To add insult to injury! Harbin Pharmaceutical Group Inc. reports investment losses exceeding 1.1 billion yuan—has the once-promising star reached its twilight years?

Written by haon

Recently, Harbin Pharmaceutical Group Co., Ltd. issued an announcement stating that GNC Holdings Inc., a U.S.-based health supplement company in which the company has invested (known in Chinese as "Jian An Xi"), reported losses exceeding 1.165 billion RMB.

It is reported that Harbin Pharmaceutical Group's net assets in 2019 stood at around 5 billion yuan, and this latest investment loss has effectively wiped out roughly one-fifth of the company's value. Such a setback undoubtedly adds fuel to the fire for Harbin Pharmaceutical Group, whose performance has been steadily declining in recent years and has already found itself mired in operational difficulties.

Affected by the aforementioned news, Harbin Pharmaceutical Group shares have been declining steadily despite the generally strong performance of pharmaceutical stocks. As of the close on June 24, the stock was trading at 3.33 yuan per share.

In fact, since the share price of Harbin Pharmaceutical Group Co., Ltd. reached a high of 17.2 yuan per share at the end of June 2015, the stock has been on a continuous downward trend for nearly five years overall.

Determined to embrace the greater health movement, yet tragically facing a Waterloo.

Hengyao Group, which has long been eager to regain its former glory, places high hopes on expanding its greater-health product line—and GNC is particularly seen as a key player in this endeavor.

Data shows that GNC is a U.S.-based health supplement company with over 9,000 retail stores across more than 50 countries and regions worldwide. It primarily sells over 1,500 health products, including vitamins, minerals, herbal supplements, sports nutrition items, and weight-management products. For two decades in a row, GNC has been named America's No. 1 specialty retail brand for nutritional products by a renowned magazine.

In February 2018, Harbin Pharmaceutical Group Co., Ltd. announced that it had subscribed to GNC's convertible preferred shares, totaling up to US$300 million. According to the terms of this transaction, once the conversion is completed, Harbin Pharmaceutical will hold a 40.1% stake in GNC, becoming its single largest shareholder.

As of February 13, 2019, Harbin Pharmaceutical Group had already paid a total of US$299.5 million in three installments to GNC, in exchange for subscribing to 299,950 shares of convertible preferred stock issued by the company.

Why did Harbin Pharmaceutical Group choose GNC?

It is reported that, prior to receiving investment from Harbin Pharmaceutical Group (Harpharm), GNC had already been operating at a loss for several consecutive years. According to disclosures by Harpharm Shares, GNC recorded net losses of 286 million yuan in 2016 and 149 million yuan in 2017, with its net assets remaining negative throughout those same periods.

However, Harbin Pharmaceutical Group Co., Ltd. believes that investing in GNC will help diversify the company’s product lineup and enhance its brand image. Moreover, given the stable dividends from preferred shares, the company can not only participate in GNC’s operations but also secure a steady stream of income.

Notably, in August 2019, Harbin Pharmaceutical Group completed its mixed-ownership reform, aiming to raise funds through capital increases and share expansions to support mergers and acquisitions of major healthcare companies. This move is intended to help the company maintain its rapid growth momentum and restore Harbin Pharmaceutical Group's former glory.

However, things didn't go as planned.

Investing in GNC preferred shares failed to deliver the expected returns for Harbin Pharmaceutical Group Co., Ltd. According to GNC's Q1 2020 financial report, the company’s operating performance suffered a significant decline due to the impact of the COVID-19 pandemic. As of May 6, 2020, approximately 40% (or 1,300 stores) of GNC locations in the U.S. and Canada were temporarily closed, with some stores potentially facing permanent closures in the future. Moreover, given the ongoing global situation surrounding COVID-19, GNC continues to face the risk of further performance deterioration in the months ahead.

On June 15, 2020, GNC issued an announcement regarding its debt extension. GNC reached an agreement with the relevant lenders to postpone the maturity date of the outstanding loan portion until June 30, 2020. If the loan matures on this new date, GNC may face the risk of being unable to secure another extension. As a result, Harbin Pharmaceutical Group Co., Ltd. could encounter the risk of partially or fully recovering its receivable dividends.

Regarding this, industry expert Shi Lichen stated that Harbin Pharmaceutical Group's investment in GNC appears more like an investment for the sake of investing, rather than aligning with its own practical realities. Harbin Pharmaceutical Group doesn't possess any inherent advantages in the health supplement sector—after all, it doesn't even have any well-known health product lines—and lacks experience in managing such businesses. Boldly pouring substantial funds into a project that is already consistently losing money is clearly a strategic misstep.

Deeply mired in operational quagmire, the once-prized prodigy has fallen from grace.

Overall, Harbin Pharmaceutical Group's predicament is far more complex than just the disastrous investment in GNC.

Harbin Pharmaceutical Group's Harbin Pharmaceutical Shares is China's first publicly listed company in the pharmaceutical industry and was once hailed as the pride of its era. Its flagship products, such as the TV commercials for "Xin Gai Zhong Gai" and "Blue Bottle Cap," have become iconic memories for an entire generation. Meanwhile, Harbin Pharmaceutical Factory No. 6's Xia Li Ting, Hutong Children's Aminophenol Guanamin Granules with Calcium and Zinc, Blood-Nourishing Oral Liquid, Xin Gai Zhong Gai Brand High-Calcium Tablets, Yan Di Cold Medicine, and Harbin Pharmaceutical Sanjing's Calcium Gluconate, Zinc Gluconate, Shuanghuanglian Oral Liquid—and even Harbin Pharmaceutical Factory No. 4's "1234 Wei Bi Zhi"—have all gained immense popularity through relentless advertising campaigns, becoming household names across the country.

The "Harbin Pharmaceutical Group Model," which has generated immense business value for the company through sky-high advertising expenses, was once emulated by numerous competitors.

It is reported that, at its peak in 2010, Harbin Pharmaceutical Group achieved revenues of 18 billion yuan, with net profits soaring to 1.13 billion yuan.

However, prosperity gives way to decline.

In 2011, after the lavish office environment of Harbin Pharmaceutical Group—reminiscent of the Palace of Versailles—was exposed, it sparked widespread public outrage. It was also from that moment on that Harbin Pharmaceutical Group began to lose its aura of invincibility.

Beginning in 2012, with the implementation of the Advertising Law and the subsequent loss of advertising support, coupled with the introduction of policies such as antibiotic restrictions, medical insurance cost controls, and regulations on auxiliary medications, various underlying issues within Harbin Pharmaceutical Group—once known for its vibrant and thriving image—began to surface one by one. Later, the company frequently found itself embroiled in a series of negative controversies, including environmental scandals, allegations of pyramid schemes, fake drug scandals, and instances of improper promotional practices. As a result, the group’s recent development has taken a sharp downward turn.

Financial reports show that from 2017 to 2019, Harbin Pharmaceutical Group achieved net profits attributable to shareholders of RMB 407 million, RMB 346 million, and RMB 56 million, respectively—down 48.26%, 14.95%, and 83.88% year-on-year, marking a continuous downward trend.

This investment setback has only made Harbin Pharmaceutical Group's crucial "turnaround battle" to regain its former glory even more challenging.

Five executives abruptly resigned, leaving the mixed-ownership reform fraught with twists and turns.

In addition to the business level, Harbin Pharmaceutical Group has also seen significant changes at the talent level.

On June 11, 2020, Harbin Pharmaceutical Group issued an announcement stating that the company's board of directors had received a resignation letter from Gao Lei, the company's Deputy General Manager. Gao Lei resigned from his position as Deputy General Manager due to personal reasons and will not assume any other role within the company following his departure. According to available information, Gao Lei served as Deputy General Manager from September 13, 2018, to October 25, 2020.

Over the past two years, Harbin Pharmaceutical Group has seen four senior executives depart one after another—

Note: Senior executives who left Harbin Pharmaceutical Group in the past two years

Talent turmoil has undoubtedly plunged this already struggling, time-honored enterprise even deeper into crisis.

To turn the tide, Harbin Pharmaceutical Group has also been actively seeking "self-help" strategies and continuously undergoing transformation in recent years. To address the company's structural imbalance—where marketing takes precedence over research and development—and to eliminate longstanding systemic issues, Harbin Pharmaceutical is not only increasing its investment in R&D but also tapping into external resources to unlock new opportunities for breakthroughs.

In 2019, Harbin Pharmaceutical Group Co., Ltd. issued an announcement stating that Zhang Zhenping, Chairman and General Manager of the company, resigned from his position as General Manager due to work-related reasons, while retaining his role as Chairman. At the same time, the company announced the appointment of Xu Haiying, formerly President of Novartis China, as its new General Manager. Additionally, sources revealed that Harbin Pharmaceutical's management team has largely been replaced by overseas returnees—senior professionals with backgrounds from multinational corporations—over the past year.

The addition of executives like Xu Haiying has injected fresh energy into Harbin Pharmaceutical Group, drawing significant attention from the outside world. Five months after Xu Haiying took office, HPG’s winding journey toward mixed-ownership reform finally came to an end. Earlier, CITIC Capital, which had held a stake in HPG for over a decade, announced its participation in the group’s latest round of mixed-ownership reform, planning to increase its investment and ultimately secure a controlling stake. However, after nearly 10 months of preparation, the reform initiative was abruptly halted due to shifting government policies. As a result of disclosure violations related to this matter, both HPG and the individuals responsible at CITIC Capital were publicly criticized and disciplined by the Shanghai Stock Exchange.

In August 2019, Harbin Pharmaceutical Group’s mixed-ownership reform was officially completed through a capital increase and share expansion. Chongqing Harper and Heima Qihang—two companies—unexpectedly emerged as investors, injecting 1.28 billion yuan into the group. It was reported that Harbin Pharmaceutical planned to use the funds raised for industry consolidation, helping the company maintain its rapid and healthy growth momentum. However, little did they know that Harbin Pharmaceutical seemed to have placed their bet on the wrong horse; the failed investment in GNC has undoubtedly dealt a significant blow to the company.

However, as far as the new leadership team is concerned, it remains to be seen what kind of transformation they will bring to the company—so far, the results haven't yet become evident in terms of performance.

The Double Yellow Herb Controversy Has Been Puzzling

It's worth noting that on January 31, 2020, during the early stages of the COVID-19 outbreak, a news report claiming "taking Shuanghuanglian can inhibit the novel coronavirus" sent shockwaves through the nation. Overnight, Shuanghuanglian oral liquid virtually sold out and was removed from shelves at pharmacies nationwide as well as on all major e-commerce platforms.

Afterward, although the efficacy of Shuanghuanglian in inhibiting COVID-19 was clarified as not being definitively supported by research, the drug still triggered a frantic rush to purchase it. As a result, Harbin Pharmaceutical Group Co., Ltd.—the developer and promoter of Shuanghuanglian—experienced a significant surge in both its financial performance and stock price. In just five short days, HPG’s share price soared from 4.05 yuan per share to 6.06 yuan per share, marking an impressive cumulative increase of 50%.

However, this incident has been questioned by the outside world as a "marketing stunt." According to comprehensive reports from multiple media outlets, even before the Shuanghuanglian controversy erupted, Harbin Pharmaceutical Group seemingly found itself in a curious coincidence—on the second day of the Lunar New Year this year (January 26), the company had already resumed production of Shuanghuanglian Oral Liquid ahead of schedule. Moreover, it’s reported that the company had already ramped up overtime work prior to the Spring Festival, building up an inventory of nearly 20 million units. Strangely enough, sales of Shuanghuanglian Oral Liquid have declined significantly over the past two years, leaving Harbin Pharmaceutical Group with mounting stockpiles. This unexpected move—producing extra doses well in advance—has sparked widespread skepticism among outsiders, with many industry insiders believing that such actions are unlikely to reverse the company’s declining fortunes.

Reference materials:

1. Sina Pharma: "Change in Control at Harbin Pharmaceutical Group: The Century-Old Pharmaceutical Giant's 'Unyielding Spirit'"

2. Daily Economic News: "An Investment Loss of 1.1 Billion, Three Consecutive Years of Declining Performance—What’s Wrong with This Pharmaceutical Company Familiar to the Post-80s and Post-90s Generations?"

3. Huashang Taolue: "Shuanghuanglian Can't Cure Harbin Pharmaceutical Group"