Recently, Beijing Tong Ren Tang issued an announcement on foreign investment, stating that its holding subsidiary Beijing Tong Ren Tang Commercial intends to sign a "Share Transfer Agreement" with Honghui Technology, Daopei Hongde, Honghui Pharmaceutical, Wang Desheng and Wang Aixiao, and intends to pay about 105 million yuan to acquire Honghui Technology's 51% stake in Honghui Pharmaceutical.

As a pharmaceutical and medical device operating company, Honghui Pharmaceutical was established in 1994 and is mainly engaged in pharmaceutical research and development, pharmaceutical production and sales, and medical device operations. The performance in the first half of 2024 showed that Honghui Pharmaceutical achieved revenue of 844 million yuan and net profit of 25.5713 million yuan (unaudited). In 2023, Honghui Pharmaceutical achieved a net profit of 228 million yuan (unaudited). At present, Honghui Pharmaceutical is still a long way from catching up with last year's full-year net profit.

Tong Ren Tang is a "Chinese time-honored brand" that mainly produces and sells traditional Chinese patent medicines. It covers a number of blockbuster products, such as Angong Niuhuang Pills, Tongren Niuhuang Qingxin Pills, and Tongren Dahuoluo Pills. The latest performance report shows that in the first three quarters of 2024, Tong Ren Tang achieved revenue of approximately 13.82 billion yuan, a year-on-year increase of 0.72%; net profit attributable to the parent was approximately 1.35 billion yuan, a year-on-year decrease of 2.92%. Tong Ren Tang said that the decline in net profit was mainly due to rising prices of Chinese medicinal materials and increased product costs.

In Tong Ren Tang's view, it can take advantage of Honghui Pharmaceutical's service advantages in the medical channel, integrate internal channel resources, and tap the sales potential of Tong Ren Tang's products in the medical channel. At the same time, through Tong Ren Tang's brand empowerment, Honghui Pharmaceutical's ability to develop and cover downstream customers will be further enhanced, and the customer resources of large medical groups will be expanded. Further expand sales scale and achieve steady growth. However, affected by uncertain factors such as the macro-economy, industry policies, and market changes, competition in Honghui Pharmaceutical's main medical channel promotion and circulation and distribution business has intensified. Tongrentang also realizes that there is a certain degree of uncertainty in future operating conditions and expected earnings. In addition, this transaction needs to undergo the antitrust review of the concentration of operators by the State Administration for Market Regulation, and there is a risk of failing to obtain antitrust review.

At present, since the China Securities Regulatory Commission issued the "Opinions on Deepening the Reform of the Merger and Reorganization Market of Listed Companies" in September this year, mergers and acquisitions in the pharmaceutical industry have continued to emerge. The opinions encourage listed companies to strengthen industrial integration. While supporting the development of emerging industries, the capital market will continue to help traditional industries to reasonably increase industrial concentration and improve resource allocation efficiency through restructuring. Not only that, in January this year, the State-owned Assets Supervision and Administration Commission of the State Council issued the "Notice on Optimizing the Asset Appraisal Management of Central Enterprises" to promote the optimization of the layout and structural adjustment of central enterprises.

This year, the capital market has seen many Chinese time-honored brands acquire or have acquired assets.
For example, Shandong Keyuan Pharmaceutical plans to purchase 99.42% of the equity of Hongjitang held by 39 counterparties including Linuo Investment Holding Group and Linuo Group through issuing shares and paying cash, and raise matching funds; Zhangzhou Pien Tze Huang Investment, a wholly-owned subsidiary of Zhangzhou Pien Tze Huang Pharmaceutical, plans to acquire 100% of the equity of Zhangzhou Mingyuan Spice Co., Ltd. from Zhangzhou State-owned Assets Investment and Operation Co., Ltd. with its own or self-raised funds of about 254 million yuan.

Under the wave of mergers and acquisitions, many Chinese medicine companies have won development. For example, through the above acquisition, Pien Tze Huang is expected to "join hands" with Zhangzhou Narcissus Pharmaceutical, which is under Mingyuan Spice. Pien Tze Huang frankly said that Narcissus Pharmaceutical can carry out in-depth cooperation with it in the fields of brand promotion, product marketing, channel expansion, etc., relying on its existing management advantages and brand advantages to achieve synergy, increase the sales revenue, market share and sustainable development capabilities of both parties, and further enhance the market competitiveness of both parties.

"Continuously promoting the expansion of external business" has long been Pien Tze Huang's plan in the capital market, and it is also implementing this plan with actions. This acquisition may also be a "chess game" for Pien Tze Huang to improve its long-term profitability. In the first three quarters of 2024, Pien Tze Huang achieved revenue of 8.45 billion yuan, a year-on-year increase of 11.19%; net profit attributable to the parent company was 2.687 billion yuan, a year-on-year increase of 11.73%. Although revenue and net profit still maintain a certain growth, the increase in the cost of important raw materials has compressed Pien Tze Huang's profit margin.

Overall, when Chinese medicine companies conduct mergers and acquisitions, they generally examine the target company's business, scale, profitability, technology and management, as well as market and brand. On the one hand, some large Chinese medicine companies are incorporated into state-owned capital; on the other hand, listed pharmaceutical companies develop their own varieties or boost performance by acquiring small and medium-sized enterprises with characteristics or higher profits in the market. There are only two ways for Chinese medicine companies to acquire and merge. One is to obtain important varieties and enrich their own production lines; the other is to use the target company's rich sales channels to expand their own product development path.

It is worth noting that, at a time when the rules and development logic of the pharmaceutical market are constantly changing, some established Chinese medicine companies cannot achieve successful transformation by themselves. Therefore, once there is an opportunity to introduce state-owned capital, they will seize the opportunity.
At the same time, many Chinese medicine companies rely on the development of a single large variety, and this development model has a weak ability to resist risks, and its performance is easily affected, thus affecting the overall development of the company.

The essence of mergers and acquisitions is integration. When Chinese medicine companies conduct mergers and acquisitions or are acquired, they have only taken the first step. "A journey of a hundred miles begins with a single step." The key is how the two sides integrate resources and maximize their advantages.

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