21st Mar 2007 12:10
Hutchison China Meditech Limited21 March 2007 Hutchison China MediTech Limited (AIM: HCM) Preliminary Results for the year ended 31 December 2006 London: Wednesday, 21 March 2007: Hutchison China MediTech Limited ("Chi-Med" orthe "Company") today announces its preliminary results for the year ended 31December 2006. • Sales up 52% to $57.5 million Growth in China Healthcare business. • Loss before tax $8.6 million Tight control of R&D spending. • $13 billion Chinese TCM market growth continues strongly There are over 1,200 Traditional Chinese Medicine ("TCM") manufacturers across China. Chi-Med intends to consolidate and modernise the market through continued organic out-performance and through selective acquisition. • State-of-art R&D facility in full operation Chi-Med's purpose built 5,000 square metre R&D facility in Shanghai allows Chi-Med to run a full set of R&D programmes in-house on a cost-effective basis with a team of over 100. It is one of the most advanced pharmaceutical R&D centres in China with all the resources needed for full research capability, including Biology, Chemistry, Drug Safety Evaluation, Drug Metabolism and Pharmacokinetics, and Pharmacology. • Growing drug R&D pipeline Chi-Med has a library of over 10,000 drug substances which it has isolated from its screening of the herbal origins of TCM and which represent possibilities for the development of new drugs. It has six potential drugs in research, pre-clinical, Phase I or Phase II trials. • Phase II Trial result The result of Phase II trials in China for Chi-Med's HMPL-004 inflammatory bowel disease drug is expected in Q3 this year. • Strategic alliances Chi-Med announced key strategic partnerships with Merck of Germany for oncology drug discovery collaboration and with Procter & Gamble for collaboration on skin care targets. These agreements have generated our first research and development revenues, and similar additional agreements are expected in the future. • Sen reaches operating profit on a shop level We have expanded Sen's product and service portfolio, refined the retail shop format and expanded the London shop chain to five. Each store we now open is profitable at the operating level and we plan seven new shops in central London over the next 12 to 18 months to achieve full bottom-line profitability for the Consumer products business. Commenting, Christian Hogg, CEO of Chi-Med, said: "In its first year as a listed company, Chi-Med has made very good progress.Our China healthcare business has built scale, profit, and cash flows and iswell positioned to continue consolidating the major, high growth, yet veryfragmented China TCM market both organically and by acquisition. Our Drug R&Dbusiness has a growing pipeline of potential drugs and is looking forward to theresults of Phase II results for one of its leading candidates in the thirdquarter of this year. It has also signed its first discovery alliances withmajor Western corporations, earning its first revenues, with expectations ofsimilar additional deals during this year. At the same time, our Sen TCMconsumer products and services brand has reached operating profit at shop-leveland is actively planning the expansion of its London chain as well as potentialwider distribution agreements. Chi-Med is confident of delivering furthermaterial progress in the current year across all its business operations." Enquiries Chi-Med Telephone: +852 2121 8200Christian Hogg, CEO Citigate Dewe Rogerson Telephone: +44 (0) 20 7638 9571Anthony Carlisle Mobile: +44 (0) 7973 611 888Yvonne Alexander Mobile: +44 (0) 7866 610 682 About Chi-Med Chi-Med is the holding company of a pharmaceutical and healthcare group basedprimarily in China and was admitted to trading on the Alternative InvestmentMarket of the London Stock Exchange in May 2006. Chi-Med is focused onresearching, developing, manufacturing, and selling pharmaceuticals, healthsupplements and other consumer health and personal care products derived fromTraditional Chinese Medicine and botanical ingredients. Chi-Med is majority owned by Hutchison Whampoa Limited, an internationalcorporation listed on the Main Board of The Stock Exchange of Hong Kong Limited. CHAIRMAN'S STATEMENT Review of Results This is Chi-Med's first annual report as a listed company, and I am pleased toreport considerable progress on all fronts. Our China healthcare businesscontinued to increase market share in the fast growth China TCM pharmaceuticaland health supplements markets. Our Drug R&D business made excellent progressin its discovery and clinical programmes, with a growing pipeline of potentialdrugs and the signing of its first drug and active ingredient discoveryprogrammes with major Western corporations. The results of phase II trials forone of our leading candidates are now expected in the third quarter of thisyear. At the same time, our Consumer products business, through the Sen brand,expanded its London chain and reached operating profit in almost all of itsshops. Sales for the year rose 52% to $57.5 million (2005: $37.9 million), meeting ourexpectations and primarily reflecting the continuing growth in our Chinahealthcare business as well as the first revenues for our Drug R&D business, andthe continued growth of Sen. We continue to invest in our Drug R&D business soour overall loss before tax increased to $8.6 million (2005: $6.2 million).Tight controls on spending allowed us to beat our initial expectations ofoverall operating loss by a significant margin. As Chi-Med is still in its development phase, the Board do not believe itappropriate to declare a dividend for the year ended 31 December 2006. Strategic Overview Chi-Med is focused on becoming the leading player in the development of modernscience-based drug and consumer products derived from TCM to serve both theChinese and international healthcare markets. Strategically we believe that the large TCM industry in China represents areservoir of pharmaceutical activity and proven safety from which we can developnew drugs and also develop financially attractive health and wellness consumerproducts and concepts for the global market. We see the decades of success that our majority shareholder Hutchison WhampoaLimited ("Hutchison Whampoa") has enjoyed in China as a further significantadvantage for Chi-Med in our drive to explore and commercialise the drug andconsumer products opportunities, including potential acquisitions. Business and Corporate Development Our May 2006 IPO, which raised £40 million in gross proceeds, was one of thelargest fund raisings for a China based company coming to the AlternativeInvestment Market ("AIM"). It supports Chi-Med both in funding our developmentand incentivising our senior executive, as well as in helping raise ourinternational visibility. We are committed to delivering shareholder valueagainst the strategy set out at float. On the Drug R&D business, we have invested in exciting discovery and clinicalprogrammes in oncology and auto-immune disease. We expect these investments tostart to generate out licensing revenues in 2009 as our lead drug candidatesprogress through phase II clinical trials. We are particularly pleased that ourR&D capabilities were endorsed by "Big Pharma" with the two cooperation dealsChi-Med signed with Merck KGaA and Procter & Gamble. We have also made considerable progress on our Sen offering in the past twelvemonths and will seek to further expand the network of shops in London over thecoming 12 to 18 months. We continue to seek out attractive acquisitions of China businesses that willbring synergy to our existing portfolio of healthcare businesses inpharmaceuticals and health supplements, or which will expand our commercialfootprint in the fast growth China healthcare industry. On the corporate front, in order to increase the liquidity and following thelisting of shares of Chi-Med, we have broadened investor research anddistribution by appointing Investec Bank (UK) Limited as joint broker alongsidePanmure Gordon (Broking) Limited; and the executive management have investedtime in a private client broker programme. Corporate Governance Chi-Med is committed to achieving high standards of corporate governance withthe objective of building the long-term interests of the Company and maximisingreturns to shareholders and stakeholders. Our move from a private to a publiclytraded company required certain Board adjustments in order to comply withcorporate governance best practice. The appointment of Mr. Michael Howell,Professor Christopher Huang and Mr. Christopher Nash as IndependentNon-executive Directors early in the year 2006 was followed by the appointmentof Mr. Nash as Senior Independent Director in September 2006. As a group, ourIndependent Non-executive Directors bring a wealth of knowledge on AIM andgrowth businesses, UK corporate governance, and pharmaceutical research anddevelopment to the Company. They are making valuable contributions to theevolution of Chi-Med. I very much appreciate their involvement and wish tothank them all for their efforts. Outlook We are excited and confident about Chi-Med's future prospects. With the fullsupport of Hutchison Whampoa and its goodwill, experience, and capabilitiesthroughout China, Chi-Med is well positioned to benefit from securing furtherattractive acquisitions in the China healthcare industry and to realise synergyand rapid growth from these activities. Our strong management and R&D team arealso well placed to capitalise on the substantial growth potential in the globalpharmaceutical and consumer products businesses. I would like to express my deep appreciation for the support of our investors,directors, and partners as well as for the commitment and dedication ofChi-Med's management and staff. CHIEF EXECUTIVE OFFICER'S STATEMENT Chi-Med's purpose is to create value by being a pioneer in the field ofmodernisation and globalisation of TCM. TCM has for generations been a majorelement of China's healthcare system and represents over 30% of all healthcarespending in China. With the opening of China, the opportunity to establishTCM on a broad scale around the world has become an exciting reality. In the late-nineties, Hutchison Whampoa identified the potential within TCM forglobal development. Chi-Med was then established and has for the pastseven-years built operations and businesses aimed at innovation in the TCMfield. The three core Chi-Med operating units are: 1) China healthcare; 2)Drug R&D; and 3) Consumer products. Each of these three operating unitscontribute to Chi-Med's unique capability to build a major TCM group withinChina and globally. CHINA HEALTHCARE Chi-Med aims to build its China healthcare business into one of the largest andmost profitable healthcare groups in China. This objective will be realisedthrough organic growth, systematic acquisitions and effective integration of thebusiness over the coming years. Multiple factors combine to make China healthcare, and TCM in particular, a highpotential long-term opportunity for Chi-Med. These factors include: 1) strongunderlying China healthcare market growth; 2) current fragmentation in themarket; and 3) the Chinese Central Government's firm support for TCM. Within China healthcare, the TCM industry comprises four core sub-sectors:prescription drugs; OTC drugs; health supplements; and raw herb preparations.Although each sub-sector has a very different operating framework ofmanufacturing, marketing and distribution, TCM in China is a fast growthconsumer driven business which plays to Chi-Med's organisational strengths whichare deep in China consumer products experience. Chi-Med has established operations in three of these sub-sectors: prescriptiondrugs; OTC drugs; and health supplements. The know-how we have accumulated hasprepared us to scale-up operations in each sub-sector through both organicgrowth and acquisitions or joint ventures. 2006 China healthcare performance Chi-Med's China healthcare sales grew 48% to $55.1 million in 2006 (2005: $37.2million) and operating profit grew over five-fold to $2.5 million (2005: $0.4million). This reflected both strong operating performance and the firstfull-year effect of Chi-Med's most recent joint venture, Hutchison WhampoaGuangzhou Baiyunshan Chinese Medicine Limited ("HBYS"). Separating out the impact of the HBYS acquisition, the China healthcare businessrecorded organic sales growth of 11.1% during 2006. This represents solidprogress, particularly given some challenging market conditions on ourprescription drug and health supplement businesses, and underlines theimportance of having a diversified portfolio of products across multiple Chinahealthcare sub-sectors. For perspective, 93% of Chi-Med's China healthcaresales were derived from a portfolio of nine core products four of them OTCdrugs; three prescription; and two health foods. Our China healthcare sales and distribution network strengthened in 2006.Currently, through our three China healthcare joint ventures, Chi-Med employsover 800 full-time and 1,200 part-time sales and distribution personnel in 30provinces across China. This network provides us with a solid foundation forour organic growth over the coming years and closely mirrors populationdistribution in China. Over-the-counter drugs OTC drug sales, through HBYS, increased 113% in 2006 to $34.6 million (2005:$16.3m). HBYS started operations in May 2005. It recorded year-on-year organicgrowth of 28% in 2006 and the full year effect of HBYS added a further $13.8million in sales. HBYS has a very impressive track record in OTC marketing operations in Chinaover the past four years. Three HBYS marketing and PR campaigns since 2003 havebeen voted in the top 10 Marketing Campaigns in China by the Xin Jing Bao andNanfang Dushi Bao, two leading industry journals. These programmes include: 1)the PR campaign promising both free product and a price freeze on Banlangengranules (anti-viral) during the SARS epidemic of 2003; 2) the PR campaignpromoting Banlangen granules as the "TCM antibiotic" concurrent with the StateGovernment's clamp down on over prescription of antibiotics in 2004; and 3) thehighly successful expired prescription medicine exchange programme of 2005-06which led to widespread national PR coverage in China over the past eighteenmonths. Each of these marketing and PR campaigns has contributed to buildingthe Baiyunshan brand in China and these successful campaigns have been asignificant factor in our strong business results. The four key products of HBYS have all exhibited fast growth despite priceincreases of 17% in Jun-05 on Banlangen granules (anti-viral) and of 7% inJan-06 on Fu Fang Dan Shen tablets (Angina). These price increases, which provepricing can rise in China healthcare, were designed to both offset the impact ofraw material cost increases (sugar) and build gross margins which have improvedfrom 52% in 2005 to 54% in 2006. HBYS has an almost national presence across China with particular strength incentral and southern China. Geographical expansion potential lies in botheastern and southwest China. We are confident that our leading brand positionsin the generic OTC Banlangen granule (40% market share) and Fu Fang Dan Shentablet (50% market share) markets will help us both penetrate new markets andbuild incrementally in our existing strong markets. We expect our major investments in R&D should begin to reap benefits over thefollowing two years through the HBYS R&D centre which, in March 2006, wasdesignated as a TCM Provincial Technology Centre by the Guangdong ProvincialGovernment. Work is currently underway to expand Fu Fang Dan Shen tablet usageindications as well as prepare Banlangen granules for export to Europe.Furthermore the fourth HBYS Good Agricultural Practice ("GAP") site, for thegrowing of herb raw materials, is planned for Tibet now that the Tibet railwayis in place. GAP sites have proven to be a source of major product qualityimprovement and differentiation between HBYS's generic OTC products and itsnumerous competitors. HBYS has spent the past three years developing and test marketing a range of TCMbottled drinks under the Kou Yang Qing ("KYQ") label. These products areplanned to bridge the gap between TCM medicines and food & beverage products.We will continue to test market these products in Guangdong province in 2007 andbased on success we will look to expand across China. HBYS has a strong balance sheet with US$23.6 million of liquid assets on handwhich came primarily from the Chi-Med cash injection at the start of the jointventure in early-2005. We intend to use this cash to support furtheracquisitions of TCM OTC businesses under the HBYS joint venture. Prescription drugs Prescription drug sales through our Shanghai Hutchison Pharmaceuticals Limited("SHPL") joint venture remained flat in 2006 at $11.6 million (2005: $11.6m).This reflects good progress on our She Xiang Bao Xin ("SXBX") pills offset by aState Food & Drug Administration policy shift and a one-off distributorinventory rebalancing, the latter affecting our Dan Ning tablets. We expectSHPL, however, to resume growth in the current year. Our SXBX pills are our top cardiovascular product and we grew sales by 17% to$8.7m, despite the difficulties we reported in July 2006 stemming from the StateFood & Drug Administration's ("SFDA") policy of limiting medical salesrepresentative activities in hospitals. We are succeeding to systematicallymigrate our commercial model on SXBX pill away from hospital sales towardstargeted consumer education and brand building. In 2006, the SXBX pill formula was awarded a State Secret Certificate as "Confidential Information" by the Ministry of Science and Technology and theState Secrecy Bureau. This certificate extends the intellectual propertyprotection of SXBX pill for a further five years to late-2010 and guaranteesSXBX pill protection against generics as well as superior status in the marketas one of less than thirty TCM formulas granted protection by the State SecrecyBureau. Offsetting the progress on SXBX pill was a decline in the sales of Dan Ningtablets, for gall bladder inflammation, (-16% to $1.7m) due to one-time Shanghaidistributor inventory rebalancing. As we also reported in July 2006, our ShengMai injection (cardiovascular/immunity) was affected by an SFDA policy shiftwhich limited its prescription to emergency use only. This shift ultimately ledto a 53% drop in Sheng Mai injection sales to $0.9m which, while severe,represents just 1.6% of Chi-Med's China healthcare sales and is notrepresentative of the overall trend for the industry. Innovation work on SHPL comes in two key areas: 1) expanding the usage claimson existing products; and 2) in-licensing of new products at pre-clinical stage.In 2006, we successfully gained SFDA approval to start clinical trials on DanNing tablets on a new usage indication of treating fatty liver. Two furtherapplications to start clinical trials were submitted to the SFDA on in-licensedproducts, No. 1 Fu Huan (anti-hepatitis B) and Yin Zhi Huang powder injection(hepatitis). Our pipeline of new products on SHPL is robust and we believe thatit will yield incremental benefit in the next three to five years. SHPL is expected to resume growth in 2007 coming principally from geographicexpansion of SXBX pill beyond our relatively limited regional east-Chinastronghold. Health supplements Health supplement sales through the Hutchison Healthcare Limited ("HHL") jointventure declined 4% in 2006 to $8.9 million (2005: $9.3m). The lack of growth in 2006 came after the very strong geographic sales growthduring 2004 (+30%) and 2005 (+52%) as we expanded our school promotion model inseveral new provinces in east China for our Nao Ling Tong ("NLT") capsule - anomega-3 memory product for school children. As reported in July 2006, we hadhoped to continue this expansion to several new provinces in 2006 but we foundthat expanding at this rate geographically led to a dilution of oureffectiveness. This has led us to a short-term strategy of focusing ourefforts on the approximately 400 million people in our six core provincialstrongholds of Chongqing, Sichuan, Anhui, Shandong, Zhejiang and Jiangsuprovinces. HHL has had strong success in these six markets over the past four years wherewe have built from scratch: well established commercial operations; a high levelof brand and corporate awareness; and a strong understanding of the healthsupplement consumer in these markets. Today, the majority of HHL sales come through NLT capsule and Zhi Ling Tong ("ZLT") capsules (pure DHA for foetus and infant brain and retinal development).The business models used on both NLT and ZLT are labour intensive with largenumbers of sales staff calling on schools and hospitals throughout the country.It is this labour intensive approach that has required us to expand lessquickly. In the short-term, our focus for both NLT and ZLT will be incrementalgrowth potential within existing markets. To accelerate HHL growth however, we will focus attention on the development oftwo new mass-market product initiatives over the coming year - Health Goalgrowth liquid and ZLT Probiotics (children's immunity). These products aredesigned to be sold "off-the-shelf" behind strong media support and will be lesslabour intensive and easier to expand than the NLT and ZLT models. In November 2006, we began test marketing Health Goal growth liquid in fourcounties in Zhejiang province. Health Goal is an oral liquid designed topromote growth in children ages 4-7. It combines TCM to promote appetite withWestern vitamins and minerals. The Zhejiang test market has to-date been astrong success reaching breakeven on an EBIT level only 10 weeks after the startof advertising. We will continue to monitor this test and contingent oncontinued strong results through Q2 2007. We will expand this testsystematically into our six core provincial markets. In mid-2007 we expect to receive registration approvals from the SFDA to begintest marketing ZLT Probiotics. ZLT Probiotics is a product priced at a levelthat will appeal to the mass markets, while building off the strong brand equitycreated by the ZLT capsule (pure DHA) business which is limited to hospitalsales because of its very high price and requirement for doctor referrals. China healthcare mergers & acquisitions At IPO, we stated that Chi-Med intended to expand both organically via its threeexisting China joint ventures, as well as through a selective acquisitionprogramme. We are currently in negotiations with a number of mainland China healthcarecompanies. In addition to the internally generated prospects, we also haveseveral advisers supporting our M&A search and negotiation programme. We havestated that it is simply a matter of time before Chi-Med announces progress inthe area of China healthcare M&A. As is always the case in such negotiations,and particularly in the Chinese market, patience and thorough due diligence arethe most important factors. The success of our most recent joint venture, HBYS,is proof that good investment opportunities are available and we need to spendgreat effort and time separating the good from the bad. We fully expect Chinahealthcare M&A activity to rapidly evolve Chi-Med over the coming years. DRUG RESEARCH & DEVELOPMENT Hutchison MediPharma Limited ("HMPL"), under the strong leadership of Dr.Samantha Du and her team, is dedicated to transforming scientific discoveriesfrom TCM into innovative therapies for cancer and auto-immune diseases. Basedin Shanghai, HMPL is uniquely positioned to take advantage of an in-depthknowledge of TCM, a large pool of scientific talent, a large and affordablepatient population, and easy access to a China's fast growth biotechinfrastructure. During 2006, HMPL advanced its two leading candidates into Phase II studies inboth the US and China. Our HMPL-004 Phase II programs is expectingproof-of-concept ("POC") readout in Q3 2007. With a tripartite discoveryapproach including botanical drugs, natural products for optimal productivity,and synthetic new chemical entities, HMPL has filed multiple patent applicationsto protect its new discoveries. In the field of cancer therapy, a novel seriesof chemicals was discovered for a receptor tyrosine kinase and was progressedinto late discovery stage. In the field of inflammatory disease, a novel smallmolecule, which inhibits the synthesis of cytokines through inhibition of NF-Kbeta activation was discovered and has entered the preclinical stage. Inaddition to these internal discovery programs, HMPL has also established IPco-ownership model strategic alliances with global healthcare companies MerckKGaA and Procter & Gamble. These collaborations are expected to bring bothmeaningful short-term revenue and major long-term value creation to Chi-Med. 2006 Drug R&D performance Drug R&D registered its first income with $0.2 million in 2006 (2005: $0.0million) with payments from Merck KGaA and Procter & Gamble for collaborationsstarted in Q4 2006. Operating loss increased 20% to -$6.0 million (2005:-$5.0 million) as a result of further investment in HMPL's discoveryorganization and activities as well as clinical programmes in the US and China. HMPL-002, sensitizer for cancer chemo-radiotherapy HMPL is currently developing HMPL-002 in the United States for locally advancedhead and neck cancer ("HNC") patients undergoing concurrent Cisplatinchemo-radiotherapy treatment. As reported in July 2006, HMPL had completedpreclinical studies and successfully obtained the approval from the US Food andDrug Administration ("FDA") for its IND amendment to extend the clinical trialsto concurrent chemo-radiotherapy. The radiation therapy alone targets arelatively smaller portion of the eligible patient population, as concurrentplatinum-based chemo-radiotherapy is now considered the standard treatment formost locally advanced HNC patients who could tolerate the combined modality.The granting of this amendment from the FDA allows us to not only target a muchlarger patient population at faster speed, but also broaden the market potentialof this important drug. The newly amended trial is in active recruitment stage. We now anticipate the completion of the Phase I portion of the combinationtrial and the initiation of the Phase II clinical studies in the US for theconcurrent chemo-radiotherapy before the end of 2007. HMPL is also proceeding well with a Phase II proof-of-concept ("POC") study inChina of HMPL-002 indicated for its concurrent chemo-radiotherapy in stage III A/B non-small cell lung cancer ("NSCLC") patients. The clinical study examinesthe efficacy and safety of HMPL-002 in its concomitant use with the mostaccepted first-line chemo-radiotherapy for NSCLC patients. The study is now inits active recruiting period. Through February 2007, nearly half of thetargeted patient numbers have been enrolled. We expect to complete thepatient's enrollment by the end of 2007. Clinical studies conducted in China on over 3,000 human subjects have shown thatHMPL-002 in combination with radiotherapy alone had only limited adversereactions in patients with solid tumours. The most reported and notable adversereactions are limited in gastrointestinal system such as nausea, vomiting, anddiarrhoea. In our current clinical trials in the US for HNC and in China forNSCLC, data collected so far have further shown that HMPL-002 is generally welltolerated with no unexpected safety outcomes by patients undergoing concurrentplatinum-based chemo-radiotherapies. HMPL-004 - treatment for auto-immune disorders HMPL-004 is our second lead drug candidate in Phase II clinical development.HMPL is conducting two clinical studies to evaluate the safety and efficacy ofHMPL-004. A Phase II trial in the US for Crohn's disease ("CD") and a proof ofconcept ("POC") study in China for ulcerative colitis ("UC"). The US Phase II trial is a double blinded, randomised, multi-centred,placebo-controlled study in both male and female patients with active moderateCrohn's disease. We are anticipating finishing patient enrolment and treatmentin 2008. The POC study of HMPL-004 for UC is progressing well in China. Weare anticipating initial reading from this study by 3Q 2007. The anti-inflammation activity of HMPL-004 was originally identified in acell-based anti-inflammation screening assay at HMPL. We have demonstrated thatHMPL-004 inhibits multiple targets in the mechanisms leading to inflammatoryprocesses. These anti-inflammation activities of HMPL-004 were furtherconfirmed in various experimental animal models. Additional three-month animaltoxicity studies demonstrated no significant toxicities of HMPL-004, inagreement with the known safety profile of previous human usage experience ofthe herb. Discovery 2006 has been a fulfilling year for discovery. We are continuing our efforts onauto-immune and oncology and growing the organisation significantly. In theoncology field, a novel chemical series was discovered for a receptor tyrosinekinase. As of the end of 2006, multiple compounds in the series demonstratedpotency in vitro activity, good selectivity and efficacy in animal models oftumor growth. Patent application is in preparation. In support of our clinicalcandidate HMPL-002, an active metabolite of HMPL-002 was identified and PCTpatents were filed. The discovery of the metabolite will contribute to ourunderstanding of how HMPL-002 works in-vivo, open up more options for drugdelivery to optimise efficacy and safety, and add value to HMPL-002. Theidentification of this metabolite provides further IP protection to the HMPL-002product. On the auto-immune front, a novel small molecule cytokine synthesiscompound was discovered. This compound inhibits the synthesis of cytokinesthrough inhibition of NF-K beta activation and has demonstrated activity inanimal models of a variety of inflammatory diseases, including inflammatorybowel diseases, rheumatoid arthritis and multiple sclerosis. Currently thisproject is in preclinical evaluation phase. Strategic alliances Two external collaborations were announced during 2006: a drug discoverycollaboration with Merck KGaA of Germany; and a natural product screeningcollaboration for skin care targets with Procter & Gamble of the US. Thesecollaborations adopted a risk and reward sharing scheme with milestones androyalty payments to HMPL. These deals mark the first intellectual propertyco-ownership collaborations of this type for a Chinese pharmaceutical companywith global healthcare companies. We expect revenues in the $1 million range in2007 accelerating significantly from 2008 onwards from success based milestonepayments and royalties from these agreements. CONSUMER PRODUCTS Chi-Med's objective for our consumer products division is to create and developa differentiated, "new to the world", premium brand centred on consumer healthproducts and services derived from TCM and to establish Sen as the leading TCMbrand in the Western world. We believe consumers in the Western world are becoming increasingly interestedin complementary and alternative healthcare in addition to having an alreadyhigh level of interest in consumer products with botanical based ingredients.This interest places TCM as one of the highest potential new premium consumerproducts concepts in the market that can be applied to most consumer productscategories including food and beverage ("F&B"), beauty, and obviously health. Given the regulatory constraints surrounding TCM and herbal medicines, as wellas our desire to test multiple product ranges, we chose a retail format to startpilot testing the Sen Brand and product portfolio. We also chose to start thispilot test in London in order to gain access to the highly diverse andinternational consumer population. This London test has given us invaluablelearning on how premium demographic consumers from all over the world view TCM. Our primary focus over the past four years has been to create a profitableretail business model on the Sen Brand. This has required aggressive expansionof our product portfolio into multiple categories such as F&B, body care, skincare, and TCM services (e.g. acupuncture, acupressure & reflexology), as well astight controls in rental, fit-out, and staffing costs. We have been successfulin our efforts and now have a profitable operating model on a shop-level. Thishas meant that the majority of new shops opened in 2005 and 2006 have deliveredoperating profit from day one thereby contributing to paying our head office andwarehouse overhead costs. 2006 Consumer products performance Chi-Med's consumer products sales grew 206% to $2.1 million in 2006 (2005: $0.7million) and operating losses declined 16% to -$1.1 million (2005: -$1.3million). The driver of the improvement was the full year effect of the new Senshops in the City (Spitalfields) and Chelsea (King's Road), as well as part yeareffect of the Harrods and Harvey Nichol's shops in Knightsbridge. Excluding new store openings in 2006, Sen delivered very strong like-for-likeorganic growth in net sales of 32% in 2006 in shops open for more than one year.This is highly encouraging as it shows that the Sen proposition is one thatgenerates loyalty and repurchase over time. Breaking down the 2006 performance of each of the core Sen product and servicecategories, we can see that major progress was made in retail item sales (e.g. F&B, body, and skin care) with total sales up 174% in 2006 (organic growth 28%);and provision of consultations & services up 294% in 2006 (organic growth 34%).OTC medicine sales grew 143% in total, but organically they declined by 9% asmore customers were traded up to more effective tailor-made prescriptionformulations provided after consultation. New Shops We will focus on opening new shops in central London, aiming to build a verystrong presence and reputation through opening a further seven shops. This willbring the total number of Sen shops within central London to thirteen over thecoming 12 to 18 months and will allow us to start targeted marketing and PRcampaigns. We expect these new shops to contribute sufficient profit to put Senin a breakeven position on a standalone basis. CONCLUDING REMARKS Chi-Med intends to build each of our three core divisions into successful,large-scale businesses. It is our intention to become one of the leadingplayers in China healthcare; to successfully discover and bring new oncology andauto-immune therapies to global markets; and to create a globally known consumerproducts brand. With the very high quality and energy of our entrepreneurialmanagement and the strong support of Hutchison Whampoa, I am confident we willachieve our ambitions. CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2006 Note 2006 2005 US$'000 US$'000 Sales 2 57,474 37,861Cost of sales (23,404) (14,615) ________ _________Gross profit 34,070 23,246Selling expenses (23,902) (18,200)Administrative expenses (20,709) (10,837)Other net operating income 2,302 63 ________ _________Operating loss (8,239) (5,728)Finance costs (392) (496)Share of results of an associate - (7) ________ _________Loss before taxation (8,631) (6,231)Taxation charge (1) (141) ________ _________Loss for the year (8,632) (6,372) ________ _________ Attributable to:Equity holders of the Company (9,605) (6,777)Minority interests 973 405 ________ _________ (8,632) (6,372) ________ _________ Loss per share for loss attributable toequity holders of the Company during theyear - Basic and diluted (US$ per share) 3 (0.2101) (0.1848) ________ _________ CONSOLIDATED BALANCE SHEET AS AT 31 DECEMBER 2006 2006 2005 US$'000 US$'000ASSETSNon-current assetsProperty, plant and equipment 22,874 22,012Leasehold land prepayments 4,230 4,085Goodwill 6,241 5,948Trademarks and patents 775 862Available-for-sale financial asset 128 - ________ _________ 34,248 32,907 ________ _________Current assetsInventories 9,490 8,678Trade receivables 16,582 12,864Other receivables and prepayments 2,110 2,816Financial assets at fair value through 60,544 -profit or lossCash and bank balances 10,069 5,617 ________ _________ 98,795 29,975 ________ _________ Total assets 133,043 62,882 ________ _________EQUITYCapital and reserves attributable to theCompany's equity holdersShare capital 51,212 -Reserves 51,739 (33,670) ________ _________ 102,951 (33,670)Minority interests 7,030 5,661 ________ _________Total equity/(deficits) 109,981 (28,009) ________ _________ LIABILITIESCurrent liabilitiesTrade payables 3,185 3,938Other payables and accruals 11,894 8,156Amounts due to related parties 868 71,412Short-term bank loans 7,115 7,385 ________ _________Total liabilities 23,062 90,891 ________ _________ Total equity and liabilities 133,043 62,882 ________ _________ CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2006 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$'000As at 1January 2005 - - - (31) - (27,368) (27,399) - (27,399) Exchangetranslationdifferences - - - 468 - - 468 - 468 (Loss)/profit forthe year - - - - - (6,777) (6,777) 405 (6,372) Capitalinjection byminorityshareholderof asubsidiary - - - - - - - 5,256 5,256 Relating todisposal ofa subsidiary - - - 38 - - 38 - 38 ________ _______ _________ _______ _______ _________ _______ _______ ______ As at 31December2005 - - - 475 - (34,145) (33,670) 5,661 (28,009) ________ _______ _________ _______ _______ _________ _______ _______ ______ As at 1January 2006 - - - 475 - (34,145) (33,670) 5,661 (28,009) Exchangetranslationdifferences - - - 1,369 - - 1,369 308 1,677 (Loss)/ profit forthe year - - - (9,605) (9,605) 973 (8,632) Issue of 51,212 97,560 - - - - 148,772 - 148,772shares Shareissuancecosts - (6,283) - - - - (6,283) - (6,283) Relating toacquisitionofsubsidiariesby a jointlycontrolledentity - - - - - - - 58 58 Relating toformation ofa subsidiaryby a jointlycontrolled - - - - - 30 30entity Share-based compensationexpense - 2,368 - - - 2,368 - 2,368 Transferbetweenreserves - - 29 (29) - - - ________ _______ _________ _______ _______ _________ _______ _______ ______ As at 31 December2006 51,212 91,277 2,368 1,844 29 (43,779) 102,951 7,030 109,981 ________ _______ _________ _______ _______ _________ _______ _______ ______ CONSOLIDATED CASH FLOWS STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2006 Note 2006 2005 US$'000 US$'000 Cash flows from operating activitiesCash used in operations 4 (3,246) (13,080)Interest received 559 104Interest paid (392) (496)Income tax paid (1) (20) _________ _________ Net cash used in operating activities (3,080) (13,492) _________ _________ Cash flows from investing activitiesPurchase of property, plant and (2,582) (1,781)equipmentPurchase of trademarks and patents (44) -Purchase of available-for-sale financial (124) -assetNet capital injection in the formation - (11,675)of jointly controlled entitiesAcquisition of subsidiaries by a jointly (20) -controlled entityFormation of a subsidiary by a jointly 30 -controlled entityDisposal of a subsidiary - (14,518) _________ _________ Net cash used in investing activities (2,740) (27,974) _________ _________ Cash flows from financing activitiesIncrease in amount due to immediate 2,479 25,072holding companyIncrease in amount due to minority - 5,253shareholder of a subsidiaryNew short-term bank loans 374 317Repayment of short-term bank loans (936) (302)Capital injection by minority - 3shareholder of a subsidiaryIssue of shares, net of share issuance 68,743 -costs _________ _________ Net cash from financing activities 70,660 30,343 _________ _________ Net increase/(decrease) in cash and cash 64,840 (11,123)equivalents Cash and cash equivalents at beginning 5,617 16,274of yearExchange differences 156 466 _________ _________ Cash and cash equivalents at end of year 70,613 5,617 _________ _________ Analysis of cash and cash equivalents- Cash and bank balances 10,069 5,617- Financial assets at fair value through 60,544 -profit or loss _________ _________ 70,613 5,617 _________ _________ NOTE 1 Basis of preparation The consolidated financial statements of the Company have been prepared inaccordance with International Financial Reporting Standards ("IFRS"). Thesefinancial statements have been prepared under the historical cost convention, asmodified by the revaluation of certain financial assets, which were carried atfair value. 2 Segment information The Group's activities can be categorised into three main areas: - China healthcare: comprises the development, manufacturer,distribution and sale of traditional Chinese medicine pharmaceuticals and healthsupplements. - Consumer products: relates to traditional Chinese medicine-basedconsumer products and services sold through retail stores. - Drug research and development: relates mainly to pharmaceuticalresearch and development activities. 2006 2005 China healthcare 55,147 37,176 Consumer products 2,099 685 Drug research and development 228 - _______ _______ Total 57,474 37,861 _______ _______ 3 Loss per share Basic loss per share is calculated by dividing the loss attributable to equityholders of the Company by the weighted average number of ordinary shares inissue during the year. 2006 2005 Loss attributable to equity holders of the (9,605) (6,777) Company (US$000) Weighted average number of ordinary shares 45,712,743 36,666,667 in issue (Note) Basic loss per share (US$ per share) (0.2101) (0.1848) _________ ________ Note: The weighted average number of ordinary shares for the purposes of basicearnings per share has been retrospectively adjusted for the effects of thecapitalisation of 36,666,665 ordinary shares on 9 May 2006. Diluted loss per share is not presented as the exercise of the employee shareoption would have an antidilutive effect. 4 Notes to consolidated cash flow statements (a) Reconciliation of loss for the year to cash used in operations 2006 2005 US$'000 US$'000 Loss for the year (8,632) (6,372) Adjustments for: Taxation charge 1 141 Share of results of an associate - 7 Share-based compensation expense 2,368 - Amortisation of trademarks and patents 163 154 Amortisation of leasehold land prepayments 91 72 Depreciation on property, plant and 2,740 2,093 equipment Loss on disposal of property, plant and 80 11 equipment Interest income (559) (175) Interest expense 392 496 Net gain on disposal of a subsidiary - (195) _________ ________ (3,356) (3,768) Changes in working capital: - increase in inventories (184) (2,375) - increase in trade receivables (3,062) (5,257) - decrease/(increase) in other receivables 854 (1,172) and prepayments and amounts due from related parties - decrease in trade payables (927) (1,279) - increase in other payables and accruals 3,429 771 and amounts due to related parties Cash used in operations (3,246) (13,080) _________ ________ Ends This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Hutchmed