Chinese Medicine Pharmaceutical Revenue and Net Profit Under Significant Pressure: Marketing Expense Ratio Exceeds 50%, Pre-IPO Dividend of 200 Million

Ask AI · How can Hanfang Pharmaceuticals break the dependency on a single product after the 2030 protection period?

“Harbor Business Observation” Xu Huijing

On February 25, 2026, Shandong Hanfang Pharmaceuticals Co., Ltd. (hereinafter referred to as Hanfang Pharmaceuticals) submitted an IPO prospectus to the Hong Kong Stock Exchange, planning to list on the Main Board, with CITIC Securities as the exclusive sponsor.

Hanfang Pharmaceuticals’ story encapsulates the difficult breakthrough of traditional Chinese medicine into the modern medical system. From its origins with a medical institution’s experience formula, the “Compound Huangbai Liquid Ointment,” to becoming a national second-class Chinese medicine protected variety, and now with nearly 1 billion yuan in revenue, it has witnessed the entire process of China’s topical Chinese patent medicine market evolving from wild growth to regulated competition.

As the capital market shifts its narrative from “exclusive varieties” to “research and development innovation” for Chinese medicine companies, is Hanfang Pharmaceuticals’ IPO a strategic move to strengthen its moat or a desperate attempt to break product dependency?

1

Declining Revenue and Net Profit, Over Half Marketing Expenses

According to the IPO prospectus, Hanfang Pharmaceuticals was established in 2004. It is a comprehensive pharmaceutical company engaged in the production, sales, and R&D of traditional Chinese medicine products, focusing on skin and mucosal diseases, committed to integrating traditional Chinese medicine wisdom with modern pharmaceutical science. The company’s core business revolves around its flagship product, the Compound Huangbai Liquid Ointment, which is currently the only approved prescription ointment in China’s Chinese patent medicine field.

Financial data shows that in 2023, 2024, and January-September 2025 (hereinafter referred to as the reporting period), the company’s operating revenues were 1.053 billion yuan, 992 million yuan, and 803 million yuan, respectively. Revenue in 2024 decreased by 5.8% year-on-year, showing a downward trend. This change mainly stems from the decline in the maximum hospital selling price of the Compound Huangbai Liquid Ointment, which limits the company’s pricing power with distributors.

Meanwhile, profitability has also been under pressure. During the reporting period, net profits were 237 million yuan, 199 million yuan, and 145 million yuan. In 2024, net profit decreased by 16.1% year-on-year, and in the first three quarters of 2025, it decreased by 6.1% year-on-year. At the same time, net profit margin dropped from 22.5% in 2023 to 18.1% in the first three quarters of 2025, indicating a continuous narrowing of profitability.

In response, Shen Meng, Executive Director of Xiangsong Capital, stated: “Hanfang Pharmaceuticals lacks a solid foundation to ensure profit margins. Its business model is driven by marketing and price competition, with limited growth potential.”

Gross profit margins remained high during the reporting period, at 84.3%, 82.5%, and 84.3%. The company explained in the prospectus that the Compound Huangbai Liquid Ointment, as a product with proven efficacy, has a certain rigid demand and is minimally affected by economic cycles. It holds a unique market position in China’s topical Chinese patent medicine field, being the only approved ointment form in this sector and recognized as a national second-class Chinese medicine protected variety under the “Chinese Medicine Varieties Protection Regulations.” These attributes help improve patient compliance and create high barriers to substitution.

Cost structure is relatively clear. During the reporting period, Hanfang Pharmaceuticals’ sales and marketing expenses were 513 million yuan, 483 million yuan, and 420 million yuan, accounting for 48.7%, 48.7%, and 52.3% of revenue, respectively. R&D expenses were 54.55 million yuan, 58.59 million yuan, and 26.69 million yuan, with R&D expense ratios of 5.2%, 5.9%, and 3.3%. Notably, from the expense ratio perspective, marketing expenses exceeded 50%, showing an increasing trend, while R&D expenses sharply declined in the first three quarters of 2025.

Promotion costs constitute a significant part of operations. During the reporting period, marketing and promotion expenses were 469 million yuan, 436 million yuan, and 381 million yuan, accounting for 44.6%, 44.0%, and 47.4% of total revenue, respectively. It is noteworthy that the company’s promotional services are partly provided by related parties. Shandong Jiyuan Information Technology Co., Ltd., controlled by the nephew of the controlling shareholder, was the company’s first and second largest supplier in 2023 and 2024, with procurement amounts of 147 million yuan and 32 million yuan, representing 24.4% and 5.4% of total procurement. The company terminated all business relations with this related party in 2025.

Tax and financial expert Liu Zhigeng pointed out that the high sales and marketing expenses have substantially suppressed Hanfang Pharmaceuticals’ profitability. Despite the core product’s high gross margin of 84.4%, demonstrating strong pricing power and cost control, high sales expenses have significantly reduced net profit. For example, in 2024, revenue fell by 5.8% year-on-year, but net profit dropped by 16.1%. In the first three quarters of 2025, revenue increased slightly by 3.1%, but profit declined by 6.1%, showing a typical “revenue growth but profit decline” pattern. This indicates that current growth largely depends on sales investment rather than product strength or efficiency improvements, raising concerns about profit quality.

Deeper analysis reveals that this “heavy marketing, light R&D” resource allocation pattern (sales expenses roughly ten times R&D investment) exposes strategic short-sightedness. Over-reliance on third-party academic promotion and distribution networks poses compliance risks. Meanwhile, insufficient long-term R&D investment (only 5-6% of revenue) hampers product pipeline iteration. Once the core product’s exclusive protection period (until 2030) ends, the company may face a sharp decline.

For financial analysts, this high sales expense ratio reflects underlying risks to sustainable profitability and free cash flow generation. High gross margins are not translating into high net profits but are locked into rigid marketing costs, indicating weak resilience to economic cycles and requiring cautious long-term investment evaluation.

2

99.7% Product Dependency, Countdown to 2030 Protection Period

Hanfang Pharmaceuticals faces a core challenge: extreme dependence on a single product. During the reporting period, sales of the core product, the Compound Huangbai Liquid Ointment, accounted for 99.8%, 99.8%, and 99.7% of total revenue, respectively. This means the company almost entirely relies on this product to support all revenue, gross profit, and profit.

This “star product” is currently the only approved prescription ointment in China’s Chinese patent medicine sector, a second-class national protected variety, with exclusive production rights until July 2030. According to Frost & Sullivan data, based on 2024 sales revenue, this product ranks fourth in China’s topical Chinese patent medicine market, with a 1.1% market share, and leads the dermatological topical medicine market with a 5.5% share.

However, even this core product’s growth has shown signs of fatigue. The IPO prospectus indicates that in 2024, sales of the Compound Huangbai Liquid Ointment were 990 million yuan, down 5.79% year-on-year; in the first three quarters of 2025, sales were 800 million yuan, up only 2.93% year-on-year.

More critically, the exclusive production right for this product has less than five years remaining. The prospectus explicitly warns that if the company fails to successfully renew the protection period, or if other companies develop similar products and obtain regulatory approval, the company could face intensified competition, which would significantly adversely affect its business, financial condition, and operating performance.

In response to the risks of relying on a single product, Hanfang Pharmaceuticals has attempted diversification, but with limited success.

The company launched the “Xilai Duo” brand of cosmetics, aiming to leverage Chinese medicine formulations to enter the functional skincare segment; it also acquired production licenses for classic formulas like Angong Niuhuang Wan and Wujijing Fengtong Pill to expand into broader Chinese patent medicine markets. However, the IPO prospectus shows that during the reporting period, combined sales of cosmetics and Angong Niuhuang Wan were only 1.75 million yuan, 1.72 million yuan, and 2.34 million yuan, accounting for 0.2%, 0.2%, and 0.3% of total revenue. Wujijing Fengtong Pill was only officially launched in January 2026 and has not yet contributed sales.

Shen Meng commented: “Dependence on a single product nearing the end of protection may pose future sales decline risks, but other mechanisms might be in place to address this. The company needs to provide investors with more comprehensive explanations.”

3

Cash Flow Under Pressure, 200 Million Yuan Dividends Before IPO

In terms of sales channels, the company employs a mixed model combining distribution and direct sales. During the reporting period, revenue from distribution was 1.004 billion yuan, 915 million yuan, and 748 million yuan, accounting for 95.3%, 92.3%, and 93.2%, respectively. Direct sales contributed 49.1 million yuan, 76.6 million yuan, and 54.3 million yuan, representing 4.7%, 7.7%, and 6.8%. Distribution remains dominant, consistent with industry norms, but also indicates high dependence on distributors.

Customer concentration is high. The top five customers during the period were all distributors, with revenues of 590 million yuan, 555 million yuan, and 441 million yuan, accounting for 56.1%, 55.9%, and 55.0%. The largest customer contributed 239 million yuan, 215 million yuan, and 167 million yuan, representing 22.7%, 21.7%, and 20.8%.

Working capital shows rising accounts receivable. At each period’s end, trade receivables and notes receivable were 254 million yuan, 191 million yuan, and 231 million yuan, respectively, making up 41.8%, 38.0%, and 51.7% of current assets. Days sales outstanding were 87.7, 81.7, and 71.8 days. As of September 30, 2025, overdue receivables over 271 days totaled 8.336 million yuan, up 39.2% from 2024 year-end.

On the supplier side, during the reporting period, the top five suppliers accounted for 37.1%, 26.9%, and 16.4% of total procurement, with the largest supplier, Shandong Jiyuan Information Technology Co., Ltd., a related party, accounting for 24.4% of procurement in 2023. The company terminated all transactions with this related party in 2025.

Inventory levels at each period’s end were 97.07 million yuan, 99.37 million yuan, and 84.28 million yuan, representing 16.0%, 19.8%, and 18.8% of current assets. Inventory turnover days were 264.7, 206.1, and 199.2 days. As of January 31, 2026, about 62.9 million yuan of inventory had been consumed or sold.

Cash flow from operating activities was 286 million yuan, 199 million yuan, and 165 million yuan, respectively, remaining positive but declining. Cash used in investing activities was 296 million yuan, 58.93 million yuan, and 75.66 million yuan, mainly for production facilities and equipment. As of September 30, 2025, the company’s cash and cash equivalents were 57.42 million yuan, down about 48% from 110 million yuan at the end of 2024.

Net current assets declined from 301 million yuan in 2023 to 211 million yuan in 2024, and 70.12 million yuan as of September 30, 2025. The company states in the prospectus that maintaining healthy cash reserves and sufficient liquidity supports operations and future expansion, but if the decline in net current assets continues without improvement, it could threaten financial stability.

Ownership structure shows typical family control. According to the prospectus, as of the last practicable date, Qin Wenji held 90% of the shares, Qin Yinji held 10%, and both exercised voting rights jointly through an agreement. They are brothers.

Qin Wenji is the founder and has served as chairman since inception, overseeing overall strategy and development.

Notably, the company paid large dividends just before the IPO. The prospectus shows dividends of 50 million yuan in 2024 and 150 million yuan in the first three quarters of 2025, with 50 million yuan and 133 million yuan paid out respectively. Based on ownership, these dividends were almost entirely received by the Qin brothers.

For this IPO, Hanfang Pharmaceuticals plans to use the proceeds for ongoing R&D, clinical development, commercialization of candidate products, construction and renovation of new production units within the Shandong Hanfang Chinese medicine industrial park, and general corporate purposes. Whether the company can leverage the IPO to shift from “single product dependence” to “diversified development” remains a key point for investor attention. (Harbor Finance Production)