9th Aug 2006 07:21
Hutchison China Meditech Limited09 August 2006 For Immediate Release Hutchison China MediTech Limited ("Chi-Med") (AIM: HCM) Financial Results for the Six Months Ended 30 June 2006 Strong Growth. Positive Outlook. • Promising drug discovery and clinical programs • Group sales up 86% to $32 million+ • Gross profit up 75% to $19.4 million • Adjusted loss before tax improved 31% to $1.9 million • Cash and cash equivalents totalled $72.6 million London: Wednesday, 9 August 2006: Chi-Med today announces its financial resultsfor the six months ended 30 June 2006, the first results of Chi-Med since itslisting on AIM in May 2006. Chi-Med is a pharmaceutical and healthcare group based primarily in China. Itfocuses on researching, developing, manufacturing and selling pharmaceuticals,health supplements and other consumer health and personal care products derivedfrom Traditional Chinese Medicine ("TCM") and botanical ingredients. It hasthree businesses: Drug Research and Development ("R&D"); China Healthcare; andConsumer Products. Its aim is to become a major player in the globalpharmaceutical and consumer healthcare markets. Sales for the six months increased by 86% to $32 million (2005: $17.2m) drivenprimarily by strong organic growth and the full period impact of HutchisonWhampoa Guangzhou Baiyunshan Chinese Medicine Company Limited ("HBYS") jointventure in the China Healthcare operations. Gross profit increased 75% to $19.4 million (2005: $11.1m) with selling expensesfalling to 42.1% of sales (2005: 52.1%) as a result of increased scale fromHBYS. Operating profitability of the China Healthcare business grew to $1.9 million,compared to a $0.1 million loss for the same period in 2005. The ChinaHealthcare operating profits partially offset increased investment in Chi-Med'sDrug R&D operations. Investment continued as planned in Drug R&D behindexpansion of the research team and new drug discovery operations, as well asprogress of US and China clinical trials on both HMPL-002 (cancer) and HMPL-004(inflammatory bowel disease). Administrative expenses across the group rose to 29.2% of sales (2005: 28.6%) asa result of costs associated with the employee share option scheme and relatingto Chi-Med's being a publicly traded company ($1.0 million). The adjusted loss before taxation (before amortization, share option charges andexpenses associated with the listing) improved to -$1.9 million (2005: -$2.7m). Loss to equity holders of Chi-Med rose to $3.8 million (2005: $2.9m). Cash and cash equivalents at the end of the period totalled $72.6 million (2005:$5.5m), following the raising of $69.8 million net proceeds from the placing ofChi-Med shares and the listing. Net cash (outflow)/inflow from operatingactivities was $(3.9) million (2005: $1.1m) due to an increase in short termtransaction related payables on the acquisition of HBYS. Commenting, Christian Hogg, CEO of Chi-Med, said: "Chi-Med has had a very successful first half, and looks forward to makingfurther substantial progress during the rest of the year. Our China Healthcare business continues to benefit from strong growth in demandfor TCM products, both over the counter and prescription, and we continue toout-perform overall China market growth. The policy changes introduced byChina's State Food and Drug Administration which we reported earlier should onlyhave a short term impact,and expectations of continuing positive progress remainunchanged. Our core drug research and development business is growing in scale. Itsclinical trials in auto-immune disease and cancer are progressing well, with thelatter now enabled by the US Food and Drug Administration to widen its INDprotocol to include platinum-based chemoradiotherapy, thereby increasing itsmarket potential by five times or more. During the first half of the year, ourscreening has led to four new lead candidates and five qualified hits in theoncology and auto-immune disease fields. We have now begun to explore drugresearch collaborations with major global pharmaceutical groups and are meetingwith a high level of interest. Sen, our consumer products brand, more than quadrupled sales, with same storesales up 21%, and we continue to explore avenues to accelerate growth, includingpartnerships with large scale international consumer groups. We remain convinced of the major reservoir TCM represents for developing newdrugs and health and wellness consumer products for the global market. Ourflotation was a milestone, which has provided additional funding for drugresearch and development and enabled our important equity incentive plan for keyemployees. We look forward to making further substantial progress in the secondhalf." An analyst presentation will be held at 9.30am today at Citigate Dewe Rogerson,3 London Wall Buildings, London, EC2M 5SY. The interim results statement is available on the website of Chi-Med:www.chi-med.com * The Traditional Chinese Medicine Industry is defined as raw TCM herbs andState Food & Drug Administration registered TCM health foods, OTC drugs, andprescription drugs. Source: China Pharmaceutical Statistical Yearbook1999-2004. 2005 data not yet published. + In US dollar currency unless stated otherwise. Enquiries Chi-Med Christian Hogg, CEO Telephone: August 9: +44 (0) 20 7638 9571 www.Chi-Med.com Citigate Dewe Rogerson Telephone: +44 (0) 20 7638 9571 Anthony Carlisle (07973 611 888) Chris Gardner (07903 737 649) Yvonne Alexander (07866 610682) INTRODUCTION In 1999 Hutchison China MediTech Limited ("Chi-Med") identified a majoropportunity to modernise and globalise the Traditional Chinese Medicine ("TCM")industry*. In China this industry* is estimated at over $15 billion+ annuallyand is growing rapidly with the expansion of the Chinese economy. Outside Chinahowever, the TCM industry is a fraction of the size and remains largelyundeveloped and unexplored. During the past six 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. Through its three core business units: Drug R&D; China healthcare; and consumerproducts, Chi-Med is now positioned to unlock the global potential of the TCMindustry, thereby delivering high-growth and ultimately achieving the vision ofbecoming a major player in the global pharmaceutical and consumer productsbusinesses. YEAR TO DATE RESULTS • Chi-Med sales up 86% to $32 million (2005: $17.2m); loss attributable to equity holders to $3.8 million (2005: $2.9m) • Drug R&D investment increased behind expansion of the research team and new drug discovery operations, as well as progress of US and China clinical trials on both HMPL-002 (cancer) and HMPL-004 (inflamatory bowel disease); operating loss increased to $3.3 million (2005: $2.1m) • China healthcare sales up 84% to $31.1 million (2005: $16.9m) due to full period consolidation and post joint venture growth of HBYS; operating profit $1.9m (2005: -$0.1m) • Consumer products sales up 257% to $0.9 million (2005: $0.2m) with expansion of Sen retail outlets and operating losses being tightly controlled to $0.48 million (2005: $0.52m). • £40m ($75.2m) gross fundraising from placement of new shares at IPO. CHAIRMAN'S STATEMENT We are delighted to report our first financial period as a publicly tradedcompany following our IPO in May 2006. Our vision is simple; our intention is to become a major player in the globalpharmaceutical and consumer products businesses. Strategically, we believe that the enormous TCM industry in China represents areservoir of pharmaceutical activity and proven safety from which we coulddevelop new drugs, and a breeding ground for highly attractive health andwellness based global consumer products and concepts. We believe that the decades of success that Hutchison Whampoa Limited hasenjoyed in China is an advantage for Chi-Med in the race to explore andcommercialise the pharmaceutical and consumer products opportunities that we arediscovering in the TCM industry. In May 2006, Chi-Med was admitted to trading on the Alternative InvestmentMarket ("AIM") in London. We did this at a relatively early stage in Chi-Med'sdevelopment, in order to create independence, a higher profile, and provide acurrency, in the form of the share option scheme, to retain key personnel. The promise of the share option scheme, as set out in the admission document,has been used to attract key staff during the past six years. The exercise priceof 109p is a discount of 60% versus the 275p admission price. This one-timediscount is recognition for the work of the past six years; future options willbe granted at market price. The share option scheme is limited to no more than5% of the enlarged capital of Chi-Med. The cost of options outstanding is $5.4million over the following three years. In addition to completing the IPO, we have delivered strong results on our threecore businesses. Financial review Sales for the six months to 30 June 2006 were $32 million (2005: $17.2m), anincrease of 86%. This was driven primarily by the fast growth and full-periodimpact of the successful HBYS joint venture that commenced operations in May 2005. Gross profit for the period was $19.4 million (2005: $11.1m). Selling expensesas a percentage of sales dropped to 42.1% (2005: 52.1%) as a result of theincreased scale from HBYS. Administrative expenses as a percentage of salesrose to 29.2% (2005: 28.6%) as a result of accounting for our employee shareoption scheme and expenses resulting from being a publicly traded company. Lossattributable to equity holders of Chi-Med grew 29% to -$3.8 million (2005:-$2.9m). During the period we continued to grow operating profitability on the Chinahealthcare business to $1.9 million (2005: -$0.1m) in line with our strategy ofusing China healthcare operating profits to partially offset operating losses onour Drug R&D operations (up 55% to -$3.3 million; 2005: -$2.1m). The impact of the employee share option scheme of Chi-Med, as well as expensesresulting from being a publicly traded company began to be felt in the periodwith expenses of $1.0 million (2005: $0). Adjusted loss before taxation(before amortisation, share option charges, and the expenses referred to above)was reduced by 31% to -$1.9 million (2005: -$2.7m). Cash and Financing In May we raised $75.2 million ($70.1m net of expenses) by the issue of14,545,454 new ordinary shares at an issue price of 275 pence through an IPO onAIM in London. Our net cash outflow from operating activities during the periodwas -$3.9 million (2005: inflow of $1.1m due to an increase in short-termtransaction related payables on the HBYS joint venture). Cash and cashequivalents at the end of the period totalled $72.6 million (2005: $5.5m) andare sufficient to fund Drug R&D operations, one or more China healthcareacquisitions; and the expansion of the Sen consumer products business in thefollowing three years. Outlook We are very excited and confident about the future prospects of Chi-Med. Withthe full support of Hutchison Whampoa and its unrivalled goodwill, experience,and capabilities throughout China, Chi-Med hopes to be well positioned to secureattractive positions in joint ventures in the China healthcare industry and torealise synergy and rapid growth from these activities. Our strong managementand R&D team are also well placed to capitalise on the substantial growthpotential in the global pharmaceutical and consumer products businesses. 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 To, Executive Chairman, 8 August 2006 CEO'S REVIEW OF OPERATIONS We are pleased to present the review of our three core operating businesses:Drug R&D; China healthcare; and consumer products for the period ended 30 June2006. Drug R&D Chi-Med has continued to increase investment in Drug R&D operations in line withour agreed discovery and development plans. As a result, the operating losses ofHutchison MediPharma Limited ("HMPL") increased 55% to -$3.3 million (2005:-$2.1m). The IPO and employee share option scheme have enabled Chi-Med tofulfil promises made during the recruitment of our team of extraordinarilyexperienced Drug R&D personnel from big Pharma and Biotech companies in theUnited States. These key personnel have helped develop HMPL into a highlysophisticated and productive single molecular entity discovery and developmentoperation. During the first six months of 2006, the 94-person research team of HMPL (17PhD; 45 Master; and 23 Bachelor level) continued to build new global standard invitro assay platforms (to a total of 42) and in vivo models (a total of 58) inthe oncology and auto-immune areas. HMPL performed thousands of assays inscreening substances for activity, most of which were single entities eithersynthesized or isolated from botanical and TCM sources by HMPL. This screeningidentified over 150 hits, which in turn has led to four new lead candidates andfive new qualified hits (i.e. robust IP) in the fields of oncology andauto-immune disease. On the development side, HMPL is progressing well. Clinical trials onHMPL-002, a cancer product, in the United States (head & neck cancer) andChina (non-small cell lung cancer) progress to plan. As recently announced, theUS Food and Drug Administration has allowed HMPL to amend the HMPL-002 protocolto include its use in combination with platinum-based chemoradiotherapy versusthe previous plan of radiotherapy alone. This will increase HMPL-002 marketpotential at least five-fold. Clinical trials on HMPL-004, an inflammatory bowel disease product, in theUnited States (Crohn's disease) and China (ulcerative colitis), are ahead ofrecruitment targets with lower than anticipated dropout rates. It should be noted, HMPL's current monthly cash burn of approximately $0.7million ($0.3m discovery/pre clinical; $0.2m clinical; and $0.2m overhead anddepreciation) is extremely low for a 94-person team with the qualificationprofile and discovery and development productivity that HMPL has shown duringthe period. Being based in China is a major cost advantage for HMPL. We have begun to explore HMPL drug research collaborations with big Pharma andhave been met with a high level of interest. China Healthcare During the period, the China healthcare business of Chi-Med displayed continuedoverall strength with sales growth of 84% to $31.1 million (2005: $16.9m).Operating profit grew to $1.9 million (2005: - $0.1m). Looking at the market more broadly, the fragmented TCM industry* in China grewat over 20% per annum from 2001 to 2004. The industry is set for continuedgrowth of a similar magnitude for the foreseeable future driven by expansion inthe Chinese economy and mandatory employee insurance programmes that reimburse the cost of healthcare. During the period, two State Food and Drug Administration (SFDA) policy shiftswere imposed on the China healthcare business: one limiting reimbursement ofSheng Mai injection to emergency use and one banning the use of medicalrepresentatives in hospitals. These policy shifts are not of long-term concern to Chi-Med. Sheng Mai is arelatively small part of our business with sales of $0.5 million during theperiod (2005: $0.7m) or only 1.6% of total sales. Furthermore, the medical representative policy shift has affected all companiesin the prescription drug industry, thereby challenging Shanghai HutchisonPharmaceuticals Limited ("SHPL") in the short-term to re-tool its commercialmodel, but not presenting SHPL with a long-term issue. China is a rapidlydeveloping healthcare market where regulatory change is normal. To succeed wewill react quickly to change by exploiting our experience in the China market,as well as protecting ourselves with an increasingly diversified productportfolio. During the period, HBYS, our joint venture which began operations in May 2005,has performed well with May-June 2006 sales up 20% to $5.4 million (2005:$4.5m). Sales for the period grew 22% to $19.1 million (2005: $15.7munaudited). HBYS is proof of Chi-Med's ability to secure fast growth,profitable joint ventures in China healthcare. SHPL succeeded in holding flat, with sales down only 2% to $5.8 million (2005:$6.0m), despite the emerging impact of the two SFDA policy shifts. SHPL is abusiness with very high potential due to its main product, She Xiang Bao Xinpill ("SXBXP"), which has grown 18% compound annually in the past four years.Underlying in-market consumption of SXBXP during the period grew 16% to $4.8million (2005: $4.1m) far exceeding invoice sales of $4.2 million. This healthyin-market consumption exists in both hospitals (up 14% to $3.5 million) and indrugstores (up 20% to $1.3 million). Hutchison Healthcare Limited ("HHL"), Chi-Med's health food business performedbelow expectations during the period after an average of 71% growth on our mainproduct, Nao Ling Tong capsule ("NLT"), in each of the past two years. WhileNLT still has major expansion potential, we will continue to expand our productportfolio to reduce reliance on any one product. The expansion of the Zhi LingTong ("ZLT") infant nutrition line and the launch of two new schools channelproducts (Health Goal growth liquid and NLT 1+1+1 study driving force) in 2006are expected to help to HHL's growth. Chi-Med is in negotiations with multiple China healthcare joint venture targets. Our hope is to replicate, potentially on a larger scale, the success of theHBYS deal. Consumer Products Sales in Chi-Med's consumer products business, Sen Medicine Company Limited ("Sen"), have grown 257% to $0.9 million (2005: $0.2m). Operating losses are down8% to -$0.48m (2005: -$0.52m). Same store sales (for stores open more than oneyear) increased 21% during the period compared to the same period in 2005. Thisgives us confidence to open more stores in London starting with a 900 sq.ft.store-in-store in Harvey Nichols in Knightsbridge in September 2006. The May 2006 launch of a new range of high-end Sen skin care products has beenwell received and represents a good opportunity to broaden distribution to thirdparty retailers. We continue to explore avenues to accelerate growth on Sen includingpartnerships with large-scale global consumer products groups. Outlook Our China healthcare business is a solid, fast growth unit. We hope to growfaster than the industry's 20% per annum through further joint ventures and thecommercial synergies that will come from consolidation. This we feel isconservative given that we saw 67% compound annual growth from 2003 through2005. We have a very strong track record in China M&A. We know how to identify,acquire, integrate, and modernise China healthcare targets. We are now workingon several potential joint ventures that we expect will create value forChi-Med. The Drug R&D business is a long-term project and although costs are very tightlycontrolled, represents a major investment for Chi-Med. We continue to believethis investment is justified given our world-class team and the major costadvantages that come from being based in China. HMPL has a strong track recordof efficient productivity in oncology and auto-immune new drug discovery. Weexpect to validate our position in these areas by entering collaborations withbig Pharma. On the development front, we expect our clinical trials on HMPL-002 and HMPL-004in the US and China to stay on course with respect to recruitment, treatment,and out-licensing revenue post US Phase II clinical trials. Our consumer products business will continue to grow through store expansion.Our focus will continue to be establishment of the Sen brand in the London andUK markets. Chi-Med has a very solid foundation of operations that are the result of oversix years hard work. This foundation in Drug R&D; China healthcare; andconsumer products, represents an ideal spring board for fast growth. We areconfident that Chi-Med will achieve a great deal in the coming years. Christian Hogg, Chief Executive Officer, 8 August 2006 HUTCHISON CHINA MEDITECH LIMITED CONDENSED CONSOLIDATED INCOME STATEMENTFOR THE SIX MONTHS PERIOD ENDED 30 JUNE 2006 Unaudited Six months period ended 30 June Note 2006 2005 US$'000 US$'000 Sales 4 31,999 17,174Cost of sales (12,615) (6,090) Gross profit 19,384 11,084Selling expenses (13,461) (8,953)Administrative expenses (9,332) (4,908)Other net operating income 5 506 272 Operating loss 6 (2,903) (2,505)Finance costs 7 (189) (240)Share of results of an associate - (7) Loss before taxation (3,092) (2,752)Taxation charge 8 - (140) Loss for the period (3,092) (2,892) Attributable to:Minority interests 681 32Equity holders of the Company (3,773) (2,924) (3,092) (2,892) US$ US$ per share per share Loss per share 9 (0.3101) (1,462,000) The notes on pages 11 to 22 are an integral part of these condensed interimaccounts. HUTCHISON CHINA MEDITECH LIMITED CONDENSED CONSOLIDATED BALANCE SHEETAS AT 30 JUNE 2006 Unaudited Audited Note 30 June 31 December 2006 2005 US$'000 US$'000ASSETSNon -current assets Property, plant and equipment 10 22,380 22,012 Leasehold land prepayments 4,149 4,085 Intangible assets 6,820 6,810 Other non-current assets 124 - 33,473 32,907 Current assets Inventories 8,657 8,678 Trade receivables 13 18,699 12,864 Other receivables and prepayments 2,145 2,239 Amounts due from related parties 13 487 577 Cash and cash equivalents 72,613 5,617 102,601 29,975 Total assets 136,074 62,882 EQUITYCapital and reserves attributable to the Company's equityholders Share capital 11 51,212 - Reserves 54,905 (33,670) 106,117 (33,670)Minority interests 6,393 5,661 Total equity/(deficits) 112,510 (28,009) LIABILITIESCurrent liabilities Trade payables 13 4,061 3,938 Other payables and accruals 11,466 8,103 Amounts due to related parties 13 575 71,465 Short-term bank loans 7,462 7,385 Total liabilities 23,564 90,891 Total equity and liabilities 136,074 62,882 The notes on pages 11 to 22 are an integral part of these condensed interimaccounts. HUTCHISON CHINA MEDITECH LIMITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITYFOR THE SIX MONTHS PERIOD ENDED 30 JUNE 2006 Unaudited Attributable to equity holders of the Company Share Share Share- Exchange Accumu- Minority Total capital premium based reserve lated interests compensa- losses tion reserve US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 As at 1 January - - - (31) (27,368) - (27,399)2005Currency - - - (43) - - (43)translationdifferences(Loss)/profit for - - - - (2,924) 32 (2,892)the periodReserves - - - 38 - - 38transferred toincome statementupon disposal of asubsidiary As at 30 June - - - (36) (30,292) 32 (30,296)2005 As at 1 January - - - 475 (34,145) 5,661 (28,009)2006Currency - - - 411 - - 411translationdifferences(Loss)/profit for - - - - (3,773) 681 (3,092)the periodIssue of shares 51,212 91,510 - - - - 142,722(Note 11)Acquisition of a - - - 51 51subsidiary by ajointly controlled - -entityEmployee share - - 427 - - - 427option benefits As at 30 June 51,212 91,510 427 886 (37,918) 6,393 112,5102006 The notes on pages 11 to 22 are an integral part of these condensed interimaccounts. HUTCHISON CHINA MEDITECH LIMITED CONDENSED CONSOLIDATED CASH FLOW STATEMENTFOR THE SIX MONTHS PERIOD ENDED 30 JUNE 2006 Unaudited Six months period ended 30 June Note 2006 2005 US$'000 US$'000 Cash flows from operating activitiesCash (used in)/generated from operations 12 (4,060) 1,262Interest received 325 82Interest paid (189) (240) Net cash (outflow)/inflow from operating activities (3,924) 1,104 Cash flows from investing activitiesPurchase of property, plant and equipment (1,406) (515)Purchase of intangible assets (43) -Addition of other non-current assets (124) -Net capital injection in the formation of jointly - (11,675)controlled entitiesAcquisition of a subsidiary by a jointly controlled (4) -entityDisposal of a subsidiary - (14,518) Net cash used in investing activities (1,577) (26,708) Cash flows from financing activitiesIncrease in loans from immediate holding company 2,479 15,213Repayment of short-term bank loans - (302)Issue of shares, net of share issuance costs 70,109 - Net cash generated from financing activities 72,588 14,911 Net increase/(decrease) in cash and cash equivalents 67,087 (10,693) Cash and cash equivalents at beginning of period 5,617 16,274Exchange differences (91) (75) Cash and cash equivalents at end of period 72,613 5,506 The notes on pages 11 to 22 are an integral part of these condensed interimaccounts. HUTCHISON CHINA MEDITECH LIMITEDNOTES TO THE CONDENSED INTERIM ACCOUNTS 1 General information Hutchison China MediTech Limited (the "Company") and its subsidiaries (togetherthe "Group") are principally engaged in the manufacturing, distribution andsales of traditional Chinese medicine ("TCM") and healthcare products. The Groupis also engaged in carrying out pharmaceutical research and development. TheGroup has manufacturing plants in Shanghai and Guangzhou in the People'sRepublic of China (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. On 4 August 2005, the Company changed itsname from Hutchison Global MediTech Limited to Hutchison China MediTech Limited.The address of its registered office is Ugland House, P.O Box 309, George Town,Grand Cayman, Cayman Islands, British West Indies. The Company's ordinary shares were admitted to trading on the AlternativeInvestment Market operated by the London Stock Exchange ("AIM"). Thesecondensed interim accounts are presented in thousands of United States Dollars("US$'000"), unless otherwise stated, and was approved for issue by the Board ofDirectors on 8 August 2006. 2 Basis of preparation The Company has a financial year end date of 31 December. Thesecondensed interim accounts for the six months period ended 30 June 2006 has beenprepared in accordance with International Accounting Standard 34, "Interimfinancial reporting". In connection with the Company's admission on AIM (the "Admission"), the Company issued an admission document (the "Admission Document")on 10 May 2006 and an accountants' report (the "Accountants' Report") isincluded in the Admission Document. These condensed interim accounts should beread in conjunction with the financial information of the Group for the yearended 31 December 2005 as set out in the Accountants' Report. 3 Accounting policies The accounting policies adopted are consistent with those used in theAccountant's Report. The following amendments to standards and interpretationsare mandatory for financial year ending 31 December 2006. IAS 19 (Amendment) Actuarial Gains and Losses, Group Plans and Disclosures IAS 21 (Amendment) Net Investment in a Foreign Operation IAS 39 (Amendment) Cash Flow Hedge Accounting of Forecast Intra-group Transactions IAS 39 (Amendment) The Fair Value Option IAS 39 and IFRS 4 (Amendment) Financial Guarantee Contracts IFRS 1 and IFRS 6 (Amendment) First-time Adoption of International Financial Reporting Standards and Exploration for and Evaluation of Mineral Resources IFRIC 4 Determining whether an Arrangement contains a Lease IFRIC 5 Rights to Interests Arising from Decommissioning, Restoration and Environmental Rehabilitation Funds IFRIC 6 Liabilities arising from Participating in a Specific Market - Waste Electrical and Electronic Equipment The adoption of the above amendments to standards and interpretations did nothave any significant financial impact to the Group. HUTCHISON CHINA MEDITECH LIMITED NOTES TO THE CONDENSED INTERIM ACCOUNTS 4 Segment information The Group is principally engaged in the manufacturing, distribution and sales oftraditional Chinese medicine and healthcare products. The Group is also engagedin carrying out pharmaceutical research and development. Business segments Drug China Consumer Corporate TotalSix months period research healthcare products unallocatedended 30 June 2006 and expenses development US$'000 US$'000 US$'000 US$'000 US$'000 Sales - 31,129 870 - 31,999 Operating profit/ (3,255) 1,871 (480) (1,039) (2,903)(loss) Business segments Drug China Consumer Corporate TotalSix months period research healthcare products unallocatedended 30 June 2005 and expenses development US$'000 US$'000 US$'000 US$'000 US$'000 Sales - 16,930 244 - 17,174 Operating profit/ (2,098) (95) (523) 211 (2,505)(loss) Note: (a) Included in the corporate unallocated expenses for the six months period ended 30 June 2006 were share-based compensation expenses of US$427,000 (2005: Nil). HUTCHISON CHINA MEDITECH LIMITED NOTES TO THE CONDENSED INTERIM ACCOUNTS 5 Other net operating income Six months period ended 30 June 2006 2005 US$'000 US$'000 Interest income 325 153 Net gain on disposal of a subsidiary - 195 Net foreign exchange gains 84 95 Other operating income 166 43 Other operating expenses (69) (214) 506 272 6 Operating loss Operating loss is stated after charging the following: Six months period ended 30 June 2006 2005 US$'000 US$'000 Amortisation of intangible assets and leasehold land 122 103 prepayments Cost of inventories recognised as expense 11,415 5,103 Depreciation of property, plant and equipment 1,354 956 Operating lease rentals in respect of land and buildings 588 266 Research and development expense 1,644 802 Employee benefits expense 6,525 3,324 7 Finance costs Six months period ended 30 June 2006 2005 US$'000 US$'000 Interest expense on amount due to a joint venture partner - 14 of a jointly controlled entity Interest expense on short-term bank loans 189 226 189 240 HUTCHISON CHINA MEDITECH LIMITEDNOTES TO THE CONDENSED INTERIM ACCOUNTS 8 Taxation charge Six months period ended 30 June 2006 2005 US$'000 US$'000 Current tax - 20 Deferred income tax - 120 - 140 (a) The Group had no estimated assessable profit for the six months period ended 30 June 2006. (b) Pursuant to the relevant PRC income tax rules and regulations, as foreign invested enterprises, special income tax rates ranging from 15% to 27% have been granted to certain subsidiaries and jointly controlled entities. (c) As approved by the tax authorities, certain subsidiaries and jointly controlled entities are also entitled to a two year exemption from income taxes followed by a 50% reduction in income taxes for the following three years, commencing from their first cumulative profit-making year net of losses carried forward. 9 Loss per share Basic loss per share is calculated by dividing the loss attributable to equityholders of the Company by the weighted average number of ordinary shares inissue during the period. Six months period ended 30 June 2006 2005 Loss attributable to equity holders of the Company (3,773) (2,924) (US$'000) Weighted average number of ordinary shares in issue 12,166,417 2 Basic loss per share (US$ per share) (0.3101) (1,462,000) Diluted loss per share is not presented as the exercise of theemployee share option would have an antidilutive effect. HUTCHISON CHINA MEDITECH LIMITED NOTES TO THE CONDENSED INTERIM ACCOUNTS 10 Property, plant and equipment As at 30 June 2006 2005 US$'000 US$'000 Net book value as at 1 January 22,012 13,322 Additions 1,406 9,239 Acquisition of a subsidiary by a jointly controlled 66 - entity Disposal of a subsidiary - (73) Disposals (39) - Depreciation for the period (1,354) (956) Exchange differences 289 (49) Net book value as at 30 June 22,380 21,483 HUTCHISON CHINA MEDITECH LIMITED NOTES TO THE CONDENSED INTERIM ACCOUNTS 11 Share capital (a) Authorised and issued capital Number of US$ shares Authorised: As at 1st January 2005 and 31st December 2005 50,000 50,000 Increase in authorised share capital (note (i)) 74,950,000 74,950,000 As at 30 June 2006 75,000,000 75,000,000 Number of US$ shares Issued and fully paid: As at 1st January 2005 and 31st December 2005 2 2 Capitalisation issue (note (ii)) 36,666,665 36,666,665 Issue of shares for offering (note (iii)) 14,545,454 14,545,454 As at 30 June 2006 51,212,121 51,212,121 Notes: (i) Pursuant to a resolution passed by the then sole shareholder of the Company on 9 May 2006, conditional upon Admission taking place not later than 19 May 2006, the authorised share capital of the Company was increased from US$50,000 to US$75,000,000 by the creation of 74,950,000 shares of US$1 each. (ii) On 9 May 2006, conditional upon Admission taking place not later than 19 May 2006, an amount due to Hutchison Healthcare Holdings Limited ("HHHL"), the immediate holding company of the Company, amounting to HK$575,219,920 (equivalent to US$73,746,000) was capitalised as 36,666,665 shares of the Company of US$1 each, credited as fully paid. By the time of Admission, these new shares rank pari passu in all respects with the then existing shares. (iii) On 19 May 2006, the Company completed an offering of 14,545,454 shares with a par value of US$1 each, of which 14,537,704 shares and 7,750 shares were allotted and issued at a price of £2.75 and HK$39.62 respectively, for an aggregate consideration equivalent to US$75,026,000. All these shares rank pari passu in all respects with the then existing shares. These shares commenced trading on AIM on 19 May 2006. (b) Share option scheme On 4 June 2005, the Company adopted a share option scheme (the "Share OptionScheme"), conditional on Admission, pursuant to which the Board of Directors ofthe Company may, at its discretion, offer any employees and directors (includingexecutive and non-executive directors other than independent non-executivedirectors) of the Company, its subsidiaries and jointly controlled entitiesoptions to subscribe for shares of the Company. As of 30 June 2006, optionsrepresenting approximately 3.85% of the issued share capital of the Company weregranted to a director of the Company and certain employees of the Group and itsjointly controlled entities under the Share Option Scheme which are exercisablewithin a period of ten years from the offer date subject to vesting on the first, second and third anniversaries of the Company's Admission on AIM. HUTCHISON CHINA MEDITECH LIMITED NOTES TO THE CONDENSED INTERIM ACCOUNTS 11 Share capital (Continued) (b) Share option scheme (Continued) Details of the options granted under the Share Option Scheme outstanding as at30 June 2006 are as follows: Effective date Exercise period Exercise Number of shares of grant of share options price subject to the (Note (i)) (Note (ii)) options Christian Hogg 19 May 2006 On Admission to 768,182 3 June 2015 £1.09 11 employees in 19 May 2006 On Admission to 1,203,483 aggregate 3 June 2015 £1.09 1,971,665 There is no consideration in connection with all options granted. Upon thedeparture of an employee, 25,606 options lapsed during the six months periodended 30 June 2006. Save as mentioned above, no other share options werecancelled or exercised or lapsed during the six months period ended 30 June2006. The Company has no legal or constructive obligation to repurchase orsettle the options in cash. Notes: (i) Options were granted to a director of the Company and certain employees of the Group and its jointly controlled entities on 4 June 2005 conditionally upon Admission which took place on 19 May 2006. (ii) The share options granted to certain founders are subject to amongst other relevant vesting criteria the vesting schedule of 50% on the first anniversary of the Company's Admission and 25% on each of the second and third anniversaries of the Company's Admission. The share options granted to non-founders are subject to amongst other relevant vesting criteria the vesting schedule of one third on each of the first, second and third anniversaries of the Company's Admission. (iii) The fair value of share options in connection with the 1,971,665 options granted amounting to £3,049,000 (equivalent to US$5,427,000) is to be recognised as expense of the Group over the 3 years vesting periods as mentioned in note (ii) above from the effective grant date. The amount recognised as expense for the 6 month period ended 30th June 2006 amounted to US$427,000 (2005: Nil). HUTCHISON CHINA MEDITECH LIMITED NOTES TO THE CONDENSED INTERIM ACCOUNTS 11 Share capital (Continued) (b) Share option scheme (Continued) The fair value of options granted under the Share Option Scheme determined usingthe Binomial Model is as follows: Effective date of grant of share option (Note (i) above) 19 May 2006 Value of each option £1.546 Total value of share option scheme £3,049,057 Significant inputs into the valuation model: Exercise price £1.09 Share price at effective grant date £2.505 Expected volatility (Note) 38.8% Risk-free interest rate 4.54% Expected life of options 9.04 years Expected dividend yield 0% Note: The volatility of the underlying stock during the life of the options isestimated based on the historical volatility of the comparable companies for thepast one year as of the valuation date, that is, the effective grant date, sincethere is no trading record of the Company's shares at the grant date. HUTCHISON CHINA MEDITECH LIMITED NOTES TO THE CONDENSED INTERIM ACCOUNTS 12 Note to condensed consolidated cash flow statement Reconciliation of loss for the period to net cash (used in)/generated fromoperations Six months period ended 30 June 2006 2005 US$'000 US$'000 Loss for the period (3,092) (2,892) Adjustments for:Taxation - 140Share of results of an associate - 7Share-based compensation expense 427 -Amortisation of intangible assets and leasehold land 122 103prepaymentsDepreciation on property, plant and equipment 1,354 956Loss on disposal of property, plant and equipment 39 -Interest income (325) (153)Interest expense 189 240Net gain on disposal of a subsidiary - (195) (1,286) (1,794)Changes in working capital:- decrease/(increase) in inventories 312 (321)- (increase) in trade receivables (5,658) (871)- decrease/(increase) in other receivables and prepayments and 251 (4,516)amounts due from related parties- increase in trade payables 48 176- increase in other payables and accruals and amounts due to 2,273 8,588related parties Cash (used in)/generated from operations (4,060) 1,262 HUTCHISON CHINA MEDITECH LIMITED NOTES TO THE CONDENSED INTERIM ACCOUNTS 13 Significant related party transactions The Group is controlled by Hutchison Healthcare Holdings Limited ("HHHL") (acompany incorporated in the British Virgin Islands), which owns approximately72% of the Company's shares. The ultimate holding company of the Company isHutchison Whampoa Limited, a company incorporated and listed in Hong Kong. The major related parties that had transactions with the Group were as follows: Name of related parties Relationship with the Company Hutchison Whampoa (China) Limited ("HWCL") An intermediate holding company HHHL The immediate holding company Cascade Trading Limited A fellow subsidiary Hutchison Whampoa (China) Commerce Limited A fellow subsidiary Hutchison Whampoa Enterprises Limited A fellow subsidiary Shanghai Traditional Chinese Medicine Co., Ltd. (" A joint venture partner of a jointly controlled STCM") entity Shanghai Lei Yun Shang Pharmaceuticals Co., Ltd. A subsidiary of STCM Shanghai Huayu Pharmaceuticals Co., Ltd. A subsidiary of STCM Ningxia Dyne Pharmaceuticals Co., Ltd. A minority shareholder of a subsidiary Masson Holdings Co., Ltd. A minority shareholder of a subsidiary A minority shareholder of a subsidiary Bestchosen Limited Guangzhou Baiyunshan Pharmaceuticals Holdings Co., A joint venture partner of a jointly controlled Ltd. entity The following significant transactions were carried out with related parties forthe six months ended 30 June 2006: Six months period ended 30 June 2006 2005 US$'000 US$'000 Revenues: Sales of goods and materials - Shanghai Lei Yun Shang Pharmaceuticals Co., Ltd. 2,068 2,731 - Cascade Trading Limited 1,094 914 HUTCHISON CHINA MEDITECH LIMITED NOTES TO THE CONDENSED INTERIM ACCOUNTS 13 Significant related party transactions (Continued) Six months period ended 30 June 2006 2005 US$'000 US$'000 Expenses: Purchase of goods and raw materials - Shanghai Huayu Pharamaceuticals Co., Ltd. 461 401 - Masson Holdings Co., Ltd. 675 375 Sub-contracting charge - Masson Holdings Co., Ltd. 434 522 Technology fee - Masson Holdings Co., Ltd. 151 155 Key management compensation borne by the Group - Wages, salaries and bonus 155 - - Pension costs - defined contribution plans 4 - - Other employee benefits - - Other items not recognised in income statement Key management compensation borne by HWCL - Wages, salaries and bonus 100 211 - Pension costs - defined contribution plans 5 9 - Other employee benefits - 1 Other administrative expenses borne by HWCL 267 728 These transactions are entered into at terms agreed with these related partiesin the ordinary course of the Group's business. No transactions have been entered into with the directors of the Company (beingthe key management personnel) during the six months period ended 30 June 2006other than the emoluments paid to them (being the key management personnelcompensation) as disclosed. 30 June 31 December 2006 2005 US$'000 US$'000 Balances with related parties included in: Trade receivables due from related parties - Shanghai Lei Yun Shang Pharmaceuticals Co., Ltd. 2,609 2,484 - Hutchison Whampoa (China) Commerce Limited 476 - 3,085 2,484 Amounts due from related parties - Guangzhou Baiyunshan Pharmaceuticals Holdings Co., Ltd. 487 577 HUTCHISON CHINA MEDITECH LIMITED NOTES TO THE CONDENSED INTERIM ACCOUNTS 13 Significant related party transactions (Continued) 30 Jun 2006 31 Dec 2005 US$'000 US$'000 Balances with related parties included in: Trade payables due to related parties - Shanghai Huayu Pharmaceuticals Co., Ltd. 383 174 - Ningxia Dyne Pharmaceuticals Co., Ltd. 263 271 - Masson Holdings Co., Ltd. 16 - 662 445 Amounts due to related parties - Hutchison Whampoa Enterprises Limited - 1,103 - HHHL 274 62,891 - HWCL - 7,273 - STCM 53 53 - Ningxia Dyne Pharmaceuticals Co., Ltd. 77 85 - Masson Holdings Co., Ltd. 161 60 - Hutchison Whampoa (China) Commerce Limited 10 - 575 71,465 Minority interests - amount due to a minority shareholder of a subsidiary - Bestchosen Limited 5,253 5,253 Note: Except for the amount due to a minority shareholder of a subsidiary which doesnot have fixed repayment terms, balances with related parties are unsecured,interest-free and are repayable on demand. The amount due to a minorityshareholder of a subsidiary represents the minority shareholder's equitycontributions to the subsidiary. The carrying value of other balances withrelated parties approximates their fair values due to the short term maturity. INDEPENDENT REVIEW REPORT TO THE BOARD OF DIRECTORS OFHUTCHISON CHINA MEDITECH LIMITED(incorporated in the Cayman lslands with limited liability) Introduction We have reviewed the accompanying condensed consolidated interim balance sheetof Hutchison China MediTech Limited (the "Company") and its subsidiaries(together the "Group") as of 30 June 2006, and the related condensedconsolidated interim statements of income, changes in equity and cash flows forthe six-month period then ended. Management is responsible for the preparationand presentation of this condensed consolidated interim financial information inaccordance with International Accounting Standard 34 "Interim FinancialReporting" issued by the International Accounting Standards Committee. It is our responsibility to express a conclusion, based on our review, on thiscondensed consolidated interim financial information and to report ourconclusion solely to you, as a body, in accordance with our agreed terms ofengagement and for no other purpose. We do not assume responsibility towards oraccept liability to any other person for the contents of 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." A review of interim financial informationconsists of making inquiries, primarily of persons responsible for financial andaccounting matters, and applying analytical and other review procedures. Areview is substantially 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 accompanying condensed consolidated interim financial information isnot prepared, in all material respects, in accordance with InternationalAccounting Standard 34 "Interim Financial Reporting". PricewaterhouseCoopersCertified Public Accountants Hong Kong, 8 August 2006 INFORMATION FOR SHAREHOLDERS Listing Depositary The Company's ordinary shares are listed on the Computershare Investor Services plcAlternative Investment Market operated by the P. O. Box 82, The PavilionsLondon Stock Exchange plc Bridgwater Road Bristol BS99 7NH United Kingdom Telephone: +44 (0) 870 702 0003 Facsimile: +44 (0) 870 703 6114 CodeHCM Registered Office Investor InformationUgland House, P.O. Box 309 Corporate press releases, financial reports andGeorge Town, Grand Cayman other investor information on the Company areCayman Islands, British West Indies available online at the Company's website.Telephone: +1 345 949 8066Facsimile: +1 345 949 8080 Investor Relations Contact Please direct enquires to: E-mail: [email protected] Office Telephone: +852 2121 820022nd Floor, Hutchison House Facsimile: +852 2121 828110 Harcourt RoadHong KongTelephone: +852 2128 1188 Website AddressFacsimile: +852 2128 1778 www.chi-med.com Principal Executive Office21st Floor, Hutchison House10 Harcourt RoadHong KongTelephone: +852 2121 8200Facsimile: +852 2121 8281 Share RegistrarComputershare Investor Services(Channel Islands) LimitedP. O. Box 83, Ordinance House31 Pier Road, St. HelierJersey, Channel Islands JE4 8PWTelephone: +44 (0) 1534 825200Facsimile: +44 (0) 1534 825250 CORPORATE INFORMATION BOARD OF DIRECTORS Executive Chairman Simon TO, BSc, ACGI, MBA Executive Directors Christian HOGG, BSc, MBA Chief Executive OfficerPatrick WAN, ACCA Non-executive Directors Christian SALBAING, BA, LLL, JDEdith SHIH, BSE, MA, MA, EdM, Solicitor, FCS, FCISStephen YEUNG, BA, MBA, CA Independent Non-executive Directors Michael HOWELL, MA, MBAChristopher HUANG, BM, BCh, PhD, DM, ScDChristopher NASH, BSc, MBA, ACGI AUDIT COMMITTEE Michael HOWELL (Chairman)Christopher HUANGChristopher NASH REMUNERATION COMMITTEE Simon TO (Chairman)Michael HOWELLChristopher NASH TECHNICAL COMMITTEE Christopher HUANG (Chairman)Simon TOChristian HOGG COMPANY SECRETARY Edith SHIH, BSE, MA, MA, EdM, Solicitor, FCS, FCIS NOMINATED ADVISER Lazard & Co., Limited CORPORATE BROKER Panmure Gordon (Broking) Limited AUDITORS PricewaterhouseCoopers This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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