China Healthcare Business

Hutchison Baiyunshan primarily engages in the research and development, manufacture and sale of OTC and prescription TCM drugs. Hutchison Baiyunshan is a joint venture in which Chi-Med owns a 37.5 per cent share (through a 75 per cent equity interest in an intermediate holding company which holds 50 per cent of Hutchison Baiyunshan). The Chinese joint venture partner, Guangzhou Baiyunshan, is a pharmaceutical company listed on the Shenzhen stock exchange.

Hutchison Baiyunshan was one of the first TCM manufacturers in China to obtain Chinese Good Agricultural Practice ("GAP") certification for its cultivation operations and during the SARS outbreak of 2003 was the leading domestic supplier of Ban Lan Gen granules, a Chinese herb with antiviral properties. It was also one of the first pharmaceutical companies to introduce the concept of "TCM antibiotics", following the issue in 2004 of a decree by the SFDA that restricted the sale of Western antibiotics in China.

OTC drug sales through Hutchison Baiyunshan increased 22% in 2009 to $67.8 million (2008: $55.4m), all of which was organic growth. Since HBYS was formed in mid-2005, compound annual sales growth has averaged 43%. We believe this continues to make HBYS one of the fastest growing, large-scale OTC drug businesses in China.

HBYS is a truly national company in China. Its OTC distribution network now has over 1,600 sales and marketing staff, up from about 1,500 in 2008, covering all cities with a population of over 1 million. These staff co-operate with about 225 first tier distributors in all provinces of China and manage local retail activities and marketing programmes. On a regional level, HBYS continued to advance further in the lucrative, and previously relatively un-covered east China market. Sales in this important region grew 30% to $9.3 million (2008: $7.2m). Strong progress was also made in southwest China where sales grew 27% to $7.7 million (2008: $6.1m). Outside these two above average markets, HBYS growth in 2009 was spread fairly evenly across China.

As in recent years, the five major Hutchison Baiyunshan products dominated sales, accounted for 90% of total Hutchison Baiyunshan sales (2008: 90%). These products are Banlangen granules, an anti-viral treatment; Fu Fang Dan Shen tablets, principally for angina; Kou Yan Qing granules for periodontitis; Xiao Yan Li Dan tablets for liver/gallbladder; and Chuan Xin Lian tablets for inflammation.

Hutchison Baiyunshan's best selling products are:

• Ban Lan Gen granules: for the treatment of colds, viral flu, fever, and respiratory tract infections. Ban Lan Gen is a herb available widely in China and products derived from it were used extensively during the SARS outbreak of early 2003 as a prophylactic measure. As a result of the effective promotion and positioning of its product during that period, Baiyunshan's Ban Lan Gen granules became one of the leading brands of Ban Lan Gen products in China;
• Fu Fang Dan Shen tablets: as a treatment of chest congestion and angina pectoris, to promote blood circulation and relieve pain;
• Kou Yan Qing granules: for detoxification and for the treatment of mouth ulcers and periodontitis. The drug has been granted Class II TCM protection by the SFDA until 21 November 2009, and is currently admitted to the Insurance Catalogue of Guangdong province; and
• Xiao Yan Li Dan tablets: to promote the function of the liver and gallbladder. It is also used for the treatment of acute cholecystitis and cholangitis.

Banlangen granules are HBYS's market leading anti-viral product series, and their sales grew 42% to $30.0 million (2008: $21.1m) as an immediate result of the severe cough and cold season in China and the major impact of H1N1 in late 2008 and 2009. The past six years have seen several major flu and respiratory outbreaks in the region, from SARS in 2003, to the several H5N1 bird flu outbreaks, to H1N1. This has led to continuously increasing demand for HBYS Banlangen granules. Banlangen, which is a generic OTC product manufactured by many companies in China, accounted for approximately 6.7% of the total cold remedy market in China in 2009 (IMS Health data) and the ex-factory cough and cold remedy sales in 2009 was estimated to be approximately $2.7 billion (Business Monitor International). HBYS Banlangen is the market leader in this generic Banlangen sub-category with an average of about 45.6% market share. In some markets of China, particularly central and southern China, HBYS Banlangen holds 60-70% market share in the Banlangen sub-category.

TCM treatments account for approximately 59% of the entire Chinese cough and cold remedy market, with western drugs accounting for the remaining 41%. HBYS is well positioned to continue to grow in this segment by increasing market share in new markets such as Beijing and northern China where HBYS Banlangen market share grew to 26.1% in Q4 2009 from 19.1% in Q4 2008. We believe growth will also come from market development, since the China cold remedy market is still underdeveloped compared to developed countries.

Fu Fang Dan Shen tablets (angina) grew sales 3% in 2009 to $21.6 million (2008: $21.0m), the rate of growth principally reflecting HBYS' prioritisation of large-scale production focus to the Banlangen granule business in 2009. In 2009, however, we invested both in organisational and marketing resources to develop our third ranked product Kou Yan Qing granules (periodontitis), sales of which grew 34% to $4.9 million (2008: $3.7m). We believe Kou Yan Qing granules have the potential to become a major product for HBYS over the next five years.

Beyond these drugs, the balance of the HBYS portfolio of over 10 minor drugs grew 20% to $6.7 million (2008: $5.6m).

Importantly, in late 2009, HBYS secured inclusion of an additional three drugs on the new NMC as Type-B drugs. These were Kou Yan Qing granules (periodontitis), Nao Xin Qing tablets (central nervous system/cardiovascular), and Dan Hong Hua Yu oral liquid (ophthalmology). Sales of these three Drugs increased 37% in 2009 to $5.9 million and can be expected to continue growth in the coming years as a result of their inclusion on the NMC and resulting reimbursement.

By the end of 2009, a total of 56 HBYS products were included in the China NMC with 25 designated as Type-A and 31 as Type-B. In addition to this, a total of 23 HBYS drugs were included on the China Essential Medicines List.

In 2009, HBYS continued to offset increased raw material and labour costs by aggressive cost control programme as well as a 2.9% increase in Banlangen pricing. As in 2008, HBYS increased product and intermediate material outsource production. Along with the effective establishment of Enterprise Resource Planning systems and procedures, this enabled HBYS to slightly improve gross margins to 54.8% (2008: 54.2%).

HBYS continues to be one of the innovative OTC drug marketers in China, using a combination of effective public relations and mainstream advertising. HBYS deployed over $13.9 million, 10.4% of sales, in national advertising in China and used famous Chinese actors as spokespeople for the Baiyunshan brand, the Banlangen product range, and Kou Yan Qing.

In research and development, HBYS made major progress in 2009 with a total of 13 projects receiving commitments for financial support of over $2.4 million from China State, provincial, and local governments. These projects include research on new TCM technology platforms, research and development on new TCM drugs and therapeutic areas, and construction of new Good Agricultural Practice Sites in China. In 2009, HBYS was granted 46 patents by the China State Intellectual Property Office, and a further 22 submissions were made. Finally, HBYS Banlangen granules have been included as the research subject of a joint United States National Institutes of Health and Guangzhou Respiratory Disease Research Centre research project under Dr. Zhong Nan Shan. Dr. Zhong is arguably China's leading respiratory disease expert and the scientist who was responsible for isolating the cause of SARS in 2003.

http://www.813zy.com