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

AI Inquiry · What Compliance Risks Are Exposed by High Sales Commissions?

Our reporter: Xu Libo Edited by: Wei Guanhong

At a critical stage of rushing toward a Hong Kong stock IPO, Shandong Hanfang Pharmaceutical Co., Ltd. (hereinafter “Hanfang Pharma”) is facing an unexpected compliance storm.

On March 24, a notice from the National Healthcare Security Administration revealed that this pharmaceutical company planning to go public has its core product—Fufang Huangbai Liquid—linked to a bribery case involving “selling drugs with kickbacks” that has lasted for ten years.

According to excerpts from court criminal judgments, in the “Zhang Mou Meng drug sales bribery case,” defendant Zhang Mou Meng cooperated with Shandong Moumou Pharmaceutical Co., Ltd. to promote the drug Fufang Huangbai Liquid. From 2013 to 2023, Zhang Mou Meng bribed multiple medical personnel with a total of about 365,000 yuan.

The National Healthcare Security Administration emphasized that bribery in drug purchase and sales essentially involves giving improper benefits to buy out prescription rights, disrupting normal medical order, and shifting drug sales from actual clinical value to high rebates and kickbacks. Moving forward, the administration will guide Hebei Province’s healthcare security bureau to evaluate the creditworthiness of the involved company, Shandong Moumou Pharmaceutical Co., Ltd., according to the price procurement credit evaluation system.

On March 26, a reporter from Daily Economic News contacted Qin Yinji, general manager of Hanfang Pharma, expressing an interview request. He declined, citing “being in a meeting.” The reporter also sent an interview letter to Hanfang Pharma’s public email, but as of press time, no reply has been received.

Credit Evaluation and Disciplinary Action Will Be Taken Against the Involved Company

Although the National Healthcare Security Administration did not directly name Hanfang Pharma in the notice, verification by the reporter indicates that “Shandong Moumou Pharmaceutical Co., Ltd.” in the notice refers to Hanfang Pharma.

Based on the “Zhang Mou Meng Bribery and Bribery of Non-State Employees First Instance Criminal Judgment” (Case No.: Ji 0303 Xingchu 126), the judgment disclosed that the drug involved has the Chinese drug approval number “Z10950097.” Using this number as a keyword to search the National Medical Products Administration database reveals that the drug involved is the Fufang Huangbai Liquid ointment produced by Shandong Hanfang Pharmaceutical Co., Ltd.

The notice and related judicial documents show that Hanfang Pharma’s former sales representative Zhang Mou Meng, to increase sales of its exclusive product Fufang Huangbai Liquid, engaged in continuous commercial bribery of multiple medical staff at Shanhai Pass People’s Hospital in Qinhuangdao, Hebei Province, over ten years from 2013 to 2023.

Specifically, Zhang Mou Meng arranged with Sun Moumei, then director of the obstetrics and gynecology department at Shanhai Pass People’s Hospital, Qinhuangdao, to promote the drug and pay rebates based on the number of prescriptions issued by the department. Sun Moumei used her position to recommend the drug to physicians in the department, receiving a total of 156,900 yuan in kickbacks from August 2013 to January 2023.

Additionally, to precisely calculate the rebate amounts, Zhang Mou Meng approached Zhang Mou Song, director of the outpatient pharmacy, offering a benefit of 25,000 yuan in exchange for him to tally the number of prescriptions for Fufang Huangbai Liquid issued by relevant departments and doctors—industry insiders call this “unified prescription.” Furthermore, two doctors in the dermatology department, Wang Mouhui and Zhang Mouwen, also issued more prescriptions for the drug during diagnosis and treatment, receiving a total of 183,000 yuan in kickbacks from October 2014 to January 2023.

This case was brought to a first-instance verdict in November 2024. The court found that Zhang Mou Meng, seeking improper benefits, provided property to the above-mentioned state employees (Sun Moumei, Zhang Mou Song), constituting bribery; and also provided property to Wang Mouhui and Zhang Mouwen, with a relatively large amount, constituting bribery of non-state employees. The verdict sentenced Zhang Mou Meng to one year in prison with a one-year and six-month probation and a fine of 20,000 yuan.

Regarding this case, the National Healthcare Security Administration pointed out: “Bribery in drug purchase and sales essentially involves giving improper benefits to buy out prescription rights, disrupting normal medical order, and shifting drug sales from actual clinical value to high rebates and kickbacks.”

The administration also stated: “Judicial authorities have penalized the bribery cases, but the issue of inflated drug prices still exists. If not addressed, inflated prices will continue to harm patients and the medical insurance fund’s legitimate rights.” More concerning for Hanfang Pharma’s prospects is that the National Healthcare Security Administration has issued this case as a source of medical commercial bribery and explicitly stated that it will guide Hebei Province’s healthcare security bureau to evaluate the creditworthiness of “Shandong Moumou Pharmaceutical Co., Ltd.” involved in the case according to the price procurement credit evaluation system.

On March 26, Liu Peng, a lawyer from Shanghai Huzhi Law Firm, told Daily Economic News that from a regulatory perspective, for companies involved in commercial bribery or “selling with kickbacks” in the drug purchase and sales field that are judged or investigated by judicial or relevant authorities, the healthcare security department can initiate a credit evaluation. Based on the severity, the company may be classified as generally untrustworthy, seriously untrustworthy, or especially untrustworthy. Corresponding measures often include suspending or canceling the drug’s listing qualification, restricting participation in centralized procurement or bidding, and limiting distribution rights; in severe cases, the company’s related products may be restricted from procurement and sales within public medical institutions for a certain period. “Therefore, if the involved company’s credit evaluation is conducted, its related drugs’ procurement and sales qualifications in some regions could indeed be affected.”

High Sales Commissions Include 147 Million Yuan Flowing to the Ultimate Controller’s Nephew

According to Hanfang Pharma’s IPO prospectus submitted to the Hong Kong Stock Exchange, the “Fufang Huangbai Liquid” is the company’s exclusive product. In the first three quarters of 2023, 2024, and 2025, this ancient Chinese herbal medicine, used externally, contributed revenues of 1.05 billion, 990 million, and 800 million yuan respectively, accounting for 99.8%, 99.8%, and 99.7% of total revenue.

Supporting this nearly 1 billion yuan annual sales figure is its high marketing expenses. The prospectus shows that in 2023, 2024, and the first three quarters of 2025, the company’s sales and marketing expenses reached 510 million, 480 million, and 420 million yuan, respectively, accounting for 48.7%, 48.6%, and 52.3% of the total income in those periods. This sales expense ratio far exceeds the industry average of around 30%. In contrast, the company’s R&D expenditure during the same period was only 56.95 million, 59.62 million, and 41.55 million yuan, roughly one-tenth of the sales expenses, reflecting a “heavy marketing, light R&D” characteristic.

Among the high sales expenses, a large amount of promotional service fees paid to related parties drew attention. The prospectus shows that in 2023, Hanfang Pharma purchased promotional services worth as much as 1.47 billion yuan from its largest supplier, Shandong Jiyuan Information Technology Co., Ltd. (“Shandong Jiyuan”), accounting for 24.4% of that year’s total procurement. This company is ultimately controlled by the company’s actual controllers Qin Wenji and Qin Yinji’s nephew Wang Meng.

This means the company handed over over 100 million yuan of promotional business to the nephew of its actual controller. The fairness and authenticity of this related-party transaction are questionable. According to Xin Huanghe, this Shandong Jiyuan, which received nearly 1.47 billion yuan in promotional fees, was publicly reprimanded in April 2025 by the industry conference organizer for “unauthorized participation” and “mixing its promotional materials into conference packets.”

Facing the upcoming IPO review, Hanfang Pharma conducted an emergency divestment before listing. The prospectus shows that in 2025, Wang Meng sold all his shares in Shandong Jiyuan, and Hanfang Pharma also terminated its business relationship with the company. However, this pre-IPO rush operation, combined with the disclosed bribery case, will undoubtedly lead to stricter scrutiny of Hanfang Pharma’s internal controls and sales compliance.

Liu Peng also pointed out that from a capital market perspective, companies need to fully disclose major lawsuits, criminal cases, and compliance risks during the Hong Kong IPO process, and accept due diligence from regulators and sponsors. If the case involves product promotion, regulators will typically focus on whether the company’s sales model has compliance risks, whether internal controls are sound, and whether the issues are ongoing. Issuers are usually required to disclose these risks in the prospectus and propose corrective measures. Overall, whether the case will materially impact the company’s operations and listing process depends on the final regulatory findings, the company’s rectification efforts, and the degree of connection between the case and the company.