19th Mar 2008 07:13
Hutchison China Meditech Limited19 March 2008 Hutchison China MediTech Limited ("Chi-Med") (AIM: HCM) Preliminary Results for the year ended 31 December 2007 Strong operating performance. Positive outlook across the Group. London, Wednesday, 19 March 2008: Chi-Med today announces its preliminaryresults for the year ended 31 December 2007. Group Results • Sales up 29% to $65.1 million (2006: $50.4 million). Organic growthon continuing operations. • Operating loss -$14.8 million (2006: -$8.2 million) reflecting higherresearch and development and consumer products investment and non-recurring lossfrom discontinued operations. • Non-recurring loss from discontinued operations -$5.1 million (2006:-$2.9 million) includes losses plus one-time provision for closing Nao Ling Tongproduct line. • Net loss attributable to equity holders of Chi-Med -$17.2 million(2006: -$9.6 million). China Healthcare Division • China Healthcare Division sales, on continuing operations, up 28% to$61.4 million (2006: $48.1 million), operating profit up 27% to $6.8 million(2006: $5.4 million) and net profit after tax attributable to equity holders ofChi-Med up 13% to $4.5 million (2006: $4.0 million). • Due diligence underway on several potential China acquisitions andjoint ventures. Drug R&D Division • Drug R&D Division spent $12.4 million in cash during 2007 (2006: $6.7million). • Landmark strategic partnership agreement signed with Eli Lilly andCompany. • Clinical progress on our Group lead drug candidate HMPL-004, positiveoutcomes in China Phase II study on ulcerative colitis and FDA clearance toexpand to global Phase IIb trial. • Discovery progress. Two novel small molecule compounds in latepreclinical development. 72 global patent applications filed by the end of 2007(2006: 61). Consumer Products Division • Sales up 36% to $2.9 million (2006: $2.1 million) following furtherLondon shop openings. • Planning to launch Sen consumer products internationally in 2008. Commenting, Christian Hogg, Chi-Med CEO, said: "We have made considerable progress across each of our three operating divisionsduring the last year, in each case improving their underlying performance. Our China Healthcare Division is benefiting from buoyant growth in the Chinapharmaceutical market, and existing operations are now contributing strongprofit to the group. We are progressing multiple acquisition opportunities thatcould start to materialise this year. Our Drug R&D Division is exceeding our expectations with breakthrough results inboth development and discovery. Our lead drug, HMPL-004, returned excitingPhase II results this year and our team of over 160 scientists and staff haveidentified multiple novel small molecule compounds. As further validation ofthe strategy, we signed a landmark co-discovery partnership with Eli Lilly andCompany ("Eli Lilly") to add to our existing partnerships with Merck KGaA andProcter & Gamble. Our Consumer Product Division, Sen Medicine Company Limited ("Sen"), isdemonstrating the attractiveness of its offer, further developing its brand inthe UK and experiencing encouraging sales growth in 2007. In addition, we arenow in late-stage planning to expand its products into luxury retail chainsinternationally. With a strong cash position and continued growth opportunities for each of ourdivisions, we view 2008 with considerable confidence." Ends Enquiries Chi-Med Telephone: +852 2121 8200 Christian Hogg, CEO Citigate Dewe Rogerson Telephone: +44 (0) 20 7638 9571 Anthony Carlisle +44 (0) 7973 611 888 David Dible +44 (0) 7967 566 919 About Chi-Med Chi-Med is the holding company of a pharmaceutical and healthcare group focusedon traditional Chinese medicine ("TCM") based primarily in China and wasadmitted to trading on the Alternative Investment Market of the London StockExchange in May 2006. Chi-Med operates three core business segments: 1) Chinahealthcare - the manufacture, distribution and marketing of pharmaceuticals andhealth supplements in China; 2) Drug R&D - the discovery and global developmentof novel drug in the oncology and auto-immune therapeutic areas; and 3) Consumerproducts - global retailing and distribution consumer health and personal careproducts derived from TCM and botanical ingredients. Chi-Med is majority owned by Hutchison Whampoa Limited, an international companylisted on the Main Board of The Stock Exchange of Hong Kong Limited. Results are reported in US dollar currency unless stated otherwise. Chairman's Statement I am pleased to report on another year of considerable progress across Chi-Med'sbusinesses. Sales, on a continuing operations basis, of the Group grew 29% to$65.1 million (2006: $50.4 million) primarily following strong China HealthcareDivision performance. Total consolidated sales of the Group for 2007 were $69.7million (2006: $57.5 million). Net loss attributable to Chi-Med stakeholdersgrew to -$17.2 million (2006: -$9.6 million) behind our increases in R&D andconsumer products investment, and a non-recurring loss from discontinuing theproduct line of the Nao Ling Tong memory supplement ("NLT"). Strategic Overview Chi-Med was created by Hutchison Whampoa Limited ("Hutchison Whampoa") to applymodern science and business practice to traditional Chinese medicine ("TCM"), inorder to realise the substantial potential of novel TCM-based products, both forthe China and the global pharmaceutical and consumer products markets.Chi-Med's intention is to build a unique and well-balanced portfolio ofbusinesses that enable us to manage both the pace of growth and the risksassociated with it. China Healthcare Division -- We see particularly strong opportunity in the ChinaHealthcare area and due to our range of fast growth and profitable products cantarget to maintain organic growth rates of over 20% for the foreseeable future. The Group's China Healthcare strategy is to combine organic growth withacquisition. A key strength of our business is the infrastructure, reputation,experience and depth of connections of Hutchison Whampoa in China, all of whichwe leverage and which provides significant support in identifying potential,value creating acquisitions and joint ventures (collectively "acquisitions"). Weare currently engaged in due diligence on multiple projects and hopeful to begincompleting such acquisitions during the current financial year. Drug R&D Division -- TCM, with its botanical origins, has demonstrated itsefficacy and safety under scientific scrutiny over several decades. We see itas a major and substantially untapped reservoir of novel drugs for the globalpharmaceutical market. Our Drug R&D Division is dedicated to using the higheststandards of modern science to identify and develop both botanical substancesand small molecule compounds derived from TCM, which can deliver new treatments,especially in the areas of oncology and auto-immune diseases. The validation of our drug research and development business, reflected by theEli Lilly deal, our existing partnerships with Merck KGaA and Procter & Gamble,and the successful Phase II proof-of-concept ("POC") result on HMPL-004, givesus great confidence that we have a first-in-class operation with very highpotential that justifies the accelerated investment that we expect to make in2008. Consumer Products Division -- With our Sen business, we have always stated thatone route to accelerated growth is to leverage synergy with Hutchison Whampoa'sglobal chain of over 7,800 health and beauty shops, 1,600 of which are luxuryfocused and consistent with the Sen brand image. We believe this will betransformational for our consumer products division. Corporate Governance We continue to maintain high standards of corporate governance with theobjective of building the long-term interests of the Company and maximisingreturns to stakeholders. During 2007 the Chi-Med Board remained largely unchanged apart from thedeparture of Mr. Stephen Yeung. I would like to take this opportunity to thankStephen for his involvement as a Non-executive Director over the past years andwish him well in his retirement. As a group, our Independent Non-executiveDirectors bring a wealth of knowledge on AIM and growth businesses; corporategovernance; and pharmaceutical research and development. They are making avaluable contribution to the evolution of Chi-Med and I very much appreciatetheir involvement and wish to thank them all for their efforts. Dividend Over the coming years, Chi-Med will continue making significant investments inits businesses, in which we see substantial opportunity to create superiorshareholder value. For this reason, the Board has decided not to recommend adividend for the year ended 31 December 2007. The progress that has been made on the Chi-Med business is the result of thequality and commitment of our strong management team and all our employees andpartners. My thanks and deep appreciation go to them all. Simon To Chairman, 17 March 2008 Chief executive officer's Statement Group Results The Group continues to deliver rapid growth, with sales up 29% to $65.1 million.This reflected strong organic growth in our China Healthcare Division wheresales, on a continuing operations basis, grew 28% to $61.4 million; a fourfoldincrease in revenues to $0.9 million in our Drug R&D Division, HutchisonMediPharma Limited ("HMPL"), from its strategic partnerships; and continuedrapid growth in our Consumer Products Division where the Sen brand increasedsales 36% to $2.9 million. The China Healthcare Division increased its operating profit to $4.4 millionfrom $2.5 million, before non-recurring items. However, this understates theperformance of its continuing businesses since, in December 2007, we decided todiscontinue the loss-making NLT. Excluding this product line, last year, theChina Healthcare Division's operating profit was up 27% to $6.8 million. Thishighlights the improved platform for growth and profitability with which we haveentered the current financial year. HMPL continues to invest in its strong drug discovery and development programmesand has achieved significant success to date. As expected, therefore, despitethe sharp increase in its revenues, its operating loss widened from -$6.0million to -$10.1 million. Sen too continues to invest, and its operating loss widened from -$1.1 millionto -$2.1 million reflecting the set-up costs for its planned expansion, anassociated write-down of inventory and the unfavourable impact of foreignexchange. An effective Group overhead structure is necessary to develop all three of ourdivisions in parallel as well as manage the complexity of being a listed Group.Operating losses from Group overheads totalled -$4.3 million (2006: -$3.6million). The $5.7 million expense of the one-off grant of share options at thetime of the IPO is being amortised over the 2006-2009 period. Excluding thisnon-cash expense, Group overheads, after interest income, totalled $1.8 million(2006: $1.3 million). The Group's overall operating loss, therefore, was -$14.8 million, compared to-$8.2 million in 2006. The Group's overall operating loss, on continuing operations, however was -$9.7 million compared to -$5.4 million in 2006,after excluding the losses and one-time provision for discontinuing the NLTproduct line. Our tax charge increased to $0.8 million (2006: $0.0 million) reflecting thefirst stage increase in effective tax rate, as we approach the end of the taxholidays on both our Hutchison Whampoa Guangzhou Baiyunshan Chinese MedicineCompany Limited ("HBYS") and Shanghai Hutchison Pharmaceuticals Limited ("SHPL")joint ventures. HBYS and SHPL continue to enjoy a 50% reduction in Chinacorporate income tax rate for the ensuing two years towards year 2009 at a rateof 12% and 12.5% respectively. Thereafter they will pay the full 25% Chinacorporate income tax rate. Finance costs of $0.4 million (2006: $0.4 million)were incurred primarily as a result of borrowing in our SHPL joint venture thatis being paid back with the positive cash flow on this business. Profits attributable to minority interests increased to $1.2 million (2006: $1.0million) as the HBYS joint venture continued to improve performancesignificantly. In consequence, the Group's net loss attributable to equityholders increased to -$17.2 million from -$9.6 million in 2006. The Group maintains a strong balance sheet and ended the year with net assets of$97.6 million, including cash and cash equivalents totalling $53.3 million(2006: $70.6 million). In addition the Group holds $13.6 million (Chi-Med prorata share) in bank guaranteed bills receivable (2006: $8.6 million) whichalthough held in HBYS, can be accessed at a discount rate of less than 5% ondemand. China Healthcare We believe the China healthcare market, and particularly the TCM segment, willcontinue to grow strongly and that our China Healthcare Division is extremelywell positioned to take advantage of this opportunity and deliver sustained andprofitable growth. Underlying this belief is our view of the Central Government's healthcarepolicy, drug reimbursement system and position on TCM; as well as Chi-Med'sexisting operating framework in China. Central Government Healthcare Policy The State Basic Medical Insurance Program ("BMIP") is the Central Government'smain national health insurance system. Under this system, the governmentreimburses the cost of drug purchases by participants enrolled in the system.Enrolment is restricted to employees of companies that participate in the schemethrough salary-based contributions. At the end of 2006, approximately 160million Chinese people were enrolled based on the latest China State Food & DrugAdministration ("SFDA") data, which is around only 12% of the Chinese populationand skewed to China's more economically developed urban areas. According to the latest SFDA data, enrolment in the BMIP has increased atapproximately 13% a year for the past five years, and this has primarilycontributed to about a 19% a year increase in total pharmaceutical industryrevenue over the same period. So in theory, BMIP enrolment increases, so doesdrug industry consumption and revenue. In addition to the BMIP, the Chinese government has other medical care systemsthat offer considerably less cover for unemployed and rural consumers. AsChina's economy develops, we believe it is reasonable to expect that theseconsumers will gradually migrate to the BMIP. Regulatory/Reimbursement Framework The BMIP regularly reviews all drugs in China and regulates reimbursement byassigning each drug a classification on the National Medicine Catalogue ("NMC")and Provincial Medicine Catalogues ("PMC"). Drugs most commonly included on theNMC and PMC, and thereby reimbursed, are those that are necessary clinicaltreatments, that have wide application, good effect, and low cost. Chi-Med's strategy is to ensure broadest possible reimbursement of the productsof the Group across China to maximise sales. To do this, we generally focus onprescription drugs that provide proprietary clinical treatment as well asover-the-counter ("OTC") drugs that we can produce at a competitively low cost. Central Government position on TCM The Central Government has stated that it intends to firmly support thedevelopment of TCM. As reported by China Daily in January 2007, Vice Premier Wu Yi outlinedgovernment measures to accelerate the development of TCM. These include Chinabidding to list TCM as a world intangible cultural heritage, as well asstrengthening protection of TCM intellectual property rights. We believe thisis one of the main factors which has led the Chinese TCM drug industry to growby 24% to $16.5 billion in 2006 (2005: $13.3 billion), significantly outpacinggrowth in the chemical and biotech drug industry, which grew only 13% to $35.7billion (2005: $31.7 billion), according to the latest SFDA data. Furthermore, while a new policy is still in the drafting stage, we understandthat the SFDA is currently working on significantly expanding the scope of itsTCM protection policy on both existing and future proprietary TCM drugs.Chi-Med's experience on the She Xiang Bao Xin pill ("SXBXP") - where protectionwas extended for 5 years under State Secrecy Bureau direction - and on our DanNing tablet - where a 20-year process and composition patent was granted in 2007- are clear examples of the Central Government's intention to continue toprotect and support TCM. The Existing Operating Framework of Chi-Med in China Through our two TCM operating joint ventures in China, we believe we hold strongcompetitive advantages in both the proprietary prescription drug market -through SHPL - and the OTC market - through HBYS. Our core products are alleither on the NMC or the PMC and we believe they are well positioned to grow asthe overall market grows. 2007 China Healthcare Division performance Chi-Med's total China healthcare sales, including discontinued operations, grew20% to $65.9 million in 2007 (2006: $55.1 million) and operating profit, beforeone-time provisions, grew 73% to $4.4 million (2006: $2.5 million). In lateDecember 2007 however, a decision was made to discontinue the loss making NLTproduct line in order to significantly improve the ongoing operating profit ofChi-Med's China Healthcare Division. A one-time provision of $2.6 million, ofwhich approximately $2.1 million was non-cash in nature, was taken in the 2007accounts to cover charges associated with the discontinuation of NLT. Importantly, 2007 performance of Chi-Med's China Healthcare Division excludingNLT ("Continuing Operations") was very strong with sales growing 28% to $61.4million (2006: $48.1 million) and operating profit up 27% to $6.8 million (2006:$5.4 million). Net profit after tax ("NPAT") attributable to Chi-Med equityholders on Continuing Operations grew 13% to $4.5 million (2006: $4.0 million).This NPAT growth lagged operating profit growth primarily because as mentioned,above tax holidays on both of our joint ventures partially expired. The China healthcare sales and distribution network of the Group continued tostrengthen in 2007. Currently, through HBYS and SHPL, over 1,800 full-timesales and distribution personnel are employed in over 200 cities in China. It should be noted that the true scale of Chi-Med's China healthcare operationsdoes not come through in IFRS financial statements which use prorated revenueconsolidation, and thereby only reflect about 50% of the actual domestic salesin our joint ventures. For perspective, total domestic China sales in our threejoint ventures in 2007 was $123.6 million (2006: $101.4 million) - representingthe manufacture and sale of over 3.2 billion doses of medicine. Chi-Med's product portfolio remains well diversified with 93% of the Group'sChina Healthcare sales last year coming from nine core products of which fourare OTC; three Rx; and two health food. Over-the-counter drugs OTC drug sales through HBYS increased 26% in 2007 to $43.6 million (2006: $34.6million), all of which was organic growth. We believe HBYS is now one of thelargest and fastest growing OTC drug companies in China. With domestic sales approaching $100 million, HBYS has improved scale inmanufacturing operations. This combined with the successful strategy of annualprice increases on key products - for example, the price of Fu Fang Dan Shentablets was increased 10% in January 2007 - improving gross margins by 1.0percentage point to 54.5% in 2007 (2006: 53.5%), despite significant rawmaterial price increases during the year. We believe that marketing operations and execution are HBYS's main competitiveadvantage. Three HBYS marketing campaigns, which focus effort on publicrelations rather than hard sell direct advertising, have been voted in the top10 Marketing Programmes in China since 2003 by the Xin Jing Bao and NanfangDushi Bao, the two industry leading journals in China. These programmesinclude: the public relations campaign promising both free product and a pricefreeze on Banlangen granules (anti-viral) during the SARS epidemic of 2003; thepublic relations campaign promoting Banlangen granules as the "TCM antibiotic"concurrent with the State Government's clamp down on over prescription ofantibiotics in 2004; and the highly successful expired prescription medicineexchange programme for families, which has led to widespread national publicrelations coverage in China over the past eighteen months as well asparticipation by over 3 million Chinese consumers. In 2007, HBYS opened the "Shen Nong TCM Garden", a novel cultural theme park, onthe grounds of the factory in Guangzhou. The garden, with the objective ofexplaining TCM and its history, attracted over 300,000 visitors and broad mediacoverage in 2007. Second phase expansion is planned to open in 2009 and isexpected to strengthen HBYS's position as one of the most respected TCM brandsin Southern China. HBYS's OTC distribution network grew significantly in 2007 and now has over 200offices across China, employs over 1,200 staff, covering all cities with apopulation over 1 million. Furthermore 85% of PMC drug tenders were successfulin 2007 and HBYS now holds 51, or 6.3%, of the total 815 PMC listed TCM drugproducts listed in all China. Major activity in HBYS's Guangdong Government designated TCM ProvincialTechnology Centre has led to participation in multiple provincial innovationproject tenders, government declared projects, and has secured the joint ventureover $1.3 million in government R&D grants in 2007. These activities areexpected to provide the joint venture with a stable stream of new products overthe next five years. Strong progress was also made in 2007 on HBYS's range of TCM bottled drinksunder the Bai Yun Shan ("BYS") label. Sales grew 123% to $1.3 million (2006:$0.6 million) as test marketing progressed well and set a strong foundation forregional expansion of the BYS drink. These products are planned to bridge thegap between TCM medicines and daily use food and beverage products and representa major area of growth potential for the HBYS. Prescription Drugs Prescription drug sales through our SHPL joint venture grew 21% to $14.1 millionin 2007 (2006: $11.6 million) all of which was organic from existing products. As reported previously, last year's SFDA tightening of policy on the access ofmedical representatives to hospitals, which initially was cause for concern, hasturned out to have had no impact on SHPL results. Two factors have contributedto this - firstly, we have effectively migrated a significant portion of ourhospital sales personnel to community marketing programmes which have proven tobe effective; and secondly, after lobbying efforts by many of the majorPharmaceutical companies in China, the SFDA has softened its position onlimiting medical representatives' access to hospitals. SHPL's strong performance has seen a 32% increase in sales of our keycardiovascular prescription drug SXBXP to $11.5 million (2006: $8.7 million).In 2007 we focused on this product and have built very strong momentum behindit, which we expect to carry over into 2008. Regionally, SHPL is making progress in expanding beyond our historical Shanghaistronghold which in 2007 represented 46% of sales (2006: 48%). Sales in marketsoutside Shanghai grew 25% during 2007 to $7.7 million (2006: $6.1 million)whereas sales in our more mature Shanghai market grew 17% to $6.5 million (2006:$5.6 million). Importantly, an encouraging sign for SHPL in 2007 was thatin-market consumption grew 25%, outpacing ex-factory sales growth of 21%,signifying that hospital pharmacy and chain drugstore inventories were reducedduring the year. Good progress was made in both the hospital pharmacy (72% ofsales) and chain drugstore channels (28% of sales) where in-market consumptiongrew 27% and 21% respectively. Government relations have been a key focus area for SHPL over the past two yearsand are now yielding direct tangible benefits to the joint venture. In late2006 SXBXP was awarded a State Secret Certificate as "Confidential Information"by the Ministry of Science and Technology and State Secrecy Bureau therebyextending effective IP protection for five years. In June 2007 the StateScience & Technology Commission approved a $0.3 million grant to fund researchon SXBXP's mechanism of action at one of China's top universities, Beijing QingHua University. In June 2007 the State Science and Technology Commission alsoapproved a further grant of $0.4 million for the study of SXBXP mechanism ofaction and Dan Ning tablet activity in liver disease. In July 2007 our numbertwo product, Dan Ning tablet (gall stone treatment), was granted a 20-yearprocess and formula patent by the State Patent Bureau thereby guaranteeing itlong-term NMC inclusion. In July 2007 the Shanghai Economic & Trade Commissionalso approved a grant of $0.1 million for research on SXBXP. In August 2007 theShanghai Price Bureau approved a 14.9% increase in SXBXP's hospital biddingprice to RMB 21.00/box, which improved its gross margin by some $0.5 million/year. Health Supplements Health supplement sales through our Hutchison Healthcare Limited ("HHL") jointventure, on a continuing operations basis, almost doubled to $3.7 million in2007 (2006: $1.9 million). Including sales of the discontinued NLT productline, HHL sales for 2007 dropped 7% to $8.3 million (2006: $8.9 million). In2007, $5.1 million was incurred in costs that covered both operating losses anda one-off provision associated with the discontinuation of the NLT product line. HHL has had two distinct business units. In the first, our profitable Zhi Ling Tong ("ZLT") infant nutrition brand, wesaw sales double to $3.7 million (2006: $1.9 million). This reflected goodperformance by the exclusive distributor of ZLT, He Hui Pharmaceuticals Limited,which is successful in developing a strong hospital and mother/baby storedistribution model across China; and the marketing investment made by HHL behindthe brand and its patented omega-3 product which is unique in the China market. In mid-2007 registration approvals were received on ZLT probiotics, a toddlerimmunity product whose raw materials are imported from Denmark, to add to thealready marketed omega-3 brain/retinal development product and calcium powderinfant bone development product. The Group intends to further expand the ZLTrange over the coming years to establish the brand as a leader in baby/infanthealth. In contrast, the second distinct business unit of HHL, NLT, has performed poorlyover the past two years in the face of increasing generic competition. WhileNLT operating losses were narrowed in 2007 by 14% to -$2.5 million (2006: -$2.9million) by withdrawing from several unprofitable provincial markets, theresulting 35% drop in sales to $4.6 million (2006: $7.0 million) left the Groupwith little confidence in the long term potential of the product line. At theend of 2007, it was decided that the product line be discontinued and, inaddition to the 2007 operating loss, a one-time provision of -$2.6 million wasmade, of which approximately -$2.1 million non-cash, to cover closure charges. Acquisitions The run up of the Chinese stock market has led to rapid appreciation invaluations of listed China healthcare enterprises in 2007. Naturally this hasled to materially increased valuation expectations by some of the companies thatChi-Med has been in acquisition discussions with over the past two years.Despite this, we have continued to appraise potential strategic acquisitions andbelieve there remain good earnings enhancing opportunities. The Group is focusing primarily on deals with similar structure to our SHPL andHBYS which expand the capital of new joint ventures through a cash injection inreturn for an injection of assets by Chinese partners. We are generallytargeting to take at least a 50% share in new joint ventures, which aresynergistic with our existing China Healthcare Division assets and are able tobenefit from the strategic advantages that Hutchison Whampoa has to offer. Itis hopeful that acquisitions could start to materialise in 2008. Drug Research & Development HMPL is dedicated to transforming scientific discoveries into innovativetherapies for cancer and auto-immune diseases. 2007 Drug R&D Division performance Chi-Med's Drug R&D revenue grew almost four-fold during 2007 to $0.9 million(2006: $0.2 million) from payments by Merck KGaA, Procter & Gamble and EliLilly. Its operating loss rose to -$10.1 million (2006: -$6.0 million) as aresult of increased investment in HMPL's discovery organisation and programmes,as well as the cost of clinical trial programmes in the US and China. Overall, 2007 was a highly productive year for HMPL in which the two majorachievements were the landmark strategic alliance with Eli Lilly and thepositive Phase II POC results on the Group's lead product, HMPL-004 therebyproving the Group's preclinical hypothesis and validating its scientificcapability. We believe HMPL is now generally accepted as one of the leaders in China'sPharmaceutical drug discovery arena. Going forward, the Group's target is forit to continue to build strategic alliances with multi-national pharmaceuticalgroups; identify global partners with which to co-develop our lead candidates;and advance our in-house preclinical programs into clinical POC studies takingadvantage of China's low cost R&D structure and vast patient population. Discovery Summary During 2007, two novel small molecule compounds were selected for development,HMPL-010 for psoriasis and HMPL-011 for auto-immune diseases, such as rheumatoidarthritis. HMPL-010 is a novel chemical entity that blocks activation of NF-kBand is positioned as a topical treatment for psoriasis. HMPL-011 is a smallmolecule cytokine modulator that controls the production of pro-inflammatorycytokines and has been found to be effective in animal models of rheumatoidarthritis as well as a number of other inflammatory conditions. Both compoundsare currently in preclinical evaluation. In addition, the Group continued to execute against its goals of building asustainable project portfolio and significant progress has been made on a numberof other early stage projects. These projects are positioned for candidateselection throughout 2008 and beyond in the oncology and inflammationtherapeutic areas. During 2007, six cases covering three new invention patentswere filed in China and the US. Notice of allowance for two patent applicationshas been received: the HMPL-004 US patent application covering composition andusage; and the HMPL-001 China patent application covering composition and usage. On the strategic alliance front, the Group commenced research collaboration withEli Lilly. HMPL will be responsible for all discovery activities leading toclinical candidate selection, and Eli Lilly will be responsible for clinicaldevelopment. The collaborations with Merck KGaA and Procter & Gamble have goneaccording to plan in 2007 with solid progress having been made on both. Development Summary HMPL-004, treatment for auto-immune disorders HMPL-004 is the lead drug candidate of the Group for treating inflammatory boweldiseases in Phase II clinical development. HMPL-004 is an orally active,proprietary botanic product that acts on multiple targets in the pathogenesis ofinflammation. It is a compound extracted from a Chinese herb under controlledconditions and its composition well characterised. The anti-inflammationactivity of HMPL-004 was originally identified in a cell-based anti-inflammationscreening assay at HMPL and further confirmed in a various experimental animalmodels. HMPL is currently conducting two clinical studies to evaluate the safety andefficacy of HMPL-004, a Phase II trial in the US for Crohn's disease ("CD") anda global Phase IIb trial for ulcerative colitis ("UC"). In July 2007, HMPLcompleted a POC study for UC in China and announced positive clinical outcomesand all trial endpoints met. In this POC study, HMPL-004 was well tolerated andeffective for treating patients with mild-to-moderate UC. The Phase II POC study for UC was a multi-centre, randomised, double-blind,comparator study of 120 patients conducted in China. The study evaluatedHMPL-004 at 400mg taken three times a day, orally, compared to Etiasa(R)(Mesalazine SR), the current first line standard of care. The primary endpointwas the improvement of the patient's clinical symptom score. The secondaryendpoint was a colonoscopic score. After treatment for eight weeks the overallremission rate (combination of complete and partial remissions) for HMPL-004 was57% by clinical score compared to 53% for Etiasa(R) in the Intent-To-Treat ("ITT") population, and 47% for HMPL-004 versus 42% for Etiasa(R) by colonoscopy inthe ITT population. HMPL-004 was well tolerated in the study. The adverseevent ("AE") rate was low and reported AEs were mild in nature. In November 2007, HMPL obtained clearance from the Food and Drug Administrationof the US to commence a global Phase IIb trial with HMPL-004 in patients withmild-to-moderate UC based on the successful outcome of China's POC result. Thetrial will assess the efficacy and safety profile of the drug in a broaderpatient population and dose range. The patient recruitment for this UC trialstarted in January 2008. The on-going US Phase II trial for CD is a multi-centre, double-blind,randomised, and placebo-controlled study in both male and female patients withactive moderate CD. It is anticipated that patient enrolment would be finishedin 2008. HMPL is also proceeding well with a Phase II POC study in China of HMPL-002indicated for its concurrent chemo-radiotherapy usage in stage III A/B non-smallcell lung cancer ("NSCLC") patients. The clinical study examines the efficacyand safety of HMPL-002 in its concomitant use with the most accepted first-linechemo-radiotherapy therapies for NSCLC patients. The study completed enrolmentat the end of 2007 with response results expected to be released in the thirdquarter of 2008 and survival data to be completed in early 2009. Depending on the successful outcome of the HMPL-002 US Phase I trial, and theconcurrent China Phase II POC study for NSCLC, we will make a go/no go decisionfor the US Phase II arm of the HMPL-002 trial. 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. Strategic Alliances Under the Eli Lilly partnership agreement, HMPL scientists and an Eli Lilly teamwill collaborate on the discovery and development of pharmaceutical compoundsfocused on targets in oncology and inflammation. The research partnershipleverages the strengths and expertise of the two companies while takingadvantage of the unique opportunities available in China to expedite the drugdiscovery process and reduce overall cost. Eli Lilly will provide HMPL anupfront payment, annual R&D support fees, potential discovery and developmentmilestone payments, and royalties on worldwide sales of any commercialisedproducts resulting from the collaboration. Potential discovery and developmentmilestone payments will total from $20 million to $29 million per candidate. Itis expected that HMPL will be delivering multiple candidates in the next severalyears. The Eli Lilly deal is the first such kind of deal in China Pharmaceutical R&Dhistory and represents a new model for innovative drug discovery and developmentpartnership. Furthermore, to the best of our knowledge, never before has amajor global pharmaceutical group injected its own in-house drug discoveryprogrammes into a China based R&D company. It is a direct reflection of thebusiness model of the Group and the quality of our China drug R&D operations. HMPL will continue to seek additional strategic alliances to further enhance ourdiscovery and development pipeline and to bring in short term revenue, as wellas setting up the basis for major long term value creation through milestonesand royalties on successful projects. Consumer Products Chi-Med's consumer products objective remains to create and develop a "new tothe world" premium brand proposition centred on consumer health products andservices derived from TCM and botanical ingredients. We believe the TCM concept of natural botanical health can be applied to mostconsumer products categories such as food & beverage, beauty, and personalcleansing. We intend for Sen to establish a reputation as the leading TCM brandin the West through a one-of-a-kind premium product and service offering. The Group has expanded its consumer product portfolio to over 250 items incategories such as teas, body care and skin care. It is expected that a further200 items, in both existing and new related categories, will be needed tosupport our own standalone shops. In addition to these consumer products, TCMservices (e.g. acupuncture, acupressure, reflexology, and facials) represent akey reputation building block and income source. To start, Sen had to build a reputation as an expert in the field. We believethis is being achieved by continuing to offer sophisticated western consumershigh quality TCM products and services, as we have done for the past five years. Given the regulatory constraints surrounding TCM and herbal medicines, as wellas our desire to test multiple ranges of consumer products, a retail format hasbeen chosen to start pilot testing the Sen brand and product portfolio. Theobjective of the Group, however, is to expand beyond our own shops by launchingselect Sen consumer products internationally through luxury retailers. 2007 Consumer products performance Chi-Med's consumer products sales grew 36% to $2.9 million in 2007 (2006: $2.1million) and operating loss increased to -$2.1 million (2006: -$1.1 million). Sales growth was mainly driven by the full year effect of the successful HarveyNichols shop and the part-year effect of the three new central London Sen shopswhich opened in late-2007 in Kensington, Westbourne Grove and Green Park. The widening operating loss was mainly driven by set up costs for luxury retailexpansion, an associated write-down of inventory, and the unfavourable impact offoreign exchange. Without these three one-time factors, operating loss wouldhave been approximately equal to that of 2006. Sen delivered like-for-like sales growth of 2% in shops open for more than oneyear consolidating the very strong 32% organic sales growth in 2006 as weexpanded our ranges of consumer products items. Consumer loyalty continues togrow at Sen, with return customers making up an increasing proportion of oursales. Breaking down the 2007 performance of each of the core Sen product and servicecategories, consumer product sales - teas, body care and skin care - were up45%; the provision of consultations & services grew 49%; and OTC medicine salesgrew 8%. New Shops At the end of 2007 Sen operated a chain of seven shops in central Londonincluding: Mayfair, King's Road; Knightsbridge (Harvey Nichols); Kensington;Westbourne Grove; Green Park; and the City. The UK strategy of the Group is tocontinue to open new shops in central London and by end-2008 Sen targets to havetwelve shops, allowing for a more aggressive, targeted PR and marketingprogrammes. Luxury Retail Expansion In addition to our own UK shops, the Group is now planning to sell Sen productsinternationally through luxury retail chains, starting in France. Preparationfor this expansion has taken almost two years, involving considerableorganisational time and expense. Over 100 Sen consumer products are beingregistered in France under EU regulations. All product claims have been fullysupported, all packaging and marketing materials have been adapted to beappropriate for both English and French markets. Importantly also, both the Sencommercial and product supply organisations have been built up to support thisexpansion. This investment will enable Sen to expand luxury distributioninternationally, thereby transforming the potential scale of the business overthe coming five years. Current Trading and Outlook for the Group It is encouraging to report that to date this year, sales and profit growthrates in the China Healthcare Division are running well ahead of last year asthe China pharmaceutical market continues to show robust growth. Furthermore,we have now started treating patients on our global HMPL-004 Phase IIb trial inUC, and hope to shortly announce Sen's international consumer product launchplans for 2008. The Chi-Med Group organisation is currently focused on China acquisitions and,following current due diligence, we expect progress in 2008. We remain very confident of the growth prospects for Chi-Med. Christian HoggChief Executive Officer, 17 March 2008 CONSOLIDATED INCOME STATEMENTFOR THE YEAR ENDED 31 DECEMBER 2007 Note 2007 2006 US$'000 US$'000Continuing operations Sales 2 65,110 50,433Cost of sales (27,656) (21,322) Gross profit 37,454 29,111Selling expenses (23,091) (17,104)Administrative expenses (27,423) (19,807)Other net operating income 3,337 2,417 Operating loss (9,723) (5,383)Finance costs (299) (388) Loss before taxation (10,022) (5,771)Taxation charge (838) (1) Loss for the year from continuing (10,860) (5,772)operations Discontinued operations Loss for the year from discontinued 3 (5,106) (2,860)operations Loss for the year (15,966) (8,632) Attributable to: Equity holders of the Company (17,191) (9,605)Minority interests 1,225 973 (15,966) (8,632) Loss per share for loss from continuing and discontinued operations attributable to equity holders of the Company for the year - Basic and diluted (US$ per share) 4 (0.3357) (0.2101) Loss per share for loss from continuing operations attributable to equity holders of the Company for the year - Basic and diluted (US$ per share) 4 (0.2360) (0.1475) CONSOLIDATED BALANCE SHEETAS AT 31 DECEMBER 2007 2007 2006 US$'000 US$'000ASSETS Non-current assets Property, plant and equipment 25,682 22,874Leasehold land 5,828 4,230Goodwill 6,616 6,241Trademarks and patents 602 775Available-for-sale financial asset 136 128Deferred tax assets 256 - 39,120 34,248 Current assets Inventories 11,722 9,490Trade receivables 21,172 16,582Other receivables and prepayments 2,204 2,110Financial assets at fair value through - 60,544profit or loss Cash and bank balances 53,345 10,069 88,443 98,795 Total assets 127,563 133,043 EQUITY Capital and reserves attributable to the Company's equity holders Share capital 51,229 51,212Reserves 39,067 51,739 90,296 102,951Minority interests 7,311 7,030 Total equity 97,607 109,981 LIABILITIES Current liabilities Trade payables 5,303 3,185Other payables and accruals 17,042 11,894Amounts due to related parties 496 868Current tax liabilities 551 -Short-term bank loans 6,564 7,115 Total liabilities 29,956 23,062 Total equity and liabilities 127,563 133,043 CONSOLIDATED STATEMENT OF CHANGES IN EQUITYFOR THE YEAR ENDED 31 DECEMBER 2007 Attributable to equity holders of the Company Share Share Share-based Exchange General Accumu-lated Total Minority Total capital premium Compensa-tion reserve reserves losses interests equity reserve US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 As at 1 - - - 475 - (34,145) (33,670) 5,661 (28,009)January 2006 Exchange - - - 1,369 - - 1,369 308 1,677translation differences (Loss)/ - - - - - (9,605) (9,605) 973 (8,632)profit for the year Issue of 51,212 97,560 - - - - 148,772 - 148,772shares Share - (6,283) - - - - (6,283) - (6,283)issuance costs Relating to - - - - - - - 58 58acquisition of subsidiar ies by a jointly controlled entity Relating to - - - - - - - 30 30formation of a subsidiary by a jointly controlled entity Share-based - - 2,368 - - - 2,368 - 2,368compensation expense Transfer - - - - 29 (29) - - -between reserves As at 31 51,212 91,277 2,368 1,844 29 (43,779) 102,951 7,030 109,981December 2006 As at 1 51,212 91,277 2,368 1,844 29 (43,779) 102,951 7,030 109,981January 2007 Exchange - - - 2,037 1 - 2,038 333 2,371translation differences (Loss)/ - - - - - (17,191) (17,191) 1,225 (15,966)profit for the year Issue of 17 74 (53) - - - 38 - 38shares Dividend - - - - - - - (1,277) (1,277)paid to a minority shareholder of a subsidiary Share-based - - 2,460 - - - 2,460 - 2,460compensation expense Transfer - - (528) - 35 493 - - -between reserves As at 31 51,229 91,351 4,247 3,881 65 (60,477) 90,296 7,311 97,607December 2007 CONSOLIDATED CASH FLOW STATEMENTFOR THE YEAR ENDED 31 DECEMBER 2007 Note 2007 2006 US$'000 US$'000 Cash flows from operating activities Net cash used in operations 5 (7,688) (3,246)Interest received 937 559Interest paid (367) (392)Income tax paid (543) (1) Net cash used in operating activities (7,661) (3,080) Cash flows from investing activities Purchase of property, plant and equipment (5,807) (2,582)Addition to leasehold land (1,415) -Purchase of trademarks and patents (15) (44)Purchase of available-for-sale financial - (124)asset Acquisition of subsidiaries by a jointly - (20)controlled entity Formation of a subsidiary by a jointly - 30controlled entity Net cash used in investing activities (7,237) (2,740) Cash flows from financing activities (Decrease)/increase in amount due to (471) 2,479immediate holding company Dividend paid to a minority shareholder of (1,277) -a subsidiary New short-term bank loans 4,760 374Repayment of short-term bank loans (5,709) (936)Issue of shares, net of share issuance 38 68,743costs Net cash (used in)/generated from financing (2,659) 70,660activities Net (decrease)/increase in cash and cash (17,557) 64,840equivalents Cash and cash equivalents at beginning of 70,613 5,617year Exchange differences 289 156 Cash and cash equivalents at end of year 53,345 70,613 Analysis of cash and cash equivalents - Cash and bank balances 53,345 10,069- Financial assets at fair value through - 60,544profit or loss 53,345 70,613 NOTES 1 Basis of preparation The consolidated financial statements of the Company have been prepared inaccordance with International Financial Reporting Standards. These financialstatements have been prepared under the historical cost convention, as modifiedby the revaluation of certain financial assets. 2 Revenue and segment information The Group is principally engaged in the manufacturing, distribution and sales ofTCM and healthcare products. Revenue recognised for the year are as follows: 2007 2006 US$'000 US$'000 Continuing operations Sales of goods 62,530 49,060 Revenue from services 2,580 1,373 65,110 50,433 Discontinued operations Sales of goods 4,551 7,041 69,661 57,474 Primary reporting format - business segments The Group's activities are categorised into four main areas: - China healthcare - Health supplement: comprises the research anddevelopment, manufacture, distribution and sale of western and TCM healthsupplements products. - China healthcare - Over-the-counter ("OTC") & prescription: comprisesthe development, manufacture, distribution and sale of OTC & prescription TCMproducts. - Consumer products: relates to TCM pharmaceuticals and sales ofTCM-based consumer lifestyle products and services sold through retail stores. - Drug research and development: relates mainly to drug discoveries andother pharmaceutical research and development activities, and the provision ofresearch and development services. NOTES 3 Loss for the year from discontinued operations In December 2007, the Group discontinued its Nao Ling Tong memory supplementoperations, which represented a separate major line of the Group's business, asthe product line performed below expectation in light of increased competitiveand regulatory activities in the generic health supplement market. The results and cash flows of the discontinued operations are set out below. The2006 comparative figures in the consolidated income statement have also beenreclassified to conform to the current year presentation. 2007 2006 US$'000 US$'000 Revenue 4,551 7,041 Expenses (9,657) (9,901) Loss before taxation from discontinued (5,106) (2,860) operations Taxation charge - - Loss for the year from discontinued (5,106) (2,860) operations Cash flows from discontinued operations Net cash flows from operating activities (2,194) (2,229) Net cash flows from investing activities (14) (1) Net cash flows from financing activities (174) 23 Net cash flows (2,382) (2,207) 4 Loss per share Basic loss per share is calculated by dividing the loss attributable to equityholders of the Company by the weighted average number of ordinary shares inissue during the year. 2007 2006 Loss for the year - Continuing operations (US$'000) (12,085) (6,745) - Discontinued operations (US$'000) (5,106) (2,860) (17,191) (9,605) Weighted average number of outstanding 51,216,279 45,712,743 ordinary shares in issue Basic and diluted loss per share (US$) - Continuing operations (0.2360) (0.1475) - Discontinued operations (0.0997) (0.0626) Total basic and diluted loss per share (US$) (0.3357) (0.2101) NOTES 4 Loss per share (continued) (a) The weighted average number of ordinary shares for the year ended 31December 2006, for the purposes of basic loss per share, has beenretrospectively adjusted for the effects of the capitalisation of 36,666,665ordinary shares on 9 May 2006. (b) Diluted loss per share equals basic loss per share as the exercise of theoutstanding employee share options would have an antidilutive effect. 5 Note to the consolidated cash flow statement Reconciliation of loss for the year to net cash used in operations 2007 2006 US$'000 US$'000 Loss for the year (15,966) (8,632) Adjustments for: Taxation charge 838 1 Share-based compensation expense 2,460 2,368 Amortisation of trademarks and patents 212 163 Amortisation of leasehold land 111 91 Impairment on property, plant and equipment 603 - Write-off of inventories 359 - Provision for inventories 326 - Provision for trade and other receivables 1,734 161 Depreciation on property, plant and 3,477 2,740 equipment Loss on disposal of property, plant and 269 80 equipment Interest income (937) (559) Interest expense 367 392 Operating loss before working capital (6,147) (3,195) changes Changes in working capital: - increase in inventories (2,419) (184) - increase in trade receivables (5,129) (3,223) - (increase)/decrease in other receivables (244) 854 and prepayments - increase/(decrease) in trade payables 1,837 (927) - increase in other payables, accruals and 4,414 3,429 amounts due to related parties Net cash used in operations (7,688) (3,246) END This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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