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 26% in 2007 to $43.6 million (2006: $34.6 million), all of which was organic growth. We believe Hutchison Baiyunshan is now one of the largest and fastest growing OTC drug companies in China.

With domestic sales approaching $100 million, Hutchison Baiyunshan has improved scale in manufacturing operations. This combined with the successful strategy of annual price increases on key products – for example, the price of Fu Fang Dan Shen tablets was increased 10% in January 2007 - improving gross margins by 1.0 percentage point to 54.5% in 2007 (2006: 53.5%), despite significant raw material price increases during the year.

We believe that marketing operations and execution are Hutchison Baiyunshan 's main competitive advantage. Three Hutchison Baiyunshan marketing campaigns, which focus effort on public relations rather than hard sell direct advertising, have been voted in the top 10 Marketing Programmes in China since 2003 by the Xin Jing Bao and Nanfang Dushi Bao, the two industry leading journals in China. These programmes include: the public relations campaign promising both free product and a price freeze on Banlangen granules (anti-viral) during the SARS epidemic of 2003; the public relations campaign promoting Banlangen granules as the “TCM antibiotic” concurrent with the State Government’s clamp down on over prescription of antibiotics in 2004; and the highly successful expired prescription medicine exchange programme for families, which has led to widespread national public relations coverage in China over the past eighteen months as well as participation by over 3 million Chinese consumers.

Hutchison Baiyunshan's best selling products are:

• Fu Fang Dan Shen tablets: as a treatment of chest congestion and angina pectoris, to promote blood circulation and relieve pain;
• 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;
• 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.

In 2007, Hutchison Baiyunshan opened the “Shen Nong TCM Garden”, a novel cultural theme park, on the grounds of the factory in Guangzhou. The garden, with the objective of explaining TCM and its history, attracted over 300,000 visitors and broad media coverage in 2007. Second phase expansion is planned to open in 2009 and is expected to strengthen Hutchison Baiyunshan's position as one of the most respected TCM brands in Southern China.

Hutchison Baiyunshan's OTC distribution network grew significantly in 2007 and now has over 200 offices across China, employs over 1,200 staff, covering all cities with a population over 1 million. Furthermore 85% of PMC drug tenders were successful in 2007 and Hutchison Baiyunshan now holds 51, or 6.3%, of the total 815 PMC listed TCM drug products listed in all China.

Major activity in Hutchison Baiyunshan's Guangdong Government designated TCM Provincial Technology Centre has led to participation in multiple provincial innovation project tenders, government declared projects, and has secured the joint venture over $1.3 million in government R&D grants in 2007. These activities are expected to provide the joint venture with a stable stream of new products over the next five years.

Strong progress was also made in 2007 on Hutchison Baiyunshan's range of TCM bottled drinks under 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 for regional expansion of the BYS drink. These products are planned to bridge the gap between TCM medicines and daily use food and beverage products and represent a major area of growth potential for the Hutchison Baiyunshan.

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