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.

SHPL grew prescription drug sales 38% to $27.2 million in 2009 (2008: $19.7m) all of which was organic from existing products. In the three years since 2006, compound annual sales growth in SHPL has averaged 33%. Over the past two years, it has averaged 39% as a result of very effective expansion of our commercial network across China.

Sales of SHPL's proprietary cardiovascular prescription drug She Xiang Bao Xin pill ("SXBXP") grew 41% to $22.4 million (2008: $15.8m). SHPL is the only manufacturer of SXBXP in China. During 2009, it achieved two major regulatory results on SXBXP: first, the inclusion of SXBXP on the Essential Medicines List of 307 products that are now mandatory for all state-owned health institutions to carry in China; and, secondly, renewal of SXBXP's Type-A NMC drug status, which means it is fully reimbursed in all provinces.

The market size for ex-factory sales in the Chinese cardiovascular prescription drug market in 2007 was approximately $0.5 billion (Business Monitor International). Regionally, as expected, SXBXP held a leadership market share of approximately 30% in Shanghai in 2009 and shares of approximately 20% to 28% in select eastern markets in Jiangsu and Zhejiang provinces respectively. Beyond eastern China, apart from Beijing (approximately 6% market share) and Guangzhou (approximately 11% market share) we estimate SXBXP market shares are mostly less than 5% (IMS Health data). This highlights the opportunity for SXBXP to expand geographically.

SHPL has made solid progress in expanding out of its eastern China base and has proven its ability to enter and succeed in new markets. In 2009, sales in SHPL's east China stronghold of Shanghai, Jiangsu and Zhejiang provinces grew 33% to $16.4 million. At the same time, sales in markets outside east China accelerated quickly and grew 45% to $10.8 million (2008: $7.5m) and grew to 40% of SHPL's total sales (2008: 38%).

SHPL also continued 2008's strong momentum on its second product, Dan Ning tablets (gallbladder/inflammation) with sales up 29% to $3.7 million (2008: $2.9m). Dan Ning's growth was spurred by the grant of a 20-year process and formula patent from the China State Intellectual Property Office in 2007, an important result that enabled Dan Ning to retain NMC Type-B drug status.

By the end of 2009, a total of 34 SHPL products were included in the NMC with 19 designated as Type-A and 15 as Type-B. In addition to this, a total of 15 SHPL drugs were included on the China Essential Medicines List.

SHPL continued to build its powerful commercial team from around 800 people in 2008 to over 900 sales and marketing staff by the end of 2009, with distribution of its SXBXP in over 6,700 hospitals in China, still only approximately 34% of the 19,712 hospitals in China (China Health Statistical Year Book 2009). There exists major expansion potential for SXBXP resulting from inclusion in the Essential Medicines List, which requires all state-owned, grass roots, health institutions to carry SXBXP by 2020. Furthermore, in addition to hospitals, there are over 212,000 state-run community health centres and clinics which, in theory, will also be required to carry SXBXP.

As a direct result of rapidly increasing scale, with stable market pricing, SHPL gross margins grew to 71.4% in 2009 (2008: 68.2%) despite general inflationary pressure on production costs.

In research and development, in 2009, SHPL secured Government commitments for research funding of approximately $1.4 million. China patents were granted on both Dan Ning tablet and Shengmai injection (cardiovascular and general immunity) and a further three patents were submitted for SXBXP as part of our continuing effort to protect our proprietary position on this important drug in China. Furthermore, a three-year research collaboration with Cambridge University was started in late 2009 aimed at studying the angiogenesis effect of SXBXP and its seven main medicinal component ingredients.

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