Preliminary Results
Hutchison China Meditech Limited
19 March 2008
Hutchison China MediTech Limited ('Chi-Med')
(AIM: HCM)
Preliminary Results for the year ended 31 December 2007
Strong operating performance. Positive outlook across the Group.
London, Wednesday, 19 March 2008: Chi-Med today announces its preliminary
results for the year ended 31 December 2007.
Group Results
• Sales up 29% to $65.1 million (2006: $50.4 million). Organic growth
on continuing operations.
• Operating loss -$14.8 million (2006: -$8.2 million) reflecting higher
research and development and consumer products investment and non-recurring loss
from discontinued operations.
• Non-recurring loss from discontinued operations -$5.1 million (2006:
-$2.9 million) includes losses plus one-time provision for closing Nao Ling Tong
product line.
• Net loss attributable to equity holders of Chi-Med -$17.2 million
(2006: -$9.6 million).
China Healthcare Division
• China Healthcare Division sales, on continuing operations, up 28% to
$61.4 million (2006: $48.1 million), operating profit up 27% to $6.8 million
(2006: $5.4 million) and net profit after tax attributable to equity holders of
Chi-Med up 13% to $4.5 million (2006: $4.0 million).
• Due diligence underway on several potential China acquisitions and
joint ventures.
Drug R&D Division
• Drug R&D Division spent $12.4 million in cash during 2007 (2006: $6.7
million).
• Landmark strategic partnership agreement signed with Eli Lilly and
Company.
• Clinical progress on our Group lead drug candidate HMPL-004, positive
outcomes in China Phase II study on ulcerative colitis and FDA clearance to
expand to global Phase IIb trial.
• Discovery progress. Two novel small molecule compounds in late
preclinical development. 72 global patent applications filed by the end of 2007
(2006: 61).
Consumer Products Division
• Sales up 36% to $2.9 million (2006: $2.1 million) following further
London shop openings.
• Planning to launch Sen consumer products internationally in 2008.
Commenting, Christian Hogg, Chi-Med CEO, said:
'We have made considerable progress across each of our three operating divisions
during the last year, in each case improving their underlying performance.
Our China Healthcare Division is benefiting from buoyant growth in the China
pharmaceutical market, and existing operations are now contributing strong
profit to the group. We are progressing multiple acquisition opportunities that
could start to materialise this year.
Our Drug R&D Division is exceeding our expectations with breakthrough results in
both development and discovery. Our lead drug, HMPL-004, returned exciting
Phase II results this year and our team of over 160 scientists and staff have
identified multiple novel small molecule compounds. As further validation of
the strategy, we signed a landmark co-discovery partnership with Eli Lilly and
Company ('Eli Lilly') to add to our existing partnerships with Merck KGaA and
Procter & Gamble.
Our Consumer Product Division, Sen Medicine Company Limited ('Sen'), is
demonstrating the attractiveness of its offer, further developing its brand in
the UK and experiencing encouraging sales growth in 2007. In addition, we are
now in late-stage planning to expand its products into luxury retail chains
internationally.
With a strong cash position and continued growth opportunities for each of our
divisions, we view 2008 with considerable confidence.'
Ends
Enquiries
Chi-Med Telephone: +852 2121 8200
Christian Hogg, CEO
Citigate Dewe Rogerson Telephone: +44 (0) 20 7638 9571
Anthony Carlisle +44 (0) 7973 611 888
David Dible +44 (0) 7967 566 919
About Chi-Med
Chi-Med is the holding company of a pharmaceutical and healthcare group focused
on traditional Chinese medicine ('TCM') based primarily in China and was
admitted to trading on the Alternative Investment Market of the London Stock
Exchange in May 2006. Chi-Med operates three core business segments: 1) China
healthcare - the manufacture, distribution and marketing of pharmaceuticals and
health supplements in China; 2) Drug R&D - the discovery and global development
of novel drug in the oncology and auto-immune therapeutic areas; and 3) Consumer
products - global retailing and distribution consumer health and personal care
products derived from TCM and botanical ingredients.
Chi-Med is majority owned by Hutchison Whampoa Limited, an international company
listed on the Main Board of The Stock Exchange of Hong Kong Limited.
Results are reported in US dollar currency unless stated otherwise.
Chairman's Statement
I am pleased to report on another year of considerable progress across Chi-Med's
businesses. Sales, on a continuing operations basis, of the Group grew 29% to
$65.1 million (2006: $50.4 million) primarily following strong China Healthcare
Division performance. Total consolidated sales of the Group for 2007 were $69.7
million (2006: $57.5 million). Net loss attributable to Chi-Med stakeholders
grew to -$17.2 million (2006: -$9.6 million) behind our increases in R&D and
consumer products investment, and a non-recurring loss from discontinuing the
product line of the Nao Ling Tong memory supplement ('NLT').
Strategic Overview
Chi-Med was created by Hutchison Whampoa Limited ('Hutchison Whampoa') to apply
modern science and business practice to traditional Chinese medicine ('TCM'), in
order to realise the substantial potential of novel TCM-based products, both for
the China and the global pharmaceutical and consumer products markets.
Chi-Med's intention is to build a unique and well-balanced portfolio of
businesses that enable us to manage both the pace of growth and the risks
associated with it.
China Healthcare Division -- We see particularly strong opportunity in the China
Healthcare area and due to our range of fast growth and profitable products can
target to maintain organic growth rates of over 20% for the foreseeable future.
The Group's China Healthcare strategy is to combine organic growth with
acquisition. A key strength of our business is the infrastructure, reputation,
experience and depth of connections of Hutchison Whampoa in China, all of which
we leverage and which provides significant support in identifying potential,
value creating acquisitions and joint ventures (collectively 'acquisitions'). We
are currently engaged in due diligence on multiple projects and hopeful to begin
completing such acquisitions during the current financial year.
Drug R&D Division -- TCM, with its botanical origins, has demonstrated its
efficacy and safety under scientific scrutiny over several decades. We see it
as a major and substantially untapped reservoir of novel drugs for the global
pharmaceutical market. Our Drug R&D Division is dedicated to using the highest
standards of modern science to identify and develop both botanical substances
and small molecule compounds derived from TCM, which can deliver new treatments,
especially in the areas of oncology and auto-immune diseases.
The validation of our drug research and development business, reflected by the
Eli Lilly deal, our existing partnerships with Merck KGaA and Procter & Gamble,
and the successful Phase II proof-of-concept ('POC') result on HMPL-004, gives
us great confidence that we have a first-in-class operation with very high
potential that justifies the accelerated investment that we expect to make in
2008.
Consumer Products Division -- With our Sen business, we have always stated that
one route to accelerated growth is to leverage synergy with Hutchison Whampoa's
global chain of over 7,800 health and beauty shops, 1,600 of which are luxury
focused and consistent with the Sen brand image. We believe this will be
transformational for our consumer products division.
Corporate Governance
We continue to maintain high standards of corporate governance with the
objective of building the long-term interests of the Company and maximising
returns to stakeholders.
During 2007 the Chi-Med Board remained largely unchanged apart from the
departure of Mr. Stephen Yeung. I would like to take this opportunity to thank
Stephen for his involvement as a Non-executive Director over the past years and
wish him well in his retirement. As a group, our Independent Non-executive
Directors bring a wealth of knowledge on AIM and growth businesses; corporate
governance; and pharmaceutical research and development. They are making a
valuable contribution to the evolution of Chi-Med and I very much appreciate
their involvement and wish to thank them all for their efforts.
Dividend
Over the coming years, Chi-Med will continue making significant investments in
its businesses, in which we see substantial opportunity to create superior
shareholder value. For this reason, the Board has decided not to recommend a
dividend for the year ended 31 December 2007.
The progress that has been made on the Chi-Med business is the result of the
quality and commitment of our strong management team and all our employees and
partners. My thanks and deep appreciation go to them all.
Simon To
Chairman, 17 March 2008
Chief executive officer's Statement
Group Results
The Group continues to deliver rapid growth, with sales up 29% to $65.1 million.
This reflected strong organic growth in our China Healthcare Division where
sales, on a continuing operations basis, grew 28% to $61.4 million; a fourfold
increase in revenues to $0.9 million in our Drug R&D Division, Hutchison
MediPharma Limited ('HMPL'), from its strategic partnerships; and continued
rapid growth in our Consumer Products Division where the Sen brand increased
sales 36% to $2.9 million.
The China Healthcare Division increased its operating profit to $4.4 million
from $2.5 million, before non-recurring items. However, this understates the
performance of its continuing businesses since, in December 2007, we decided to
discontinue the loss-making NLT. Excluding this product line, last year, the
China Healthcare Division's operating profit was up 27% to $6.8 million. This
highlights the improved platform for growth and profitability with which we have
entered the current financial year.
HMPL continues to invest in its strong drug discovery and development programmes
and has achieved significant success to date. As expected, therefore, despite
the sharp increase in its revenues, its operating loss widened from -$6.0
million to -$10.1 million.
Sen too continues to invest, and its operating loss widened from -$1.1 million
to -$2.1 million reflecting the set-up costs for its planned expansion, an
associated write-down of inventory and the unfavourable impact of foreign
exchange.
An effective Group overhead structure is necessary to develop all three of our
divisions in parallel as well as manage the complexity of being a listed Group.
Operating losses from Group overheads totalled -$4.3 million (2006: -$3.6
million). The $5.7 million expense of the one-off grant of share options at the
time of the IPO is being amortised over the 2006-2009 period. Excluding this
non-cash expense, Group overheads, after interest income, totalled $1.8 million
(2006: $1.3 million).
The Group's overall operating loss, therefore, was -$14.8 million, compared to
-$8.2 million in 2006. The Group's overall operating loss, on continuing
operations, however was -$9.7 million compared to -$5.4 million in 2006,
after excluding the losses and one-time provision for discontinuing the NLT
product line.
Our tax charge increased to $0.8 million (2006: $0.0 million) reflecting the
first stage increase in effective tax rate, as we approach the end of the tax
holidays on both our Hutchison Whampoa Guangzhou Baiyunshan Chinese Medicine
Company Limited ('HBYS') and Shanghai Hutchison Pharmaceuticals Limited ('SHPL')
joint ventures. HBYS and SHPL continue to enjoy a 50% reduction in China
corporate income tax rate for the ensuing two years towards year 2009 at a rate
of 12% and 12.5% respectively. Thereafter they will pay the full 25% China
corporate income tax rate. Finance costs of $0.4 million (2006: $0.4 million)
were incurred primarily as a result of borrowing in our SHPL joint venture that
is being paid back with the positive cash flow on this business.
Profits attributable to minority interests increased to $1.2 million (2006: $1.0
million) as the HBYS joint venture continued to improve performance
significantly. In consequence, the Group's net loss attributable to equity
holders increased to -$17.2 million from -$9.6 million in 2006.
The Group maintains a strong balance sheet and ended the year with net assets of
$97.6 million, including cash and cash equivalents totalling $53.3 million
(2006: $70.6 million). In addition the Group holds $13.6 million (Chi-Med pro
rata share) in bank guaranteed bills receivable (2006: $8.6 million) which
although held in HBYS, can be accessed at a discount rate of less than 5% on
demand.
China Healthcare
We believe the China healthcare market, and particularly the TCM segment, will
continue to grow strongly and that our China Healthcare Division is extremely
well positioned to take advantage of this opportunity and deliver sustained and
profitable growth.
Underlying this belief is our view of the Central Government's healthcare
policy, drug reimbursement system and position on TCM; as well as Chi-Med's
existing operating framework in China.
Central Government Healthcare Policy
The State Basic Medical Insurance Program ('BMIP') is the Central Government's
main national health insurance system. Under this system, the government
reimburses the cost of drug purchases by participants enrolled in the system.
Enrolment is restricted to employees of companies that participate in the scheme
through salary-based contributions. At the end of 2006, approximately 160
million Chinese people were enrolled based on the latest China State Food & Drug
Administration ('SFDA') data, which is around only 12% of the Chinese population
and skewed to China's more economically developed urban areas.
According to the latest SFDA data, enrolment in the BMIP has increased at
approximately 13% a year for the past five years, and this has primarily
contributed to about a 19% a year increase in total pharmaceutical industry
revenue over the same period. So in theory, BMIP enrolment increases, so does
drug industry consumption and revenue.
In addition to the BMIP, the Chinese government has other medical care systems
that offer considerably less cover for unemployed and rural consumers. As
China's economy develops, we believe it is reasonable to expect that these
consumers will gradually migrate to the BMIP.
Regulatory/Reimbursement Framework
The BMIP regularly reviews all drugs in China and regulates reimbursement by
assigning each drug a classification on the National Medicine Catalogue ('NMC')
and Provincial Medicine Catalogues ('PMC'). Drugs most commonly included on the
NMC and PMC, and thereby reimbursed, are those that are necessary clinical
treatments, that have wide application, good effect, and low cost.
Chi-Med's strategy is to ensure broadest possible reimbursement of the products
of the Group across China to maximise sales. To do this, we generally focus on
prescription drugs that provide proprietary clinical treatment as well as
over-the-counter ('OTC') drugs that we can produce at a competitively low cost.
Central Government position on TCM
The Central Government has stated that it intends to firmly support the
development of TCM.
As reported by China Daily in January 2007, Vice Premier Wu Yi outlined
government measures to accelerate the development of TCM. These include China
bidding to list TCM as a world intangible cultural heritage, as well as
strengthening protection of TCM intellectual property rights. We believe this
is one of the main factors which has led the Chinese TCM drug industry to grow
by 24% to $16.5 billion in 2006 (2005: $13.3 billion), significantly outpacing
growth in the chemical and biotech drug industry, which grew only 13% to $35.7
billion (2005: $31.7 billion), according to the latest SFDA data.
Furthermore, while a new policy is still in the drafting stage, we understand
that the SFDA is currently working on significantly expanding the scope of its
TCM protection policy on both existing and future proprietary TCM drugs.
Chi-Med's experience on the She Xiang Bao Xin pill ('SXBXP') - where protection
was extended for 5 years under State Secrecy Bureau direction - and on our Dan
Ning tablet - where a 20-year process and composition patent was granted in 2007
- are clear examples of the Central Government's intention to continue to
protect and support TCM.
The Existing Operating Framework of Chi-Med in China
Through our two TCM operating joint ventures in China, we believe we hold strong
competitive advantages in both the proprietary prescription drug market -
through SHPL - and the OTC market - through HBYS. Our core products are all
either on the NMC or the PMC and we believe they are well positioned to grow as
the overall market grows.
2007 China Healthcare Division performance
Chi-Med's total China healthcare sales, including discontinued operations, grew
20% to $65.9 million in 2007 (2006: $55.1 million) and operating profit, before
one-time provisions, grew 73% to $4.4 million (2006: $2.5 million). In late
December 2007 however, a decision was made to discontinue the loss making NLT
product line in order to significantly improve the ongoing operating profit of
Chi-Med's China Healthcare Division. A one-time provision of $2.6 million, of
which approximately $2.1 million was non-cash in nature, was taken in the 2007
accounts to cover charges associated with the discontinuation of NLT.
Importantly, 2007 performance of Chi-Med's China Healthcare Division excluding
NLT ('Continuing Operations') was very strong with sales growing 28% to $61.4
million (2006: $48.1 million) and operating profit up 27% to $6.8 million (2006:
$5.4 million). Net profit after tax ('NPAT') attributable to Chi-Med equity
holders on Continuing Operations grew 13% to $4.5 million (2006: $4.0 million).
This NPAT growth lagged operating profit growth primarily because as mentioned,
above tax holidays on both of our joint ventures partially expired.
The China healthcare sales and distribution network of the Group continued to
strengthen in 2007. Currently, through HBYS and SHPL, over 1,800 full-time
sales and distribution personnel are employed in over 200 cities in China.
It should be noted that the true scale of Chi-Med's China healthcare operations
does not come through in IFRS financial statements which use prorated revenue
consolidation, and thereby only reflect about 50% of the actual domestic sales
in our joint ventures. For perspective, total domestic China sales in our three
joint ventures in 2007 was $123.6 million (2006: $101.4 million) - representing
the manufacture and sale of over 3.2 billion doses of medicine.
Chi-Med's product portfolio remains well diversified with 93% of the Group's
China Healthcare sales last year coming from nine core products of which four
are OTC; three Rx; and two health food.
Over-the-counter drugs
OTC drug sales through HBYS increased 26% in 2007 to $43.6 million (2006: $34.6
million), all of which was organic growth. We believe HBYS is now one of the
largest and fastest growing OTC drug companies in China.
With domestic sales approaching $100 million, HBYS has improved scale in
manufacturing operations. This combined with the successful strategy of annual
price increases on key products - for example, the price of Fu Fang Dan Shen
tablets was increased 10% in January 2007 - improving gross margins by 1.0
percentage point to 54.5% in 2007 (2006: 53.5%), despite significant raw
material price increases during the year.
We believe that marketing operations and execution are HBYS's main competitive
advantage. Three HBYS marketing campaigns, which focus effort on public
relations rather than hard sell direct advertising, have been voted in the top
10 Marketing Programmes in China since 2003 by the Xin Jing Bao and Nanfang
Dushi Bao, the two industry leading journals in China. These programmes
include: the public relations campaign promising both free product and a price
freeze on Banlangen granules (anti-viral) during the SARS epidemic of 2003; the
public relations campaign promoting Banlangen granules as the 'TCM antibiotic'
concurrent with the State Government's clamp down on over prescription of
antibiotics in 2004; and the highly successful expired prescription medicine
exchange programme for families, which has led to widespread national public
relations coverage in China over the past eighteen months as well as
participation by over 3 million Chinese consumers.
In 2007, HBYS opened the 'Shen Nong TCM Garden', a novel cultural theme park, on
the grounds of the factory in Guangzhou. The garden, with the objective of
explaining TCM and its history, attracted over 300,000 visitors and broad media
coverage in 2007. Second phase expansion is planned to open in 2009 and is
expected to strengthen HBYS's position as one of the most respected TCM brands
in Southern China.
HBYS's OTC distribution network grew significantly in 2007 and now has over 200
offices across China, employs over 1,200 staff, covering all cities with a
population over 1 million. Furthermore 85% of PMC drug tenders were successful
in 2007 and HBYS now holds 51, or 6.3%, of the total 815 PMC listed TCM drug
products listed in all China.
Major activity in HBYS's Guangdong Government designated TCM Provincial
Technology Centre has led to participation in multiple provincial innovation
project tenders, government declared projects, and has secured the joint venture
over $1.3 million in government R&D grants in 2007. These activities are
expected to provide the joint venture with a stable stream of new products over
the next five years.
Strong progress was also made in 2007 on HBYS's range of TCM bottled drinks
under the Bai Yun Shan ('BYS') label. Sales grew 123% to $1.3 million (2006:
$0.6 million) as test marketing progressed well and set a strong foundation for
regional expansion of the BYS drink. These products are planned to bridge the
gap between TCM medicines and daily use food and beverage products and represent
a major area of growth potential for the HBYS.
Prescription Drugs
Prescription drug sales through our SHPL joint venture grew 21% to $14.1 million
in 2007 (2006: $11.6 million) all of which was organic from existing products.
As reported previously, last year's SFDA tightening of policy on the access of
medical representatives to hospitals, which initially was cause for concern, has
turned out to have had no impact on SHPL results. Two factors have contributed
to this - firstly, we have effectively migrated a significant portion of our
hospital sales personnel to community marketing programmes which have proven to
be effective; and secondly, after lobbying efforts by many of the major
Pharmaceutical companies in China, the SFDA has softened its position on
limiting medical representatives' access to hospitals.
SHPL's strong performance has seen a 32% increase in sales of our key
cardiovascular prescription drug SXBXP to $11.5 million (2006: $8.7 million).
In 2007 we focused on this product and have built very strong momentum behind
it, which we expect to carry over into 2008.
Regionally, SHPL is making progress in expanding beyond our historical Shanghai
stronghold which in 2007 represented 46% of sales (2006: 48%). Sales in markets
outside Shanghai grew 25% during 2007 to $7.7 million (2006: $6.1 million)
whereas sales in our more mature Shanghai market grew 17% to $6.5 million (2006:
$5.6 million). Importantly, an encouraging sign for SHPL in 2007 was that
in-market consumption grew 25%, outpacing ex-factory sales growth of 21%,
signifying that hospital pharmacy and chain drugstore inventories were reduced
during the year. Good progress was made in both the hospital pharmacy (72% of
sales) and chain drugstore channels (28% of sales) where in-market consumption
grew 27% and 21% respectively.
Government relations have been a key focus area for SHPL over the past two years
and are now yielding direct tangible benefits to the joint venture. In late
2006 SXBXP was awarded a State Secret Certificate as 'Confidential Information'
by the Ministry of Science and Technology and State Secrecy Bureau thereby
extending effective IP protection for five years. In June 2007 the State
Science & Technology Commission approved a $0.3 million grant to fund research
on SXBXP's mechanism of action at one of China's top universities, Beijing Qing
Hua University. In June 2007 the State Science and Technology Commission also
approved a further grant of $0.4 million for the study of SXBXP mechanism of
action and Dan Ning tablet activity in liver disease. In July 2007 our number
two product, Dan Ning tablet (gall stone treatment), was granted a 20-year
process and formula patent by the State Patent Bureau thereby guaranteeing it
long-term NMC inclusion. In July 2007 the Shanghai Economic & Trade Commission
also approved a grant of $0.1 million for research on SXBXP. In August 2007 the
Shanghai Price Bureau approved a 14.9% increase in SXBXP's hospital bidding
price to RMB 21.00/box, which improved its gross margin by some $0.5 million/
year.
Health Supplements
Health supplement sales through our Hutchison Healthcare Limited ('HHL') joint
venture, on a continuing operations basis, almost doubled to $3.7 million in
2007 (2006: $1.9 million). Including sales of the discontinued NLT product
line, HHL sales for 2007 dropped 7% to $8.3 million (2006: $8.9 million). In
2007, $5.1 million was incurred in costs that covered both operating losses and
a one-off provision associated with the discontinuation of the NLT product line.
HHL has had two distinct business units.
In the first, our profitable Zhi Ling Tong ('ZLT') infant nutrition brand, we
saw sales double to $3.7 million (2006: $1.9 million). This reflected good
performance by the exclusive distributor of ZLT, He Hui Pharmaceuticals Limited,
which is successful in developing a strong hospital and mother/baby store
distribution model across China; and the marketing investment made by HHL behind
the brand and its patented omega-3 product which is unique in the China market.
In mid-2007 registration approvals were received on ZLT probiotics, a toddler
immunity product whose raw materials are imported from Denmark, to add to the
already marketed omega-3 brain/retinal development product and calcium powder
infant bone development product. The Group intends to further expand the ZLT
range over the coming years to establish the brand as a leader in baby/infant
health.
In contrast, the second distinct business unit of HHL, NLT, has performed poorly
over the past two years in the face of increasing generic competition. While
NLT operating losses were narrowed in 2007 by 14% to -$2.5 million (2006: -$2.9
million) by withdrawing from several unprofitable provincial markets, the
resulting 35% drop in sales to $4.6 million (2006: $7.0 million) left the Group
with little confidence in the long term potential of the product line. At the
end of 2007, it was decided that the product line be discontinued and, in
addition to the 2007 operating loss, a one-time provision of -$2.6 million was
made, of which approximately -$2.1 million non-cash, to cover closure charges.
Acquisitions
The run up of the Chinese stock market has led to rapid appreciation in
valuations of listed China healthcare enterprises in 2007. Naturally this has
led to materially increased valuation expectations by some of the companies that
Chi-Med has been in acquisition discussions with over the past two years.
Despite this, we have continued to appraise potential strategic acquisitions and
believe there remain good earnings enhancing opportunities.
The Group is focusing primarily on deals with similar structure to our SHPL and
HBYS which expand the capital of new joint ventures through a cash injection in
return for an injection of assets by Chinese partners. We are generally
targeting to take at least a 50% share in new joint ventures, which are
synergistic with our existing China Healthcare Division assets and are able to
benefit from the strategic advantages that Hutchison Whampoa has to offer. It
is hopeful that acquisitions could start to materialise in 2008.
Drug Research & Development
HMPL is dedicated to transforming scientific discoveries into innovative
therapies for cancer and auto-immune diseases.
2007 Drug R&D Division performance
Chi-Med's Drug R&D revenue grew almost four-fold during 2007 to $0.9 million
(2006: $0.2 million) from payments by Merck KGaA, Procter & Gamble and Eli
Lilly. Its operating loss rose to -$10.1 million (2006: -$6.0 million) as a
result of increased investment in HMPL's discovery organisation and programmes,
as well as the cost of clinical trial programmes in the US and China.
Overall, 2007 was a highly productive year for HMPL in which the two major
achievements were the landmark strategic alliance with Eli Lilly and the
positive Phase II POC results on the Group's lead product, HMPL-004 thereby
proving the Group's preclinical hypothesis and validating its scientific
capability.
We believe HMPL is now generally accepted as one of the leaders in China's
Pharmaceutical drug discovery arena. Going forward, the Group's target is for
it to continue to build strategic alliances with multi-national pharmaceutical
groups; identify global partners with which to co-develop our lead candidates;
and advance our in-house preclinical programs into clinical POC studies taking
advantage of China's low cost R&D structure and vast patient population.
Discovery Summary
During 2007, two novel small molecule compounds were selected for development,
HMPL-010 for psoriasis and HMPL-011 for auto-immune diseases, such as rheumatoid
arthritis. HMPL-010 is a novel chemical entity that blocks activation of NF-kB
and is positioned as a topical treatment for psoriasis. HMPL-011 is a small
molecule cytokine modulator that controls the production of pro-inflammatory
cytokines and has been found to be effective in animal models of rheumatoid
arthritis as well as a number of other inflammatory conditions. Both compounds
are currently in preclinical evaluation.
In addition, the Group continued to execute against its goals of building a
sustainable project portfolio and significant progress has been made on a number
of other early stage projects. These projects are positioned for candidate
selection throughout 2008 and beyond in the oncology and inflammation
therapeutic areas. During 2007, six cases covering three new invention patents
were filed in China and the US. Notice of allowance for two patent applications
has been received: the HMPL-004 US patent application covering composition and
usage; and the HMPL-001 China patent application covering composition and usage.
On the strategic alliance front, the Group commenced research collaboration with
Eli Lilly. HMPL will be responsible for all discovery activities leading to
clinical candidate selection, and Eli Lilly will be responsible for clinical
development. The collaborations with Merck KGaA and Procter & Gamble have gone
according to plan in 2007 with solid progress having been made on both.
Development Summary
HMPL-004, treatment for auto-immune disorders
HMPL-004 is the lead drug candidate of the Group for treating inflammatory bowel
diseases in Phase II clinical development. HMPL-004 is an orally active,
proprietary botanic product that acts on multiple targets in the pathogenesis of
inflammation. It is a compound extracted from a Chinese herb under controlled
conditions and its composition well characterised. The anti-inflammation
activity of HMPL-004 was originally identified in a cell-based anti-inflammation
screening assay at HMPL and further confirmed in a various experimental animal
models.
HMPL is currently conducting two clinical studies to evaluate the safety and
efficacy of HMPL-004, a Phase II trial in the US for Crohn's disease ('CD') and
a global Phase IIb trial for ulcerative colitis ('UC'). In July 2007, HMPL
completed a POC study for UC in China and announced positive clinical outcomes
and all trial endpoints met. In this POC study, HMPL-004 was well tolerated and
effective for treating patients with mild-to-moderate UC.
The Phase II POC study for UC was a multi-centre, randomised, double-blind,
comparator study of 120 patients conducted in China. The study evaluated
HMPL-004 at 400mg taken three times a day, orally, compared to Etiasa(R)
(Mesalazine SR), the current first line standard of care. The primary endpoint
was the improvement of the patient's clinical symptom score. The secondary
endpoint was a colonoscopic score. After treatment for eight weeks the overall
remission rate (combination of complete and partial remissions) for HMPL-004 was
57% by clinical score compared to 53% for Etiasa(R) in the Intent-To-Treat ('ITT
') population, and 47% for HMPL-004 versus 42% for Etiasa(R) by colonoscopy in
the ITT population. HMPL-004 was well tolerated in the study. The adverse
event ('AE') rate was low and reported AEs were mild in nature.
In November 2007, HMPL obtained clearance from the Food and Drug Administration
of the US to commence a global Phase IIb trial with HMPL-004 in patients with
mild-to-moderate UC based on the successful outcome of China's POC result. The
trial will assess the efficacy and safety profile of the drug in a broader
patient population and dose range. The patient recruitment for this UC trial
started in January 2008.
The on-going US Phase II trial for CD is a multi-centre, double-blind,
randomised, and placebo-controlled study in both male and female patients with
active moderate CD. It is anticipated that patient enrolment would be finished
in 2008.
HMPL is also proceeding well with a Phase II POC study in China of HMPL-002
indicated for its concurrent chemo-radiotherapy usage in stage III A/B non-small
cell lung cancer ('NSCLC') patients. The clinical study examines the efficacy
and safety of HMPL-002 in its concomitant use with the most accepted first-line
chemo-radiotherapy therapies for NSCLC patients. The study completed enrolment
at the end of 2007 with response results expected to be released in the third
quarter of 2008 and survival data to be completed in early 2009.
Depending on the successful outcome of the HMPL-002 US Phase I trial, and the
concurrent China Phase II POC study for NSCLC, we will make a go/no go decision
for the US Phase II arm of the HMPL-002 trial.
Clinical studies conducted in China on over 3,000 human subjects have shown that
HMPL-002 in combination with radiotherapy alone had only limited adverse
reactions in patients with solid tumours. The most reported and notable adverse
reactions are limited in gastrointestinal system such as nausea, vomiting, and
diarrhoea. In our current clinical trials in the US for HNC and in China for
NSCLC, data collected so far have further shown that HMPL-002 is generally well
tolerated with no unexpected safety outcomes by patients undergoing concurrent
platinum-based chemo-radiotherapies.
Strategic Alliances
Under the Eli Lilly partnership agreement, HMPL scientists and an Eli Lilly team
will collaborate on the discovery and development of pharmaceutical compounds
focused on targets in oncology and inflammation. The research partnership
leverages the strengths and expertise of the two companies while taking
advantage of the unique opportunities available in China to expedite the drug
discovery process and reduce overall cost. Eli Lilly will provide HMPL an
upfront payment, annual R&D support fees, potential discovery and development
milestone payments, and royalties on worldwide sales of any commercialised
products resulting from the collaboration. Potential discovery and development
milestone payments will total from $20 million to $29 million per candidate. It
is expected that HMPL will be delivering multiple candidates in the next several
years.
The Eli Lilly deal is the first such kind of deal in China Pharmaceutical R&D
history and represents a new model for innovative drug discovery and development
partnership. Furthermore, to the best of our knowledge, never before has a
major global pharmaceutical group injected its own in-house drug discovery
programmes into a China based R&D company. It is a direct reflection of the
business model of the Group and the quality of our China drug R&D operations.
HMPL will continue to seek additional strategic alliances to further enhance our
discovery and development pipeline and to bring in short term revenue, as well
as setting up the basis for major long term value creation through milestones
and royalties on successful projects.
Consumer Products
Chi-Med's consumer products objective remains to create and develop a 'new to
the world' premium brand proposition centred on consumer health products and
services derived from TCM and botanical ingredients.
We believe the TCM concept of natural botanical health can be applied to most
consumer products categories such as food & beverage, beauty, and personal
cleansing. We intend for Sen to establish a reputation as the leading TCM brand
in the West through a one-of-a-kind premium product and service offering.
The Group has expanded its consumer product portfolio to over 250 items in
categories such as teas, body care and skin care. It is expected that a further
200 items, in both existing and new related categories, will be needed to
support our own standalone shops. In addition to these consumer products, TCM
services (e.g. acupuncture, acupressure, reflexology, and facials) represent a
key reputation building block and income source.
To start, Sen had to build a reputation as an expert in the field. We believe
this is being achieved by continuing to offer sophisticated western consumers
high quality TCM products and services, as we have done for the past five years.
Given the regulatory constraints surrounding TCM and herbal medicines, as well
as our desire to test multiple ranges of consumer products, a retail format has
been chosen to start pilot testing the Sen brand and product portfolio. The
objective of the Group, however, is to expand beyond our own shops by launching
select Sen consumer products internationally through luxury retailers.
2007 Consumer products performance
Chi-Med's consumer products sales grew 36% to $2.9 million in 2007 (2006: $2.1
million) and operating loss increased to -$2.1 million (2006: -$1.1 million).
Sales growth was mainly driven by the full year effect of the successful Harvey
Nichols shop and the part-year effect of the three new central London Sen shops
which opened in late-2007 in Kensington, Westbourne Grove and Green Park.
The widening operating loss was mainly driven by set up costs for luxury retail
expansion, an associated write-down of inventory, and the unfavourable impact of
foreign exchange. Without these three one-time factors, operating loss would
have been approximately equal to that of 2006.
Sen delivered like-for-like sales growth of 2% in shops open for more than one
year consolidating the very strong 32% organic sales growth in 2006 as we
expanded our ranges of consumer products items. Consumer loyalty continues to
grow at Sen, with return customers making up an increasing proportion of our
sales.
Breaking down the 2007 performance of each of the core Sen product and service
categories, consumer product sales - teas, body care and skin care - were up
45%; the provision of consultations & services grew 49%; and OTC medicine sales
grew 8%.
New Shops
At the end of 2007 Sen operated a chain of seven shops in central London
including: Mayfair, King's Road; Knightsbridge (Harvey Nichols); Kensington;
Westbourne Grove; Green Park; and the City. The UK strategy of the Group is to
continue to open new shops in central London and by end-2008 Sen targets to have
twelve shops, allowing for a more aggressive, targeted PR and marketing
programmes.
Luxury Retail Expansion
In addition to our own UK shops, the Group is now planning to sell Sen products
internationally through luxury retail chains, starting in France. Preparation
for this expansion has taken almost two years, involving considerable
organisational time and expense. Over 100 Sen consumer products are being
registered in France under EU regulations. All product claims have been fully
supported, all packaging and marketing materials have been adapted to be
appropriate for both English and French markets. Importantly also, both the Sen
commercial and product supply organisations have been built up to support this
expansion. This investment will enable Sen to expand luxury distribution
internationally, thereby transforming the potential scale of the business over
the coming five years.
Current Trading and Outlook for the Group
It is encouraging to report that to date this year, sales and profit growth
rates in the China Healthcare Division are running well ahead of last year as
the China pharmaceutical market continues to show robust growth. Furthermore,
we have now started treating patients on our global HMPL-004 Phase IIb trial in
UC, and hope to shortly announce Sen's international consumer product launch
plans for 2008.
The Chi-Med Group organisation is currently focused on China acquisitions and,
following current due diligence, we expect progress in 2008.
We remain very confident of the growth prospects for Chi-Med.
Christian Hogg
Chief Executive Officer, 17 March 2008
CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 2007
Note 2007 2006
US$'000 US$'000
Continuing operations
Sales 2 65,110 50,433
Cost of sales (27,656) (21,322)
Gross profit 37,454 29,111
Selling expenses (23,091) (17,104)
Administrative expenses (27,423) (19,807)
Other net operating income 3,337 2,417
Operating loss (9,723) (5,383)
Finance costs (299) (388)
Loss before taxation (10,022) (5,771)
Taxation charge (838) (1)
Loss for the year from continuing (10,860) (5,772)
operations
Discontinued operations
Loss for the year from discontinued 3 (5,106) (2,860)
operations
Loss for the year (15,966) (8,632)
Attributable to:
Equity holders of the Company (17,191) (9,605)
Minority interests 1,225 973
(15,966) (8,632)
Loss per share for loss from continuing
and discontinued operations attributable
to equity holders of the Company for the
year
- Basic and diluted (US$ per share) 4 (0.3357) (0.2101)
Loss per share for loss from continuing
operations attributable to equity holders
of the Company for the year
- Basic and diluted (US$ per share) 4 (0.2360) (0.1475)
CONSOLIDATED BALANCE SHEET
AS AT 31 DECEMBER 2007
2007 2006
US$'000 US$'000
ASSETS
Non-current assets
Property, plant and equipment 25,682 22,874
Leasehold land 5,828 4,230
Goodwill 6,616 6,241
Trademarks and patents 602 775
Available-for-sale financial asset 136 128
Deferred tax assets 256 -
39,120 34,248
Current assets
Inventories 11,722 9,490
Trade receivables 21,172 16,582
Other receivables and prepayments 2,204 2,110
Financial assets at fair value through - 60,544
profit or loss
Cash and bank balances 53,345 10,069
88,443 98,795
Total assets 127,563 133,043
EQUITY
Capital and reserves attributable to the
Company's equity holders
Share capital 51,229 51,212
Reserves 39,067 51,739
90,296 102,951
Minority interests 7,311 7,030
Total equity 97,607 109,981
LIABILITIES
Current liabilities
Trade payables 5,303 3,185
Other payables and accruals 17,042 11,894
Amounts due to related parties 496 868
Current tax liabilities 551 -
Short-term bank loans 6,564 7,115
Total liabilities 29,956 23,062
Total equity and liabilities 127,563 133,043
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2007
Attributable to equity holders of the Company
Share Share Share-based Exchange General Accumu-lated Total Minority Total
capital premium Compensa-tion reserve reserves losses interests equity
reserve
US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000
As at 1 - - - 475 - (34,145) (33,670) 5,661 (28,009)
January 2006
Exchange - - - 1,369 - - 1,369 308 1,677
translation
differences
(Loss)/ - - - - - (9,605) (9,605) 973 (8,632)
profit for
the year
Issue of 51,212 97,560 - - - - 148,772 - 148,772
shares
Share - (6,283) - - - - (6,283) - (6,283)
issuance
costs
Relating to - - - - - - - 58 58
acquisition
of subsidiar
ies by a
jointly
controlled
entity
Relating to - - - - - - - 30 30
formation of
a subsidiary
by a jointly
controlled
entity
Share-based - - 2,368 - - - 2,368 - 2,368
compensation
expense
Transfer - - - - 29 (29) - - -
between
reserves
As at 31 51,212 91,277 2,368 1,844 29 (43,779) 102,951 7,030 109,981
December
2006
As at 1 51,212 91,277 2,368 1,844 29 (43,779) 102,951 7,030 109,981
January 2007
Exchange - - - 2,037 1 - 2,038 333 2,371
translation
differences
(Loss)/ - - - - - (17,191) (17,191) 1,225 (15,966)
profit for
the year
Issue of 17 74 (53) - - - 38 - 38
shares
Dividend - - - - - - - (1,277) (1,277)
paid to a
minority
shareholder
of a
subsidiary
Share-based - - 2,460 - - - 2,460 - 2,460
compensation
expense
Transfer - - (528) - 35 493 - - -
between
reserves
As at 31 51,229 91,351 4,247 3,881 65 (60,477) 90,296 7,311 97,607
December
2007
CONSOLIDATED CASH FLOW STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 2007
Note 2007 2006
US$'000 US$'000
Cash flows from operating activities
Net cash used in operations 5 (7,688) (3,246)
Interest received 937 559
Interest paid (367) (392)
Income tax paid (543) (1)
Net cash used in operating activities (7,661) (3,080)
Cash flows from investing activities
Purchase of property, plant and equipment (5,807) (2,582)
Addition to leasehold land (1,415) -
Purchase of trademarks and patents (15) (44)
Purchase of available-for-sale financial - (124)
asset
Acquisition of subsidiaries by a jointly - (20)
controlled entity
Formation of a subsidiary by a jointly - 30
controlled entity
Net cash used in investing activities (7,237) (2,740)
Cash flows from financing activities
(Decrease)/increase in amount due to (471) 2,479
immediate holding company
Dividend paid to a minority shareholder of (1,277) -
a subsidiary
New short-term bank loans 4,760 374
Repayment of short-term bank loans (5,709) (936)
Issue of shares, net of share issuance 38 68,743
costs
Net cash (used in)/generated from financing (2,659) 70,660
activities
Net (decrease)/increase in cash and cash (17,557) 64,840
equivalents
Cash and cash equivalents at beginning of 70,613 5,617
year
Exchange differences 289 156
Cash and cash equivalents at end of year 53,345 70,613
Analysis of cash and cash equivalents
- Cash and bank balances 53,345 10,069
- Financial assets at fair value through - 60,544
profit or loss
53,345 70,613
NOTES
1 Basis of preparation
The consolidated financial statements of the Company have been prepared in
accordance with International Financial Reporting Standards. These financial
statements have been prepared under the historical cost convention, as modified
by the revaluation of certain financial assets.
2 Revenue and segment information
The Group is principally engaged in the manufacturing, distribution and sales of
TCM and healthcare products. Revenue recognised for the year are as follows:
2007 2006
US$'000 US$'000
Continuing operations
Sales of goods 62,530 49,060
Revenue from services 2,580 1,373
65,110 50,433
Discontinued operations
Sales of goods 4,551 7,041
69,661 57,474
Primary reporting format - business segments
The Group's activities are categorised into four main areas:
- China healthcare - Health supplement: comprises the research and
development, manufacture, distribution and sale of western and TCM health
supplements products.
- China healthcare - Over-the-counter ('OTC') & prescription: comprises
the development, manufacture, distribution and sale of OTC & prescription TCM
products.
- Consumer products: relates to TCM pharmaceuticals and sales of
TCM-based consumer lifestyle products and services sold through retail stores.
- Drug research and development: relates mainly to drug discoveries and
other pharmaceutical research and development activities, and the provision of
research and development services.
NOTES
3 Loss for the year from discontinued operations
In December 2007, the Group discontinued its Nao Ling Tong memory supplement
operations, which represented a separate major line of the Group's business, as
the product line performed below expectation in light of increased competitive
and regulatory activities in the generic health supplement market.
The results and cash flows of the discontinued operations are set out below. The
2006 comparative figures in the consolidated income statement have also been
reclassified to conform to the current year presentation.
2007 2006
US$'000 US$'000
Revenue 4,551 7,041
Expenses (9,657) (9,901)
Loss before taxation from discontinued (5,106) (2,860)
operations
Taxation charge - -
Loss for the year from discontinued (5,106) (2,860)
operations
Cash flows from discontinued operations
Net cash flows from operating activities (2,194) (2,229)
Net cash flows from investing activities (14) (1)
Net cash flows from financing activities (174) 23
Net cash flows (2,382) (2,207)
4 Loss per share
Basic loss per share is calculated by dividing the loss attributable to equity
holders of the Company by the weighted average number of ordinary shares in
issue during the year.
2007 2006
Loss for the year
- Continuing operations (US$'000) (12,085) (6,745)
- Discontinued operations (US$'000) (5,106) (2,860)
(17,191) (9,605)
Weighted average number of outstanding 51,216,279 45,712,743
ordinary shares in issue
Basic and diluted loss per share (US$)
- Continuing operations (0.2360) (0.1475)
- Discontinued operations (0.0997) (0.0626)
Total basic and diluted loss per share (US$) (0.3357) (0.2101)
NOTES
4 Loss per share (continued)
(a) The weighted average number of ordinary shares for the year ended 31
December 2006, for the purposes of basic loss per share, has been
retrospectively adjusted for the effects of the capitalisation of 36,666,665
ordinary shares on 9 May 2006.
(b) Diluted loss per share equals basic loss per share as the exercise of the
outstanding employee share options would have an antidilutive effect.
5 Note to the consolidated cash flow statement
Reconciliation of loss for the year to net cash used in operations
2007 2006
US$'000 US$'000
Loss for the year (15,966) (8,632)
Adjustments for:
Taxation charge 838 1
Share-based compensation expense 2,460 2,368
Amortisation of trademarks and patents 212 163
Amortisation of leasehold land 111 91
Impairment on property, plant and equipment 603 -
Write-off of inventories 359 -
Provision for inventories 326 -
Provision for trade and other receivables 1,734 161
Depreciation on property, plant and 3,477 2,740
equipment
Loss on disposal of property, plant and 269 80
equipment
Interest income (937) (559)
Interest expense 367 392
Operating loss before working capital (6,147) (3,195)
changes
Changes in working capital:
- increase in inventories (2,419) (184)
- increase in trade receivables (5,129) (3,223)
- (increase)/decrease in other receivables (244) 854
and prepayments
- increase/(decrease) in trade payables 1,837 (927)
- increase in other payables, accruals and 4,414 3,429
amounts due to related parties
Net cash used in operations (7,688) (3,246)
END
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