China Healthcare Business

Shanghai Hutchison Pharmaceuticals engages in the development, manufacture and sale of TCM pharmaceuticals, with a primary focus on TCM prescription drugs in the cardiovascular area. Shanghai Hutchison Pharmaceuticals was one of the first Sino-foreign TCM equity joint ventures established in China. It is 50 per cent owned by Chi-Med and 50 per cent owned by the Shanghai Medicine Company Limited ("Shanghai Medicine"). Shanghai Medicine forms part of the Shanghai Pharmaceuticals Group, the largest pharmaceutical group in Eastern China. Shanghai Hutchison Pharmaceuticals owns the original Shanghai No. 1 TCM Plant, which was founded in 1958 and created the first TCM injection in China.

Shanghai Hutchison Pharmaceuticals' products are sold under the "Shang Yao" brand, a trademark that has been used for over 30 years in the TCM pharmaceutical retail market in Eastern China. Shang Yao means "Shanghai pharmaceuticals" a general term which is associated by the public with government endorsement and a reputation for quality stemming from the 1970s, when products from Shanghai were generally considered to be the best in China. The ownership rights of the Shang Yao trademarks were transferred to Shanghai Hutchison Pharmaceuticals in 2001 and 2002 as part of Shanghai Medicine Company Limited's contribution to the joint venture's capital.

Prescription drug sales through our Shanghai Hutchison Pharmaceuticals joint venture grew 21% to $14.1 million in 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 of medical representatives to hospitals, which initially was cause for concern, has turned out to have had no impact on Shanghai Hutchison Pharmaceuticals results. Two factors have contributed to this – firstly, we have effectively migrated a significant portion of our hospital sales personnel to community marketing programmes which have proven to be effective; and secondly, after lobbying efforts by many of the major Pharmaceutical companies in China, the SFDA has softened its position on limiting medical representatives’ access to hospitals.

Shanghai Hutchison Pharmaceuticals’s strong performance has seen a 32% increase in sales of our key cardiovascular prescription drug SXBXP to $11.5 million (2006: $8.7 million). In 2007 we focused on this product and have built very strong momentum behind it, which we expect to carry over into 2008.

Regionally, Shanghai Hutchison Pharmaceuticals is making progress in expanding beyond our historical Shanghai stronghold which in 2007 represented 46% of sales (2006: 48%). Sales in markets outside 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 Shanghai Hutchison Pharmaceuticals in 2007 was that in-market consumption grew 25%, outpacing ex-factory sales growth of 21%, signifying that hospital pharmacy and chain drugstore inventories were reduced during the year. Good progress was made in both the hospital pharmacy (72% of sales) and chain drugstore channels (28% of sales) where in-market consumption grew 27% and 21% respectively.

Government relations have been a key focus area for Shanghai Hutchison Pharmaceuticals over the past two years and are now yielding direct tangible benefits to the joint venture. In late 2006 SXBXP was awarded a State Secret Certificate as “Confidential Information” by the Ministry of Science and Technology and State Secrecy Bureau thereby extending effective IP protection for five years. In June 2007 the State Science & Technology Commission approved a $0.3 million grant to fund research on SXBXP’s mechanism of action at one of China’s top universities, Beijing Qing Hua University. In June 2007 the State Science and Technology Commission also approved a further grant of $0.4 million for the study of SXBXP mechanism of action and Dan Ning tablet activity in liver disease. In July 2007 our number two product, Dan Ning tablet (gall stone treatment), was granted a 20-year process and formula patent by the State Patent Bureau thereby guaranteeing it long-term NMC inclusion. In July 2007 the Shanghai Economic & Trade Commission also approved a grant of $0.1 million for research on SXBXP. In August 2007 the Shanghai Price Bureau approved a 14.9% increase in SXBXP’s hospital bidding price to RMB 21.00/box, which improved its gross margin by some $0.5 million/year.

The three major products of Shanghai Hutchison Pharmaceuticals are:

• She Xiang Bao Xin pills: for the long term treatment of coronary artery and heart disease, and for rapid control and prevention of acute angina. In 2006, the SXBX pill formula was awarded a State Secret Certificate as "Confidential Information" by the Ministry of Science and Technology and the State Secrecy Bureau. This certificate extends the intellectual property protection of SXBX pill for a further five years to late-2010 and guarantees SXBX pill protection against generics as well as superior status in the market as one of less than thirty TCM formulas granted protection by the State Secrecy Bureau. She Xiang Bao Xin pills are currently admitted to the Insurance Catalogue for all of China.
• Dan Ning tablets: for the treatment of chronic gall bladder inflammation and gallstones. Shanghai Hutchison Pharmaceuticals has proprietary rights over the medical formula of the Dan Ning tablet produced by it, which is also subject to PRC State TCM protection until 12 September 2009. Shanghai Hutchison Pharmaceuticals is currently the only approved manufacturer for the drug in China. The Dan Ning tablet is currently admitted to the Insurance Catalogue in multiple provinces in China.
• Sheng Mai injection: for the treatment of cardiovascular disease and to enhance general immunity. Shanghai Hutchison Pharmaceuticals does not have propriotary rights to the Sheng Mai injection but the Sheng Mai injection does have PRC State TCM 28 protection until 9 July 2012. The Sheng Mai injection is currently admitted to the Insurance Catalogue for multiple province in China and is produced by a number of manufacturers in China.

http://www.shpl.com.cn