alliance regions.

Source: Corporate financial report

The 2023 financial report shows that Ipomoea Pharmaceutical's tranexamic acid injection, torsemide injection, caspofung acetate injection, and acyclovir injection were qualified for selection in the eighth and ninth batches of national centralized drug procurement, respectively.

Yipinhong Pharmaceutical believes that,As the centralized procurement enters the implementation stage, the selection of the company's products will help expand the sales amount of the selected products., increasing the market share of the selected products will have a positive impact on the company's development."

However, according to the provisions of the "centralized procurement documents", if an enterprise breaches the contract, the enterprise deemed to have serious circumstances will be included in the "violation list". Once included in the "violation list", the enterprise or product may be disqualified from participating in the centralized procurement of drugs in various places within two years.

Although the defaulting Ipomoea Pharmaceutical is only a subsidiary of Ipomoea Pharmaceuticals, it remains to be seen whether Ipomoea Pharmaceuticals will be implicated by its subsidiaries amid the current anti-corruption campaign in the pharmaceutical industry.

Image source: Canned Image Library

It is worth noting thatThis is not the first time that Poinsettia Pharmaceuticals has violated regulations.

According to Jiemian News, in 2023, the National Audit Office issued a special audit investigation report on pharmaceutical consumables in Guangdong Province (hereinafter referred to as the "Audit Investigation Report"),Yipinhong Pharmaceuticals once siphoned off 1.675 billion yuan in funds for public relations expenses by registering conference service companies in batches。

It shows that Yipinhong Pharmaceuticals appointed a third-party company to register and establish 962 conference service companies at the same address in a "cluster registration manner". The third-party company further decomposed the funds as required by Guangzhou Yipinhong Company and transferred them to the accounts of specific personnel to pay for the public relations expenses of hospitals in various regions.

In less than two years, Poinsettia committed two serious violations in a row, which had a far-reaching impact on its brand and operations.

Li Hanxiong's family gathers at "Poinsettia"

From the perspective of shareholder relations, Yipinhong Pharmaceutical is a typical family business.The actual controllers are Li Hanxiong and Wu Meirong, a couple。

Li Hanxiong, the founder of Yipinhong Pharmaceutical, was born in 1974 and is currently the chairman and general manager of Yipinhong. Wu Meirong participated in the establishment of Yipinhong Pharmaceutical in 2002 and is currently the executive director and manager of Guangrun Group, Zhaocheng Investment, Yunrun Biotechnology, Motianshi Investment, and Daxiongfeng.

Li Handong, Li Hanxiong's elder brother, is six years older than Li Hanxiong and is also a shareholder of Yipinhong. He has worked at Yipinhong since 2003 and is currently a director of the third board of directors of Yipinhong Pharmaceutical and a director of Pinrui Pharmaceutical. In addition, Wu Meirong's younger brother Wu Chunjiang also holds shares in Yipinhong Pharmaceutical.

Source: Company’s 2023 financial report

In addition to Poinsettia, Li Hanxiong and Wu Meirong hold 70% and 30% of the investment in Guangdong Guangrun Group Co., Ltd. respectively; Li Hanxiong and Li Handong hold 37.45% and 31.11% of the investment in shareholder Guangzhou Fuze Investment Management Center (Limited Partnership) respectively.

On October 10, 2019, Li Hanxiong and Wu Meirong ranked 1166th on the Hurun Rich List 2019 with a net worth of 3.5 billion yuan;In October 2023, Li Hanxiong and Wu Meirong ranked 1090th on the "2023 Hurun Rich List" with a wealth of 5.5 billion yuan.

Li Fanxiong is a well-known domestic pharmaceutical entrepreneur.One of his highlights was being awarded the title of "China's Outstanding Innovative Entrepreneur" in 2010.On June 6, 2010, he received the award at the Great Hall of the People in Beijing. The award was selected by a selection committee composed of experts and scholars from the Development Research Center of the State Council and other institutions.Only 100 outstanding innovative entrepreneurs nationwide received this honor。

In addition, Li Hanxiong has also won the titles of "China's Outstanding Innovative Entrepreneur", "China's Outstanding Private Entrepreneur", "China's Outstanding Private Technological Innovation Entrepreneur","Outstanding Economic Figure in Guangdong Province's Pharmaceutical Industry"He has been awarded honors such as "Entrepreneur with Special Contributions in Guangdong Province's Pharmaceutical Industry", "Entrepreneur with Outstanding Contributions in Guangdong Province's Pharmaceutical Industry's Anti-epidemic Efforts", "Guangzhou City's Industry Leading Talent (Outstanding Industry Talent)", and "Guangzhou City's Science and Technology Innovation Talent".

Currently, Li Hanxiong also serves as a director of the China Soong Ching Ling Foundation, vice president of the China Pharmaceutical Enterprise Management Association, vice chairman of the Children's Health and Drug Research Professional Committee of the China Association of Traditional Chinese Medicine, vice president of the Guangdong International Chamber of Commerce, and vice president of the Guangdong Provincial Society of Preventive Medicine.

It is not difficult to see that Li Hanxiong holds multiple positions and is very busy with official duties, but judging from this breach of contract incident, Li Hanxiong may need to focus more on the company's compliance operations in order to make the long-term development of Poinsettia more secure.

Have you used Poinsettia Medicine? Let us know in the comments.