Hanfang Pharmaceutical’s IPO bid hits a snag: National Healthcare Security Administration exposes decade-long bribery case; promotional expenses and related-party transactions raise questions

ZC Asia has learnt that, just one month after submitting its listing application to the Hong Kong Stock Exchange, Shandong Hanfang Pharmaceutical Co., Ltd. (hereinafter referred to as ‘Hanfang Pharmaceutical’) has found itself at the centre of a compliance crisis due to a decade-long case of commercial bribery in the pharmaceutical sector. On 24 March 2026, the National Healthcare Security Administration issued an official bulletin regarding the ‘Zhang Moumeng Pharmaceutical Sales Bribery Case’, confirming that the key drug involved was the company’s exclusive product, Compound Phellodendron Liquid Ointment, and revealing that credit rating measures would be initiated.

Established in 2004, Hanfang Pharmaceutical specialises in the treatment of skin and mucosal diseases. Its core product, Compound Phellodendron Liquid Ointment, is the only prescription ointment approved in China and has been designated a National Class II Traditional Chinese Medicine Protected Variety, with market exclusivity extending until July 2030. According to Frost & Sullivan data, based on 2024 sales revenue, the product ranks fourth in the domestic traditional Chinese medicine market, accounting for a 1.1% share.

From a financial perspective, the company is highly reliant on a single product. The prospectus reveals that in 2023, 2024 and the first three quarters of 2025, Compound Phellodendron Liquid Ointment accounted for 99.8%, 99.8% and 99.7% of total revenue respectively. During the same periods, combined revenue from new business lines such as An Gong Niu Huang Wan and cosmetics amounted to only 2.34 million yuan, failing to provide effective support.

In terms of performance, the company has exhibited a trend of rising revenue but falling profits. In 2023, revenue stood at 1.053 billion yuan with a net profit of 237 million yuan; in 2024, revenue declined to 992 million yuan and net profit fell to 199 million yuan; in the first three quarters of 2025, revenue was 803 million yuan, a marginal year-on-year increase of 3.1%, but net profit continued to decline to 145 million yuan. The gross profit margin remained at a high level of 82.5%–84.3%, but the net profit margin fell from 22.5% to 18.1%, primarily due to sustained pressure from selling expenses.

A decade-long bribery chain exposed; evidence of kickback sales confirmed

According to a notice from the National Healthcare Security Administration and the criminal judgement (No. Ji 0303 Xing Chu 126) disclosed on the Judgment Document Network, Zhang Moumeng, a former marketing representative at Hanfang Pharmaceutical, bribed several medical staff members at Shanhaiguan People’s Hospital in Qinhuangdao City, Hebei Province, between August 2013 and July 2023 to boost sales of Compound Phellodendron Liquid Ointment, totalling 365,000 yuan.

The judgment reveals that Zhang Moumeng bribed Sun Moumei, Head of the Obstetrics and Gynaecology Department at the hospital, with 156,900 yuan to encourage the department to prioritise prescribing the implicated medicine; paid Zhang Mousong, Head of the Outpatient Pharmacy, 25,000 yuan in exchange for prescription data; and bribed two dermatologists with a further 183,000 yuan. In November 2024, the court sentenced Zhang Moumeng to one year’s imprisonment, suspended for one year and six months, and a fine of 20,000 yuan for the offences of bribery and bribing non-state personnel.

In its statement, the National Healthcare Security Administration noted that such conduct “buys prescription rights through the provision of improper benefits, disrupts normal clinical practices, and shifts the focus of pharmaceutical sales from actual clinical value to high rebates and kickbacks”, adding that it would instruct the Hebei Provincial Healthcare Security Administration to conduct credit evaluations and take appropriate measures against the implicated companies in accordance with the price and procurement credit evaluation system.

Exorbitant sales expenses: over 100 million yuan in promotional funds flowed to relatives of the actual controller

The prospectus reveals that sales and marketing expenses at Hanfang Pharmaceutical have consistently accounted for nearly half of its revenue. In 2023, 2024 and the first three quarters of 2025, these expenses amounted to 513 million yuan, 480 million yuan and 420 million yuan respectively, representing 48.7%, 48.6% and 52.3% of revenue during the corresponding periods – far exceeding the industry average of approximately 30% for the traditional Chinese medicine sector. During the same periods, R&D expenditure amounted to only 56.95 million yuan, 59.62 million yuan and 41.55 million yuan respectively, less than one-tenth of the sales expenses.

Among the substantial promotional expenses, a transaction with a related party has drawn attention. The prospectus disclosed that Shandong Jiyuan Information Technology Co., Ltd. (hereinafter “Shandong Jiyuan”) was the company’s largest supplier in both 2023 and 2024, with Hanfang Pharmaceutical paying it promotion service fees of 147 million yuan and 32.176 million yuan respectively. During the reporting period, the company was effectively controlled by Wang Meng, the nephew of Qin Wenji and Qin Wenyin—the brothers who are the actual controllers of Hanfang Pharmaceutical—constituting a related-party transaction.

Questions have been raised regarding the fairness of the pricing for this related-party transaction and the destination of the funds. According to public reports, Shandong Jiyuan was publicly named and shamed by the organisers of an industry conference in April 2025 for engaging in unauthorised promotional activities. In 2025, Wang Meng transferred all his shares in Shandong Jiyuan, and the company terminated its cooperation with the firm. This ‘last-minute severance’ has been questioned by the market as an attempt to circumvent listing regulations.

Internal training account exposes non-compliant sales pitches, raising doubts about compliance framework

Industry media investigations have confirmed that a WeChat public account named “Shandong Hanfang Internal Training” is closely linked to the company’s sales team and has repeatedly published training materials containing non-compliant sales pitches regarding “prescription incentives”, “prescription reconciliation” and “customer relationship management”. Among these, an article titled “Core Issues in Increasing Prescription Drug Sales Volume” published in 2015 mentioned terms such as “first-box prescription incentives” and “prescription volume rebates”, which closely match the modus operandi observed in the Zhang Moumeng case. The timing of these articles’ publication coincides with the start of the bribery activities, pointing to systemic compliance issues within the company’s sales structure.

Legal Expert: Credit Rating May Affect Procurement Eligibility, IPO Prospects Uncertain

In an interview, Liu Peng, a lawyer at Shanghai Huzi Law Firm, stated that medical insurance authorities may initiate credit evaluations against companies engaged in commercial bribery under the price-based procurement credit rating system. In serious cases, companies may face restrictive measures such as the suspension or revocation of online listing qualifications for implicated medicines, or restrictions on participation in centralised procurement.

From the perspective of Hong Kong IPO scrutiny, Liu Peng noted that companies must fully disclose major litigation, criminal cases and compliance risks, with regulators focusing on the compliance of sales models, the integrity of internal control systems and the persistence of issues. This bribery case, along with related-party transactions and internal training issues, may have a substantial impact on the company’s operations and listing process.

At the time of writing, Qin Yinjie, General Manager of Hanfang Pharmaceutical, declined an interview on the grounds that he was “in a meeting”, and the company’s public email address has not responded. During this critical phase of the listing review, this traditional Chinese medicine enterprise, which is highly reliant on a single product, is facing multiple challenges from regulators, the market and public opinion.

Disclaimer: The content herein is for reference only and does not constitute any form of investment advice. Should any information contained herein prove inaccurate, incomplete, or potentially misleading, please refer to the company's official announcements. Market risks exist; investment requires caution.