9th Aug 2007 07:01
Hutchison China Meditech Limited09 August 2007 Hutchison China MediTech Limited ("Chi-Med") (AIM: HCM) Interim Results for the Six Months Ended 30 June 2007 All businesses developing rapidly. Positive outlook. • Group sales up 18% to $37.7 million (H1 2006: $32.0m)• Spending on Drug R&D continues as planned -- breakthrough Phase II trial results in ulcerative colitis• China Healthcare -- sales up 16% to $36.0 million and operating profit up 62% to $3.0 million• Consumer Products -- sales up 44% driven by further Sen shop openings• Resulting loss to shareholders also as planned at $5.6 million (H1 2006: $3.8m)• Cash and cash equivalents totalled $64.1 million at 30 June 2007 London: Thursday, 9 August 2007: Chi-Med, the pharmaceutical and healthcaregroup backed by Hutchison Whampoa Limited, today announces its interim resultsfor the six months ended 30 June 2007. Christian Hogg, CEO of Chi-Med, said: "Chi-Med has delivered a strong set of results for the first half of the yearwith group sales up 18% to $37.7 million. Our China Healthcare business continues to grow fast with like-for-like sales up16% and operating profits up 62%. Our Consumer Products business has expandedits Sen shop portfolio and grown sales by 44%, and our Drug R&D business hasmade major clinical progress. Significantly, our Drug R&D business has announced successful Phase IIproof-of-concept trial results for HMPL-004, our ulcerative colitis therapy, aswell as progressing enrollment on its other three clinical trials. Concurrentlythe in-house drug discovery programme and joint-discovery collaborations withMerck KGaA and Procter & Gamble are advancing well. Undoubtedly the focus ofthe pharmaceutical industry is on Chi-Med for the quality of its discovery anddevelopment capability and for its potential to develop important new drugs forthe global marketplace from its efficient cost base in China. As previouslystated, the increased spend on Drug R&D has led to a larger loss for the groupas a whole. However this is our plan and expectation. Looking ahead, we expect our Drug R&D business to conclude further collaborationagreements with major pharmaceutical companies. The China Healthcare businesswill continue to grow strongly with the potential for strategic opportunities toadd to its organic growth and we see continuing good growth potential for theSen brand in our Consumer Products business. A strong cash position isunderpinning our future growth plans in all three core businesses. We remainconfident we will add further significant value for shareholders in the rest ofthis year and beyond." Enquiries Chi-Med Christian Hogg, CEO Telephone: +44 (0) 20 7638 9571 Citigate Dewe Rogerson Telephone: +44 (0) 20 7638 9571 Anthony Carlisle Mobile: +44 (0) 7973 611 888Yvonne Alexander Mobile: +44 (0) 7866 610 682 Results are reported in US dollar currency unless stated otherwise. The interim results statement and the information required by Rule 26 (Companyinformation disclosure) of the AIM Rules for the Companies are available on thewebsite of Chi-Med: www.chi-med.com An analyst presentation will be held at 9.00am today at Citigate Dewe Rogerson,3 London Wall Buildings, London, EC2M 5SY. 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. INTRODUCTION In 1999 Hutchison China MediTech Limited ("Chi-Med"), the pharmaceutical andhealthcare group backed by Hutchison Whampoa Limited ("Hutchison Whampoa"),identified a major opportunity to modernise and globalise the TraditionalChinese Medicine ("TCM") industry. In China this industry is estimated at over$15 billion annually and is growing rapidly with the expansion of the Chineseeconomy. Outside China however, the TCM industry is a fraction of the size andremains largely undeveloped and unexplored. During the past seven years, Chi-Med has established operations aimed at drawingupon the untapped wealth of knowledge and history of usage in the China TCMindustry to develop pharmaceuticals and consumer products for the global market. CHAIRMAN'S STATEMENT Our vision is simple - to become a major player in the global pharmaceutical andconsumer products businesses. We believe that TCM represents a reservoir of pharmaceutical activity and provensafety from which we can develop new drugs and new health and wellness consumerproducts and concepts for the global market. We believe that the strength and experience of Hutchison Whampoa in China,built-up through its decades of operation in the country, is also an importantadvantage for Chi-Med in its drive to explore and commercialise thepharmaceutical and consumer products opportunities represented by TCM. Financial review Sales for the six months to 30 June 2007 were $37.7 million (H1 2006: $32.0m),an increase of 18%. This was driven primarily by strong organic growth in theChina Healthcare business. Gross profit for the period was $22.9 million (H1 2006: $19.4m). Sellingexpenses as a percentage of sales dropped to 39% (H1 2006: 42%) as a result ofthe increased volume scale. Administrative expenses as a percentage of salesrose to 38% (H1 2006: 29%) as a result of accounting for our employee shareoption scheme and the full period effect of unallocated corporate expensesprimarily resulting from being a publicly quoted company. The loss attributableto equity holders increased, in line with budget, to -$5.6 million (H1 2006:-$3.8m). During the period we grew the operating profitability of our China Healthcarebusiness by 62% to $3.0 million (H1 2006: $1.9m). This partially offset theoperating losses on our Drug R&D business, which as planned, rose 16% to -$3.8million (H1 2006: -$3.3m). Cash and Financing Net operating cash outflow was -$4.6 million (H1 2006: -$3.9m). Chi-Med's cash position remains very strong, providing a strong base, togetherwith operational cash inflows, to finance its Drug R&D business and theexpansion of its other businesses over the coming years. Cash and cashequivalents at the end of the period totalled $64.1 million (H1 2006: $72.6m).In addition to this cash balance, Chi-Med guaranteed bill receivables rose to$15.6 million (H1 2006: $8.6m). Outlook We remain very confident about the future prospects of Chi-Med. With the full support of Hutchison Whampoa and its unrivalled goodwill,experience, and capabilities throughout China, we believe we are well positionedto secure attractive positions in joint ventures in the China healthcareindustry and to realise synergy and rapid growth from these activities. Ourstrong management and R&D team are also well placed to capitalise on thesubstantial growth potential in the global pharmaceutical and consumer productsbusinesses. I would like to express my deep appreciation for the support of our investors,directors, and partners and for the commitment and dedication of Chi-Med'smanagement and staff. Simon ToExecutive Chairman, 8 August 2007 CHIEF EXECUTIVE OFFICER'S STATEMENT Our core businesses are Drug R&D, China Healthcare and Consumer Products. Eachhas made very good progress in the first half of this year. Drug R&D Chi-Med's Drug R&D business, which is focused on the development of novel cancerand auto-immune therapeutics, has made good progress through our wholly ownedsubsidiary Hutchison MediPharma Limited ("HMPL"). Operating losses, asexpected, have increased 16% to -$3.8 million (H1 2006: -$3.3m). In line with its agreed discovery and development plans, the business has grownits research and development team and now has over 130 full time employees,compared to 70 a year ago, in our Pu Dong site. The new employees are primarilyengaged in the discovery area, in medicinal chemistry, biology, andpharmacology, principally to staff our internal discovery programme and ourdiscovery co-operations with Merck KGaA and Procter & Gamble. By 30 June 2007,HMPL had filed 63 patent applications worldwide, up from 26 a year ago. On the discovery front, we focused on the progression of pre-clinical candidatesand initiation of new projects. In the oncology area, the multi-kinaseinhibitor project is now in final stages of evaluation for candidate selectionand patent applications were filed both in China and the U.S. Two other newprojects for cancer were initiated and are now at the lead generation stage. In the auto-immune area, HMPL-010, a cytokine inhibitor with potential for usein psoriasis, was delivered in February 2007. Preliminary safety evaluation onHMPL-010 has been completed and pre-clinical results are pending. Another novelseries of cytokine modulators has been identified and patent application isbeing prepared as an alternative to HMPL-010. Multiple compounds in this seriesdemonstrated good efficacy in animal models of rheumatoid arthritis andexcellent pharmacokinetic properties. Work is in progress to evaluate thepotential of this series as a clinical candidate for auto-immune diseases suchas rheumatoid arthritis. Furthermore, a kinase inhibition project targetinginflammation and asthma has advanced to lead optimization stage. Our most advanced clinical candidate, HMPL-004, has now completed its Phase IIproof-of-concept ("POC") study in China for the treatment of patients withmild-to-moderate ulcerative colitis ("UC"). The trial fully met its objectives,in that HMPL-004 was well tolerated and met all its efficacy end points. Aftertreatment for eight weeks, the patients' clinical symptom score reduction forHMPL-004 was 56% versus 59% for Mesalazine (the current first-line treatment forUC) in the Intention-to-treat ("ITT") population. The overall remission rate(combination of complete and partial remissions) for HMPL-004 was 57% byclinical score compared to 53% for Mesalazine in the ITT population and 47% forHMPL-004 versus 42% for Mesalazine by colonoscopy in the ITT population.HMPL-004 was well tolerated in the study and the patients with adverse eventswere half that in the Mesalazine group. This positive result on HMPL-004 is asignificant milestone for us as Mesalazine has only approximately 60% responseamong UC patients and resistance can build up over time, so HMPL-004, which hasa novel mechanism of action, has potential to bring patients another option forthe treatment of this chronic, painful and frequently recurring disease. HMPL-004 has a second clinical trial in progress in the US. This Phase II trialis a double blinded, randomised, multi-centred, placebo-controlled study in bothmale and female patients with active moderate Crohn's disease. Recruitment isongoing and 35% of the required patients have already been enrolled into thestudy. HMPL-004's positive UC Phase II POC results in China will boostrecruitment speed in the US and we anticipate finishing patient enrolment andtreatment in the third quarter 2008. HMPL's second clinical candidate HMPL-002 is also progressing well in a Phase IIPOC study in China where it is being used concurrently with chemo-radiotherapyin stage III non-small cell lung cancer ("NSCLC") patients. To-date, 80% of therequired patients have been enrolled into the study, indicating that HMPL willmeet the end-2007 enrolment completion target date. HMPL-002 is also in clinical trials in the US for the treatment of head and neckcancer. The first cohort for the Phase I trial has been completed with no drugrelated severe adverse events observed. The second and final dose cohortstarted in July 2007 and will be followed by a Phase II trial that is expectedto commence during the second half of 2007. The two projects in collaboration with Merck KGaA for cancer are progressing asplanned, and we expect completion of HMPL's screening activities by the end of2007. Once screening is completed, upon agreement by both parties, qualifiedhits will be chosen for further development and HMPL will start to receivemilestone income. The collaboration with Procter & Gamble is on track to complete the screening ofits collection of plant extracts against beauty care targets nominated byProcter & Gamble by early 2008. Once screening is completed, Procter & Gamblewill commence work to formulate active components into its beauty care products,the ultimate objective being consumer noticeable beauty care benefits. If thisobjective is met, HMPL will become the exclusive supplier of these activecomponents to Procter & Gamble. In addition, in June 2007, HMPL exercised an option to purchase, for $3.3million, the 5,024 sq.m. building it leased for the past three years in theZhang Jiang High Tech Park ("ZJHTP"). The purchase price compares veryfavourably with the current market price for the facility, which is nowapproximately $7.0 million. This reflects the very tight inventory of buildingsand the high demand from global pharmaceutical companies looking to set upoperations in ZJHTP, which is now the primary biotech and pharmaceutical R&Dcentre in China. By buying the property, HMPL has protected itself againstrapidly rising rental costs. For a facility of this size in ZJHTP, currentrents are approximately $800,000 a year and are currently growing atapproximately 15% a year. China Healthcare Chi-Med's China Healthcare business has three operating companies: HutchisonWhampoa Guangzhou Baiyunshan Chinese Medicine Company Limited ("HBYS"), ShanghaiHutchison Pharmaceuticals Limited ("SHPL") and Hutchison Healthcare Limited ("HHL"). Overall, the China Healthcare business has accelerated its growth withsales up 16% to $36.0 million (H1 2006: $31.1m) and operating profits up 62% to$3.0 million (H1 2006: $1.9m). The sales growth was driven principally by continued progress on the Baiyunshanbrand of over-the-counter ("OTC") medicines (cough cold, angina, periodontitis,and liver health); the strong performance of SHPL's cardiovascular prescriptiondrug She Xiang Bao Xin pill ("SXBXP"); and the advances made on the HHL Zhi LingTong ("ZLT") brand of infant nutritional health supplement products. Volume sales growth has driven margin enhancement. In addition, as a by-productof recent SXBXP State Secrecy Bureau and State Science and Technology Commissionawards, we have been able to argue for and secure our first price increases(under the full reimbursement system) on SXBXP since 2000. While prices to theconsumer remain flat, SXBXP's bidding price to hospitals has increased 10%. Inthe second quarter, we also started the restructure of the NLT capsule (formemory) business by withdrawing from unprofitable markets and focusing on sixcore markets thereby leading to improved margins despite volume loss of 21%. Inparallel, the restructure of the Sheng Mai injection business, which wasaffected in 2006 by the State Food and Drug Administration ("SFDA") restrictionson reimbursement to emergency use only, led to us reducing the price and cuttingall marketing expense in order to reposition the product to compete against lowcost manufacturers. While lower prices led to a 54% loss in sales on Sheng Maiinjection during the period, it also led to a 19% increase in unit volume withconsequent benefits in both capacity utilisation and contribution. In line with our strategy, we continue to appraise potential strategicacquisitions in the China market, in particular looking atState-owned-enterprises, pre-IPO firms, and large private firms, for which ourname, market position and expansion potential can make us an attractive partner.We believe there remain potential opportunities; but we will only makeacquisitions where the price and fit are attractive and we are confident of theability to add value. HBYS: The Baiyunshan brand is rapidly becoming one of the top OTC brands inChina. HBYS is delivering a rate of growth of over 20% with sales for theperiod up 24% for the second year in a row to $23.7 million (H1 2006: $19.1m).HBYS has a four pronged commercial strategy: 1) to focus distribution on fewer,but larger, distributors across China; 2) to continue its expired prescriptionmedicine exchange programme which continues to gain plaudits from StateGovernment and media as well as building consumer loyalty; 3) to expand itsreimbursement list - for example, in Guangdong 87% of HBYS's 137 products arenow reimbursed; and 4) the opening of the Baiyunshan TCM Museum in Guangzhouwhich has attracted both strong media interest and a significant number ofvisitors. SHPL: Last year's SFDA tightening of policy on the access of medical salesrepresentatives to hospitals initially led to some uncertainty on SHPL'sprescription cardiovascular drug business (SXBXP), but it has not had anylong-term impact. SHPL grew sales on SXBXP for the period 17% to $4.9 million(H1 2006: $4.2m). This helped SHPL resume growth with total joint venture salesfor the period up 6% to $6.2 million (H1 2006: $5.8m) despite price cuts thatwere required to remain competitive in the generic Sheng Mai injection business. As a prescription drug business, our commercial focus has been on building thereputation of SHPL's products (particularly SXBXP) among the medical andacademic communities by securing State Government intellectual propertyprotection and technical endorsements. In late 2006, SXBXP was awarded a StateSecret Certificate as "Confidential Information" by the Ministry of Science andTechnology and State Secrecy Bureau. This extends effective patent protectionfor five years. In early 2007, SXBXP was one of only two TCM products selectedto be part of the State 11th Five Year Scientific Plan, by the State Science andTechnology Commission ("SSTC"). This selection means that the SSTC will fund78% of a RMB 4.5 million ($0.6m) research project, between SHPL and top academicand research institutions in China, into SXBXP's mechanism of action. Allpatents generated by this research will belong to SHPL. Finally, in June 2007,SHPL's number two product Dan Ning tablet (for gall bladder) was granted atwenty-year China patent on the formulation and process by the State PatentBureau. HHL: Strong progress was made during the period by HHL on ZLT, our infantnutrition brand. ZLT sales for the period grew 170% to $1.8 million (H1 2006:$0.7m). After four years of effort to establish the brand, ZLT is now startingto grow rapidly and is an example of the speed at which health supplementbusinesses can grow in China. The cooperation between ZLT and the primary Staterun family planning organisation, the Chinese Association for Improving BirthOutcomes and Child Development, as well as local family planning cliniceducation programmes, has been a very effective driver of trial and loyalty.Overall HHL sales were flat during the period at $6.2 million (H1 2006: $6.2m)as the progress on ZLT offset declines in NLT capsule sales as we commencedwithdrawal from some unprofitable provincial markets. Consumer Products Chi-Med's Consumer Products business, through its wholly owned subsidiary SenMedicine Company Limited ("Sen"), grew sales by 44% during the period to $1.3million (H1 2006: $0.9m), reflecting the full period effect of the Harrods andHarvey Nichols shop openings and good like-for-like sales growth in shops openmore than a year. Operating losses increased to $0.8 million (H1 2006: $0.5m)due to investments in product and brand development in preparation for thirdparty retail expansion projects. Like-for-like sales increased 4%, consolidating the 32% step-change growth inlike-for-like sales achieved in 2006. The two main initiatives of 2006, theopening of the 900 sq.ft. Harvey Nichols shop-in-shop and the introduction ofSen skin care and body care accessories have been successful. Sen has consistently been a strong performer on the fourth floor of HarveyNichols and has been profitable since day one. This, and the continued positiveresults of our other established shops, means we are planning a further sevenopenings in central London. These include a shop off Piccadilly that openedthis July; planned openings in Kensington and Westbourne Grove during the secondhalf of 2007; and further shops to be opened in Holborn, the new Westfieldshopping centre in Shepherd's Bush, and another two central London locations in2008. Sen's skin care and body care accessories are selling well, helping increaseSen's retail product sales by 26% during the period. Retail product (primarilybody care, skin care, and teas) sales now account for 21% of Sen total sales (H12006: 17%). This strong progress has given us confidence to accelerate plans toexpand these lines into third party luxury retail distribution channels. Outlook We expect our Drug R&D business to create substantial value over the comingyears. It has started to deliver breakthrough results. Its model has now beenvalidated through: our joint-discovery collaborations with Merck KGaA andProcter & Gamble; our discovery success and the progression of several new highpotential pre-clinical projects; and delivering a positive result in theHMPL-004 Phase II POC trial in record time. We have a very high quality teamand state-of-the-art facilities, which enable us quickly and effectively toperform pre-clinical work and run clinical trials to ICH standards. Ourstrategy of screening natural substances with a history of use reducesprobability of failure and our location in China reduces discovery anddevelopment costs. We expect internal discovery and development projects toprogress over the balance of the year as well as completing the majority ofscreening activities under the Merck KGaA and Procter & Gamble collaborations.Furthermore, we intend to develop further joint discovery deals with globalpartners. With our China Healthcare business, we have a diversified portfolio of productswhose sales are growing rapidly, with earnings improving at a greater rate. Weexpect strong organic growth to continue and believe there will be opportunitiesto add to this over time through acquisitions. Our Consumer Products business model in London is now tested and we believe ourplanned further London openings over the balance of 2007 and early 2008 andexpansion into third party luxury distribution channels will increase the rateof growth and have a positive impact on operating margins. Chi-Med has a solid foundation of operations, which represent a strong platformfor growth and value creation. Christian HoggChief Executive Officer, 8 August 2007 HUTCHISON CHINA MEDITECH LIMITED CONDENSED CONSOLIDATED INCOME STATEMENTFOR THE SIX MONTHS ENDED 30 JUNE 2007 Unaudited Six months ended 30 June Note 2007 2006 US$'000 US$'000 Sales 3 37,723 31,999Cost of sales (14,811) (12,615) Gross profit 22,912 19,384Selling expenses (14,729) (13,461)Administrative expenses (14,234) (9,332)Other net operating income 4 2,029 506 Operating loss 5 (4,022) (2,903)Finance costs 6 (172) (189) Loss before tax (4,194) (3,092)Tax charge 7 (508) - Loss for the period (4,702) (3,092) Attributable to:Equity holders of the Company (5,647) (3,773)Minority interests 945 681 (4,702) (3,092) Loss per share for loss attributable to US$ US$equity holders of the Company during the per share per shareperiod - Basic and diluted 8 (0.1103) (0.0940) The notes below are an integral part of these condensed consolidated interimaccounts. HUTCHISON CHINA MEDITECH LIMITED CONDENSED CONSOLIDATED BALANCE SHEETAS AT 30 JUNE 2007 Unaudited Audited Note 30 June 31 December 2007 2006 US$'000 US$'000ASSETSNon-current assetsProperty, plant and equipment 9 23,249 22,874Leasehold land 4,309 4,230Goodwill 6,428 6,241Trademarks, patents and others 875 775Available-for-sale financial asset 132 128 34,993 34,248 Current assetsInventories 9,427 9,490Bill receivables 15,565 8,585Trade receivables 12 10,079 7,997Other receivables and prepayments 2,142 2,110Financial assets at fair value through profit or loss 50,348 60,544Cash and bank balances 13,716 10,069 101,277 98,795 Total assets 136,270 133,043 EQUITY Capital and reserves attributable to the Company's equity holdersShare capital 10 51,212 51,212Reserves 48,712 51,739 99,924 102,951Minority interests 7,804 7,030 Total equity 107,728 109,981 LIABILITIESCurrent liabilitiesTrade payables 12 5,911 3,185Other payables and accruals 15,119 11,894Amounts due to related parties 12 202 868Short-term bank loans 7,310 7,115 Total liabilities 28,542 23,062 Total equity and liabilities 136,270 133,043 The notes below are an integral part of these condensed consolidated interimaccounts. HUTCHISON CHINA MEDITECH LIMITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITYFOR THE SIX MONTHS ENDED 30 JUNE 2007 UnauditedAttributable to equity holders of the Company Share Share Share-based Exchange Statutory Accumulated Total Minority Total capital premium compensation reserve reserves losses interests equity reserve US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 As at 1 January2006 - - - 475 - (34,145) (33,670) 5,661 (28,009) Exchangetranslationdifferences - - - 411 - - 411 - 411(Loss)/profit for the period - - - - - (3,773) (3,773) 681 (3,092) Issue of shares (Note 10) 51,212 91,510 - - - - 142,722 - 142,722 Acquisition of asubsidiary by ajointly controlledentity - - - - - - - 51 51 Share-basedcompensationexpense - - 427 - - - 427 - 427 As at 30 June 2006 51,212 91,510 427 886 - (37,918) 106,117 6,393 112,510 As at 1 January2007 51,212 91,277 2,368 1,844 29 (43,779) 102,951 7,030 109,981 Exchangetranslationdifferences - - - 1,001 - - 1,001 170 1,171 (Loss)/profit forthe period - - - - - (5,647) (5,647) 945 (4,702) Dividend paid to aminorityshareholder of asubsidiary - - - - - - - (341) (341) Share-basedcompensationexpense - - 1,619 - - - 1,619 - 1,619 Transfer betweenreserves - - (285) - - 285 - - - As at 30 June 2007 51,212 91,277 3,702 2,845 29 (49,141) 99,924 7,804 107,728 The notes below are an integral part of these condensed consolidated interimaccounts. HUTCHISON CHINA MEDITECH LIMITED CONDENSED CONSOLIDATED CASH FLOW STATEMENTFOR THE SIX MONTHS ENDED 30 JUNE 2007 Unaudited Six months ended 30 June Note 2007 2006 US$'000 US$'000 Cash flows from operating activitiesCash used in operations 11 (4,009) (4,060)Interest received 41 325Interest paid (172) (189)Income tax paid (508) - Net cash used in operating activities (4,648) (3,924) Cash flows from investing activitiesPurchase of property, plant and equipment (1,271) (1,406)Purchase of trademarks, patents and others (170) (43)Purchase of available-for-sale financial asset - (124)Acquisition of a subsidiary by a jointly controlled entity - (4) Net cash used in investing activities (1,441) (1,577) Cash flows from financing activitiesIncrease in amount due to immediate holding company - 2,479Repayment of short-term bank loans (19) -Dividend paid to a minority shareholder of a subsidiary (341) -Issue of shares, net of share issuance costs - 70,109 Net cash (used in)/generated from financing activities (360) 72,588 Net (decrease)/increase in cash and cash equivalents (6,449) 67,087 Cash and cash equivalents at beginning of period 70,613 5,617Exchange differences (100) (91) Cash and cash equivalents at end of period 64,064 72,613 Analysis of cash and cash equivalents Cash and bank balances 13,716 72,613Financial assets at fair value through profit or loss 50,348 - 64,064 72,613 The notes below are an integral part of these condensed consolidated interimaccounts. HUTCHISON CHINA MEDITECH LIMITED NOTES TO THE CONDENSED CONSOLIDATED INTERIM ACCOUNTS 1 General information Hutchison China MediTech Limited (the "Company") and its subsidiaries (togetherthe "Group") is principally engaged in the manufacturing, distribution and salesof traditional Chinese medicine ("TCM") and healthcare products. The Group isalso engaged in carrying out pharmaceutical research and development. The Grouphas manufacturing plants in Shanghai and Guangzhou in the Peoples' Republic ofChina (the "PRC") and sells mainly in the PRC and the United Kingdom (the "UK"). The Company was incorporated in the Cayman Islands on 18 December 2000 as anexempted company with limited liability under the Companies Law (2000 Revision),Chapter 22 of the Cayman Islands. The address of its registered office isUgland House, P.O Box 309, George Town, Grand Cayman, Cayman Islands, BritishWest Indies. The Company's ordinary shares were admitted to trading on the AlternativeInvestment Market operated by the London Stock Exchange ("AIM"). Thesecondensed consolidated interim accounts are presented in thousands of UnitedStates Dollars ("US$'000"), unless otherwise stated, and were approved for issueby the Board of Directors on 8 August 2007. 2 Summary of significant accounting policies (a) Basis of preparation The Company has a financial year end date of 31 December. These condensedconsolidated interim accounts for the six months ended 30 June 2007 have beenprepared in accordance with International Accounting Standard 34, " Interimfinancial reporting". These condensed consolidated interim accounts should beread in conjunction with the annual financial statements of the Group for theyear ended 31 December 2006. (b) Significant accounting policies The condensed consolidated interim accounts have been prepared under thehistorical cost convention except for certain financial instruments which arestated at fair values. The accounting policies and methods of computation used in the preparation ofthese condensed consolidated interim accounts are consistent with those used inthe 2006 annual accounts except for the adoption of standards, amendments andinterpretations issued by the International Accounting Standards Board mandatoryfor annual financial periods beginning 1 January 2007. The adoption of these standards, amendments and interpretations was not materialto the Group's results of operations or financial position. HUTCHISON CHINA MEDITECH LIMITED NOTES TO THE CONDENSED CONSOLIDATED INTERIM ACCOUNTS 3 Segment information The following is an analysis of the sales and results for the period, analysedby business segment, the Group's primary basis of segmentation. Six months ended 30 June 2007 China Consumer Drug Corporate Total healthcare products research unallocated and expenses development US$'000 US$'000 US$'000 US$'000 US$'000 Sales 36,037 1,255 431 - 37,723 Operating profit/(loss) 3,030 (833) (3,782) (2,437) (4,022) Six months ended 30 June 2006 China Consumer Drug Corporate Total healthcare products research unallocated and expenses development US$'000 US$'000 US$'000 US$'000 US$'000 Sales 31,129 870 - - 31,999 Operating profit/(loss) 1,871 (480) (3,255) (1,039) (2,903) Included in the corporate unallocated expenses for the six months ended 30 June2007 were share-based compensation expense of US$1,619,000 (2006: US$427,000). 4 Other net operating income Six months ended 30 June 2007 2006 US$'000 US$'000 Interest income 41 325 Fair value gain on financial assets at fair value through profit 1,507 - or loss Net foreign exchange gain 312 84 Other operating income 183 166 Other operating expenses (14) (69) 2,029 506 HUTCHISON CHINA MEDITECH LIMITED NOTES TO THE CONDENSED CONSOLIDATED INTERIM ACCOUNTS 5 Operating loss Operating loss is stated after charging the following: Six months ended 30 June 2007 2006 US$'000 US$'000 Amortisation of trademarks, patents and others and leasehold 143 122 land Cost of inventories recognised as expense 14,163 11,415 Depreciation of property, plant and equipment 1,548 1,354 Employee benefits expense 8,774 6,525 Loss on disposal of property, plant and equipment 18 39 Operating lease rentals in respect of land and buildings 739 588 Research and development expense 1,866 1,644 6 Finance costs Six months ended 30 June 2007 2006 US$'000 US$'000 Interest expense on short-term bank loans 172 189 7 Tax charge Six months ended 30 June 2007 2006 US$'000 US$'000 Current tax 508 - (a) The Group has no assessable profit in Hong Kong and the UK for theperiod (2006: Nil). (b) Pursuant to the relevant PRC income tax rules and regulations, specialincome tax rates of (i) 15% has been granted to Hutchison MediPharma Limited asforeign invested enterprise which is engaged in research and developmentactivities, and (ii) 27% have been granted to Hutchison Healthcare Limited,Hutchison Whampoa Guangzhou Baiyunshan Chinese Medicine Company Limited andShanghai Hutchison Pharmaceuticals Limited as foreign investment productionenterprises. (c) As approved by the PRC tax authorities, certain subsidiaries and jointlycontrolled entities in the PRC, which qualify as foreign investment productionenterprises, are entitled to a two-year exemption from income taxes followed bya 50% reduction in income taxes for the ensuring three years, commencing fromtheir first cumulative profit-making year net of losses carried forward. HUTCHISON CHINA MEDITECH LIMITED NOTES TO THE CONDENSED CONSOLIDATED INTERIM ACCOUNTS 8 Loss per share Basic loss per share is calculated by dividing the loss attributable to equityholders of the Company by the weighted average number of ordinary shares inissue during the period. Six months ended 30 June 2007 2006 Loss attributable to equity holders of the Company (US$'000) (5,647) (3,773) Weighted average number of ordinary shares in issue 51,212,121 40,122,217 Basic loss per share (US$ per share) (0.1103) (0.0940) The weighted average number of ordinary shares for the purposes of basic earningper 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 the same as basic loss per share as the exercise ofthe employee share option would have an antidilutive effect. 9 Property, plant and equipment Six months ended 30 June 2007 2006 US$'000 US$'000 Net book value as at 1 January 22,874 22,012 Additions 1,271 1,406 Acquisition of a subsidiary by a jointly controlled entity - 66 Disposals (18) (39) Depreciation for the period (1,548) (1,354) Exchange differences 670 289 Net book value as at 30 June 23,249 22,380 10 Share capital (a) Authorised and issued capital There is no movement in authorised and issued capital during the six monthsended 30 June 2007. (b) Share option scheme On 4 June 2005, the Company adopted a share option scheme ( the "Share OptionScheme"), which was subsequently amended by the Board of Directors of theCompany on 21 March 2007. Pursuant to the Share Option Scheme, the Board ofDirectors of the Company may, at its discretion, offer any employees anddirectors (including executive and non-executive directors but excludingindependent non-executive directors) of the Company, holding companies of theCompany and any of their subsidiaries or affiliates, and subsidiaries oraffiliates of the Company options to subscribe for shares of the Company. As of30 June 2007, options representing approximately 4.35% of the issued sharecapital of the Company were granted to a director of the Company and certainemployees of the Group and its jointly controlled entities under the ShareOption Scheme. HUTCHISON CHINA MEDITECH LIMITED NOTES TO THE CONDENSED CONSOLIDATED INTERIM ACCOUNTS 10 Share capital (Continued) (b) Share option scheme (Continued) Details of the share options granted under the Share Option Scheme outstandingas at 30 June 2007 are as follows: Effective date of Exercise period of Exercise price Number of shares grant of share share options subject to the share options options Christian Hogg 19 May 2006 From 19 May 2006 to 3 £1.090 768,182 (Notes (i) & June 2015 (ii)) 9 employees in 19 May 2006 From 19 May 2006 to £1.090 998,635 aggregate (Notes (i) & 3 June 2015 (ii)) 2 employees in 11 September From 11 September £1.715 120,810 aggregate 2006 (Note (ii)) 2006 to 18 May 2016 1 employee 23 March 2007 From 23 March 2007 to £1.750 25,606 (Note (iii)) 22 March 2017 11 employees in 18 May 2007 From 18 May 2007 to £1.535 314,146 aggregate (Note (iii)) 17 May 2017 2,227,379 467,782 share options were granted to certain employees during the six monthsended 30 June 2007. There is no consideration in connection with all shareoptions granted. Upon the departure of 3 employees, 373,131 share optionslapsed during the six months ended 30 June 2007. Save as mentioned above, noother share options were cancelled or exercised or lapsed during the six monthsended 30 June 2007. The Company has no legal or constructive obligation torepurchase or settle the share options in cash. Notes: (i) Options were granted on 4 June 2005, conditionally upon theCompany's Admission which took place on 19 May 2006 (the "Admission Date"). (ii) The share options granted to certain founders are subjectto, amongst other relevant vesting criteria, the vesting schedule of 50% on thefirst anniversary of the Admission Date and 25% on each of the second and thirdanniversaries of the Admission Date. The share options granted to non-foundersare subject to, amongst other relevant vesting criteria, the vesting schedule ofone-third on each of the first, second and third anniversaries of the AdmissionDate. (iii) The share options granted are subject to, amongst otherrelevant vesting criteria, the vesting schedule of one-third on each of thefirst, second and third anniversaries of the date of grant of share options. HUTCHISON CHINA MEDITECH LIMITED NOTES TO THE CONDENSED CONSOLIDATED INTERIM ACCOUNTS 10 Share capital (Continued) (b) Share option scheme (Continued) The fair value of share options granted under the Share Option Scheme determinedusing the Binomial Model is as follows: Effective date of grant of share 19 May 2006 11 September 2006 23 March 2007 18 May 2007 options Value of each share option £1.546 £0.553 £0.635 £0.533 Total value of the Share Option £2,732,305 £66,572 £16,261 £167,317 Scheme (Note (i)) Significant inputs into the valuation model: Exercise price £1.090 £1.715 £1.750 £1.535 Share price at effective grant £2.5050 £1.7325 £1.7900 £1.5400 date Expected volatility (Note (ii)) 38.8% 38.8% 40.0% 40.0% Risk-free interest rate 4.540% 4.766% 4.834% 5.098% Life of share options 9.04 years 9.69 years 10 years 10 years Expected dividend yield 0% 0% 0% 0% Notes: (i) The fair value of share options in connection with the2,227,379 share options granted amounting to £2,982,455 (equivalent toUS$5,973,000) is to be recognised as expense of the Group over the vestingperiod as mentioned in the notes above from the effective date of grant of shareoptions. The amount recognised as expense for the six months ended 30 June 2007amounted to US$1,619,000 (2006: US$427,000). (i) The volatility of the underlying stock during the life ofthe share options is estimated based on the historical volatility of thecomparable companies for the past one to two years as of the respectivevaluation date, that is, the effective date of grant of share options, sincethere is no or only a relatively short period of trading record of the Company'sshares at the respective grant dates. HUTCHISON CHINA MEDITECH LIMITED NOTES TO THE CONDENSED CONSOLIDATED INTERIM ACCOUNTS 11 Note to condensed consolidated cash flow statement Reconciliation of loss for the period to cash used in operations Six months ended 30 June 2007 2006 US$'000 US$'000 Loss for the period (4,702) (3,092) Adjustments for:Tax charge 508 -Share-based compensation expense 1,619 427Amortisation of trademarks, patents and others and 143 122leasehold landDepreciation on property, plant and equipment 1,548 1,354Loss on disposal of property, plant and equipment 18 39Interest income (41) (325)Interest expense 172 189 (735) (1,286)Changes in working capital:- decrease in inventories 332 312- increase in bill and trade receivables (8,428) (5,658)- decrease in other receivables and prepayments 25 251- increase in trade payables 2,596 48- increase in other payables and accruals and amounts due 2,201 2,273to related parties Cash used in operations (4,009) (4,060) 12 Significant related party transactions Save as disclosed above, the Group has the following significant transactionsduring the period with related parties which were carried out in the normalcourse of business at terms determined and agreed by the relevant parties: Six months ended 30 June 2007 2006 US$'000 US$'000 Revenues: Sales of goods - Fellow subsidiaries 1,813 1,094 Expenses: Purchase of goods and raw materials - A minority shareholder of a subsidiary 253 675 Sub-contracting charges - A minority shareholder of a subsidiary 532 434 HUTCHISON CHINA MEDITECH LIMITED NOTES TO THE CONDENSED CONSOLIDATED INTERIM ACCOUNTS 12 Significant related party transactions (Continued) Six months ended 30 June 2007 2006 US$'000 US$'000 Expenses: Management service fee - An intermediate holding company 437 184 Technology fee - A minority shareholder of a subsidiary 121 151 Key management compensation borne by an intermediate holding company - Wages, salaries and bonus - 100 - Pension costs - defined contribution plans - 5 Other administrative expenses borne by an intermediate - 267 holding company No transactions have been entered into with the directors of the Company (beingthe key management personnel) during the period other than the emoluments paidto them. 30 June 31 December 2007 2006 US$'000 US$'000 Balances with related parties included in: Trade receivables due from related parties - A fellow subsidiary 2,316 833 Trade payables due to related parties - A fellow subsidiary 532 - - A minority shareholder of a subsidiary 279 499 Amounts due to related parties - An intermediate holding company - 740 - Minority shareholders of a subsidiary 202 128 Note: Balances with related parties are unsecured, interest-free and repayable ondemand. The carrying value of balances with related parties approximates theirfair values due to the short term maturity. 13 Capital commitments The Group has the following capital commitments not provided for atthe balance sheet date: 30 June 31 December 2007 2006 US$'000 US$'000 Property, plant and equipment Authorised but not contracted for 244 161 Contracted but not provided for 4,022 739 4,266 900 REPORT ON REVIEW OF INTERIM FINANCIAL INFORMATION TO THE BOARD OF DIRECTORS OFHUTCHISON CHINA MEDITECH LIMITED(incorporated in the Cayman lslands with limited liability) Introduction We have reviewed the interim financial information set out on pages 8 to 19,which comprises the condensed consolidated balance sheet of Hutchison ChinaMediTech Limited (the "Company") and its subsidiaries (together, the "Group") asat 30 June 2007, and the condensed consolidated income statement, the condensedconsolidated statement of changes in equity and the condensed consolidated cashflow statement for the six-month period then ended, and a summary of significantaccounting policies and other explanatory notes. Management is responsible forthe preparation and presentation of this condensed consolidated interimfinancial information in accordance with International Accounting Standard 34 "Interim Financial Reporting". Our responsibility is to express a conclusion onthis interim financial information based on our review and to report ourconclusion solely to you, as a body, and for no other purpose. We do not assumeresponsibility towards or accept liability to any other person for the contentsof this report. Scope of Review We conducted our review in accordance with International Standard on ReviewEngagements 2410, "Review of Interim Financial Information Performed by theIndependent Auditor of the Entity" issued by the International Federation ofAccountants. A review of interim financial information consists of makinginquiries, primarily of persons responsible for financial and accountingmatters, and applying analytical and other review procedures. A review issubstantially less in scope than an audit conducted in accordance withInternational Standards on Auditing and consequently does not enable us toobtain assurance that we would become aware of all significant matters thatmight be identified in an audit. Accordingly, we do not express an auditopinion. Conclusion Based on our review, nothing has come to our attention that causes us to believethat the interim financial information is not prepared, in all materialrespects, in accordance with International Accounting Standard 34 "InterimFinancial Reporting". PricewaterhouseCoopersCertified Public AccountantsHong Kong, 8 August 2007 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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