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Recently, Huadong Medicine seems to have entered the "buy, buy, buy" mode.

On July 14, Huadong Medicine announced that its wholly-owned subsidiary Zhongmei Huadong signed an exclusive product license agreement with Ausone Biotech. Zhongmei Huadong obtained the exclusive license for all indications of Ausone Biotech's TTYP01 tablets (edaravone tablets) in mainland China, Hong Kong, Macau and Taiwan, including development, registration, production and commercialization rights; on July 21, Huadong Medicine's subsidiary acquired 100% of the equity of Guizhou Hengba Pharmaceutical Co., Ltd. for 530 million yuan; on August 4, Huadong Medicine and ImmunoPharma reached a commercialization cooperation in mainland China for its CD19-targeting autologous CART candidate product IM19 chimeric antigen receptor T cell injection.

In fact, it may not be quite appropriate to say that Huadong Medicine has only recently started to “buy, buy, buy”. By reviewing its development in recent years, it is not difficult to find that after experiencing the “double kill” of centralized procurement and national negotiations, Huadong Medicine took the initiative to seek change, build a diversified product pipeline, and vowed not to put all its eggs in one basket.

Successive winning of the bid for pillar products loses the price market

Founded in 1993 and listed in 1999, Huadong Medicine has become a large-scale comprehensive pharmaceutical listed company integrating pharmaceutical research and development, production and distribution after more than 30 years of development. Its pharmaceutical business sector has been among the top ten pharmaceutical commercial enterprises in China for several consecutive years, and its scale and market share in this field are second to none in Zhejiang Province.

Since its listing, Huadong Medicine's performance has been booming, with net profit being positive all year round and the highest growth reaching 125.05%.

The most recent decline in net profit occurred in 2021. Financial report data showed that during the reporting period, Huadong Medicine's net profit was 2.302 billion yuan, a year-on-year decrease of 18.38%. It was also in 2020 and 2021 that Huadong Medicine experienced the "double kill" of centralized procurement and national negotiations.

In the pharmaceutical field, centralized procurement refers to the centralized procurement organized by the National Healthcare Security Administration and other relevant departments to uniformly collect the drug demand of medical institutions across the country, and then negotiate prices with drug manufacturers with a larger procurement volume to achieve a reduction in drug prices; national negotiations refer to medical insurance negotiations, in which experts from the National Healthcare Security Administration negotiate with pharmaceutical companies to negotiate drug prices, thereby reducing drug prices and reducing the financial pressure on patients. Negotiations are usually for drugs that are exclusively produced, lack competition, are expensive, and are usually used to treat major diseases.

Bailing Capsules are used as an adjuvant treatment for diseases such as chronic bronchitis. They are a major Chinese patent medicine preparation of Huadong Medicine and one of the main supports for its profits. According to data from MinEnet, the sales of Bailing Capsules reached 3.486 billion yuan in 2019. In the first half of 2020, Bailing Capsules ranked first among the top 20 Chinese patent medicines sold in public hospitals in key cities, with a market share of 2.10%.

In December 2020, Bailing Capsules participated in the National Healthcare Security Administration's medical insurance payment standards and medical insurance renewal negotiations and successfully negotiated a 33% price reduction.

In January of the same year, Bayer and Luye of Huadong Medicine won the bid in the procurement, with a price reduction of 78.37%; in February 2021, Sino-US Huadong's pantoprazole injection won the bid in the fourth batch of national centralized procurement, with a price reduction of more than 90%; at the same time, the company's other pillar product, acarbose tablets, was further reduced by about 40% in the new medical insurance payment standard after the renewal of medical insurance; in 2022, mycophenolate mofetil capsules won the bid in the seventh batch of centralized procurement, with a price reduction of more than 50%.

"BD Maniac" in the Industry

The continuous winning of bids has discounted the performance of Huadong Medicine. The centralized procurement has led to a sharp drop in the prices of some of the company's drugs, which has had a certain impact on short-term profits. However, centralized procurement has also brought positive aspects. With the market expansion of centralized procurement products and the expansion of the outpatient market, Huadong Medicine has gradually eliminated the negative impact while increasing the research and development of innovative drugs, building a diversified product pipeline, and actively seeking new growth points for performance.

Judging from the company's previous actions, mergers and acquisitions have become one of the important measures in Huadong Medicine's new layout.

In 2021, Huadong Medicine participated in the bankruptcy reorganization of Anhui Huachang Hi-Tech and acquired 100% of its equity. The purpose is to rationally plan its production lines and make new investments through its subsidiary Zhongmei Huadong, so as to activate Huachang Hi-Tech's production capacity and expand its chemical production capacity;

At the end of February 2022, Huadong Medicine acquired publicly issued shares of Germany's Heidelberg Pharma AG at a price of 6.44 euros per share through its wholly-owned subsidiary, and acquired 35% of its equity, becoming the second largest shareholder. Sino-US Huadong paid a down payment of US$20 million, with a maximum of US$449 million in development expenses and related net sales commissions. The significance of this move is that it can obtain exclusive licenses for Heidelberg Pharma's two products under development, HDP-101 and HDP-103, in 20 Asian countries and regions including mainland China. In addition, Sino-US Huadong will also obtain exclusive selection rights and priority negotiation rights for some of Heidelberg Pharma's products under development;

In August 2022, Zhongmei Huadong acquired 60% of Huaren Technology's equity by increasing capital and acquiring shares for no more than RMB 396 million, becoming its controlling shareholder. It is understood that Huaren Technology is in the leading position in the field of nucleoside raw materials for small nucleic acid drugs and nucleotides for diagnostic reagents;

In April 2023, Huadong Medicine acquired 70% of the equity of Jiangsu Nanjing Agricultural University Animal Pharmaceutical Co., Ltd. by equity transfer and capital increase for a total of RMB 205 million. The acquisition aims to enhance Huadong Medicine's competitiveness in the field of industrial microorganisms.

According to Tonghuashun data, since April 11, 2006, Huadong Medicine alone has had 37 mergers and acquisitions, and is also known as the "BD maniac" in the industry. During the merger and acquisition process, Huadong Medicine's goodwill has also been rising. As of Q1 this year, Huadong Medicine's goodwill was 2.597 billion yuan.

The company acquired by the medical beauty sector achieved profitability for the first time

From the gradual clearing of negative impacts from centralized procurement to large-scale mergers and acquisitions, Huadong Medicine has not stepped on any major "mines" and has not deviated too much from the company's own expectations. The performance of the four major sectors, pharmaceutical industry, pharmaceutical commerce, medical beauty, and industrial microbiology, has shown a growth trend.

According to financial report data, in 2022, Huadong Medicine's net profit was 2.499 billion yuan, a year-on-year increase of 8.58%; in 2023, the net profit was 2.839 billion yuan, a year-on-year increase of 13.59%; in Q1 2024, the net profit was 862.4 million yuan, a year-on-year increase of 14.18%.

It is not difficult to see Huadong Medicine's "vision" from past mergers and acquisitions and performance. Analysts at Cinda Securities said that they predict that recent acquisitions or technology introductions will continue to bring new growth to Huadong Medicine.

It is worth mentioning that in recent years, Huadong Medicine has actively developed the medical beauty sector and has achieved significant long-term growth.

As of 2023, Huadong Medicine has a total of 38 high-end medical beauty products (24 of which have been launched at home and abroad). The product portfolio covers mainstream non-surgical medical beauty fields such as improving frown lines, facial and body fillers, thread embedding, skin management, body shaping, hair removal, and private repair.

In terms of performance, Huadong Medicine's medical beauty business achieved operating income of 2.447 billion yuan in 2023, a year-on-year increase of 27.79%; its wholly-owned subsidiary Xinkeli Aesthetics achieved revenue of 1.051 billion yuan, a year-on-year increase of 67.83%; its wholly-owned subsidiary Sinclair in the UK achieved sales revenue of 149.58 million pounds (about 1.304 billion yuan) in 2023, a year-on-year increase of 14.49%. It is worth noting that this is also the first time that Sinclair in the UK has achieved annual profit since its acquisition.

The agency predicts that in 2023, the company's core domestic medical beauty product Yiyanshi will continue to grow impressively, and overseas medical beauty will achieve profitability. The profit contribution capacity of Huadong Medicine's overall medical beauty business will continue to increase. In addition, liraglutide weight loss indication products are also continuing to increase in volume, and we can expect better contributions to the company's revenue and profits in 24 years.