Liankang Pharmaceutical Responds to Inquiry: Detailed Explanation of the Logic Behind the "Surge" in Distribution Business Revenue | Auditing Firm Investigates the Flow of Over 100 Million in Marketing Expenses | Quick Read of the Announcement

Source: Caixin Media

Caixin Media March 24 (Reporter Lu Aifeng) Liling Kang Pharmaceutical Co., Ltd. (603669.SH), which is in a period of transition pains as well as a period of recovering its performance, is trying to dispel regulators’ and the market’s doubts about the authenticity of its financial data through a detailed reply to the exchange’s inquiry letter.

This evening, Liling Kang Pharmaceutical released an announcement to respond one by one to the Shanghai Stock Exchange’s inquiries regarding matters related to its 2025 annual performance forecast. In response to core questions that the market has paid close attention to—such as the discrepancy in the revenue scale of its pharmaceutical distribution business, fluctuations in the gross margin of cardiovascular and cerebrovascular products, and where tens of millions of yuan in market marketing service fees went—Liling Kang Pharmaceutical has handed over a detailed “itemized bill.” Its auditing firm, Zhongshen Yatai Certified Public Accountants (Zhongshen Yatai), also issued a special verification opinion, concluding that the relevant capital flows do not involve circumstances of disguised transfer of benefits.

It is worth noting that this is not the first time Liling Kang Pharmaceutical has been questioned by the exchange due to operational and financial issues. In 2024, after the company disclosed its annual report, it also received an inquiry from the Shanghai Stock Exchange, focusing on issues such as changes to revenue recognition methods, changes in its business model, and fluctuations in certain segments. At that time, the company had already explained that some businesses were changed from the gross method to the net method for accounting. This time, with the company again being asked, the focus has further shifted toward expansion in the distribution business and its fee structure. The inquiry by regulators shows characteristics of expanding from “accounting treatment compliance” to “business substance and revenue quality.”

Pharmaceutical distribution business volume expands; Liling Kang Pharmaceutical says “small base, fast growth”

In the inquiry letter, the Shanghai Stock Exchange first pointed to a “data contradiction” in Liling Kang Pharmaceutical’s pharmaceutical distribution business: in the first half of 2025, the company’s distribution business revenue was about RMB 130 million, but its key subsidiary, Xizang Huaxin, contributed only RMB 18.51 million. This scale mismatch led outsiders for a time to question whether the company inflated revenue or had overlapping reporting bases.

Liling Kang Pharmaceutical responded that its pharmaceutical distribution and agency business is not carried solely by Xizang Huaxin, but is driven by a dual-subject model jointly led by Xizang Huaxin and Zhejiang Liling Kang Pharmaceutical Co., Ltd. (abbreviated as “Zhejiang Liling Kang”). Among them, Zhejiang Liling Kang, a well-established player established more than 20 years ago, has a mature GSP warehouse and 84 professional employees. It is the company’s “base camp” for carrying out distribution business in the East China region. Meanwhile, Xizang Huaxin is more inclined to operate a light-asset model that provides warehousing and delivery services through third-party outsourcing (such as China Resources Kelun).

The data show that in 2025, the company’s distribution business achieved explosive growth. The company disclosed that in 2024, revenue from pharmaceutical distribution and agency business totaled RMB 46.3136 million, including distribution business revenue of RMB 13.6517 million and agency business revenue of RMB 32.6619 million; by 2025, this figure rose to RMB 160 million, including distribution business revenue of RMB 77.3235 million and agency business revenue of RMB 82.2847 million.

Liling Kang Pharmaceutical explained that this growth stems from the company’s strategic transformation under the pressure of the centralized procurement (volume-based procurement) policy—by introducing high-value products such as Ejiao, An Gong Niuhuang Wan, and Galbut? (hydrobromide of galar? min injection), and leveraging the existing nationwide chain of hospital/clinic channel resources to “bridge” them.

In explaining the logic behind its growth, Liling Kang Pharmaceutical positions itself as a “small base, fast-growth” transformation case. The company said that over the past two decades, in the field of prescription injectables, it has accumulated experience in hospital/clinic channels, customer resources, and professional services. Against the backdrop of centralized procurement, it is now trying to combine its own manufactured products with externally sourced agency product categories, extending into the pharmaceutical distribution and agency segments. The company also cited industry data indicating that in 2024, the national total sales value of the pharmaceutical distribution market increased year over year by 0.6%, and 32 listed pharmaceutical distribution companies’ aggregate revenue increased year over year by 0.93%, meaning the company’s growth is not out of line with the industry trend.

Regarding abnormal changes in the gross margin of the distribution business, in its reply letter Liling Kang Pharmaceutical emphasized that this was mainly affected by changes in the revenue recognition basis. The company disclosed that starting from its 2024 annual report, based on the substance of its business, it changed some distribution businesses from the gross method to the net method for accounting. Although this adjustment caused revenue scale to appear as a non-operational contraction on the books, its core logic is to distinguish the boundary of rights and obligations between outright purchase-style sales and intermediary services, making the financial performance more aligned with the actual operating model.

In addition to the distribution business, the Shanghai Stock Exchange also raised inquiries regarding the sharp fluctuations in revenue from its core product, Huishengdan? (drug name: Ruilisu). Revenue from this product’s 2024 sales soared 320% year over year to RMB 141 million, but in 2025 it is expected to decline by about 30%.

In the announcement released tonight, Liling Kang Pharmaceutical revealed the logic behind its “roller-coaster” performance: on the one hand, it is affected by seasonality—cardiovascular and cerebrovascular diseases are more prevalent in the fall and winter, and customers stock up toward year-end; on the other hand, it is more directly tied to whether the drug can enter the National Reimbursement Drug List (the “National Drug Negotiations,” “Guo Tan”) and local centralized procurement. In 2024, as the company carried out preparations for the National Drug Negotiations, an old customer, Jiangxi Xincheng Pharmaceutical Co., Ltd., looked favorably on the prospects and made large purchases, contributing more than RMB 55 million in revenue. In 2025, since the product did not make it into the National Drug Negotiations list, that customer terminated the cooperation. Meanwhile, because the product was included in the inter-provincial alliance procurement for 2026, a new customer, Jiangxi Jiusheng Gong Pharmaceutical Co., Ltd., also looked favorably on the market after centralized procurement and took over as the largest customer.

In addition, regarding its anti-infective business that generated substantial revenue in 2024 but saw a sharp shrinkage in 2025, Liling Kang Pharmaceutical disclosed in the announcement a unique model of “contract manufacturing + closed-loop sales.” The company’s only raw material supplier and its only finished goods customer are both Hunan-based enterprises. The inquiry asks whether this constitutes related-party transactions or involves capital circulation. Both Liling Kang Pharmaceutical and the auditing firm denied that there is any related-party relationship, saying the transactions are independent. The main reason for the business decline is that, after the core product won the bid for national centralized procurement, its price was substantially lowered.

More than a hundred million in sales expense: where it goes made clear; auditors say they conducted a penetration review of the top five service providers

Sales expenses in the pharmaceutical industry have long been a key focus of regulatory verification. Liling Kang Pharmaceutical is no exception. The inquiry letter required the company to explain the basic information of the top five market promotion service companies, and whether there are any situations where funds flow to customers.

According to what was disclosed in the announcement, after Liling Kang Pharmaceutical paid funds to the cooperating promotion companies, they independently carried out services such as market research and consultation. The total amounts involving the top five promotion service providers (including Jiujiang Yuxiang Technology, etc.) are about RMB 60.11 million. To verify the authenticity of the expenses, the accounting firm carried out stringent “penetration” procedures.

In its reply, Zhongshen Yatai Certified Public Accountants stated that the verification procedures include, but are not limited to: retrieving the market marketing service management system, interviewing the financial and sales heads, selecting major contracts from the first half of 2023 to the first half of 2025, and focusing on verifying evidence of service results, such as promotion activity reports and research data documents.

“Through industrial and commercial penetration reviews of the top five service providers and related-party relationship checks, no benefit exchanges were found between them and the company’s controlling shareholder, actual controller, or distributors.” The audit firm stated clearly in its opinion that Liling Kang Pharmaceutical’s sales expense expenditures are executed strictly in accordance with internal control systems, and there is no situation where funds are disguised as service fees and returned to customers, or where funds are advanced on behalf of other parties.

Caixin Media reporter Lu Aifeng noted that, looking across the entire reply to the inquiry, the core message Liling Kang Pharmaceutical is trying to convey is: the company is in the process of transforming from “pure industrial production” to “an integrated model of R&D, production, and sales + large health distribution.”

From operating data, Liling Kang Pharmaceutical’s performance in recent years has shown pronounced fluctuations. According to financial reports, in 2021 the company still achieved operating revenue of RMB 740 million and a net profit attributable to shareholders of RMB 65.9 million; but after entering 2022, performance declined significantly—operating revenue fell to RMB 289 million and net profit attributable to shareholders turned into a loss of RMB 196 million; in 2023, revenue further dropped to RMB 197 million and net profit attributable to shareholders recorded a loss of RMB 152 million; by 2024, the company’s revenue rebounded to RMB 380 million, but the net profit attributable to shareholders loss expanded to RMB 131 million.

In 2025, the company’s performance forecast shows that as the distribution and agency business expands, the revenue mix changes. Revenue from relevant businesses increased from RMB 46.3136 million in 2024 to RMB 160 million, becoming an important component of the revenue for the period.

By reviewing the company’s operating trajectory over the past few years, it can be seen that the centralized procurement policy has continuously reshaped the company’s business structure. However, looking further ahead, the challenges facing Liling Kang Pharmaceutical have not disappeared completely. On the one hand, the company’s distribution business gross margin varies drastically across different product categories (from 2.53% to 78%); how to maintain the stability of high-gross-margin products is key. On the other hand, as the pharmaceutical industry and the secondary market place stronger emphasis on compliance and regulation, every cent of promotion expenses by pharmaceutical companies will be under the spotlight.

(Caixin Media reporter Lu Aifeng)