Hanfang Pharmaceutical's Hong Kong IPO faces bribery scandal, which may have a significant impact on the listing process

Every reporter | Xu Libo Every editor | Wei Guanhong

At a critical juncture in its sprint towards an IPO on the Hong Kong Stock Exchange, Shandong Hanfang Pharmaceutical Co., Ltd. (hereinafter referred to as "Hanfang Pharmaceutical") is facing an unexpected compliance storm. 

On March 24, a notice from the National Medical Insurance Administration publicly linked the core product of this prospective listed pharmaceutical company—Fangfang Huangbai Liquid—with a bribery case involving “selling drugs with kickbacks” that has lasted for ten years. 

The National Medical Insurance Administration cited excerpts from a court criminal judgment, pointing out that in the “Zhang Certain Bribery Case,” the defendant Zhang Certain established a cooperative relationship with a certain pharmaceutical company in Shandong to promote the drug Fangfang Huangbai Liquid for that company. Between 2013 and 2023, Zhang Certain bribed multiple medical personnel with a total of approximately 365,000 yuan. 

The National Medical Insurance Administration emphasized that bribery in pharmaceutical procurement and sales essentially involves buying off prescription rights through improper benefits, disrupting normal medical procedures, and shifting the sales of pharmaceutical products from actual clinical value to high rebates and high kickbacks. The next step will see the National Medical Insurance Administration guide the Hebei Provincial Medical Insurance Bureau to conduct credit evaluations and handling of the pharmaceutical company involved in the case according to the requirements of the price procurement credit evaluation system. 

On March 26, a reporter from "Every Economic News" called Hanfang Pharmaceutical's general manager Qin Yinji to express an interview request, but he refused the interview citing "in a meeting." The reporter also sent an interview request to Hanfang Pharmaceutical's public email, but did not receive a response by the time of publication. 

Although the National Medical Insurance Administration did not directly name Hanfang Pharmaceutical in the notice, a reporter confirmed that the "certain pharmaceutical company in Shandong" mentioned in the notice should refer to Hanfang Pharmaceutical. 

According to documents obtained by the reporter from the judgment document website, the "Zhang Certain Bribery and Bribery to Non-State Personnel First Instance Criminal Judgment" (Case No.: Ji 0303 Criminal Initial 126), the judgment document disclosed that the national drug approval number for the drug involved in the case is "Z10950097." Searching the National Medical Products Administration database with this document number reveals that the drug involved is indeed the Fangfang Huangbai Liquid produced by Shandong Hanfang Pharmaceutical Co., Ltd. 

Notices and related judicial documents show that Hanfang Pharmaceutical's former promotional representative Zhang Certain engaged in ongoing commercial bribery of multiple medical personnel at the Shanhaiguan People's Hospital in Qinhuangdao, Hebei Province, to increase sales of the company's exclusive product, Fangfang Huangbai Liquid, between 2013 and 2023. 

Specifically, Zhang Certain agreed with Sun Certain, then the head of the obstetrics and gynecology department at Shanhaiguan People's Hospital, requiring her to promote the drug and pay kickbacks based on the quantity of Fangfang Huangbai Liquid prescribed by the department. Sun Certain used her position to recommend the drug to department physicians, receiving a total of 156,900 yuan in kickbacks from August 2013 to January 2023. 

Additionally, to accurately calculate the kickback amount, Zhang Certain approached Zhang Certain, the head of the outpatient pharmacy at the hospital, exchanging 25,000 yuan in bribes to obtain statistics on the quantity of Fangfang Huangbai Liquid prescribed by relevant departments and doctors in the hospital, commonly referred to in the industry as "統方" (tong fang). Furthermore, two doctors in the dermatology department, Wang Certain and Zhang Certain, also received a total of 183,000 yuan in kickbacks for prescribing the drug frequently between October 2014 and January 2023. 

The above case will reach its first-instance verdict in November 2024, with the court ruling that the defendant Zhang Certain committed bribery to obtain improper benefits by providing the above-mentioned state personnel (Sun Certain, Zhang Certain) with property, constituting the crime of bribery; providing Wang Certain and Zhang Certain with property, with a significant amount, constituting bribery to non-state personnel. The ruling is as follows: the defendant Zhang Certain is guilty of bribery and bribery to non-state personnel; he shall serve a sentence of one year in prison with a suspended sentence of one year and six months, and pay a fine of 20,000 yuan. 

Regarding this case, the National Medical Insurance Administration pointed out: "Bribery in pharmaceutical procurement and sales essentially involves buying off prescription rights through improper benefits, disrupting normal medical procedures, and shifting the sales of pharmaceutical products from actual clinical value to high rebates and high kickbacks." 

The National Medical Insurance Administration also stated: "Judicial authorities have punished the bribery case, but the price inflation exposed by the case still exists; if not addressed, inflated prices will continue to harm the legitimate rights and interests of patients and medical insurance funds." Further concerning for Hanfang Pharmaceutical's prospects is that the National Medical Insurance Administration has classified this case as a source of pharmaceutical commercial bribery and has explicitly stated it will guide the Hebei Provincial Medical Insurance Bureau to conduct credit evaluations and handling of the "certain pharmaceutical company in Shandong" involved in the case according to the price procurement credit evaluation system. 

On March 26, lawyer Liu Peng from Shanghai Huzi Law Firm pointed out in an interview with "Every Economic News" that from a regulatory perspective, for companies involved in commercial bribery and "selling drugs with kickbacks" in the pharmaceutical procurement and sales field and judged by judicial authorities or investigated by relevant departments, the medical insurance department can initiate credit evaluations based on this and classify them as general dishonesty, serious dishonesty, or particularly serious dishonesty depending on the severity of the circumstances. Corresponding restrictive measures usually include suspending or canceling the online qualification of the involved drugs, restricting participation in centralized drug procurement or bidding, and limiting distribution qualifications; in severe cases, there may also be restrictions on the procurement and sales of related products in public medical institutions for a certain period. "Therefore, if the companies involved in the case are included in the credit evaluation scope, their related drugs' qualification for procurement and sales in certain regions may indeed be affected." 

According to Hanfang Pharmaceutical's prospectus submitted to the Hong Kong Stock Exchange, the "Fangfang Huangbai Liquid" involved in the bribery case is the company's exclusive product. In the first three quarters of 2023, 2024, and 2025, this externally used traditional Chinese medicine derived from ancient Qing Dynasty formulas contributed 1.05 billion yuan, 990 million yuan, and 800 million yuan in revenue to Hanfang Pharmaceutical, accounting for as much as 99.8%, 99.8%, and 99.7% of total revenue. 

Supporting the nearly 1 billion yuan annual sales of this exclusive product are its high sales expenses. The prospectus shows that in the first three quarters of 2023, 2024, and 2025, the company's sales and marketing expenses reached 510 million yuan, 480 million yuan, and 420 million yuan, accounting for 48.7%, 48.6%, and 52.3% of total revenue during the same period. This sales expense ratio is far higher than the average level of just over 30% in the traditional Chinese medicine industry. In contrast, the company's R&D expenses during the same period were only 56.95 million yuan, 59.62 million yuan, and 41.55 million yuan, with R&D investment being only about one-tenth of sales expenses, presenting a characteristic of "heavy marketing and light R&D." 

Among the high sales expenses, a substantial promotion service fee flowing to related parties is particularly noteworthy. The prospectus shows that Hanfang Pharmaceutical procured up to 147 million yuan in promotion services from its largest supplier, Shandong Jiyuan Information Technology Co., Ltd. (hereinafter referred to as "Shandong Jiyuan") in 2023, accounting for 24.4% of total procurement that year. This company was ultimately controlled by the nephews of Hanfang Pharmaceutical's actual controllers, Qin Wenji and Qin Yinji. 

This means the company had entrusted over 100 million yuan in promotion business to the actual controller's nephew. The fairness and authenticity of this related-party transaction are inevitably called into question. According to reports from the New Yellow River client, Shandong Jiyuan, which received nearly 147 million yuan in promotion fees, was publicly reprimanded by the industry conference organizers in April 2025 for "attending the meeting without registration" and "arbitrarily mixing its commercial promotional materials into the conference material bags." 

Facing the impending IPO review, Hanfang Pharmaceutical made an urgent cut before the listing. The prospectus shows that in 2025, Wang Meng sold all his equity in Shandong Jiyuan, and Hanfang Pharmaceutical subsequently terminated its business relationship with that company. However, this sudden operation before the listing, coupled with the bribery case publicly disclosed this time, will undoubtedly subject Hanfang Pharmaceutical's internal control and sales compliance issues to more stringent scrutiny. 

Liu Peng also pointed out that from the perspective of the capital market, companies need to fully disclose significant litigation, criminal cases, and compliance risks during the Hong Kong IPO process and undergo due diligence by regulatory agencies and sponsoring organizations. If the case involves the product promotion process of the company, regulatory agencies will typically focus on whether the company's sales model poses compliance risks, whether its internal control system is sound, and whether related issues are persistent. Issuers often need to adequately warn of related risks in the prospectus and explain corrective measures. Overall, whether related cases will have a substantial impact on the company's operations and listing process still requires a comprehensive judgment based on the final determinations by regulatory authorities, the company's rectification situation, and the degree of relevance of the case to the company. 

Cover image source: AIGC 

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Editor: Hao Xinyu