SHANGHAI -–The travails of Zhejiang Hangzhou Xinfu Pharma, a small Chinese biotech firm that lost money several years running, are a clear warning to investors.

A year after barely avoiding a mandatory delisting by reporting a small yearly profit on the back of several asset sales, not operations, Zhejiang Hangzhou Xinfu Pharmaceutical Co. Ltd. now intends to issue shares to purchase Hefei Yifan Pharmaceuticals Management Co. Ltd. Yifan Pharma, part of the Novotek Group, is virtually unknown outside of its home province, but it has a large sales network.

Xinfu Pharma's plan is to raise ¥1.75 billion (US$285 million) by issuing 220 million shares at ¥7.94 (US$1.29) each. It then plans to acquire Yifan for the same amount.

The acquisition may be the last chance for survival for Xinfu Pharma, whose stock skyrocketed from ¥20 to ¥256 through the bubble years of 2006 and 2007 before plummeting to just a few renminbi.

Xinfu Pharma is named after its founder and chairman Xinfu Guo. The company went public in Shenzhen in 2004 (SZ.002019), a decade after it was first founded. Xinfu Pharma started out manufacturing vitamin B5 for global markets and rapidly expanded its operations in Europe and the U.S. It is the only manufacturer of Pro Vitamin B5 in China.

In 2005, successful but small and with funds from its listing, the company started expanding and diversifying into the production of chemicals, biochemicals, pharmaceuticals and even energy-saving materials.

As China's stock markets were riding a massive bull market through 2006 and 2007 that saw the Shanghai Composite Index almost triple in value, the company's stock price soared. Profits in 2007 amounted to ¥240 million, more than 26 times higher than a year earlier.

The next year, as the stock markets crashed everywhere, profits plummeted 82 percent and the share price dropped 90 percent. By 2010, Xinfu Pharma's profits had turned to losses of ¥198 million. In 2011, those profits swelled to ¥230 million.

Stock market rules in China aimed at improving the quality of listed companies, require companies that post three years of loses to delist. Xinfu Pharma started selling assets. It sold off a ¥118 million stake in an automotive parts maker, a ¥30 million stake in a materials company and some land. The sales allowed the company to report a small profit in 2012 and avoid a delisting. But those profits were short-lived. In the first half of 2013, the company reported profits of ¥9.3 million, down 66 percent from the same period a year earlier.

Xinfu Pharma suspended trading in April and resumed in July, when it announced the acquisition. Its shares jumped from ¥7.99 to ¥11.18 on July 30.

The acquisition of Yifan Pharma, a small company known only in the Chinese province of Anhui, might be the only way to save Xinfu Pharma. Mainland China media has reported that Yifan's chairman, Cheng Xianfeng, will replace Xinfu Guo after the takeover. Cheng, a medical doctor, founded and leads the company. Cheng worked in the Ministry of Health for a decade before launching Yifan.

Although small, Yifan is part of a larger group and is profitable. The company has a multiyear deal with South Korea's LG Life Science, which has exclusive rights to market Eutropin, a recombinant growth hormone.

Yifan is part of the Novotek Group, which sells its products in more than 70 percent of all hospitals in China. Novotek works with international companies on regulatory filings, clinical trials, market launches and distribution. Yifan handles pharmaceutical distribution for the group through a network of 500 sales reps and six branches across China. Cheng is now the president of Novotek.

Founded in 2004, Yifan was Novotek's first subsidiary. Yifan reported revenues of ¥509 million in 2011 and ¥794 million in 2012. Net profits added up to ¥1.48 million in 2011, which jumped to ¥43 million in 2012.

Novotek's CEO is Liu Jubo earned a PhD at the University of Toronto and worked at Vertex Pharmaceuticals Inc., of Cambridge, Mass., where he was involved in the development of the world's first drug against the hepatitis C virus. Novotek and Hefei Yifan merged in 2008.