Drug company denies fraud

Shanghai Pharmaceuticals Holding Co, the country's second largest drug distributor, denied media reports that the company is currently investigated by the China Securities Regulatory Commission (CSRC) and the Hong Kong Exchanges and Clearing (HKEx), it said in a filing to the Shanghai Stock Exchange yesterday.

The 21st Century Business Herald reported yesterday the drug distributor has been under investigation by the two organizations for suspected financial fraud in two acquisitions, the report citing an unidentified company executive.

Following the report, the company's shares yesterday tumbled 24.3 percent to HK$9.11 ($1.17) on the Hong Kong bourse. The company's shares on the Shanghai Stock Exchange also dropped by the maximum permitted limit of 10 percent to 10.75 yuan ($1.70) yesterday.

Li Ling, an analyst at ChinaVenture Investment Consulting Group, told the Global Times yesterday that the trading of the company's shares may be halted if it is placed under investigation, and "if financial fraud is confirmed, the company may face fines and executives involved in the fraud may face prison sentence."

Shanghai Pharmaceuticals Group, the parent company of Shanghai Pharmaceuticals Holding, merged one of its subsidiaries, Shanghai Xinya Pharmaceutical, into the listed arm in 2011.

But according to the 21st Century Business Herald report, the group had deliberately boosted the profits of Xinya to more than 100 million yuan ($15.8 million) by injecting capital into the company, which is against rules.

Earlier this year, the listed arm of Shanghai Pharmaceuticals acquired Changzhou Kangli Pharmaceutical Co, but the deal is not completed yet.

However, according to the newspaper, Shanghai Pharmaceuticals had included Kangli's profits into the listed arm's first quarter financial report even before the deal is completed.

But the company said in the statement that so far it has finished the acquisition of 70 percent of Changzhou Kangli, which means it is in accordance with the accounting rules to include Kangli's profit in the first quarter report.

The drug distributor also said that Xinya's 2011 financial report is backed by the company's accounting firm PricewaterhouseCoopers, thus it is legitimate.

The CSRC did not respond to a request for comment by the Global Times yesterday and the HKEx said that it does not comment on individual companies.

Wei Guangju, a senior consultant at Adfaith Management Consulting, told the Global Times that stockholders may decide to dump the stock following the negative publicity, and predicts the stock price to continue to be volatile in future.

Shanghai Pharmaceuticals has been plagued by negative publicity since 2011. Several days before its debut on the Hong Kong bourse in May 2011, a former business partner of the company accused that a type of medicine produced by the company may have quality problems.

At the end of 2011, the company's vice president Ge Jianqiu resigned after some staff accused him of taking bribes. And in March, its board of directors dismissed its chairman Lü Mingfang.