China healthcare business

Chi-Med's China healthcare business is currently comprised of three pharmaceutical and health supplement joint venture businesses with over 1,800 employees, several well-known Chinese brands, multiple China GMP production sites, and sales and distribution operations in over 200 cities in China. These three businesses are:

• Hutchison Baiyunshan, a joint venture in which Chi-Med holds a 37.5 per cent (through a 75 per cent equity interest in an intermediate holding company which holds 50 per cent of Hutchison Baiyunshan). Hutchison Baiyunshan is primarily focused on OTC and prescription TCM drugs;
• Shanghai Hutchison Pharmaceuticals, a 50 per cent owned joint venture, primarily focused on prescription TCM drugs; and
• Hutchison Healthcare a 68 per cent owned joint venture, which produces health food products.

Chi-Med’s total China healthcare sales, including discontinued operations, grew 20% to $65.9 million in 2007 (2006: $55.1 million) and operating profit, before one-time provisions, grew 73% to $4.4 million (2006: $2.5 million). In late December 2007 however, a decision was made to discontinue the loss making NLT product line in order to significantly improve the ongoing operating profit of Chi-Med’s China Healthcare Division. A one-time provision of $2.6 million, of which approximately $2.1 million was non-cash in nature, was taken in the 2007 accounts to cover charges associated with the discontinuation of NLT.

Importantly, 2007 performance of Chi-Med’s China Healthcare Division excluding NLT (“Continuing Operations”) was very strong with sales growing 28% to $61.4 million (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 equity holders 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 to strengthen in 2007. Currently, through Hutchison Baiyunshan and Shanghai Hutchison Pharmaceuticals, over 1,800 full-time sales 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 operations does not come through in IFRS financial statements which use prorated revenue consolidation, and thereby only reflect about 50% of the actual domestic sales in our joint ventures. For perspective, total domestic China sales in our three joint ventures in 2007 was $123.6 million (2006: $101.4 million) - representing the manufacture and sale of over 3.2 billion doses of medicine.