The gamble for Fosun Pharmaceutical is clear: win, and it secures a precious entry ticket; lose, and it might only be a loss of a few billion yuan. A major acquisition by the trillion-yuan "Fosun Department" has drawn widespread skepticism. On the evening of December 23, Fosun Pharmaceutical (600196.SH), controlled by Guo Guangchang, issued a lengthy, multi-thousand-word announcement providing a detailed response to the Shanghai Stock Exchange's inquiry regarding its acquisition of Lvgu Pharmaceutical.
▲ Lvgu Pharmaceutical responded to the inquiry from the Shanghai Stock Exchange. Just a week prior, Fosun Pharmaceutical announced its plan to acquire a controlling stake in Lvgu Pharmaceutical for 1.412 billion yuan, causing a stir in the market. Fosun Pharmaceutical's stock price subsequently declined, falling more often than rising in recent days. The entire value of Lvgu Pharmaceutical hinges on its Alzheimer's disease drug, Sodium Oligomannate Capsules (commonly known as "Jiuyi"), but production of this drug has been halted since its registration certificate expired. Lvgu Pharmaceutical has also fallen into losses, with net assets amounting to only about 10 million yuan.
The company Fosun Pharmaceutical is buying has assets worth less than one percent of the acquisition price. Furthermore, although Jiuyi is hailed as a "miracle drug," it faces persistent skepticism from the academic community. All these factors have placed this acquisition under intense scrutiny, prompting even regulators to step in and demand an explanation. Fosun Pharmaceutical's extensive, well-reasoned reply suggests it is determined to proceed with this acquisition.
The development of drugs for Alzheimer's disease remains a global challenge; pharmaceutical companies worldwide have burned through 600 billion dollars with very few successes. Guo Guangchang's bet of over a billion yuan can be considered a high-stakes gamble. Against the backdrop of the ongoing "slimming down" of the entire Fosun Department, is Guo Guangchang not afraid of losing this round?
An "Adventurous" Investment? Despite Lvgu Pharmaceutical's poor performance, Fosun Pharmaceutical is proceeding with a highly premium-priced acquisition. According to Fosun Pharmaceutical's announcement, as of the end of the third quarter this year, Lvgu Pharmaceutical had total assets of 806 million yuan, liabilities of 795 million yuan, but net assets of only 10.36 million yuan. Lvgu Pharmaceutical's financial situation is concerning, primarily due to a sudden instability in revenue. In 2024, the company's revenue was 572 million yuan, with a net profit of approximately 70 million yuan. However, in the first three quarters of this year, revenue dropped to about 100 million yuan, resulting in a loss of 67 million yuan.
The key reason for the sharp revenue decline is that its core product, Jiuyi, has been suspended from production since last November due to the expiration of its drug registration certificate, directly impacting Lvgu Pharmaceutical's fate. According to the Economic Information Daily, in June of this year, Lvgu Pharmaceutical publicly stated that positions related to Jiuyi had been suspended, followed by layoffs a month later. Its national sales team ceased work after July 30, with only a very small number of employees retained to support clinical testing work.
However, Lvgu Pharmaceutical clearly has no intention of sinking deeper into crisis; securing a lifeline is its top priority, and its reliance is the bargaining chip it holds: Jiuyi itself. As a drug for treating mild to moderate Alzheimer's disease, Jiuyi received "conditional approval" from the National Medical Products Administration (NMPA) in November 2019 and was later included in the National Reimbursement Drug List (NRDL). Before its approval, the only drug approved for this indication was memantine, which debuted in 2002.
So why couldn't Lvgu Pharmaceutical sustain itself? The primary reason is the high investment required. According to disclosures in Fosun Pharmaceutical's reply announcement, from its market approval to September of this year, Jiuyi's cumulative sales reached 1.92 billion yuan. However, the cumulative R&D, patent costs, and other expenses invested by Lvgu Pharmaceutical for Jiuyi amounted to 2.034 billion yuan, already resulting in a deficit, not to mention the need for continued future investment.
Now, the burden of reviving Jiuyi will fall on Fosun Pharmaceutical's shoulders. Many investors worry that Fosun Pharmaceutical's hasty investment of 1.4 billion yuan, despite the uncertainty surrounding Jiuyi's re-approval, might ultimately be money down the drain. Fosun Pharmaceutical clearly does not see this as a risk. In its reply announcement, Fosun Pharmaceutical stated that the acquisition payment is not a one-time investment. Specifically, 143 million yuan is for acquiring part of the existing equity, while the remaining 1.269 billion yuan, intended for subscribing to the newly increased registered capital, will be paid in installments: 635 million yuan upon closing, with the balance paid over three years based on R&D progress.
In other words, if the clinical research for Jiuyi does not meet expectations, Fosun Pharmaceutical can cut its losses at any time. Furthermore, Fosun Pharmaceutical expresses considerable confidence in the drug's re-approval, stating that if the clinical plan proceeds smoothly, it aims to complete all patient enrollment by the end of 2027, finish the study and read out data by early 2029, and submit the clinical summary report to the NMPA in the first half of 2029. From Fosun Pharmaceutical's perspective, once approved, Jiuyi, which is not unfamiliar to some Alzheimer's patients, is estimated to quickly regain its market share.
According to the Economic Observer Daily, after Jiuyi became unavailable, a large number of patients are still searching for and seeking the drug, with its price now speculated to reach 1,600 to 2,400 yuan – over five times its former医保 price. A senior biopharmaceutical investor commented, "The product definitely has commercial value; there is a large patient population using it."
Controversy Surrounding the "Miracle Drug" Persists Market skepticism about this acquisition stems, to some extent, from the controversies attached to both Lvgu Pharmaceutical and Jiuyi. The founder of Lvgu Pharmaceutical, Lü Songtao, has had a storied career in business with many ups and downs. According to media reports, he holds a master's degree in philosophy from Northeastern University (formerly the Northeastern Institute of Technology). After resigning from the Panzhihua Iron and Steel Plant in 1991, he went to Zhuhai to run a food stall, earning his first pot of gold by gathering information from customers. Subsequently, he speculated in land, worked as a pharmaceutical representative, sold glass, and was involved in steel trading. His most significant venture was co-founding "Giant Group" with Shi Yuzhu.
▲ A brief introduction to alumni and their enterprises on the official website of Northeastern University. After the incident involving the Zhuhai Giant Mansion in 1997, Lü Songtao, burdened with over 80 million yuan in debt, established the Lvgu Group. The production approval for "Zhonghua Lingzhi Bao," obtained from Giant Group, became the formal starting point of his pharmaceutical business. Following animal experiments conducted by institutions like the Shanghai Institute of Materia Medica, Chinese Academy of Sciences, and obtaining the production approval, Lü Songtao marketed "Zhonghua Lingzhi Bao" as an anti-cancer "miracle drug," selling it at high prices through "conference marketing." Within less than a year, sales exceeded 400 million yuan, with profits over 100 million yuan.
Subsequently, through Lü Songtao's efforts, "Zhonghua Lingzhi Bao" was renamed the anti-tumor drug "Shuangling Guben San." By 2006, Lvgu Pharmaceutical's annual sales exceeded 2 billion yuan, with 9,000 employees. A year later, CCTV reported that Lvgu's so-called anti-cancer products involved false advertising. Regulatory authorities intervened, and Lü Songtao left for the United States. However, within just half a year, Lü Songtao returned to China to start another business, making a comeback relying on the Salvianolate for Injection he had previously secured. According to Lü Songtao, in 2014 and 2015, Salvianolate for Injection achieved sales of 3 to 4 billion yuan, accumulating profits of 3 billion yuan.
It is likely these very profits that supported Lvgu Pharmaceutical's substantial investment in Jiuyi. As early as 2009, recommended by Ding Jian, then director of the Shanghai Institute of Materia Medica, Lü Songtao acquired the Alzheimer's drug still under development by Geng Meiyu's team. The team discovered that an ingredient extracted from seaweed could inhibit certain bacteria in the gut, thereby suppressing brain neurodegeneration and alleviating brain inflammation. GV-971 was the first active molecule obtained during the research, hence the name "Jiuyi" (meaning "Number Nine, Phase One").
Following Jiuyi's approval in 2019, renowned biologist Rao Yi repeatedly published articles questioning the authenticity of the research and the drug's efficacy, stating that "it is impossible not to have data fabrication." Geng Meiyu subsequently sued Rao Yi for reputational infringement.
▲ Geng Meiyu lost the lawsuit against Rao Yi for reputational infringement. At the time, some criticisms of Jiuyi focused on its Phase III clinical trial lasting only nine months, perceived insufficient efficacy evaluation, and unclear explanation of the drug's mechanism of action. While Rao Yi continued to voice doubts, in May 2022, Lvgu Pharmaceutical halted the international Phase III clinical trial for Jiuyi, citing pandemic impacts and funding constraints. The doubts surrounding Jiuyi thus became even harder to dispel.
For Fosun Pharmaceutical, restarting the Phase III clinical trial for Jiuyi and expanding the number of trial participants from a few hundred to over 1,900 might help alleviate some concerns regarding trial duration and efficacy.
Can Fosun Pharmaceutical Afford This Gamble? By responding to the regulator in detail across 27 pages, Fosun Pharmaceutical clearly desires to acquire Jiuyi. Over the past nearly six years, Jiuyi achieved average annual sales exceeding 300 million yuan, with data showing sales surpassed 400 million yuan last year. Given the scarcity of Alzheimer's drugs, the prospects for Jiuyi's re-approval remain promising.
Fosun Pharmaceutical's CFO, Chen Zhanyu, publicly stated that the target population for Jiuyi is estimated at approximately 3.56 million, with an expected market penetration rate of 22%. If approved in the first half of 2029 and included in the医保 the following year, peak sales are projected to reach around 4 billion yuan by 2035. If approved in the second half of 2029 and included in the医保 two years later, peak sales are projected to reach 3.8 billion yuan by 2036. Even if not included in the医保 initially, sales in 2030 are still expected to exceed 1 billion yuan.
In an environment where pharmaceutical companies are generally affected by volume-based procurement policies, innovative drugs have become a crucial direction for breaking through, and Fosun Pharmaceutical is no exception. In the first three quarters of this year, Fosun Pharmaceutical's revenue from innovative drugs exceeded 6.7 billion yuan, accounting for nearly 23% of its total revenue. If Fosun Pharmaceutical's projections hold true, Jiuyi's re-approval would significantly contribute to its innovative drug revenue.
Sustained growth in innovative drugs is essential to support Fosun Pharmaceutical's future. As a leading enterprise spanning multiple sectors, Fosun Pharmaceutical's core revenue still comes from pharmaceutical manufacturing, accounting for as much as 70% of total revenue last year. However, growth rates have been declining in recent years, directly contributing to Fosun Pharmaceutical's sluggish overall revenue growth.
Despite the decline in revenue, Fosun Pharmaceutical's net profit is still growing, but this is not due to strong performance in its main business. Financial reports show that its net profit attributable to shareholders declined significantly in 2022 and 2023. However, it grew 27.7% year-on-year in 2024 and 25.5% in the first three quarters of this year. These increases are actually attributable to investment income.
But according to data, Fosun Pharmaceutical's investment income is also declining, falling from 4.624 billion yuan in 2021 to 2.105 billion yuan last year. If it continues to decline, it will directly impact net profit.
▲ Fosun Pharmaceutical's investment income in recent years. Image from Feijing Investment Research. Due to the tens of billions of goodwill accumulated from previous continuous mergers and acquisitions, as well as guarantees provided for financing by its subsidiaries, Fosun Pharmaceutical faces significant debt repayment pressure. As of the end of September this year, Fosun Pharmaceutical's short-term borrowings reached 16.447 billion yuan, and non-current liabilities due within one year amounted to 6.232 billion yuan. Meanwhile, its monetary funds on the books were only 11.478 billion yuan, resulting in a short-term debt repayment gap of 11.2 billion yuan.
From any perspective, Fosun Pharmaceutical needs to find new profit growth drivers. Choosing to bet on innovative drugs is inevitably a high-stakes gamble requiring both capital and patience. From this angle, betting a few billion yuan on Jiuyi, which already has a user base, to secure an entry opportunity in the promising field of Alzheimer's drugs, represents a relatively small cost.
Win the bet, and it gains a precious entry ticket; lose the bet, and it might only lose a few billion yuan, while having at least provided hope for some patients. For Guo Guangchang and Fosun Pharmaceutical, this deal doesn't seem like a loss.
Comments