Pharma companies set to enter direct sales of nutritional supplements and beauty products?

Two A-share market-listed pharma companies, Xiangxue Pharma and Kangmei Pharma, announced this week that they had obtained licenses to conduct direct sales.

Such licenses are under tight regulation for fear that they would be used to start pyramid schemes.
So far there are forty direct sales companies operating in China, most being cosmetics brands such as Avon or specialized health supplement brands such as Amway. Chinese media commentary on the two companies’ direct sales licenses has speculated that the companies are eying the dietary supplement market.

Xiangxue Pharma already owns a subsidiary that produces a variety of traditional Chinese medicine- based oral supplements that claim cosmetic benefits. According to the company’s own data, such products achieved sales of 193 million yuan by mid-2012, a figure that may be impressive given
the size of the company, but meager compared to direct sales market leaders. Amway, for example, has annual sales of 27.1 billion yuan, and Perfect and Infinitus both have 12 billion each. The other company Kangmei Pharma is also reported to have launched a joint venture company last year with insurance giant PICC in the business of “health management”.

So far, the few other pharma companies that already have direct sales licenses are not doing very well with them. Harbin Pharma, for example, discontinued its direct sales department in 2010, two years after obtaining the license, when it was accused of operating a pyramid scheme. However, the market responded positively to the news and the stocks of both Xiangxue and Kangmei were boosted by the announcements.

The rationale might be that the health supplement and “cosmeceutical” (cosmetic-pharmaceutical) sectors are increasingly seen as an alternative source of growth, especially in the wake of recent government pressure to lower drug prices. This was corroborated by the recently released Q3 results of some companies. Yunnan Baiyao, a traditional Chinese medicine (TCM) company that originally produced anti-inflammatory drugs, was a pioneer in the cosmeceutical area. The company reported strong results in the first nine months of the year. Its net profit reached 1.9 billion yuan, 54.1% higher year-on-year. Strong growth in the company’s general health department, responsible for several TCM- based toothpastes, was cited as a factor.

In related news:
• A news article reports that the price of Dong-E E-Jiao – a donkey skin-based health supplement,

has grown sharply in recent years
• Jiangzhong Pharma announced a hericium erinaceus-based biscuit that claims to soothe stomach discomfort

Companies and brands affected
Xiangxue Pharma (SHE:300147)
Kangmei Pharma (SHA:600518)
Harbin Pharma (SHA:600664
Yunnan Baiyao Group (SHE:000538)
Shan Dong Dong-E E-Jiao (SHE:000423)
Jiangzhong Pharma (SHA:600750)

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