Form 20-F
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
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(Mark One) |
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REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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OR |
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2008 |
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OR |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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OR |
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SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 001-33398
Simcere Pharmaceutical Group
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrants name into English)
Cayman Islands
(Jurisdiction of incorporation or organization)
No. 699-18 Xuan Wu Avenue,
Xuan Wu District, Nanjing
Jiangsu Province 210042
Peoples Republic of China
(Address of principal executive offices)
Zhigang Zhao
Chief Financial Officer
No. 699-18 Xuan Wu Avenue,
Xuan Wu District, Nanjing
Jiangsu Province 210042
Peoples Republic of China
Tel: (86) 25 8556 6666 x 8818
Fax: (86) 25 8547 7666
E-mail: zhaozhigang@simcere.com
(Name, telephone, e-mail and/or facsimile number and address of company contact person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
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Title of Each Securities |
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Name of Each Exchange on Which Registered |
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American Depositary Shares, each representing two ordinary
shares, par value $0.01 per share
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New York Stock Exchange |
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuers classes of capital or common
stock as of the close of the period covered by the annual report. 122,227,318 ordinary shares, par
value $0.01 per share.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
If this report is an annual or transition report, indicate by check mark if the registrant is
not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934. Yes o No þ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark which basis of accounting the registrant has used to prepare the
financial statements included in this filing:
U.S. GAAP þ
International Financial Reporting Standards as issued by the International Accounting
Standards Board o
Other o
If Other has been checked in response to the previous question, indicate by check mark which
financial statement item the registrant has elected to follow. Item 17 o Item 18 o
If this is an annual report, indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to
be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court. Yes o No o
INTRODUCTION
Unless otherwise indicated, references in this annual report on Form 20-F to:
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$ and U.S. dollars refer to the legal currency of the United States; |
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ADRs refer to the American depositary receipts, which, if issued, evidence our
ADSs; |
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ADSs refer to our American depositary shares, each of which represents two
ordinary shares; |
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China and the PRC refer to the Peoples Republic of China, excluding, for the
purpose of this annual report on Form 20-F only, Taiwan and the special administrative
regions of Hong Kong and Macau; |
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ordinary shares refer to our ordinary shares, par value $0.01 per share; |
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RMB and Renminbi refer to the legal currency of China; and |
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we, us, our company and our refer to Simcere Pharmaceutical Group, its
predecessor entities and its consolidated subsidiaries. |
This annual report on Form 20-F includes our audited consolidated financial statements for the
years ended December 31, 2006, 2007 and 2008.
We and certain selling shareholders of our company completed the initial public offering of
15,625,000 ADSs, each representing two ordinary shares, in April 2007. On April 20, 2007, we listed
our ADSs on the New York Stock Exchange under the symbol SCR.
PART I
Item 1. Identity of Directors, Senior Management and Advisers
Not Applicable.
Item 2. Offer Statistics And Expected Timetable
Not Applicable.
Item 3. Key Information
A. |
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Selected Financial Data |
The selected data presented below under the captions Selected Consolidated Statement of
Income data (other than ADS data) and Selected Consolidated Balance Sheet Data for, and as of
the end of, each of the years in the five-year period ended December 31, 2008, are derived from our
consolidated financial statements and related notes thereto. Our consolidated financial statements
as of December 31, 2007 and 2008 and for each of the years in the three-year period ended December
31, 2008, which have been audited by an independent registered public accounting firm, and their
report thereon, is included elsewhere in this annual report on Form 20-F. You should read the
selected consolidated financial data in conjunction with those financial statements and Item 5.
Operating and Financial Review and Prospects included elsewhere in this annual report on Form
20-F. Our consolidated financial statements are prepared and presented in accordance with U.S.
Generally Accepted Accounting Principles, or U.S. GAAP. Our historical results do not necessarily
indicate our results expected for any future period.
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Year Ended December 31, |
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2004 |
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2005 |
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2006 |
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2007 |
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2008 |
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2008 |
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RMB |
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RMB |
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RMB |
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RMB |
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RMB |
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$ |
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(in thousands, except share, per share and per ADS data) |
Selected Consolidated Statement of
Income Data |
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Total revenues(1) |
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564,198 |
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737,014 |
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950,606 |
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1,368,748 |
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1,741,143 |
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255,206 |
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Gross profit |
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410,403 |
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565,940 |
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760,046 |
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1,127,667 |
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1,420,261 |
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208,173 |
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Research and development expenses |
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(19,907 |
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(16,288 |
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(34,289 |
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(68,295 |
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(86,089 |
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(12,618 |
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Sales, marketing and distribution
expenses |
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(230,865 |
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(312,426 |
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(442,757 |
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(634,449 |
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(782,960 |
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(114,762 |
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General and administrative expenses |
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(77,593 |
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(87,139 |
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(98,249 |
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(161,061 |
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(194,233 |
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(28,469 |
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Income from operations |
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82,038 |
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150,087 |
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184,751 |
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263,862 |
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356,979 |
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52,324 |
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Foreign currency exchange gains, net |
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24,670 |
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39,879 |
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5,845 |
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Other income(1) |
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20,526 |
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1,104 |
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162 |
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Net income(2)(3) |
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46,245 |
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102,745 |
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172,258 |
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301,261 |
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350,151 |
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51,323 |
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Earnings per share basic |
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0.67 |
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1.49 |
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1.86 |
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2.56 |
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2.80 |
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0.41 |
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Earnings per share diluted |
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0.67 |
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1.49 |
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1.86 |
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2.48 |
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2.80 |
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0.41 |
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Earnings per ADS basic |
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1.34 |
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2.98 |
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3.72 |
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5.13 |
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5.61 |
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0.82 |
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Earnings per ADS diluted |
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1.34 |
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2.98 |
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3.72 |
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4.95 |
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5.60 |
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0.82 |
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Basic weighted average number of
shares |
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69,000,000 |
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69,000,000 |
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92,695,890 |
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117,534,566 |
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124,921,934 |
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124,921,934 |
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Diluted weighted average number of
shares |
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69,000,000 |
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69,000,000 |
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92,695,890 |
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121,667,507 |
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125,005,803 |
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125,005,803 |
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(1) |
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Total revenues include product revenues and other revenue. |
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(2) |
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In 2007 and 2008, other income represented the incentive payment received from our depositary
in connection with the establishment of the ADR program following our initial public offering.
The incentive payment received in 2007 had the effect of increasing our 2007 net income by
RMB20.5 million, or RMB0.17 per share on a basic basis and a diluted basis, or RMB0.35 per ADS
on a basic basis and RMB0.34 on a diluted basis. The incentive payment received in 2008 had
the effect of increasing our 2008 net income by RMB1.1 million ($0.2 million), or RMB0.01
($0.001) per share on a basic basis and a diluted basis, or RMB0.02 ($0.003) per ADS on a
basic basis and a diluted basis. |
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In 2006, two of our operating subsidiaries were eligible for 100% tax exemptions under a tax
holiday of a two-year 100% exemption followed by a three-year 50% exemption commencing from
the first profit-making year after offsetting accumulated tax losses, or 2+3 tax holiday. In
2007, four of our operating subsidiaries were eligible for 100% tax exemptions under 2+3 tax
holiday, three of which expired at the end of 2007. In 2008, one and three of our operating
subsidiaries were eligible for 100% and 50% tax exemptions from income tax, respectively; and
two of our operating subsidiaries were qualified as advanced and new technology enterprises
and eligible for a preferential income tax rate. The effect of the income tax exemptions and
the preferential tax rate for advanced and new technology enterprises increased our net income
for 2006, 2007 and 2008 by RMB38.8 million, RMB62.9 million and RMB57.7 million ($8.5
million), respectively, or RMB0.42, RMB0.54 and RMB0.46 ($0.07) on the per share basis,
respectively. Prior to 2006, there were no such tax exemptions and preferential tax
arrangements in place. |
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Year Ended December 31, |
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2004 |
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2005 |
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2006 |
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2007 |
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2008 |
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(in percentages) |
Other Consolidated Financial Data |
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Gross margin |
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72.7 |
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76.8 |
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80.0 |
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82.4 |
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81.6 |
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Operating margin |
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14.5 |
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20.4 |
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19.5 |
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19.3 |
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20.5 |
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Net margin |
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8.2 |
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13.9 |
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18.2 |
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22.0 |
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20.1 |
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As of December 31, |
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2004 |
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2005 |
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2006 |
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2007 |
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2008 |
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2008 |
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RMB |
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RMB |
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RMB |
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RMB |
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RMB |
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$ |
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(in thousands) |
Selected Consolidated Balance Sheet Data |
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Cash and cash equivalents |
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102,672 |
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90,060 |
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106,027 |
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497,352 |
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812,814 |
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119,137 |
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Held-to-maturity investment securities |
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470,000 |
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Accounts and bills receivables, net |
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99,987 |
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130,871 |
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162,781 |
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488,374 |
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748,997 |
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109,783 |
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Inventories |
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27,878 |
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40,293 |
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39,483 |
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65,241 |
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95,948 |
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14,063 |
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Amounts due from related parties |
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91,396 |
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85,575 |
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434 |
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7,503 |
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24,365 |
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3,571 |
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Total current assets |
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322,446 |
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391,461 |
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411,429 |
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1,557,153 |
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1,707,759 |
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250,312 |
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Property, plant and equipment, net |
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119,558 |
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125,365 |
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267,054 |
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374,058 |
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463,059 |
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67,872 |
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Intangible assets, net |
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18,020 |
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15,731 |
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163,148 |
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251,221 |
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275,244 |
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40,344 |
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2
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As of December 31, |
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2004 |
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2005 |
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2006 |
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2007 |
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2008 |
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2008 |
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RMB |
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RMB |
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RMB |
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RMB |
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RMB |
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$ |
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(in thousands) |
Goodwill |
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13,814 |
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13,814 |
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100,634 |
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161,496 |
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178,211 |
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26,121 |
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Total assets |
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581,041 |
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621,227 |
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1,034,547 |
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2,472,208 |
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2,778,222 |
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407,214 |
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Short-term bank loans and borrowings and
current installments of long-term debt |
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293,000 |
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171,000 |
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333,000 |
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29,000 |
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6,000 |
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879 |
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Amounts due to related parties |
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12,908 |
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78,153 |
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1,352 |
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Total current liabilities |
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456,747 |
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421,185 |
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568,173 |
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342,637 |
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335,013 |
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49,103 |
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Long-term debt, excluding current installments |
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52,000 |
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62,000 |
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9,088 |
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Total shareholders equity |
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119,990 |
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192,537 |
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442,740 |
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1,983,816 |
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2,253,025 |
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330,235 |
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Exchange Rate Information
This annual report on Form 20-F contains translations of certain RMB amounts into U.S. dollar
amounts at specified rates. Unless otherwise stated, the translations of RMB into U.S. dollars have
been made at the noon buying rate in The City of New York for cable transfers of RMB as certified
for customs purposes by the Federal Reserve Bank of New York, or the noon buying rate, on
Wednesday, December 31, 2008, which was RMB6.8225 to $1.00. We make no representation that the RMB
or U.S. dollar amounts referred to in this annual report on Form 20-F could have been, or could be,
converted into U.S. dollars or RMB, as the case may be, at any particular rate or at all. See Item
3. Key Information. D. Risk FactorsRisks Related to Doing Business in ChinaFluctuations in the
value of the Renminbi may have a material adverse effect on your investment for discussions of the
effects of fluctuating exchange rates and currency control on the value of our ADSs. On June 12,
2009, the exchange rate, as set forth in the H.10 statistical release of the Federal Reserve Board,
was RMB6.8352 to $1.00.
The following table sets forth information concerning exchange rates between the RMB and the
U.S. dollar for the periods indicated. These rates are provided solely for your convenience and are
not necessarily the exchange rates that we used in this annual report or will use in the
preparation of our periodic reports or any other information to be provided to you. For all periods
prior to January 1, 2009, the exchange rate refers to the noon buying rate as reported by the
Federal Reserve Bank of New York. For periods beginning on or after January 1, 2009, the exchange
rate refers to the exchange rate as set forth in the H.10 statistical release of the Federal
Reserve Board.
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RMB per U.S. Dollar Exchange Rate |
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Period |
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End |
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Average(1) |
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Low |
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High |
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(RMB per $1.00) |
2004 |
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8.2765 |
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8.2768 |
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8.2774 |
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8.2764 |
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2005 |
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8.0702 |
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8.1826 |
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8.2765 |
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8.0702 |
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2006 |
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7.8041 |
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7.9579 |
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8.0702 |
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7.8041 |
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2007 |
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7.2946 |
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7.5806 |
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7.8127 |
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7.2946 |
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2008 |
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6.8225 |
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6.9193 |
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7.2946 |
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6.7800 |
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2008 |
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December |
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6.8225 |
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6.8539 |
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6.8842 |
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6.8225 |
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2009 |
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January |
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6.8392 |
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6.8360 |
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6.8403 |
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6.8225 |
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February |
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6.8395 |
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6.8363 |
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6.8470 |
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6.8241 |
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March |
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6.8329 |
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6.8360 |
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6.8438 |
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6.8240 |
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April |
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6.8180 |
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6.8304 |
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6.8361 |
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6.8180 |
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May |
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|
6.8278 |
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6.8235 |
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|
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6.8326 |
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6.8176 |
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June (through June 12) |
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6.8352 |
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6.8328 |
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6.8371 |
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6.8264 |
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|
|
|
(1) |
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Annual averages are calculated from month-end rates. Monthly averages are calculated using the
average of the daily rates during the relevant period. |
3
B. |
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Capitalization and Indebtedness |
Not Applicable.
C. |
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Reasons for the Offer and Use of Proceeds |
Not Applicable.
Risks Related to Our Company
Our products and product candidates may not achieve or maintain widespread market acceptance.
Success of our products is highly dependent on the needs and preferences of healthcare
practitioners and patients and market acceptance, and we may not achieve or maintain widespread
market acceptance of our products or product candidates among healthcare practitioners and
patients. We believe that market acceptance of our products will depend on many factors, including:
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the perceived advantages of our products over competing products and the
availability and success of competing products; |
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the effectiveness of our sales and marketing efforts; |
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the safety and efficacy of our products and the prevalence and severity of adverse
side effects, if any; |
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our product pricing and cost effectiveness; |
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publicity concerning our products, product candidates or competing products; |
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whether or not patients routinely use our products, refill prescriptions and
purchase additional products; |
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our ability to respond to changes in healthcare practitioner and patient
preferences; and |
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the continued inclusion of our products in the Medical Insurance Catalogs. |
If our products fail to achieve or maintain market acceptance, or if new products are
introduced by others that are more favorably received than our products, are more cost effective or
otherwise render our products obsolete, we may experience a decline in the demand for our products.
If we are unable to market and sell our products successfully, our business, financial condition,
results of operation and future growth would be adversely affected.
Our trademarks, patents and other non-patented intellectual property are valuable assets and if we
are unable to protect them from infringement, our business prospects may be harmed.
As our own brand of generic products constitutes a large portion of our sales, we consider our
trademarks to be valuable assets. Under PRC law, we have the exclusive right to use a trademark for
products and services for which such trademark has been registered with the PRC Trademark Office of
State Administration for Industry and Commerce. However, our efforts to defend our trademarks may
be unsuccessful against competitors or other violating entities and we may not have adequate
remedies for any breach. Our commercial success will also depend in part on our obtaining and
maintaining patent and trade secret protection of our technologies, product candidates and products
as well as successfully defending our patents against third-party challenges. We will only be able
to protect our technologies, product candidates and products from unauthorized use by third parties
to the extent that valid and enforceable patents or trade secrets cover them. In the event that our
issued patents and our applications do
4
not adequately describe, enable or otherwise provide coverage of our technologies, product
candidates and products, we would not be able to exclude others from developing or commercializing
these technologies, product candidates and products. Furthermore, the degree of future protection
of our proprietary rights is uncertain because legal means afford only limited protection and may
not adequately protect our rights or permit us to gain or keep our competitive advantage.
The patent positions of pharmaceutical companies can be highly uncertain and involve complex
legal and factual questions. The patent situation outside of China may be more complex. Changes in
either the patent laws or in interpretations of patent laws in China or other countries may
diminish the value of our intellectual property. Accordingly, we cannot predict the scope of claims
that may be allowed or enforced in our patents or in third-party patents. For example:
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we might not have been the first to make the inventions covered by each of our
pending patent applications and issued patents; |
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we might not have been the first to file patent applications for these inventions; |
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others may independently develop similar or alternative technologies or duplicate
our technologies without infringing our intellectual property rights; |
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one or more of our pending patent applications may not result in issued patents; |
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our issued patents may not provide a basis for commercially viable products, may not
provide us with any competitive advantages, or may be challenged and invalidated by
third parties; |
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we may not develop additional proprietary technologies or product candidates that
are patentable; and |
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the patents of others may prevent us from developing or commercializing our product
candidates. |
We also rely on trade secrets to protect our technology, especially where we believe patent
protection is not appropriate or obtainable. However, trade secrets are difficult to protect. While
we use reasonable efforts to protect our trade secrets, our employees, our research partners
employees, consultants, contractors or scientific and other advisors may unintentionally or
willfully disclose our information to competitors or use our trade secrets without our
authorization. In addition, confidentiality agreements, if any, executed by the foregoing persons
may not be enforceable or provide meaningful protection for our trade secrets or other proprietary
information in the event of unauthorized use or disclosure. If we were to enforce a claim that a
third party had illegally obtained and was using our trade secrets, our enforcement efforts would
be expensive and time-consuming, and the outcome would be unpredictable. In addition, if our
competitors independently develop information that is equivalent to our trade secrets, it will be
more difficult for us to enforce our rights and our business could be harmed.
If we are not able to obtain and defend our patents or trade secrets, we will not be able to
exclude competitors from developing or marketing competing products using the relevant technologies
or processes, thereby adversely affecting our competitiveness.
The existence of a patent may not necessarily protect us from competition as our patent may be
challenged, invalidated or held unenforceable. We may also be found to infringe the patents of
others.
The existence of a patent may not necessarily protect us from competition, as any patent
issued may be challenged, invalidated, or held unenforceable. Competitors may successfully
challenge our patents, produce similar products that do not infringe our patents or produce
products in countries that do not recognize our patents. The occurrence of any of these events
could hurt our competitive position and decrease our revenues from product sales and/or licensing.
In addition, even if we own patents, this does not provide assurance that the manufacture,
sale or use of our patented products does not infringe the patent rights of another. Because patent
applications can take many years to
5
approve and issue, there may be pending applications, known or unknown to us, that may later
result in issued patents that our technologies, product candidates or products may infringe.
Specifically, under the PRC Patent Law, the term of patent protection starts from the date the
patent was filed, instead of the date it was issued as is the case in many jurisdictions. Therefore
our priority in any PRC patents may be defeated by third-party patents issued on a later date if
the applications for such patents were filed prior to our own, and the technologies underlying such
patents are the same or substantially similar to ours. In such case, a third party with an earlier
application may force us to pay to license its patented technology, sue us for patent infringement
and/or challenge the validity of our patents. If a third party sues us for infringement, the suit
will divert substantial management time and resources, regardless of whether we are ultimately
successful. Further, we may be liable for monetary damages and/or forced to redesign, if possible,
our technology to avoid the infringement.
Litigation to protect our intellectual property rights or defend against third-party allegations of
infringement may be costly.
We may encounter future litigation by third parties based on claims that our products or
activities infringe the intellectual property rights of others or that we have misappropriated the
trade secrets of others. We may also initiate lawsuits to defend the ownership or inventorship of
our inventions. It is difficult, if not impossible, to predict how such disputes would be resolved.
The defense and prosecution of intellectual property rights are costly and divert technical and
management personnel from their normal responsibilities. We may not prevail in any of such
litigation or proceedings. An adverse determination of any litigation or proceedings against us,
resulting in a finding of non-infringement by others or invalidity of our patents, may result in
the sale by competitors of generic substitutes of our products. In addition, a determination that
we have infringed on the intellectual property rights of another may require us to do one or more
of the following:
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pay monetary damages to settle the results of such adverse determination, which
could adversely affect our business, financial condition and results of operations; |
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cease selling, incorporating or using any of our products that incorporate the
challenged intellectual property, which would adversely affect our revenue or costs, or
both; |
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obtain a license from the holder of the infringed intellectual property right, which
might be costly or might not be available on reasonable terms, or at all; or |
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redesign our products to make them non-infringing, which would be costly and
time-consuming and may require additional clinical trials, or may not be possible at
all. |
While we currently know of no actual or threatened claim of infringement that would be
material to us, there can be no assurance that such a claim will not be asserted. If such a claim
is asserted, there can be no assurance that the resolution of the claim would permit us to continue
producing the product in question on commercially reasonable terms. In addition, there is a risk
that some of our confidential information could be compromised by disclosure during intellectual
property litigation. Furthermore, there could be public announcements throughout the course of
intellectual property litigation or proceedings as to the results of hearings, motions or other
interim proceedings or developments in the litigation. If securities analysts or investors perceive
these results to be negative, there could be a substantial negative effect on the trading price of
our ADSs.
Most of our products are branded generics that can be manufactured and sold by other pharmaceutical
manufacturers in China once the relevant protection or monitoring periods, if any, elapse.
Most of our products are branded generic pharmaceuticals and are not protected by patents. As
a result, other pharmaceutical companies may sell equivalent products at a lower cost, and this
might result in a commensurate loss in sales of our branded generic products. Certain of our
generic products are subject to a protection or monitoring period. During such period, the PRC
State Food and Drug Administration, or the SFDA, will not accept applications for new medicine
certificates for the same product by other pharmaceutical companies or approve the production or
import of the same product by other pharmaceutical companies. Once such protection or monitoring
periods expire, other manufacturers may obtain relevant production approvals and will be entitled
to
6
sell generic pharmaceutical products with similar formulae or production methods in China. The
maximum monitoring period currently granted by the SFDA is five years. The maximum protection
period granted by the SFDA was eight years prior to April 1999, but was later increased to 12
years. As of March 31, 2009, our product Zaichang was under a monitoring period which is to expire
on March 13, 2013 and our product Anxin was under a monitoring period which is to expire on May 3,
2012. If other pharmaceutical companies sell pharmaceutical products that are similar to our
unprotected products or our protected products for which the relevant monitoring period has
expired, we may face additional competition and our business and profitability may be adversely
affected.
We may be subject to damages resulting from claims that we or our employees have wrongfully used or
disclosed alleged trade secrets of their former employers.
Certain of our employees and consultants were previously employed at other biotechnology or
pharmaceutical companies, including our competitors or potential competitors, or at universities or
other research institutions. Although no claims against us are currently pending, we may be subject
to claims that these employees, consultants or we have inadvertently or otherwise used or disclosed
trade secrets or other proprietary information of their former employers. Litigation may be
necessary to defend against these claims. Even if we are successful in defending against these
claims, litigation could result in substantial costs and be a distraction to our management. If we
fail in defending such claims, in addition to paying monetary damages, we may lose valuable
intellectual property rights or personnel. A loss of key research personnel or their work product
could delay or prevent us from commercializing one or more of our product candidates.
Our future research and development projects may not be successful.
The successful development of pharmaceutical products can be affected by many factors.
Products that appear to be promising at their early phases of research and development may fail to
be commercialized for various reasons, including the failure to obtain the necessary regulatory
approvals. In addition, the research and development cycle for new products for which we may obtain
an approval certificate is long. The process of conducting basic research and various stages of
tests and trials of a new product before obtaining an approval certificate and commercializing the
product may require ten years or longer. Many of our product candidates are in the early stages of
pre-clinical studies or clinical trials and we must conduct significant additional clinical trials
before we can seek the necessary regulatory approvals to begin commercial production and sales of
these products. For certain pharmaceuticals, such as Endu, we are required to conduct Phase IV
clinical trials even after such product has obtained the necessary regulatory approvals to begin
commercial production and sale, and if we fail to complete such Phase IV clinical trials within a
specified period, we may be unable to renew the registration for such products. For Endu, such
Phase IV clinical trials must be completed and the relevant report submitted prior to September
2010. There is no assurance that our future research and development projects will be successful or
completed within the anticipated time frame or budget or that we will receive the necessary
approvals from relevant authorities for the production of these newly developed products, or that
these newly developed products will achieve commercial success. Even if such products can be
successfully commercialized, they may not achieve the level of market acceptance that we expect.
In addition, the pharmaceutical industry is characterized by rapid changes in technology,
constant enhancement of industrial know-how and frequent emergence of new products. Future
technological improvements and continual product developments in the pharmaceutical market may
render our existing products obsolete or affect their viability and competitiveness. Therefore, our
future success will largely depend on our research and development capability, including our
ability to improve our existing products, diversify our product range and develop new and
competitively priced products that can meet the requirements of the changing market. Should we fail
to respond to these frequent technological advances by improving our existing products or
developing new products in a timely manner or these products do not achieve a desirable level of
market acceptance, our business and profitability will be materially and adversely affected.
We rely on certain domestic and overseas research institutions and universities for the research and development of new
products and any failure of our research partners to meet our timing and quality standards or our
failure to continue such collaborative arrangement or enter into such new arrangements could
adversely affect our ability to develop new pharmaceuticals and our overall business prospects.
7
Our business strategy includes collaborating with third parties for research and development
of new products. We rely on long-term cooperative relationships with a number of domestic and overseas research
institutions and universities. These research institutions and universities have
collaborated with us in a number of research projects and certain of our products that have
obtained approval certificates were developed by us together with our research partners. At
present, several research institutions and universities are working with us on various research and
development projects. Any failure of our research partners to meet the required quality standards
and timetables set in their research agreements with us, or our inability to enter into additional
research agreements with these research partners on terms acceptable to us in the future, may have
an adverse effect on our ability to develop new products and on our business prospects. In
addition, the growth of our business and development of new products may require that we seek
additional collaborative partners. We cannot assure you that we will be able to enter into
agreements with collaborative partners on terms acceptable to us. Our inability to enter into such
agreements or our failure to maintain such arrangements could limit the number of new products that
we could develop and ultimately decrease our sources of future revenue.
We may not be able to obtain regulatory approval for any of the products resulting from our
development efforts and failure to obtain these approvals could materially harm our business.
All new medicines must be approved by the SFDA before they can be marketed and sold in China.
The SFDA requires successful completion of clinical trials and demonstrated manufacturing
capability before it grants approval. Clinical trials are expensive and their results are
uncertain. It often takes a number of years before a medicine can be ultimately approved by the
SFDA. In addition, the SFDA and other regulatory authorities may apply new standards for safety,
manufacturing, packaging, and distribution of future product candidates. Complying with such
standards may be time-consuming and expensive and could result in delays in obtaining SFDA approval
for our future product candidates, or possibly preclude us from obtaining SFDA approval altogether.
Furthermore, our future products may not be effective or may prove to have undesirable or
unintended side effects, toxicities or other characteristics that may preclude us from obtaining
regulatory approval or prevent or limit commercial use. The SFDA and other regulatory authorities
may not approve the products that we develop and even if we do obtain regulatory approvals, such
regulatory approvals may be subject to limitations on the indicated uses for which we may market a
product, which may limit the size of the market for such product.
Our marketing activities are critical to the success of our products, and if we fail to grow our
marketing capabilities or maintain adequate spending on marketing activities, the market share of
our products and our brand name and product reputation would be materially adversely affected.
Most of our products are branded generic pharmaceuticals and the success and lifespan of our
products are dependent on our efforts in the marketing of our products. Our marketing professionals
regularly visit hospitals, clinics and pharmacies to explain the therapeutic value of our
pharmaceuticals and to keep healthcare professionals up to date as to any developments relating to
our pharmaceuticals. We organize in-person product presentations, conferences and seminars for
physicians and other healthcare professionals and participate in trade shows to generate market
awareness of our existing and new prescription pharmaceuticals. We are also engaged in advertising
and educational campaigns through various media channels to educate the public as to our
pharmaceuticals. These various marketing activities are critical to the success of our products.
However, we cannot assure you that our current and planned spending on marketing activities will be
adequate to support our future growth. Any factors adversely affecting our ability to grow our
marketing capabilities or our ability to maintain adequate spending on marketing activities will
have an adverse effect on the market share of our products and the brand name and reputation of our
products, which may result in decreased demand for our products and negatively affect our business
and results of operations.
We may not be successful in competing with other manufacturers of pharmaceuticals in the tender
processes for the purchase of medicines by state-owned and state-controlled hospitals.
A substantial portion of the products we sell to our distributor customers are then sold to
hospitals owned and controlled by counties or higher level government authorities in China. These
hospitals must implement collective tender processes for the purchase of medicines listed in the
Medical Insurance Catalogs and medicines that are consumed in large volumes and commonly prescribed
for clinical uses. During a collective tender process, the hospitals will establish a committee
consisting of recognized pharmaceutical experts. The committee will assess
8
the bids submitted by the pharmaceutical manufacturers, taking into consideration, among other
things, the quality and price of the medicine and the service and reputation of the manufacturers.
For the same type of pharmaceutical, the committee usually selects from among two to three
different brands. Only pharmaceuticals that have won in the collective tender processes may be
purchased by these hospitals. The collective tender process for pharmaceuticals with the same
chemical composition must be conducted at least annually, and pharmaceuticals that have won in the
collective tender processes previously must participate and win in the collective tender processes
in the following period before new purchase orders can be issued. If we are unable to win purchase
contracts through the collective tender processes in which we decide to participate, we will lose
market share to our competitors, and our revenue and profitability will be adversely affected.
We may not be able to successfully identify and acquire new products or businesses.
In addition to our own research and development efforts, our growth strategy also relies on
our acquisitions of new product candidates, products or businesses from third parties. Any future
growth through acquisitions will be dependent upon the continued availability of suitable
acquisition candidates at favorable prices and upon advantageous terms and conditions. Even if such
opportunities are present, we may not be able to successfully identify such acquisition target.
Moreover, other companies, many of which may have substantially greater financial, marketing and
sales resources, are competing with us for the right to acquire such product candidates, products
or businesses.
If an acquisition candidate is identified, the third parties with whom we seek to cooperate
may not select us as a potential partner or we may not be able to enter into arrangements on
commercially reasonable terms or at all. Furthermore, the negotiation and completion of potential
acquisitions could cause significant diversion of managements time and resources and potential
disruption of our ongoing business. Future acquisitions may also expose us to other potential risks
which may adversely affect our business, financial condition and results of operations, including
risks associated with:
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failure to obtain regulatory approval for any newly acquired product candidates; |
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the integration of the acquired businesses, operations, services and personnel with
our existing business and operations; |
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the infringement of third parties intellectual property rights or intellectual
property right challenges as to the acquired pharmaceuticals; |
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unforeseen or hidden liabilities; |
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the diversion of resources from our existing businesses and technologies; |
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our inability to generate sufficient revenue to recover costs and expenses of the
acquisitions; and |
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potential loss of, or harm to, relationships with employees or customers, any of
which could significantly disrupt our ability to manage our business and materially and
adversely affect our business, financial condition and results of operations. |
We depend on distributors for all of our revenues and failure to maintain relationships with our
distributors or to otherwise expand our distribution network would materially and adversely affect
our business.
We sell our products exclusively to pharmaceutical distributors in China and depend on
distributors for all of our revenues. We have business relationships directly or indirectly with
approximately 1,700 pharmaceutical distributors in China. In 2006, 2007 and 2008, no single
distributor contributed, on an individual basis, 10.0% or more of our total revenues, and sales to
our five largest distributors accounted in aggregate for approximately 12.7%, 13.8% and 11.6%
respectively, of our product revenues. In line with industry practices in China, we typically enter
into written distribution agreements with our distributors for one-year terms that are generally
renewed annually. As our existing distribution agreements expire, we may be unable to renew with
our desired distributors on favorable
9
terms or at all. In addition, some of our distributors may sell products that compete with our
products. We compete for desired distributors with other pharmaceutical manufacturers, many of
which may have higher visibility, greater name recognition and financial resources, and broader
product selection than we do. Consequently, maintaining relationships with existing distributors
and replacing distributors may be difficult and time-consuming. Any disruption of our distribution
network, including our failure to renew our existing distribution agreements with our desired
distributors, could negatively affect our ability to effectively sell our products and would
materially and adversely affect our business, financial condition and results of operations.
We may not be able to effectively manage our employees, distribution network and third-party
marketing firms, and our reputation, business, prospects and brand may be materially and adversely
affected by actions taken by our distributors.
We have limited ability to manage the activities of our distributors and third-party marketing
firms that we contract to promote our products and brand name, both of which are independent from
us. Our distributors and third-party marketing firms could take one or more of the following
actions, any of which could have a material adverse effect on our business, prospects and brand:
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sell our products outside their designated territory, possibly in violation of the
exclusive distribution rights of other distributors; |
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fail to adequately promote our products; or |
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violate the anti-corruption laws of China, the United States or other countries. |
In addition, although our company policies prohibit our employees from making improper
payments to hospitals or otherwise engaging in improper activities to influence the procurement
decisions of hospitals, we may not be able to effectively manage our employees, as the compensation
of our sales and marketing personnel is partially linked to their sales performance. As a result,
we cannot assure you that our employees will not violate the anti-corruption laws of China, the
United States or other countries. Such violations could have a material adverse effect on our
reputation, business, prospects and brand.
Failure to adequately manage our employees, distribution network or third-party marketing
firms, or their non-compliance with employment, distribution or marketing agreements could harm our
corporate image among end users of our products and disrupt our sales, resulting in a failure to
meet our sales goals. Furthermore, we could be liable for actions taken by our employees,
distributors or third-party marketing firms, including any violations of applicable law in
connection with the marketing or sale of our products, including Chinas anti-corruption laws and
the Foreign Corrupt Practices Act of the United States, or the FCPA. In particular, if our
employees, distributors or third-party marketing firms make any payments that are forbidden under
the FCPA, we could be subject to civil and criminal penalties imposed by the U.S. government.
Over the past few years, the PRC government has increased its anti-corruption measures. In the
pharmaceutical industry, corrupt practices include, among others, acceptance of kickbacks, bribes
or other illegal gains or benefits by the hospitals and medical practitioners from pharmaceutical
manufacturers and distributors in connection with the prescription of certain pharmaceuticals. Our
employees, affiliates, distributors or third-party marketing firms may violate these laws or
otherwise engage in illegal practices with respect to their sales or marketing of our products or
other activities involving our products. If our employees, affiliates, distributors or third-party
marketing firms violate these laws, we could be required to pay damages or fines, which could
materially and adversely affect our financial condition and results of operations. In addition, PRC
laws regarding what types of payments to promote or sell our products are impermissible are not
always clear. As a result, we, our employees, affiliates, our distributors or third-party marketing
firms could make certain payments in connection with the promotion or sale of our products or other
activities involving our products which at the time are considered by us or them to be legal but
are later deemed impermissible by the PRC government. Furthermore, our brand and reputation, our
sales activities or the price of our ADSs could be adversely affected if we become the target of
any negative publicity as a result of actions taken by our employees, affiliates, distributors or
third-party marketing firms. In
10
addition, government-sponsored anti-corruption campaigns from time to time could have a
chilling effect on our marketing efforts to new hospital customers.
There is no assurance that our existing products will continue to be included or new products
developed by us will be included in the Medical Insurance Catalogs.
Eligible participants in the national basic medical insurance program in China, which consists
of mostly urban residents, are entitled to reimbursement from the social medical insurance fund for
up to the entire cost of medicines that are included in the Medical Insurance Catalogs. See Item
4. Information of the CompanyB. Business OverviewRegulation Reimbursement Under the National
Medical Insurance Program. As of March 31, 2009, 24 of our 45 principal products that were
manufactured and sold were included in the national Medical Insurance Catalog and 15 were included
in the provincial Medical Insurance Catalogs of various provinces, municipalities and autonomous
regions. The inclusion of a medicine in the Medical Insurance Catalogs can substantially improve
the sales of the medicine. The Ministry of Human Sources and Social Security in China, or the
Ministry of Human Resources, together with other government authorities from time to time, selects
medicines to be included in the Medical Insurance Catalogs based on factors including treatment
requirements, frequency of use, effectiveness and price. The Ministry of Human Resources also
occasionally removes medicines from such catalogs. There can be no assurance that our existing
products will continue to be included in the Medical Insurance Catalogs. The removal or exclusion
of our products from the Medical Insurance Catalogs may adversely affect our sales. In addition,
there is significant uncertainty related to the coverage and reimbursement of newly approved
pharmaceutical products. The commercial success of our potential products is substantially
dependent on whether reimbursement is available for the ordering of our potential products by
hospitals for use by their patients. Our failure to obtain inclusion of our potential products to
the Medical Insurance Catalogs may adversely affect the future sales of those products.
We have limited insurance coverage and may incur losses resulting from product liability claims or
business interruptions.
The nature of our business exposes us to the risk of product liability claims that is inherent
in the research and development, manufacturing and marketing of pharmaceutical products. Using
product candidates in clinical trials also exposes us to product liability claims. These risks are
greater for our products that receive regulatory approval for commercial sale. Even if a product
were approved for commercial use by an appropriate governmental agency, there can be no assurance
that users will not claim effects other than those intended resulted from the use of our products.
While to date no material claim for personal injury resulting from allegedly defective products has
been brought against us, a substantial claim or a substantial number of claims, if successful,
could have a material adverse impact on our business, financial condition and results of
operations. Such lawsuits may divert the attention of our management from our business strategies
and may be costly to defend. In addition, we do not maintain product liability insurance or
insurance covering potential liability relating to the release of hazardous materials. In the event
of allegations that any of our products are harmful, we may experience reduced consumer demand for
our products or our products may be recalled from the market. We may also be forced to defend
lawsuits and, if unsuccessful, to pay a substantial amount in damages. In addition, business
interruption insurance available in China offers limited coverage compared to that offered in many
other countries. We do not have any business interruption insurance. Any business disruption or
natural disaster could result in substantial costs and diversion of resources.
Our revenue depends and will likely continue to depend on a limited number of product lines.
We currently have four products that individually contribute over RMB100.0 million ($14.7
million) to our revenues in 2008, which were Bicun, Zailin, Endu and Yingtaiqing. Sales of these
products accounted in aggregate for 71.8% of our product revenues in 2008. We expect sales of these
limited product lines to comprise a substantial portion of our revenues in the future. Accordingly,
any factors adversely affecting the sales of any of these products will have a material adverse
effect on our business, financial condition and results of operations.
Our limited operating history may not serve as an adequate basis to judge our future prospects and
results of operations.
11
We commenced operations in March 1995 and operated our business mainly as a distributor of
pharmaceutical products. Since then, we have gradually built up our research, development and
manufacturing capabilities and have become an integrated pharmaceutical company that develops,
manufactures and sells pharmaceutical products. Therefore we have a limited operating history under
our current business model upon which you can evaluate the viability and sustainability of our
business. Accordingly, you should consider our future prospects in light of the risks and
uncertainties experienced by other China-based early stage companies. Some of these risks and
uncertainties relate to our ability to:
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retain and acquire customers; |
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diversify our revenue sources by successfully developing and selling new products; |
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effectively manage our business as it expands; |
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respond to changes in our regulatory environment; |
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manage risks associated with intellectual property rights; |
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maintain effective control of our costs and expenses; |
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raise sufficient capital to sustain and expand our business; and |
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attract, retain and motivate qualified personnel. |
If we are unsuccessful in addressing any of these risks and uncertainties, our business,
financial condition, results of operations and future growth would be adversely affected.
We may not be able to manage our expansion of operations effectively.
We commenced business operations in March 1995, changed our business model in 2001, and have
grown rapidly. We anticipate significant continued expansion of our business to address growth in
demand for our products, as well as to capture new market opportunities. To manage the potential
growth of our operations, we will be required to improve our operational and financial systems,
procedures and controls, increase manufacturing capacity and output, and expand, train and manage
our growing employee base. Furthermore, we need to maintain and expand our relationships with our
customers, suppliers and other third parties. We cannot assure you that our current and planned
operations, personnel, systems, internal procedures and controls will be adequate to support our
future growth. In addition, the success of our growth strategy depends on a number of internal and
external factors, such as the expected growth of the pharmaceutical market in China and the
competition from other pharmaceutical companies. If we are unable to manage our growth effectively,
we may not be able to take advantage of market opportunities, execute our business strategies or
respond to competitive pressures.
We have no control over Hong Kong Medgenn or the development and sale of Endu outside of the PRC.
Our brand and reputation may be adversely affected if the development and sale of Endu outside of
the PRC violate the intellectual property rights of any third parties.
Medgenn (Hong Kong) Co., Ltd., or Hong Kong Medgenn, an affiliate company in which we owned
indirectly an effective 40.0% equity interest as of March 31, 2009, has the ability to engage in
the development and sale of Endu in any jurisdiction outside of the PRC, including the United
States, until February 10, 2015. The other 60.0% of Hong Kong Medgenn was owned by Bestspeed
Investments Limited, or Bestspeed, a British Virgin Islands company. Hong Kong Medgenn is
controlled by its board of directors, which has five members, including Dr. Yongzhang Luo, Mr.
Willi Chu and Mr. Linghai Zhu, all of whom were appointed by Bestspeed, and Mr. Jinsheng Ren and
Mr. Xiaojin Yin, both of whom were appointed by Shandong Simcere Medgenn Bio-Pharmaceutical Co.,
Ltd., or Shandong Simcere, formerly known as Yantai Medgenn Co., Ltd., and are also our executive
officers. Bestspeed was a shareholder of Hong Kong Medgenn prior to our acquisition of an 80.0%
equity interest in Shandong Simcere in May 2006 and we are unable to ascertain the identities of
the natural persons who
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control Bestspeed. We are not aware of whether Hong Kong Medgenn has commenced any operations
to date, or whether it has obtained any regulatory approval outside of the PRC to sell Endu. Hong
Kong Medgenn holds the rights to apply for patents and may grant its rights with respect to Endu in
these jurisdictions to independent third parties. A cooperation agreement entered into on February
10, 2005 between Bestspeed and Shandong Simcere provides Bestspeed with daily operating control
over Hong Kong Medgenns business, including the development and sale of Endu in any jurisdiction
outside of the PRC until February 10, 2015. If Hong Kong Medgenn violates the intellectual property
rights of any third parties or otherwise suffers economic or other losses, our brand, reputation,
business and results of operations could be adversely affected. In addition, the agreements with
Hong Kong Medgenn will prohibit us from engaging in the development and sale of Endu outside of the
PRC prior to February 10, 2015, which might hinder our ability to grow our business outside of the
PRC.
Our business depends substantially on the continuing efforts of our executive officers, research
personnel and other key personnel, and our business may be severely disrupted if we lose their
services.
We depend on key members of our management team, research personnel and other key personnel.
In particular, we depend on the services of Mr. Jinsheng Ren, our founder, the chairman of our
board of directors and our chief executive officer, and Mr. Xiaojin Yin, our senior vice president
of research and development. The loss of key employees could delay the advancement of our research
and development activities. The implementation of our business strategy and our future success will
depend in large part on our continued ability to attract and retain highly qualified scientific,
technical and management personnel. We face competition for personnel from other pharmaceutical
companies, universities, public and private research institutions and other organizations. The
process of hiring suitably qualified personnel is often lengthy. If our recruitment and retention
efforts are unsuccessful in the future, it may be more difficult for us to execute our business
strategy.
We do not maintain key employee insurance. If one or more of our executive officers, research
personnel and other key personnel are unable or unwilling to continue in their present positions,
we may not be able to replace them readily, if at all. Therefore, our business may be severely
disrupted, and we may incur additional expenses to recruit and retain new officers. In addition, if
any of our executive officers or key research personnel joins a competitor or forms a competing
company, we may lose some of our customers. Each of our executive officers, key research personnel
and marketing managers has entered into a confidentiality and non-competition agreement with us.
However, if any disputes arise between our executive officers, key research personnel and marketing
managers and us, we cannot assure you, in light of uncertainties associated with the PRC legal
system, the extent to which any of these agreements could be enforced in China, where some of our
executive officers reside and hold some of their assets. See Risks Related to Doing Business in
ChinaUncertainties with respect to the PRC legal system could have a material adverse effect on
us.
Delays in production due to regulatory restrictions or other factors could have a material adverse
impact on our business.
We manufacture substantially all of our products in our own manufacturing facilities. The
manufacture of pharmaceutical products requires precise and reliable controls and regulatory
authorities in China have imposed significant compliance obligations to regulate the manufacturing
of pharmaceutical products. As a result, we may face delays in production due to regulatory
restrictions or other factors. In addition, three of our generic pharmaceuticals, the
Yingtaiqing-branded diclofenac sodium capsules, the Faneng-branded alfacalcidol soft capsules and
the Yineng-branded generic lentinan injection, are all manufactured by independent third party
manufacturers. Our contract manufacturers may not be able to manufacture our products without
interruption, may not comply with their obligations under our various supply arrangements, and we
may not have adequate remedies for any breach. Failure by our own manufacturing facility or any
third party product supplier to comply with regulatory requirements could adversely affect our
ability to provide products. All facilities and manufacturing techniques used for the manufacture
of pharmaceutical products must be operated in conformity with Good Manufacturing Practices, or
GMPs. In complying with GMP requirements, we and our product suppliers must continually spend time,
money and effort in production, record-keeping and quality assurance and control to ensure that the
product meets applicable specifications and other requirements for product safety, efficacy and
quality. Manufacturing facilities are subject to periodic unannounced inspections by the SFDA and
other regulatory authorities. In addition, adverse experiences with the use of products must be
reported to the SFDA and could result in the imposition of market restrictions through labeling
changes or in product removal.
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Suppliers of certain active and inactive pharmaceutical ingredients and certain packaging
materials used in our products are required to obtain SFDA approval before they may supply us with
such materials. The development and regulatory approval of our products are dependent upon our
ability to procure these ingredients, packaging materials and finished products from SFDA-approved
sources. SFDA approval of a new supplier would be required if, for example, an existing supplier
breached its obligations to us, active ingredients, packaging materials or finished products were
no longer available from the initially approved supplier or if a supplier had its approval from the
SFDA withdrawn. The qualification of a new product supplier could potentially delay the manufacture
of the product involved. Furthermore, we may not be able to obtain active ingredients, packaging
materials or finished products from a new supplier on terms that are at least as favorable to us as
those agreed with the initially approved supplier or at reasonable prices.
A delay in supplying, or failure to supply, products by any product supplier could result in
our inability to meet the demand for our products and adversely affect our revenues, financial
condition, results of operations and cash flows.
Our operating results may fluctuate considerably on a quarterly basis. These fluctuations could
have an adverse effect on the price of our shares and ADSs.
Our results of operations may fluctuate significantly on a quarterly basis as a result of a
number of factors, many of which are beyond our control. Although many companies may encounter this
problem, it is particularly relevant to us because of our relatively small size, our limited
operating history, our reliance on limited number of products and the dynamics of the Chinese
pharmaceutical industry in which we operate. Factors that could cause our results of operations to
fluctuate include, among others:
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the seasonal fluctuations in demand for our products, especially our antibiotics,
such as Zailin and Anqi; |
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timing of research and development expenses; |
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regulatory events; |
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new product introductions by us or our competitors; |
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variations in the demand for products we may introduce; |
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litigation involving patents, licenses or other intellectual property; and |
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product liability lawsuits. |
Any of the foregoing factors could cause us to fail to meet the expectations of securities
analysts or investors, which could cause the trading price of our shares and ADSs to decline.
Our future liquidity needs are uncertain and we may need to raise additional funds in the future.
We may, from time to time, need to raise funds as part of our business operations if our
expenditures exceed our expectations. This could occur for a number of reasons, including:
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we determine to devote significant amount of financial resources to the research and
development of projects that we believe to have significant commercialization
potential; |
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we determine to acquire or license rights to additional product candidates or new
technologies; |
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some or all of our product candidates fail in clinical trials or pre-clinical
studies or prove to be not as commercially promising as we expect and we are forced to
develop or acquire additional product candidates; |
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our product candidates require more extensive clinical or pre-clinical testing or
clinical trials of these product candidates take longer to complete than we currently
expect; or |
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we determine or are required to conduct more high-throughput screening than expected
against current or additional disease targets to develop additional product candidates. |
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Our ability to raise additional funds in the future is subject to a variety of uncertainties,
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our future financial condition, results of operations and cash flows; |
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general market conditions for capital-raising activities by pharmaceutical
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economic, political and other conditions in China and elsewhere. |
We cannot assure you that our revenues will be sufficient to meet our operational needs and
capital requirements. If we need to obtain external financing, we cannot assure you that financing
will be available in amounts or on terms acceptable to us, if at all. Our future liquidity needs
and other business reasons could require us to sell additional equity or debt securities or obtain
a credit facility. The sale of additional equity or equity-linked securities could result in
additional dilution to our shareholders. The incurrence of additional indebtedness would result in
increased debt service obligations and could result in operating and financing covenants that would
restrict our operations.
A significant amount of intangible assets and goodwill are recorded on our balance sheet. Future
impairment of our intangible assets or goodwill could have a material adverse impact on our
financial condition and results of operations.
As of December 31, 2008, our net intangible assets amounted to RMB275.2 million ($40.3
million), representing 9.9% of our total assets, and goodwill amounted to RMB178.2 million ($26.1
million), representing 6.4% of our total assets. Besides goodwill, our intangible assets primarily
consisted of developed technology and product trademarks that we acquired in connection with our
acquisition of a 90.0% equity interest in Shandong Simcere, a 51.0% equity interest in Jilin Boda
Pharmaceutical Co., Ltd., or Jilin Boda, an 85.71% equity interest in Nanjing Tung Chit
Pharmaceutical Company Limited, or Nanjing Tung Chit, and a 70.0% equity interest in Wuhu Zhong Ren
Pharmaceutical Co., Ltd., or Wuhu Simcere Zhong Ren, during 2006, 2007 and 2008. Developed
technology represents the right to use, manufacture, market and sell the acquired products as well
as their related invention patents in the PRC or the United States, as the case may be, while
trademarks represent the right by the trademark registrant to use the registered trademark and to
protect products from infringement. Our newly acquired principal products as of December 31, 2008
include Sinofuan, Endu, Yidasheng and Jiebaishu. Our developed technology and trademarks amounted
to RMB249.0 million ($36.5 million), representing 9.0% of our total assets as of December 31, 2008.
We estimated the fair value of the developed technology of the acquired products using their
respective present values of projected cash flows based on assumptions with respect to the growth
rate of our revenues from sales, the earnings before interest and tax margin derived from sales,
the discount rate selected to measure the risks inherent in future cash flows and our assessment of
the product life cycle. We also took into consideration the competitive trends that may affect
these products sales, including consideration of any technical, legal, regulatory, and economic
barriers to entry. See Item 5. Operating and Financial Review and ProspectsA. Operating
ResultsCritical Accounting PoliciesLong-Lived Assets and Goodwill. We determined the useful
life of the developed technology of an acquired product by considering the remaining protection
period of such products patent in China and the expected competitive trend in the PRC market.
While no impairment write-downs or change in useful life have been necessary to date, future events
such as market acceptance of the acquire products, introduction of superior pharmaceuticals by our
competitors, regulatory actions, safety concerns as to our pharmaceuticals, and challenges to and
infringement of our intellectual property rights, could have a material impact on our key
assumptions in determining the fair value of the developed technology of the acquired products.
This in turn could result in write-downs of our intangible assets or goodwill, or a change in the
useful lives of our intangible assets. Future write-downs of our intangible assets or goodwill, or
change in useful lives of our intangible assets, could decrease our net income, which would have a
material adverse impact on our financial condition and results of operations.
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Our non-public shareholders have substantial influence over our company and their interests may not
be aligned with the interests of our other shareholders.
As of the date of this annual report on Form 20-F, we had a number of shareholders other than
public shareholders holding our ordinary shares in the form of ADSs, including New Good Management
Limited, a company beneficially owned by 16 individuals, including certain of our senior
management, and controlled by Mr. Jinsheng Ren, our founder, chief executive officer and chairman
of our board of directors; Assure Ahead Investments Limited, an investment vehicle owned and
controlled by a group of financial investors; and King View Development International Limited, an
investment vehicle owned and controlled by Trustbridge Partners, a private equity fund. As of May
31, 2009, New Good Management Limited owned approximately 43.1% of our outstanding share capital,
and Assure Ahead Investments Limited and King View Development International Limited owned 15.3%
and 10.1% of our outstanding share capital, respectively. As such, they have substantial influence
over our business, including decisions regarding mergers, consolidations and the sale of all or
substantially all of our assets, election of directors and other significant corporate actions.
This concentration of ownership may discourage, delay or prevent a change in control of our
company, which could deprive our shareholders of an opportunity to receive a premium for their
shares as part of a sale of our company and might reduce the price of our ADSs.
Our production activities involve the controlled use of potentially harmful biological materials as
well as hazardous materials and chemicals.
Our production activities involve the controlled use of potentially harmful biological
materials as well as hazardous materials and chemicals. We cannot completely eliminate the risk of
accidental contamination or injury from the use, storage, handling or disposal of these materials.
In the event of contamination or injury, we could be held liable for damages that result, which
could exceed our resources. We are subject to national, provincial and local laws and regulations
governing the use, storage, handling and disposal of these materials and specified waste products.
We believe we are currently in compliance with these laws and regulations. However, any failure by
us to control the use, storage, handling and disposal of these hazardous materials and chemicals
could subject us to potentially significant monetary damages and fines or suspensions of our
business operations. In addition, we do not currently carry any insurance for potential liabilities
relating to the release of hazardous materials as such insurance is not currently available in
China.
New labor laws in the PRC may adversely affect our results of operations.
On June 29, 2007, the PRC government promulgated a new labor law, namely, the Labor Contract
Law of the PRC, or the New Labor Contract Law, which became effective on January 1, 2008. The
Implementation Rules of the New Labor Contract Law was subsequently promulgated and became
effective on September 18, 2008. The PRC government also promulgated the Law on Mediation and
Arbitration of Labor Disputes on December 29, 2007 that came into effect on May 1, 2008. These
newly enacted labor laws and regulations impose greater liabilities on employers and significantly
impact the cost of an employers decision to reduce its workforce. Further, they require certain
terminations to be based upon seniority but not merit. In the event we decide to significantly
change or decrease our workforce, the New Labor Contract Law could adversely affect our ability to
enact such changes in a manner that is most advantageous to our business or in a timely and cost
effective manner, thus materially and adversely affecting our financial condition and results of
operations.
If we grant additional employee share options, restricted shares or other share-based compensation
in the future, our net income could be adversely affected.
We adopted a share incentive plan on November 13, 2006. We issued 10,000,000, 1,045,000,
400,000 and 100,000 share options under our 2006 share incentive plan on November 15, 2006, March
29, 2007, May 5, 2008, and December 24, 2008, respectively. On July 31, 2008, our shareholders
approved our 2008 share incentive plan under which we are authorized to issue up to 6,250,000
ordinary shares upon exercise of awards granted thereunder. As of May 31, 2009, no award was issued
under our 2008 share incentive plan.
On April 15, 2009, our compensation committee approved a share option exchange program that
offered our eligible employees and directors the right to exchange vested and unvested outstanding
share options to purchase our ordinary shares under the 2006 Share Incentive Plan for restricted
shares. The exchange ratio was
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determined based on the fair value of replacement restricted shares so that the fair value of
the replacement restricted shares to be issued upon exchange would be approximately equivalent to
the fair value of the share options surrendered by an individual. In addition, these replacement
restricted shares are subject to substantially the same vesting schedule as the options that were
validly tendered in the exchange offer. The exchange of the share option awards for restricted
shares was accounted for as a modification for awards which involves a cancellation of the original
award and an issuance of a new award. The replacement restricted shares were granted on May 7,
2009. We do not expect the effect of this award modification on share-based compensation expense
over the remaining requisite service period to be significant.
We account for share-based compensation in accordance with Financial Accounting Standards
Board Statement No. 123(R), Share-Based Payment, which requires a company to recognize, as an
expense, the fair value of share options and other share-based compensation to employees based on
the fair value of equity awards on the date of the grant, with the compensation expense recognized
over the period in which the recipient is required to provide service in exchange for the equity
award. If we grant additional options, restricted shares and other equity incentives in the future,
we could incur significant compensation charges and our net income could be adversely affected.
Counterfeit pharmaceuticals in China could negatively impact our revenues, brand reputation,
business and results of operations.
Our products are also subject to competition from counterfeit pharmaceuticals, which are
pharmaceuticals manufactured without proper licenses or approvals and are fraudulently mislabeled
with respect to their content and/or manufacturer. Counterfeiters may illegally manufacture and
market pharmaceuticals under our brand name or that of our competitors. Counterfeit pharmaceuticals
are generally sold at lower prices than the authentic products due to their low production costs,
and in some cases are very similar in appearance to the authentic products. Counterfeit
pharmaceuticals may or may not have the same chemical content as their authentic counterparts. If
counterfeit pharmaceuticals illegally sold under our brand name results in adverse side effects to
consumers, we may be associated with any negative publicity resulting from such incidents. In
addition, consumers may buy counterfeit pharmaceuticals that are in direct competition with our
pharmaceuticals, which could have an adverse impact on our revenues, business and results of
operations. Although the PRC government has recently been increasingly active in policing
counterfeit pharmaceuticals, there is not yet an effective counterfeit pharmaceutical regulation
control and enforcement system in China. The proliferation of counterfeit pharmaceuticals has grown
in recent years and may continue to grow in the future. Any such increase in the sales and
production of counterfeit pharmaceuticals in China, or the technological capabilities of the
counterfeiters, could negatively impact our revenues, brand reputation, business and results of
operations.
Inappropriate use of our trade names by other entities could negatively affect our business.
Our trade name Simcere is also used by companies which are partially owned and controlled by
certain shareholders of New Good Management Limited. If any such entity or any company that is
unrelated to us uses the trade name Simcere in ways that negatively affect such trade names, our
reputation could suffer harm, which in turn could have a material adverse effect on our financial
condition and results of operations.
We may be classified as a passive foreign investment company, which could result in adverse United
States federal income tax consequences to U.S. holders.
We believe that we were not a passive foreign investment company, or PFIC, for U.S. federal
income tax purposes for our taxable year ending on December 31, 2008, and we do not expect to
become one for our current taxable year or in the future, although there can be no assurance in
this regard. A non-U.S. corporation will be considered a PFIC for any taxable year if either (1) at
least 75.0% of its gross income is passive income or (2) at least 50.0% of the value of its assets
(based on an average of the quarterly values of the assets during a taxable year) is attributable
to assets that produce or are held for the production of passive income. The market value of our
assets may be determined in large part by the market price of our ADSs and ordinary shares, which
is likely to fluctuate. In addition, the composition of our income and assets will be affected by
how, and how quickly, we spend the cash we receive. If we are treated as a PFIC for any taxable
year during which U.S. holders hold ADSs or ordinary shares,
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certain adverse United States federal income tax consequences could apply to U.S. holders. See
TaxationUnited States Federal Income TaxationPassive Foreign Investment Company.
If a poll is not demanded at our shareholder meetings, voting will be by show of hands and shares
will not be proportionately represented. Shareholder resolutions may be passed without the presence
of the majority of our shareholders in person or by proxy.
Voting at any of our shareholder meetings is by show of hands unless a poll is demanded. A
poll may be demanded by the chairman of the meeting or by any shareholder present in person or by
proxy. If a poll is demanded, each shareholder present in person or by proxy will have one vote for
each ordinary share registered in his name. If a poll is not demanded, voting will be by show of
hands and each shareholder present in person or by proxy will have one vote regardless of the
number of shares registered in his name. In the absence of a poll, shares will therefore not be
proportionately represented. In addition, the quorum required for our shareholder meetings consists
of shareholders who hold at least one-third of our ordinary shares being present at a meeting in
person or by proxy. Therefore, subject to the requisite majorities, shareholder resolutions may be
passed at our shareholder meetings without the presence of the majority of our shareholders in
person or by proxy.
Risks Related to Our Industry
Changes in economic conditions and consumer confidence in China may influence consumer preferences
and spending patterns, and accordingly, our results of operations.
Our business and revenue growth primarily depend on the size of the pharmaceutical products in
China. As a result, our revenue and profitability may be negatively affected by changes in
national, regional or local economic conditions and consumer confidence in China. In particular, as
we focus our expansion of retail stores in metropolitan markets, where living standards and
consumer purchasing power are higher than rural areas, we are especially susceptible to changes in
economic conditions, consumer confidence and customer preferences of the urban Chinese population.
External factors beyond our control that affect consumer confidence include unemployment rates,
levels of personal disposable income, national, regional or local economic conditions and acts of
war or terrorism. Changes in economic conditions and consumer confidence could adversely affect
consumer preferences, purchasing power and spending patterns. For example, the recent global
economic and financial market crisis has caused, among other things, lower customer spending across
China. As a result, sales of our premium priced high-end anti-cancer medication Endu, which is
currently excluded from national medical insurance catalogue, have declined and may continue to
decline as patients decrease their purchases as a result of worries about economic conditions or
reduced incomes. In addition, the timing and nature of any recovery in the credit and financial
markets remains uncertain, and there can be no assurance that market conditions will improve in the
near future or that our results will not continue to be materially and adversely affected. In
addition, acts of war or terrorism may cause damage to our facilities, disrupt the supply of the
products and services we offer in our stores or adversely impact consumer demand. Any of these
factors could have a material adverse effect on our business, financial condition and results of
operations.
We face intense competition that may prevent us from maintaining or increasing market share for our
existing products and gaining market acceptance for our future products. Our competitors may
develop or commercialize products before us or more successfully than us.
The pharmaceutical market in China is intensely competitive, rapidly evolving and highly
fragmented. Our competitors may develop products that are superior to ours or may be more effective
in marketing products that are competitive with ours. We face competition from other pharmaceutical
companies, including multinational companies as well as manufacturers of traditional Chinese
medicines with similar curative effects that can be used as substitutes for certain of our
products.
Many of our existing and potential competitors may have greater financial, technical,
manufacturing and other resources than we do. In addition, certain competitors which were
established by multinational pharmaceutical companies, have more extensive research and development
and technical capabilities than we do. Furthermore, Chinas industry reforms aimed to meet the
World Trade Organization, or the WTO, requirements may foster increased competition from
multinational pharmaceutical companies. Such competitors may also have greater brand
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name recognition, more established distribution networks, larger customer bases or more
extensive knowledge of our target markets. Our competitors greater size in some cases provides
them with a competitive advantage with respect to manufacturing costs because of their economies of
scale and their ability to purchase raw materials at lower prices. As a result, they may be able to
devote greater resources to the research, development, promotion and sale of their products or
respond more quickly to evolving industry standards and changes in market conditions than we can.
In addition, certain of our competitors may adopt low-margin sales strategies and compete against
us based on lower prices. Our failure to adapt to changing market conditions and to compete
successfully with existing or new competitors may materially and adversely affect our financial
condition and results of operations.
In addition, to increase sales, certain manufacturers or distributors of pharmaceuticals may
engage in questionable practices in order to influence procurement decisions of our customers. As a
result, as competition intensifies in the pharmaceutical industry in China, we may lose sales,
customers or contracts to competitors that engage in these practices.
The retail prices of certain of our products are subject to control, including periodic downward
adjustment, by PRC government authorities.
Certain of our pharmaceutical products, primarily those included in the national and
provincial Medical Insurance Catalogs, are subject to price controls in the form of fixed retail
prices or retail price ceilings. See Item 4. Information of the CompanyB. Business
OverviewRegulationPrice Controls. In addition, the maximum retail prices of products that are
included in the Medical Insurance Catalogs are also subject to periodic downward adjustments as the
PRC government authorities aim to make pharmaceuticals more affordable to the general public.
However, PRC government authorities impose no control over the prices at which pharmaceutical
manufacturers sell their products to their distributors. Since May 1998, the relevant PRC
government authorities have ordered price reductions of various pharmaceuticals 24 times. The
latest price reductions occurred in January, March, April and May of 2007 and affected a total of
466 different Chinese medicines and 614 different western pharmaceuticals. The retail price
ceilings of our major products Anqi and Zailin, both of which are included in the national Medical
Insurance Catalog, were adjusted downward in June 2004, and the retail price ceilings of our Faneng
branded alfacalcidol soft capsules and Simcere Kechuanning branded herbal cough medicine were
adjusted downward in January and March 2007, respectively. As of March 31, 2009, we have not
adjusted our selling prices of Faneng and Simcere Kechuanning downward because their actual retail
prices were below their retail price ceilings after the price reductions. We do not plan to make
adjustments to our prices of Faneng and Simcere Kechuanning in the near future. However, in the
long term, the prices at which pharmaceutical manufacturers in China sell their products to
distributors, including the prices of our products, will be affected by the relevant fixed retail
prices or retail price ceilings. Government price controls, especially downward price adjustments,
may have a material adverse effect on our revenues and profitability.
Pharmaceutical companies in China require a number of permits and licenses in order to carry on
their business.
All pharmaceutical manufacturing and distribution companies in China are required to obtain
certain permits and licenses from various PRC governmental authorities, including, in the case of
manufacturing companies, a pharmaceutical manufacturing permit and, in the case of distribution
companies, a pharmaceutical distribution permit. See Item 4. Information of the CompanyB.
Business OverviewRegulation.
We have obtained permits and licenses and GMP certifications required for the manufacture of
our pharmaceutical products. In addition, we have obtained permits, licenses and Good Supply
Practice, or GSP, certifications for the distribution of our products. Each of these permits and
licenses held by us is valid for five years and subject to periodic renewal and/or reassessment by
the relevant PRC government authorities and the standards of compliance required in relation
thereto may from time to time be subject to changes. For example, the current pharmaceutical
manufacturing permit for each of Simcere Pharmaceutical Co., Ltd., or Hainan Simcere, Nanjing
Simcere Dongyuan Pharmaceutical Co., Ltd., or Nanjing Simcere, Shandong Simcere, Jilin Boda,
Nanjing Tung Chit and Wuhu Simcere Zhong Ren, will all expire on December 31, 2010. In addition,
Jilin Boda is currently expanding its facilities which then require it to renew its existing
manufacturing permit. The 20 GMP certificates for our six manufacturing facilities will expire
between August 2009 and May 2014, and the two GSP certificates held by two of our distribution
subsidiaries will expire in July 2013 and November 2013, respectively. See Item 4. Information of
the CompanyB. Business OverviewRegulation. We intend to apply for the renewal of such
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permits and licenses when required by applicable laws and regulations. Any failure by us to
obtain such renewals may have a material adverse effect on the operation of our business, and
prevent us from continuing to carry on our business. Furthermore, any changes in compliance
standards, or any new laws or regulations may prohibit or render it more restrictive for us to
conduct our business or may increase our compliance costs, which may adversely affect our
operations or profitability.
Risks Related to Doing Business in China
Uncertainties with respect to the PRC legal system could have a material adverse effect on us.
The PRC legal system is a civil law system based on written statutes. Unlike in the common law
system, prior court decisions may be cited for reference but have limited precedential value. Since
1979, PRC legislation and regulations have significantly enhanced the protections afforded to
various forms of foreign investments in China. We conduct all of our business through our
subsidiaries established in China. These subsidiaries are generally subject to laws and regulations
applicable to foreign investment in China and, in particular, laws applicable to wholly
foreign-owned enterprises. However, since these laws and regulations are relatively new and the PRC
legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules
are not always uniform and enforcement of these laws, regulations and rules involve uncertainties,
which may limit legal protections available to us. For example, we may have to resort to
administrative and court proceedings to enforce the legal protection that we enjoy either by law or
contract. However, since PRC administrative and court authorities have significant discretion in
interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate
the outcome of administrative and court proceedings and the level of legal protection we enjoy than
in more developed legal systems. These uncertainties may impede our ability to enforce the
contracts we have entered into with our business partners, customers and suppliers. In addition,
such uncertainties, including the inability to enforce our contracts, could materially and
adversely affect our business and operations. Furthermore, intellectual property rights and
confidentiality protections in China may not be as effective as in the United States or other
countries. Accordingly, we cannot predict the effect of future developments in the PRC legal
system, particularly with regard to the Chinese pharmaceutical industry, including the promulgation
of new laws, changes to existing laws or the interpretation or enforcement thereof, or the
preemption of local regulations by national laws. These uncertainties could limit the legal
protections available to us and other foreign investors, including you. In addition, any litigation
in China may be protracted and result in substantial costs and diversion of our resources and
management attention.
Adverse changes in political and economic policies of the PRC government could have a material
adverse effect on the overall economic growth of China, which could reduce the demand for our
products and materially and adversely affect our competitive position.
All of our business operations are conducted in China and all of our sales are made in China.
Accordingly, our business, financial condition, results of operations and prospects are affected
significantly by economic, political and legal developments in China. The Chinese economy differs
from the economies of most developed countries in many respects, including:
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the level of development; |
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the growth rate; |
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the control of foreign exchange; |
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access to financing; and |
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the allocation of resources. |
While the Chinese economy has grown significantly in the past, the growth has been uneven,
both geographically and among various sectors of the economy. The PRC government has implemented
various measures
20
to encourage economic growth and guide the allocation of resources. Some of these measures
benefit the overall Chinese economy, but may also have a negative effect on us. For example, our
financial condition and results of operations may be adversely affected by government control over
capital investments or changes in tax regulations that are applicable to us.
The Chinese economy has been transitioning from a planned economy to a more market-oriented
economy. Although in recent years the PRC government has implemented measures emphasizing the
utilization of market forces for economic reform, the reduction of state ownership of productive
assets and the establishment of sound corporate governance in business enterprises, a substantial
portion of the productive assets in China is still owned by the PRC government. The continued
control of these assets and other aspects of the national economy by the PRC government could
materially and adversely affect our business. The PRC government also exercises significant control
over Chinas economic growth through the allocation of resources, controlling payment of foreign
currency-denominated obligations, setting monetary policy and providing preferential treatment to
particular industries or companies. As a result, actions and policies of the PRC government could
materially affect our liquidity and access to capital and our ability to operate our business.
We rely on dividends paid by our subsidiaries for our cash needs, and any limitation on the ability
of our subsidiaries to make payments to us could have a material adverse effect on our ability to
conduct our business.
We conduct all of our business through our subsidiaries established in China. We rely on
dividends paid by these subsidiaries for our cash needs, including the funds necessary to pay
dividends and other cash distributions to our shareholders, to service any debt we may incur and to
pay our operating expenses. The payment of dividends by entities established in China is subject to
limitations. Regulations in China currently permit payment of dividends only out of accumulated
profits as determined in accordance with accounting standards and regulations in China. Each of our
PRC subsidiaries including wholly foreign-owned enterprises, or WFOEs, and domestic companies is
also required to set aside at least 10.0% of its after-tax profit based on PRC accounting standards
each year to its general reserves or statutory capital reserve fund until the accumulative amount
of such reserves reach 50.0% of its respective registered capital. As of December 31, 2008, our
restricted reserves amounted to RMB133.9 million ($19.6 million), and our accumulated profits that
were unrestricted and were available for distribution amounted to RMB686.4 million ($100.6
million). Our restricted reserves are not distributable as cash dividends. In addition, if any of
our PRC subsidiaries incurs debt on its own behalf in the future, the instruments governing the
debt may restrict its ability to pay dividends or make other distributions to us.
Recent PRC regulations relating to the establishment of offshore special purpose companies by PRC
residents may subject our PRC resident shareholders to personal liability, limit our ability to
inject capital into our PRC subsidiaries, limit our PRC subsidiaries ability to distribute profits
to us, or otherwise adversely affect us.
The PRC State Administration of Foreign Exchange, or the SAFE, issued a public notice in
October 2005, requiring PRC residents to register with the local SAFE branch before establishing or
controlling any company outside of China for the purpose of capital financing with assets or
equities of PRC companies, referred to in the notice as an offshore special purpose company. PRC
residents that are shareholders of offshore special purpose companies established before November
1, 2005 were required to register with the local SAFE branch before March 31, 2006. Our current
beneficial owners who are PRC residents have registered with the local SAFE branch as required
under the SAFE notice. The failure of these beneficial owners to timely amend their SAFE
registrations pursuant to the SAFE notice or the failure of future beneficial owners of our company
who are PRC residents to comply with the registration procedures set forth in the SAFE notice may
subject such beneficial owners to fines and legal sanctions and may also limit our ability to
contribute additional capital into our PRC subsidiaries, limit our PRC subsidiaries ability to
distribute dividends to our company or otherwise adversely affect our business. In addition, the
SAFE notice also provides that PRC residents who are shareholders of offshore special purpose
companies are required to apply for registration or file with the SAFE within 30 days after the
occurrence of certain events with respect to such offshore purpose companies, including the
increase or decrease in the registered share capital, the share transfer or exchange of stock
rights, acquisition or division, long-term investment of equity or debt, guarantees provided to
other parties, provided that such events do not involve direct investment of capital into PRC
subsidiaries by those PRC residents through the offshore special purpose companies.
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Our financial results benefit from tax concessions granted by the PRC government, the change to or
expiration of which would materially change our results of operations.
Our results of operation may be adversely affected by changes to or expiration of tax holidays
and preferential tax policies that some of our PRC subsidiaries currently enjoy. Effective from
January 1, 2008, the statutory tax rate generally applicable to Chinese companies is 25%. As a
result of tax holidays and preferential tax policies, our operations have been subject to
relatively low tax liabilities. For additional details regarding these tax incentives, please see
Item 5. Operating and Financial Review and Prospects Taxation and Incentives.
Tax laws in China are subject to interpretations by relevant tax authorities. The preferential
tax policies may not remain in effect or may change, in which case we may be required to pay the
higher income tax rate generally applicable to Chinese companies, or such other rate as is required
by the laws of China.
Dividends we receive from our operating subsidiaries located in the PRC may be subject to PRC
withholding tax.
On March 16, 2007, the National Peoples Congress passed the Corporate Income Tax Law of the
PRC, or the new CIT law. The new CIT law provides that a maximum income tax rate of 20% may be
applicable to dividends payable to non-PRC investors that are non-resident enterprises, to the
extent such dividends are derived from sources within the PRC, and the State Council has reduced
such rate to 10% through the implementation rules for the new CIT law. We are a Cayman Islands
holding company and State Good Group Limited, or SGG, is a British Virgin Islands intermediate
holding company. Substantially all of our income may be derived from dividends we receive from our
operating subsidiaries located in the PRC. Thus, dividends paid to us by our subsidiaries in China,
if any, may be subject to the 10% income tax if SGG is considered as a non-resident enterprise
under the new CIT law. If SGG is required under the new CIT law to pay income tax for any dividends
we receive from our subsidiaries, it will materially and adversely affect the amount of dividends,
if any, we may pay to our shareholders and ADS holders.
We may be deemed a PRC resident enterprise under the new CIT law and be subject to the PRC taxation
on our worldwide income.
The new CIT law also provides that enterprises established outside of China whose de facto
management bodies are located in China are considered resident enterprises and are generally
subject to the uniform 25% corporate income tax rate as to their worldwide income. Under the
implementation rules for the new CIT law issued by the PRC State Council, de facto management
body is defined as a body that has material and overall management and control over the
manufacturing and business operations, personnel and human resources, finances and treasury, and
acquisition and disposition of properties and other assets of an enterprise. Although substantially
all of our operational management is currently based in the PRC, it is unclear whether PRC tax
authorities would require (or permit) our overseas registered entities to be treated as PRC
resident enterprises. If we are treated as resident enterprises for PRC tax purposes, we will be
subject to PRC tax on our worldwide income at the 25% uniform tax rate, which could have an impact
on our effective tax rate and an adverse effect on our net income and results of operations,
although dividends distributed from our PRC subsidiaries to us could be exempt from Chinese
dividend withholding tax, since such income is exempt under the new CIT law to PRC resident
recipients.
Dividends payable by us to our foreign investors and gain on the sale of our ADSs or ordinary
shares may become subject to taxes under PRC tax laws.
Under the new CIT law and the implementation rules issued by the State Council, PRC income tax
at the rate of 10% is applicable to dividends payable to investors that are non-resident
enterprises, which do not have an establishment or place of business in the PRC, or which have
such establishment or place of business but the relevant income is not effectively connected with
the establishment or place of business, to the extent such dividends have their sources within the
PRC. Similarly, any gain realized on the transfer of ADSs or ordinary shares by such investors is
also subject to 10% PRC income tax if such gain is regarded as income derived from sources within
the PRC. If we are considered a PRC resident enterprise, it is unclear whether dividends we pay
with respect to our ordinary shares or ADSs, or the gain you may realize from the transfer of our
ordinary shares or ADSs, would be treated as income derived from sources within the PRC and be
subject to PRC income tax. If we are required under the new CIT law to withhold PRC income tax on
dividends payable to our non-PRC investors that are non-resident
22
enterprises, or if you are required to pay PRC income tax on the transfer of our ordinary
shares or ADSs, the value of your investment in our ordinary shares or ADSs may be materially and
adversely affected.
Fluctuation in the value of the Renminbi may have a material adverse effect on your investment.
The change in value of the Renminbi against the U.S. dollar, Euro or other currencies is
affected by, among other things, changes in Chinas political and economic conditions. On July 21,
2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the
U.S. dollar. Under the new policy, the Renminbi is permitted to fluctuate within a narrow and
managed band against a basket of certain foreign currencies.
There remains significant international pressure on the PRC government to adopt a more
flexible currency policy, which could result in a further and more significant appreciation of the
Renminbi against the U.S. dollar. As we rely on dividends paid to us by our operating subsidiaries,
any significant revaluation of the Renminbi may have a material adverse effect on the value of, and
any dividends payable on, our ADSs in foreign currency terms. Appreciation of the Renminbi against
the U.S. dollar would have an adverse effect on the Renminbi amount we would receive from the
conversion. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of
making payments for dividends on our ordinary shares or ADSs or for other business purposes,
appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S.
dollar amount available to us. In addition, appreciation or depreciation in the value of the
Renminbi relative to the U.S. dollar would affect our financial results reported in U.S. dollar
terms without giving effect to any underlying change in our business or results of operations.
Governmental control of currency conversion may affect the value of your investment.
The PRC government imposes controls on the convertibility of the Renminbi into foreign
currencies and, in certain cases, the remittance of currency out of China. We receive all our
revenues in Renminbi. Under our current corporate structure, our income is primarily derived from
dividend payments from our PRC subsidiaries. Shortages in the availability of foreign currency may
restrict the ability of our PRC subsidiaries to remit sufficient foreign currency to pay dividends
or other payments to us, or otherwise satisfy their foreign currency-denominated obligations. Under
existing PRC foreign exchange regulations, payments of current account items, including profit
distributions, interest payments and expenditures from trade related transactions, can be made in
foreign currencies without prior approval from the SAFE by complying with certain procedural
requirements. In addition, foreign currencies received under current account items can be retained
or sold to financial institutions engaged in the foreign exchange settlement or sales business by
complying with relevant regulations. However, approval from SAFE or its local branch is required
where Renminbi is to be converted into foreign currency and remitted out of China to pay capital
expenses such as the repayment of loans denominated in foreign currencies. Similarly, approval from
the SAFE or its local branch is required if foreign currencies received in respect of capital
account items is to be retained or sold to financial institutions engaged in the foreign exchange
settlement or sales business. The PRC government may also, at its discretion, restrict access in
the future to foreign currencies for current account transactions. If the foreign exchange control
system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we
may not be able to pay dividends in foreign currencies to our shareholders, including holders of
our ADSs.
We face risks related to health epidemics and other outbreaks of contagious diseases, including
avian flu, SARS, and swine flu.
Our business could be adversely affected by the effects of avian flu, SARS, swine flu or
another epidemic or outbreak. During April and May 2009, there have been outbreaks of highly
pathogenic swine flu, caused by the H1N1A virus, in certain regions of the world, including parts
of Asia. In 2007 and early 2008, there were reports of outbreaks of a highly pathogenic avian flu,
caused by the H5N1 virus, in certain regions of Asia and Europe. In 2005 and 2006, there were
reports on the occurrences of avian flu in various parts of China, including a few confirmed human
cases. An outbreak of avian flu in the human population could result in a widespread health crisis
that could adversely affect the economies and financial markets of many countries, particularly in
Asia. Additionally, any recurrence of SARS, a highly contagious form of atypical pneumonia, similar
to the occurrence in 2003 which affected China, Hong Kong, Taiwan, Singapore, Vietnam and certain
other countries, would also have similar adverse effects. These outbreaks of contagious diseases,
and other adverse public health developments in China,
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would have a material adverse effect on our business operations. These could include
restrictions on our ability to travel or to ship our products within China, as well as cause
temporary closure of our manufacturing facilities. Such closures or travel or shipment restrictions
would severely disrupt our business operations and adversely affect our financial condition and
results of operations. We have not adopted any written preventive measures or contingency plans to
combat any future outbreak of avian flu, SARS, swine flu or any other epidemic.
Risks Related to Our ADSs
The market price for our ADSs may be volatile.
The market price for our ADSs is likely to be highly volatile and subject to wide fluctuations
in response to factors including the following:
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announcements of technological or competitive developments; |
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regulatory developments in China affecting us, our customers or our competitors; |
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announcements regarding patent litigation or the issuance of patents to us or our
competitors; |
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actual or anticipated fluctuations in our quarterly operating results; |
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changes in financial estimates by securities research analysts; |
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changes in the economic performance or market valuations of other pharmaceutical
companies; |
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addition or departure of our executive officers and key research personnel; |
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release or expiry of lock-up or other transfer restrictions on our outstanding
ordinary shares or ADSs; and |
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sales or perceived sales of additional ordinary shares or ADSs. |
In addition, the securities market has from time to time experienced significant price and
volume fluctuations that are not related to the operating performance of particular companies.
These market fluctuations may also have a material adverse effect on the market price of our ADSs.
Substantial future sales or perceived sales of our ADSs in the public market could cause the price
of our ADSs to decline.
Future sales of our ADSs or ordinary shares in the public market or the perception that these
sales could occur, may cause the market price of our ADSs to decline. As of May 31, 2009, we have
issued 118,931,380 ordinary shares, including 116,926,380 ordinary shares outstanding and 2,005,000
ordinary shares issued to The Bank of New York Mellon which were held on behalf of us for future
exercise of share options. All ADSs sold are freely transferable without restriction or additional
registration under the Securities Act of 1933, as amended, or the Securities Act.
In addition, Assure Ahead Investment Limited or its transferees and assignees and King View
Development International Limited or its transferees and assignees will have the right to cause us
to register the sale of their shares under the Securities Act upon the occurrence of certain
circumstances. Registration of these shares under the Securities Act would result in these shares
becoming freely tradable without restriction under the Securities Act immediately upon the
effectiveness of the registration. Sales of these registered shares in the public market could
cause the price of our ADSs to decline.
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Our articles of association contain anti-takeover provisions that could discourage a third party
from acquiring us, which could limit our shareholders opportunity to sell their shares, including
ordinary shares represented by our ADSs, at a premium.
Our second amended and restated articles of association currently in effect limit the ability
of others to acquire control of our company or cause us to engage in change-of-control
transactions. These provisions could have the effect of depriving our shareholders of an
opportunity to sell their shares at a premium over prevailing market prices by discouraging third
parties from seeking to obtain control of our company in a tender offer or similar transaction. For
example, our board of directors has the authority, without further action by our shareholders, to
issue preferred shares. These preferred shares may have better voting rights than our ordinary
shares, in the form of ADSs or otherwise, and could be issued quickly with terms calculated to
delay or prevent a change in control of our company or make removal of management more difficult.
If our board of directors decides to issue preferred shares, the price of our ADSs may fall and the
voting rights of the holders of our ordinary shares and ADSs may be diluted.
Certain actions require the approval of a supermajority of at least two-thirds of our board of
directors which, among other things, would allow our non-independent directors to block a variety
of actions or transactions, such as a merger, asset sale or other change of control, even if all of
our independent directors unanimously voted in favor of such action, thereby further depriving our
shareholders of an opportunity to sell their shares at a premium.
Holders of ADSs have fewer rights than shareholders and must act through the depositary to exercise
those rights.
Holders of ADSs do not have the same rights of our shareholders and may only exercise the
voting rights with respect to the underlying ordinary shares in accordance with the provisions of
the deposit agreement. Under our second amended and restated memorandum and articles of
association, the minimum notice period required to convene a general meeting is seven days. When a
general meeting is convened, you may not receive sufficient notice of a shareholders meeting to
permit you to withdraw your ordinary shares to allow you to cast your vote with respect to any
specific matter. In addition, the depositary and its agents may not be able to send voting
instructions to you or carry out your voting instructions in a timely manner. We will make all
reasonable efforts to cause the depositary to extend voting rights to you in a timely manner, but
we cannot assure you that you will receive the voting materials in time to ensure that you can
instruct the depositary to vote your ADSs.
Furthermore, the depositary and its agents will not be responsible for any failure to carry
out any instructions to vote, for the manner in which any vote is cast or for the effect of any
such vote. As a result, you may not be able to exercise your right to vote and you may lack
recourse if your ADSs are not voted as you requested. In addition, in your capacity as an ADS
holder, you will not be able to call a shareholders meeting.
You may be subject to limitations on transfers of your ADSs.
Your ADSs are transferable on the books of the depositary. However, the depositary may close
its transfer books at any time or from time to time when it deems expedient in connection with the
performance of its duties. In addition, the depositary may refuse to deliver, transfer or register
transfers of ADSs generally when our books or the books of the depositary are closed, or at any
time if we or the depositary deem it advisable to do so because of any requirement of law or of any
government or governmental body, or under any provision of the deposit agreement, or for any other
reason.
Your right to participate in any future rights offerings may be limited, which may cause dilution
to your holdings and you may not receive cash dividends if it is impractical to make them available
to you.
We may from time to time distribute rights to our shareholders, including rights to acquire
our securities. However, we cannot make rights available to you in the United States unless we
register the rights and the securities to which the rights relate under the Securities Act or an
exemption from the registration requirements is available. Also, under the deposit agreement, the
depositary bank will not make rights available to you unless the distribution to ADS holders of
both the rights and any related securities are either registered under the Securities Act, or
exempted from registration under the Securities Act. We are under no obligation to file a
registration statement with
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respect to any such rights or securities or to endeavor to cause such a registration statement
to be declared effective. Moreover, we may not be able to establish an exemption from registration
under the Securities Act. Accordingly, you may be unable to participate in our rights offerings and
may experience dilution in your holdings.
In addition, the depositary of our ADSs has agreed to pay to you the cash dividends or other
distributions it or the custodian receives on our ordinary shares or other deposited securities
after deducting its fees and expenses. You will receive these distributions in proportion to the
number of ordinary shares your ADSs represent. However, the depositary may, at its discretion,
decide that it is inequitable or impractical to make a distribution available to any holders of
ADSs. For example, the depositary may determine that it is not practicable to distribute certain
property through the mail, or that the value of certain distributions may be less than the cost of
mailing them. In these cases, the depositary may decide not to distribute such property and you
will not receive such distribution.
We are a Cayman Islands company and, because judicial precedent regarding the rights of
shareholders is more limited under Cayman Islands law than that under U.S. law, you may have less
protection for your shareholder rights than you would under U.S. law.
Our corporate affairs are governed by our second amended and restated memorandum and articles
of association, the Cayman Islands Companies Law (as amended) and the common law of the Cayman
Islands. The rights of shareholders to take action against the directors, actions by minority
shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are
to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman
Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as
well as that from English common law, which has persuasive, but not binding, authority on a court
in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our
directors under Cayman Islands law are not as clearly established as they would be under statutes
or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands
has a less developed body of securities laws than the United States. In addition, some U.S. states,
such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than
the Cayman Islands.
As a result of all of the above, public shareholders may have more difficulty in protecting
their interests in the face of actions taken by management, members of the board of directors or
controlling shareholders than they would as shareholders of a U.S. public company.
You may have difficulty enforcing judgments obtained against us.
We are a Cayman Islands company and substantially all of our assets are located outside of the
United States. Substantially all of our current operations are conducted in the PRC. In addition,
most of our directors and officers are nationals and residents of countries other than the United
States. As a result, it may be difficult for you to effect service of process within the United
States upon these persons. It may also be difficult for you to enforce in U.S. courts judgments
obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws
against us and our officers and directors, most of whom are not residents in the United States and
the substantial majority of whose assets are located outside of the United States. In addition,
there is uncertainty as to whether the courts of the Cayman Islands or the PRC would recognize or
enforce judgments of U.S. courts against us or such persons predicated upon the civil liability
provisions of the securities laws of the United States or any state and it is uncertain whether
such Cayman Islands or PRC courts would be competent to hear original actions brought in the Cayman
Islands or the PRC against us or such persons predicated upon the securities laws of the United
States or any state. See Enforcement of Civil Liabilities.
Item 4. Information of the Company
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History and Development of the Company |
Our predecessor entity, Hainan Simcere Investment Group Ltd., or Simcere Investment, was a PRC
company that held a group of pharmaceutical companies that develops, manufactures and markets a
range of branded generic and innovative pharmaceuticals. To raise capital from investors outside of
China, we established State Good Group Limited, or SGG, in the British Virgin Islands on October
12, 2005. Our operating subsidiaries
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were transferred to SGG in March 2006 as part of a series of corporate reorganization
activities. We incorporated Simcere Pharmaceutical Group in the Cayman Islands as a listing vehicle
on August 4, 2006. Simcere Pharmaceutical Group became our ultimate holding company when it issued
ordinary shares to existing shareholders of SGG on September 29, 2006, in exchange for the
respective ordinary shares that these shareholders held in SGG.
Subsequent to our initial public offering on April 20, 2007, we have engaged in several
acquisitions to strengthen our product portfolio, especially as to first-to-market generic and
innovative pharmaceuticals in China. We have acquired the remaining 20.0% equity interest in
Shandong Simcere that we did not own at the time of our initial public offering and as a result,
Shandong Simcere is now our wholly owned subsidiary. In October 2007, we completed the acquisition
of a 51.0% equity interest in Jilin Boda. In November 2007, we acquired 100% equity interest in
Master Luck Corporation Limited, which in turns holds an 85.71% equity interest in Nanjing Tung
Chit, the manufacturer of nedaplatin injection, a chemotherapy pharmaceutical that is marketed
under the brand name Jiebaishu. Furthermore, in April 2008, we acquired a 70.0% equity interest in
Wuhu Simcere Zhong Ren for a cash consideration of approximately RMB65.1 million ($9.5 million).
Wuhu Simcere Zhong Ren is a pharmaceutical manufacturer based in the PRC specializing in the
production of antineoplastic implants. These transactions are accounted for using the purchase
method of accounting in our consolidated financial statements. Accordingly, the assets and
liabilities acquired by us have been recognized at their respective fair values on the date of
acquisition.
In May 2009, we entered into an agreement to indirectly acquire approximately 35% of the
equity interest of Shanghai Celgen Bio-Pharmaceutical Co., Ltd., or Shanghai Celgen for a total
cash consideration of RMB140.0 million. Shanghai Celgen has strong expertise in research and
production of therapeutic antibodies and possesses an antibody manufacturing facility in Shanghai,
for which GMP certification is pending. Shanghai Celgens major biogeneric drug candidate, an
etanercept, has completed clinical trials and is currently awaiting approval from the SFDA. In
addition, we are entitled to unwind the acquisition and the selling shareholders are required to
return the amounts paid by us if the SFDA does not approve Shanghai Celgens major biogeneric drug
candidate within 24 months from the date of agreement. The agreement is subject to certain closing
conditions.
In May 2009, we entered into an agreement to acquire a 37.5% equity interest in Jiangsu
Yanshen Biological Technology Stock Co., Ltd., or Jiangsu Yanshen, a China-based developer and
manufacturer of vaccines, from existing shareholders for a total cash consideration of
approximately RMB195.5 million. Jiangsu Yanshens core products include an influenza vaccine and a
human use rabies vaccine (vero cell). Upon the closing of the transaction, we are expected to be
the largest shareholder in Jiangsu Yanshen. Jiangsu Yanshen has received a new medicine
certificate from the SFDA for its freeze-dried human use rabies vaccine (vero cell) and has
completed clinical trials of its purified hepatitis A inactivated vaccine (vero cell). SFDA
approval for the purified hepatitis A inactivated vaccine (vero cell) and GMP certification for the
associated new manufacturing facility are pending.
We are a leading manufacturer and supplier of branded generic pharmaceuticals in the fast
growing China market. We focus our strategy on the development of first-to-market generic and
innovative pharmaceuticals, and have introduced a first-to-market generic anti-stroke medication
under the brand name Bicun, a 5-FU sustained release implant under the brand name Sinofuan, and an
innovative anti-cancer medication under the brand name Endu. We currently manufacture and sell 45
principal pharmaceutical products and are the exclusive distributor of three additional
pharmaceuticals that are manufactured by independent third parties but marketed under our brand
names. In addition, we have obtained approvals from the SFDA to manufacture and sell over 220 other
products. As of March 31, 2009, we also had 12 product candidates in various stages of development,
including treatments for cancer, cerebrovascular diseases, infections, rheumatoid arthritis, nausea
and vomiting associated with chemotherapy.
Our innovative anti-cancer medication Endu has been granted an invention patent in China and
was the first recombinant human endostatin injection approved for sale in China. Recombinant human
endostatin is a genetically engineered protein that interferes with the growth of blood vessels to
a tumor, thereby starving and preventing the growth of tumor cells. Our generic anti-stroke
medication Bicun was the first edaravone injection, a type of neuroprotective pharmaceutical
compound, approved for sale in China. Our generic amoxicillin granule antibiotic, marketed under
the brand name Zailin, was recognized as a China Well-Known Trademark in 2004 and our
anti-inflammatory pain relievers and analgesic drug for the treatment of rheumatoid arthritis and
osteoarthritis, marketed
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under the brand name Yingtaiqing, was recognized as a China Well-Known Trademark in 2008.
Furthermore, our medication Sinofuan, a sustained release implants for the treatment of cancer
which we acquired through our acquisition of Wuhu Simcere Zhong Ren, was the first
sustained-released fluorouracil implant approved by the SFDA, and our generic anti-infection
medication Anxin, a new product that we introduced in 2008, was the first biapenem injection, a
type of carbapenem, approved for sale in China.
We commenced operations in March 1995 as a distributor of pharmaceutical products, and since
then we have established an extensive distribution network in China that we now use to market, sell
and distribute our own pharmaceutical products. We sell our products exclusively to regional
distributors, who then sell them to local distributors, hospitals and retail pharmacies throughout
China. Our marketing team leverages the reputation of our Simcere brand name and our well-known
branded pharmaceuticals to cross-sell our other pharmaceuticals. We also have dedicated brand
management, market research and sales support teams to further enhance the effectiveness of these
marketing efforts.
We employ a market-oriented approach to research and development and focus our efforts on
branded generic pharmaceuticals that have the potential for gaining widespread market acceptance or
are the first generic version on the market. We concentrate our research and development efforts on
the treatment of diseases with high incidence and/or mortality rates and for which there is a clear
demand for more effective pharmacotherapy, such as cancer and cerebrovascular and infectious
diseases. Through our research and development efforts, we have introduced to the China market a
sizable portfolio of branded products with significant market potential.
Our Products
We currently manufacture and sell 45 principal pharmaceuticals marketed under various brands.
Of these products, 36 are prescription pharmaceuticals and nine are over-the-counter, or OTC,
pharmaceuticals. In addition, we are also the exclusive distributor of Yingtaiqing-branded generic
diclofenac sodium sustained-release capsules, the Faneng-branded generic alfacalcidol soft capsules
and the Yineng-branded generic lentinan injection, all of which are prescription pharmaceuticals
manufactured by independent third parties. Furthermore, we have obtained approvals from the SFDA to
manufacture and sell over 220 other products.
The following table sets forth the major treatment areas by our current principal products,
the number of products for each treatment area and the brands they are marketed under:
|
|
|
|
|
|
|
|
|
|
|
Number |
|
|
|
|
|
|
of |
|
|
|
|
Product Category |
|
Products |
|
Major Products |
|
Brands |
Antibacterial and Antiviral
|
|
|
16 |
|
|
Amoxicillin granules, capsules and tablets ;
Amoxicillin with clavulanate potassium granules,
tablets and injection; biapenem injection; cefaclor dry
suspension; azithromycin granules; and ribavirin
dispersible tablets
|
|
Zailin, Anqi,
Anxin, Zaike, Zaiqi
and Nanyuan |
Anti-cancer
|
|
|
5 |
|
|
Recombinant human endostatin injection, nedaplatin
injection, lentinan injection and fluorouracil implants
|
|
Endu, Jiebaishu,
Yineng and Sinofuan |
Anti-Allergic
|
|
|
2 |
|
|
Clemastine fumarate capsules and clemastine fumarate
dry suspension
|
|
Langjing |
Anti-Osteoporosis
|
|
|
2 |
|
|
Alfacalcidol soft capsules
|
|
Faneng |
Cardiovascular and
Cerebrovascular
|
|
|
5 |
|
|
Edaravone injection; amlodipine maleate tablets; and
sumatriptan succinate tablets
|
|
Bicun, Yidasheng,
Ningliping and
Youshu |
Digestive Conditions
|
|
|
3 |
|
|
Smectite powder and aldioxa tablets
|
|
Biqi and Odijia |
Non-Steroidal Anti-Inflammatory
|
|
|
2 |
|
|
Diclofenac sodium sustained-release capsules and gelatin
|
|
Yingtaiqing |
Respiratory System
|
|
|
6 |
|
|
Herbal medicine used for the treatment of cough in
liquids and tablets; artificial cowbezoar and
chlorphenamine maleate granules compound paracetamol
and amantadine hydrochloride tablets; compound zinc
gluconate; pediatric paracetamol;
|
|
Simcere
Kechuanning,
Zaikang, Boke,
Aiersi and Boting |
Urinary Conditions
|
|
|
1 |
|
|
Naftopidil tablets
|
|
Zaichang |
Others
|
|
|
3 |
|
|
Various herbal oral solutions
|
|
Chengyuan and Shibo |
Our Innovative Pharmaceutical Endu (Recombinant Human Endostatin Injection)
28
Our innovative pharmaceutical Endu, or recombinant human endostatin, has been granted an
invention patent in China and was the first recombinant human endostatin injection approved for
manufacture and sale in China and has been approved for the treatment of NSCLC. Recombinant human
endostatin is a genetically engineered protein that interferes with the growth of blood vessels to
a tumor, thereby starving and preventing the growth of tumor cells. In 2008, revenues of Endu
amounted to RMB239.4 million ($35.1 million) which accounted for 13.8% of our product revenues for
the year.
The treatment of cancer by disrupting a tumors blood supply has been under research since the
1970s. In February 2004, the U.S. Food and Drug Administration approved Avastin, an anti-cancer
drug based on this principle. Shortly before Avastins approval, a U.S. based pharmaceutical
company stopped its clinical research of a drug called endostatin, a broad spectrum antiangiogenic
protein, citing high manufacturing costs. Endu is a modified version of endostatin that was
developed by a team of scientists led by Dr. Yongzhang Luo and Dr. Bin Zhou, both of whom received
doctorate degrees in biochemistry from the University of California at Berkeley. Endu has been
engineered to contain an additional nine-amino acid sequence to enhance protein purification,
solubility and stability and has been shown to improve the function of endostatin. Endu exhibits
low toxicity in humans based on clinical trials conducted between 2001 and 2004 on 493 Chinese
patients with NSCLC.
These clinical trials showed that the median survival time of the Endu group was approximately
five months longer than that of the control group and one year survival rates of the Endu group was
62.8% compared to 31.5% for the control group. The SFDA granted the new medicine certificate for
Endu in September 2005 and the relevant approvals to manufacture and sell Endu in March 2006 to
Shandong Simcere, a pharmaceutical company founded by Dr. Luo that held an invention patent in
China on Endu granted on January 18, 2006.
We entered into an agreement to acquire an 80.0% equity interest in Shandong Simcere in May
2006. As a result of the acquisition, we have obtained the exclusive right to manufacture Endu and
hold the invention patent in China for Endu. We also hold one invention patent in the United States
covering N-terminal modified recombinant human endostatin and its production. Prior to the
completion of our acquisition of Shandong Simcere, we began to market and sell Endu in July 2006 as
the exclusive distributor for Shandong Simcere. Upon completion of the acquisition in September
2006, we also began to manufacture Endu in China. In June 2007, we acquired an additional 10.0%
equity interest in Shandong Simcere. In January 2009, we acquired the remaining 10.0% equity
interest in Shandong Simcere which is now our wholly owned subsidiary.
We have an in-house research and development team specializing in anti-cancer drugs, know-how
and technologies that will enable us to engage in research and development of other indications for
Endu, and an existing GMP-approved manufacturing facility for the production of Endu. As part of
our ongoing efforts to monitor the efficacy and any adverse reactions to Endu, we are currently
conducting Phase IV clinical trials for Endu in approximately 150 hospitals in China in which over
2,400 patients have enrolled in the trials. We are also engaged in various research and development
efforts to maximize the commercial potential of Endu. For example, we are also researching other
potential indications for Endu as well as on expanding the scope of use for Endu outside of
chemotherapy. In addition, we are working to improve the delivery method of Endu for increased ease
of use.
Hong Kong Medgenn has the exclusive right to engage in the development and sale of Endu in any
jurisdiction outside of the PRC, including the United States, until February 10, 2015. Hong Kong
Medgenn also holds the rights to apply for patents outside of the PRC and may grant its rights with
respect to Endu in these jurisdictions to independent third parties. We hold indirectly an
effective 40.0% equity interest in Hong Kong Medgenn. See Item 3. Key InformationD. Risk
FactorsRisks Related to our CompanyWe have no control over the development and sale of Endu
outside of the PRC. Our brand and reputation may be adversely affected if the development and sale
of Endu outside of the PRC violates the intellectual property rights of any third parties.
Our Principal Branded Generic Pharmaceuticals
We currently market and sell the following principal branded generic pharmaceutical products,
each of which contribute over RMB100.0 million ($14.7 million) to our revenues in 2008 and in
aggregate accounted for 58.0% of our product revenues in 2008:
29
|
|
|
Bicun (edaravone injection); |
|
|
|
|
Zailin (amoxicillin capsules, dispersible tablets, granules and injection); and |
|
|
|
|
Yingtaiqing (diclofenac sodium sustained-release capsules and gelatin). |
Bicun. Bicun is our prescription edaravone injection pharmaceutical for the treatment of
strokes. Edaravone is a synthetic free radical scavenger and has been proved to be one of the most
effective neuroprotective pharmaceuticals, as evidenced by being recommended as the only
neuroprotective agent by the Japan Stroke Therapeutic Guide (2004). Edaravone protects the brain by
eliminating excessive free radicals, which are highly reactive molecules occurring in the human
body as a result of stroke, an excessive number of which could result in cell damage. Bicun was the
first edaravone injection approved for sale in China and has been one of our major products since
its introduction in China in February 2004. We obtained regulatory approval to manufacture and sell
Bicun in December 2003. The monitoring period of Bicun expired in 2007 and a number of competitors
have been entered into the edaravone injection market. In 2008, revenues of Bicun amounted to
RMB570.6 million ($83.6 million), which accounted for 32.9% of our product revenues for the year.
Zailin. Zailin is the brand name for our line of generic prescription amoxicillin antibiotics,
which includes capsules, dispersible tablets, granules and injection. Zailin was recognized as a
China Well-Known Trademark by the PRC Trademark Office of the State Administration for Industry
and Commerce in 2004 and is one of only two antibiotic brands in China granted such recognition.
Regulatory approvals to manufacture and sell Zailin granules were obtained in February 1993, Zailin
capsules in October 1996, Zailin tablets in June 1998 and Zailin injection in July 2001.
Amoxicillin has been included in the national Medical Insurance Catalog since 2000. In 2008,
revenues of Zailin amounted to RMB290.2 million ($42.5 million), which accounted for 16.7% of our
product revenues for the year.
Yingtaiqing. Yingtaiqing is the brand name for our generic diclofenac sodium in
sustained-release capsules and gelatin dosage format, which is an anti-inflammatory pain reliever
and analgesic drug used to treat rheumatoid arthritis and osteoarthritis. Yingtaiqing
sustained-release capsules are prescription pharmaceuticals and are currently manufactured by a
third-party manufacturer, the China Pharmaceutical University Pharmaceutical Company, or China
Pharmaceutical, and we have entered into an exclusive distribution agreement with China
Pharmaceutical to distribute and sell Yingtaiqing sustained-release capsules in China since 1996. A
master distribution agreement was renewed in December 2008. Pursuant to the master distribution
agreement, we have agreed to purchase from China Pharmaceutical a certain minimum quantity of
Yingtaiqing sustained-release capsules in 2009. We obtained the regulatory approval to manufacture
and sell Yingtaiqing gelatin, an OTC medicine, in December 2005. Yingtaiqing was recognized as a
China Well-Known Trademark in 2008. Diclofenac sodium has been included in the national Medical
Insurance Catalog since 2000. In 2008, sales of Yingtaiqing amounted to RMB146.7 million ($21.5
million), which accounted for 8.4% of our product revenues for the year.
Other Branded Generic Pharmaceutical Products
In addition to Endu and our three principal products, the following branded generic
pharmaceutical products in aggregate also represent a significant portion of our revenues, and
accounted in aggregate for 19.2% of our product revenues in 2008.
|
|
|
Sinofuan. Sinofuan is our first-to-market sustained release implants for the
treatment of cancer. In April 2008, we acquired Sinofuan by acquiring a 70.0% equity
interest of Wuhu Simcere Zhong Ren. |
|
|
|
|
Yidasheng. Yidasheng is our prescription edaravone injection pharmaceutical for the
treatment of strokes. Yidasheng became our product in October 2007, when we completed
the acquisition of a 51.0% stake in Jilin Boda, the manufacturer of Yidasheng. |
30
|
|
|
Biqi. Biqi is the brand name for our generic OTC anti-diarrhea pharmaceutical. We
obtained regulatory approval to manufacture and sell Biqi in November 1999. Biqi has
been included in the national Medical Insurance Catalog since 2000. |
|
|
|
|
Anqi. Anqi is the brand name of our amoxicillin and clavulanate potassium tablets,
granules, and injection for the treatment of infections. |
|
|
|
|
Zaike. Zaike is the brand name for our cefaclor in dry suspension antibiotics for
the treatment of infections. Regulatory approval to manufacture and sell Zaike was
obtained in February 1995. Zaike has been included in the national Medical Insurance
Catalog since 2000. |
|
|
|
|
Simcere Kechuanning. Simcere Kechuanning is the brand name for our OTC herbal
medicine used for the treatment of coughs. It comes in oral liquid and tablet
formulations. Regulatory approvals to manufacture and sell Simcere Kechuanning oral
liquids were obtained in October 1995 and tablets in March 2004. Simcere Kechuanning
has been included in the national Medical Insurance Catalog since 2000. |
Marketing and Distribution
We have over a decade of marketing experience in the pharmaceutical industry in China. From
our inception in March 1995 to 2001, we operated as a distributor of pharmaceuticals and have
leveraged our experience to establish an extensive distribution network in China that we now use to
market, sell and distribute our own pharmaceuticals. As of December 31, 2008, we had 963 dedicated
brand management and marketing employees. Our marketing and distribution activities are primarily
carried out by our subsidiaries, Jiangsu Simcere and Shanghai Simcere.
Our Marketing Strategy
We have established a fully integrated marketing strategy that includes brand management,
market research and liaising with various levels of regulatory authorities and government
institutions. We host in-person product presentations, conferences and seminars for physicians,
other healthcare professionals and research scholars to promote and generate awareness of our
pharmaceuticals, and to facilitate discussion between medical and pharmaceutical professionals in
China regarding our pharmaceuticals. We also have a dedicated marketing division that is in charge
of our overall marketing strategy, our branding efforts and our market research efforts. To support
our marketing strategy, we plan to continue expanding our own internal marketing force.
In addition, for our OTC pharmaceuticals, we also engaged in consumer advertising and
educational campaigns on television, newspapers, magazines, billboards and sponsorship of
charitable events in 2008. We believe competition in the OTC market is primarily based on brand
awareness, pricing and the therapeutic value of the pharmaceuticals. Furthermore, we have also set
up a toll-free hotline to respond to end-users questions regarding our OTC pharmaceuticals.
Our marketing professionals collect feedback from healthcare professionals, pharmacies and
end-users regarding our products. Our marketing professionals then work closely with our research
and development department and manufacturing department in order to enhance our existing portfolio
of pharmaceuticals and to identify potential new products for commercialization.
Distribution
We sell all of our products to pharmaceutical distributors in China. We have business
relationships directly or indirectly with approximately 1,700 pharmaceutical distributors in China.
Each pharmaceutical distributor in turn may distribute our pharmaceuticals within a designated
region either directly to hospitals, clinics, pharmacies and other retail outlets or to local
distributors. Our products are sold to hospitals and retail pharmacies throughout China. Many of
our pharmaceuticals are widely distributed in large hospitals located in some of the most
prosperous regions in China.
31
We select our distributors based on their reputation, market coverage, sales experience and
the size of their marketing and distribution force. We typically enter into written distribution
agreements with our regional distributors for one-year terms that are generally renewed annually.
These distribution agreements set out the targeted quantities and prices for our pharmaceuticals,
as well as guidelines for the sale and distribution of our products, including restrictions on the
territories in which the products may be sold. We believe that each of our target customer groups
is important to our business and we will continue to seek opportunities for sales growth in each
group.
Our distributors are widely dispersed on a geographic basis. Each distributor is limited to
its respective designated distribution areas as specified in our distribution agreements. In each
of 2006, 2007 and 2008, no single distributor contributed to, on an individual basis, 10.0% or more
of our total revenues, and sales to our five largest distributors accounted in aggregate for
approximately 12.7%, 13.8% and 11.6%, respectively, of our product revenues.
We have limited ability to manage the activities of our distributors, who are independent from
us. Our distributors may potentially engage in actions that may violate the anti-corruption laws in
China, engage in other illegal practices or exhibit and damaging behaviors with respect to their
sales or marketing of our products, which could have a material adverse effect on our business,
prospects and brand. For additional information, see Item 3. Key InformationD. Risk
FactorsRisks Related to Our CompanyWe may not be able to effectively manage our employees,
distribution network and third-party marketing firms, and our reputation, business, prospects and
brand may be materially and adversely affected by actions taken by our distributors.
Manufacturing, Quality Control and Supplies
Manufacturing
We currently have six GMP-approved manufacturing facilities in China located in Jiangsu,
Hainan, Shandong, Jilin and Anhui Provinces. We also own the mining right of a smectite mine,
located in Sichuan Province. See Facilities. In addition, three of our generic pharmaceuticals,
the Yingtaiqing-branded diclofenac sodium capsules, the Faneng-branded alfacalcidol soft capsules
and the Yineng-branded lentinan injection, are manufactured by independent third-party
manufacturers.
A portion of our production lines are equipped with automated machinery and equipment and can
be used to produce different kinds of pharmaceuticals in the same physical dosage form without the
need to significantly modify the current production facilities and equipment. We therefore are able
to adjust our production to meet market demand and our sales target in response to market demand.
The following table is a summary of our 2008 production capacity:
|
|
|
|
|
Pharmaceutical Agent |
|
|
|
|
Production Unit |
|
Delivery Form |
|
2008 Capacity |
Hainan Simcere |
|
|
|
|
Penicillin family
|
|
Granules
|
|
630,000,000 packs |
Penicillin family
|
|
Capsules
|
|
378,000,000 pills |
Cefaclor family
|
|
Granules
|
|
240,000,000 packs |
Cefaclor family
|
|
Capsules
|
|
12,000,000 pills |
Cefaclor family
|
|
Tablets
|
|
140,000,000 pills |
General
|
|
Tablets
|
|
80,000,000 pills |
General
|
|
Granules
|
|
360,000,000 packs |
General
|
|
Gelatin
|
|
10,000,000 tubes |
General
|
|
Powder
|
|
180,000,000 packs |
General
|
|
Capsules
|
|
360,000 pills |
|
|
|
|
|
Nanjing Simcere |
|
|
|
|
Penicillin family
|
|
Powder injection
|
|
8,400,000 vials |
Penicillin family
|
|
Granules
|
|
41,904,000 packs |
Penicillin family
|
|
Dry suspension
|
|
65,000,000 bottles |
Penicillin family
|
|
Tablets
|
|
64,440,000 pills |
32
|
|
|
|
|
Pharmaceutical Agent |
|
|
|
|
Production Unit |
|
Delivery Form |
|
2008 Capacity |
General
|
|
Oral solution
|
|
28,800,000 bottles |
General
|
|
Small volume parenteral solutions
|
|
18,000,000 vials |
General
|
|
Tablets
|
|
20,640,000 packs |
General
|
|
Dry suspension
|
|
27,600,000 packs |
General
|
|
Capsules
|
|
72,000,000 pills |
General
|
|
Granules
|
|
20,000,000 packs |
General
|
|
Powder injection
|
|
7,500,000 vials |
General
|
|
Frozen-dry powder
|
|
3,200,000 vials |
General
|
|
Sterile active pharmaceutical ingredients, or APIs
|
|
420 kg |
|
|
|
|
|
Shandong Simcere |
|
|
|
|
Recombinant human endostatin
|
|
Injection
|
|
1,000,000 vials |
|
|
|
|
|
Nanjing Tung Chit |
|
|
|
|
Nedaplatin injection
|
|
Frozen-dry powder injection
|
|
600,000 bottles |
|
|
|
|
|
Jilin Boda |
|
|
|
|
Edavarone injection
|
|
Low-dose injection
|
|
10,000,000 vials |
General
|
|
Tablets
|
|
800,000,000 pills |
General
|
|
Capsules
|
|
300,000,000 pills |
General
|
|
Granules
|
|
100,000,000 packs |
General
|
|
Topical solution
|
|
5,000,000 bottles |
General
|
|
Powder injection
|
|
1,500,000 packs |
APIs
|
|
Moroxydine
|
|
1,000,000 kg |
APIs
|
|
Asparamide
|
|
100,000 kg |
APIs
|
|
Ethacridine lactate
|
|
5,000 kg |
APIs
|
|
Nefopam hydrochloride
|
|
5,000 kg |
APIs
|
|
Edaravone
|
|
60,000 kg |
|
|
|
|
|
Wuhu Simcere Zhong Ren |
|
|
|
|
Fluorouracil implant
|
|
Implant
|
|
1,000,000 vials |
Quality Control
Our senior management team is actively involved in setting internal quality control policies
and monitoring our product quality control process. Our quality control team is responsible for the
testing of our pharmaceuticals to ensure that we comply with all applicable regulations, standards
and internal policies during the manufacturing process. We carry out quality control procedures in
compliance with GMP standards and SFDA regulations and in accordance with our internal policies
with a view towards ensuring the consistency and high quality of our products. We inspect and test
packaging materials before manufacturing and test intermediate products based on various criteria,
such as physical appearance (including the shape of capsules and granules), cleanliness, ingredient
composition and weight. Once the products are finalized, we conduct final product testing before
distributing our products to our distributors.
Raw Materials
The principal raw materials used for our products are the necessary active ingredients of our
pharmaceuticals. We source such raw materials, as well as packaging materials, from various
independent suppliers in China. In addition, we produce certain active ingredients used for the
production of some of our pharmaceutical products, such as Bicun, and we also own the mining rights
relating to a smectite mine that produces smectite, a raw material used for the manufacturing of
Biqi. In the case of sourcing raw materials from third parties, the purchase price for the relevant
raw materials is based on the prevailing market price for such materials of similar quality. Our
principal packaging materials include glass ampules for injection pharmaceuticals, plastic bottles
for capsule and tablet pharmaceuticals, and external packaging and printed instructions for all of
our pharmaceuticals. In 2008, we purchased an aggregate of 40.3% of our total supply of raw
materials from our five largest suppliers.
33
Historically, the majority of our raw materials have been readily available. We generally
maintain two vendors for each major raw material in order to diversify our vendor base and help to
ensure a reliable supply of raw materials at reasonable prices. To date, raw material shortages or
price fluctuations have not had any material adverse effect on us. We also maintain a supplier
evaluation scheme through which potential vendors are evaluated based on a number of factors
including quality, timely delivery, cost and technical capability. In addition, we conduct periodic
onsite reviews of our suppliers facilities.
Competition
We face direct competition from pharmaceutical manufacturers producing the same type of
pharmaceuticals and indirect competition from pharmaceutical manufacturers producing products
having similar medical efficacy as substitutes. Our competitors vary by product:
|
|
|
For Endu, there are currently no directly competitive products as Endu is the first
recombinant human endostatin injection approved for sale in China. However, Endu
indirectly competes with other types of cancer treatments currently available in China. |
|
|
|
|
For Bicun, the main competitive product was Yidasheng manufactured by Jilin Boda,
which we acquired a 51.0% equity interest in October 2007. However, in 2008, three
other pharmaceutical companies, China National Medicines Gourui Pharmaceutical
Co.,Ltd., Kunming Jida Pharmaceutical Co,. Ltd., and Jilin Huinan Changlong
Biopharmaceutical Co., Ltd. launched their edaravone injections in China. |
|
|
|
|
For Zailin, the main competitive products are Amoxian and Amoxilin, which are
manufactured by Zhuhai United Laboratories Pharmaceutical Co., Ltd. and Kunming Baker
Norton Pharmaceutical Co., Ltd., respectively. |
|
|
|
|
For Yingtaiqing, the main competitive products are Votalin and Difene, which are
manufactured by Beijing Novartis Pharma Ltd. and Klinge Pharma GmbH of Germany,
respectively. |
Our generic pharmaceuticals are not protected by patents and are thus subject to competition
from other generic pharmaceuticals. However, the SFDA may at its discretion, subject to certain
limitations, grant first-to-market generic pharmaceuticals the protection of a multiple-year
monitoring period, or a protection period under the prior regulation, during which other
pharmaceutical companies cannot apply for the registration of pharmaceuticals with the same
chemical structure, dosage form and indication. See Item 4. Information of the CompanyB.
Business OverviewRegulationApproval and Registration of Pharmaceutical Products. Once the
transitional protection period elapses, other manufacturers will be able to produce pharmaceuticals
with the same chemical structure, dosage form and indication, and may be able to sell such products
at a lower price. As a result, hospitals, clinics, pharmacies and other retail outlets may choose
the lower priced products over our pharmaceuticals, resulting in a commensurate loss in sales of
our products. See Item 3. Key InformationD. Risk FactorsRisks Relating to Our BusinessMost
of our products are branded generics, which can be manufactured and sold by other pharmaceutical
manufacturers in China once the relevant protection or monitoring periods elapse. Furthermore, for
our patented pharmaceuticals, the existence of a patent may not necessarily protect us from
competition as our patent may be challenged, invalidated or held to be unenforceable. This is
because patent applications can take many years to be approved and issued and currently pending
applications may later result in issued patents that our product candidates or technologies may
infringe. See Item 3. Key InformationD. Risk FactorsRisks Relating to Our BusinessThe
existence of a patent may not necessarily protect us from competition as our patent may be
challenged, invalidated or held unenforceable.
The pharmaceutical industry is characterized by rapid product development and technological
change. Our pharmaceuticals could be rendered obsolete or made uneconomical by the development of
new pharmaceuticals to treat the conditions addressed by our pharmaceuticals, technological
advances affecting the cost of production, or marketing or pricing actions by one or more of our
competitors. Our business, results of operations and financial condition could be materially
adversely affected by any one or more of these developments. Our competitors may also be able to
obtain regulatory approval for new products more quickly than we are and, therefore, may begin to
34
market their products in advance of our products. We believe that competition among
pharmaceuticals in China will continue to be based on, among other things, brand name recognition,
product efficacy, safety, reliability, availability, promotional activities and price.
Many of our existing and potential competitors have substantially greater financial,
technical, manufacturing or other resources than we do. Our competitors greater size in some cases
provides them with a competitive advantage with respect to manufacturing costs because of their
economies of scale and their ability to purchase raw materials at lower prices. Many of our
competitors may also have greater brand name recognition, more established distribution networks,
larger customer bases, or have more extensive knowledge of our customer groups. As a result, they
may be able to devote greater resources to the research, development, promotion and sale of their
products and respond more quickly to evolving industry standards and changes in market conditions
than we can. In addition, certain of our competitors may adopt low-margin sales strategies and
compete against us based on lower prices. Furthermore, as a result of Chinas admission to the WTO
in 2001 and subsequent changes in PRC government laws and regulations, we may also face increasing
competition from foreign manufacturers in addition to domestic manufacturers. Subsequent to the
reduction of import tariffs pursuant to Chinas WTO obligations, the selling prices in China of
imported pharmaceuticals have become more competitive. Also, some foreign pharmaceutical
manufacturers have set up domestic production bases in China leading to increasing direct
competition.
Environmental Matters
Our operations and facilities are subject to environmental laws and regulations stipulated by
the national and the local environment protection bureaus in China. Relevant laws and regulations
include provisions governing air emissions, water discharges and the management and disposal of
hazardous substances and wastes. The PRC regulatory authorities require pharmaceutical companies to
carry out environmental impact studies before engaging in new construction projects to ensure that
their production processes meet the required environmental standards. As the PRC legal system
continues to evolve, we may be required to make significant expenditures in order to comply with
environmental laws and regulations that may be adopted or imposed in the future.
Insurance
We maintain property insurance policies covering our equipment and facilities for losses due
to fire, flood and a wide range of other natural disasters. Insurance coverage for our fixed assets
other than land amounted to approximately RMB568.9 million as of March 31, 2009. We also maintain
insurance policies covering products in transit to our customers. We do not maintain product
liability insurance or insurance covering potential liability relating to the release of hazardous
materials. In addition, we do not maintain business interruption insurance or key employee
insurance for our executive officers as we believe it is not the normal industry practice in China
to maintain such insurance. We consider our current insurance coverage to be adequate. However,
uninsured damage to any of our manufacturing facilities and buildings or a significant product
liability claim could have a material adverse effect on our results of operations. We also maintain
directors and officers liability insurance for our directors and officers.
Regulation
Our products are subject to regulatory controls governing pharmaceutical products. As a
developer, manufacturer and distributor of pharmaceuticals, we are subject to regulation and
oversight by different levels of the food and drug administration in China, in particular, the
SFDA. The Law of the PRC on the Administration of Pharmaceuticals, as amended on February 28,
2001, provides the basic legal framework for the administration of the production and sale of
pharmaceuticals in China and covers the manufacturing, distributing, packaging, pricing and
advertising of pharmaceutical products in China. Its implementation regulations set out detailed
implementation rules with respect to the administration of pharmaceuticals in China. We are also
subject to other PRC laws and regulations that are applicable to manufacturers and distributors in
general.
Pharmaceutical Product Manufacturing
35
Permits and Licenses for Pharmaceutical Manufacturers
A manufacturer of pharmaceutical products must obtain a pharmaceutical manufacturing permit
from the provincial food and drug administration. This permit, once obtained, is valid for five
years and is renewable upon its expiration. This permit must be renewed at least six months before
its expiration date. Our current pharmaceutical manufacturing permits for each of Hainan Simcere,
Nanjing Simcere, Shandong Simcere, Nanjing Tung Chit, Jilin Boda and Wuhu Simcere Zhong Ren will
all expire on December 31, 2010. In addition, as Jilin Boda is currently expanding its facilities
which then require it to renew its existing manufacturing permit. We do not believe it will be
difficult for us to renew our pharmaceutical manufacturing permit. In addition, before commencing
business, a pharmaceutical manufacturer must also obtain a business license from the relevant
administration for industry and commerce.
Good Manufacturing Practices
A manufacturer of pharmaceutical products and raw materials must obtain the GMP certification
to produce pharmaceutical products and raw materials in China. GMP certification criteria include
institution and staff qualifications, production premises and facilities, equipment, raw materials,
hygiene conditions, production management, quality controls, product distributions, maintenance of
sales records and manner of handling customer complaints and adverse reaction reports. A GMP
certificate is valid for five years. The certificate must be renewed at least six months before its
expiration date. A manufacturer is required to obtain GMP certificates to cover all of its
production operations.
Generally, GMP certificates are valid for five years and we do not believe it will be
difficult for us to renew any of our GMP certifications. The following table summarizes the most
recent GMP certificates we received for each of our manufacturing facilities:
|
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|
|
|
Certification By Facilities |
|
Coverage |
|
Issue Date |
|
Expiration Date |
Hainan Simcere
|
|
Tablets (Including Cephalosporins), Granules, Capsules,
Dry Suspensions (Including Cephalosporins, Penicillin), Soft Capsules, Powders, Gelatin |
|
August 30, 2006 |
|
August 29, 2011 |
|
|
Bulk Drug (Montmorillonite, Aluminium, Dihydroxyallan-toninate, Levamlodipine Besylate, Pamidronate Disodium, Valaciclovir Hydrochloride and Benazepril Hydrochloride) |
|
January 8, 2007 |
|
January 7, 2012 |
|
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Bulk Drug (Sumatriptan Succinate, Meloxicam, Naftopidil, Edaravone and Sibutramine Hydrochloride) |
|
November 26, 2008 |
|
November 25, 2013 |
|
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Bulk Drug (Amlodipine Maleate, Cefprozil and Cefteram pivoxil) |
|
November 1, 2005 |
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October 31, 2010 |
Nanjing Simcere
|
|
Tablets, Granules, Dry Suspensions (Penicillins) |
|
May 6, 2008 |
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May 5, 2013 |
|
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Small Volume Parenteral Solutions, |
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December 3, 2008 |
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December 2, 2013 |
|
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Mixture, Oral Solution |
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October 27,2008 |
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October 26, 2013 |
|
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Powder for Injection |
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August 6, 2008 |
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August 5, 2013 |
|
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Sterile Bulk (Biapenem) |
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July 21, 2008 |
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July 20, 2013 |
|
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Tablets, Capsules, Dry Suspensions |
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March 30, 2006 |
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March 29, 2011 |
|
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Granules |
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May 11, 2006 |
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May 10, 2011 |
|
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Powder for Injection (Penicillin) |
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April 19, 2006 |
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April 18, 2011 |
Shandong Simcere
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Recombinant Human Endostatin Injection (Anti-cancer Drugs) |
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March 20, 2006 |
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March 19, 2011 |
Jilin Boda
|
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Tablets (with hormones), Capsules, Granules, Power, Tinctures, Topical Solution, Bulk Drug (Ethacridine Lactate, Nefopam Hydrochloride,
Moroxydine Hydrochloride, Sulfaguanidinem, Phenytoinum Sodium and povidone lodine) |
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October 9, 2004 |
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October 8, 2009 |
|
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Low-Dose Injection |
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December 9, 2005 |
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December 8, 2010 |
|
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Bulk Drug (Edaravone) |
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December 12, 2005 |
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December 11, 2010 |
|
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Bulk Drug (Asparagine) |
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December 23, 2006 |
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December 22, 2011 |
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Tablets, Capsules, Granules |
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November 28, 2008 |
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November 27, 2013 |
Nanjing Tung Chit
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Frozen-Dry Powder Injection (Anti-Cancer Drug) and Bulk Drug (Nedaplatin) |
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August 18, 2004 |
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August 16, 2009 |
Wuhu Simcere Zhong Ren
|
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Anti-cancer Implants |
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May 18, 2009 |
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May 17, 2014 |
36
Approval and Registration of Pharmaceutical Products
To apply for approval of manufacturing a pharmaceutical with a national standard, the
applicant must submit relevant information and samples of the pharmaceutical prepared in accordance
with the relevant national standard to the provincial food and drug administration authority.
According to the current Administrative Rules on Drug Registration that came into effect on October
1, 2007, provincial food and drug administration authorities will examine the completeness,
standardization and authenticity of an application dossier, and organize inspection of the pilot
manufactured drugs. Three consecutive production batches of pharmaceutical samples, collected by
provincial food and drug administration authorities, will be examined by the designated drug
laboratories. Following their respective assessment and investigation of the application, the
provincial food and drug administration authority and the pharmaceutical examination laboratories
will produce their respective report to the SFDA. The SFDA shall be responsible for the review of
the application dossier and the reports, and then conduct a final assessment of the application to
consider whether to approve the registration of the medicine. Upon successful final assessment of
the application, the SFDA will issue a medicine registration approval.
If a medicine has not previously been marketed in China, the manufacturer must first obtain a
new medicine certificate as well as a medicine registration approval from the SFDA. To register new
medicines, pharmaceutical manufacturers must obtain approvals from the SFDA to carry out clinical
research. Applicants need to submit relevant pre-clinical study information and other relevant
reports to the provincial food and drug administration for review. The provincial food and drug
administration will also conduct on-site inspections to collect pharmaceutical samples and appoint
specified pharmaceutical examination laboratories to exam such pharmaceutical samples. The
pharmaceutical examination laboratories will then issue reports to the SFDA, which will then set up
an expert team comprised of pharmaceutical professionals and other specialists to conduct a
technical assessment of the proposed new medicine and decide whether clinical research should be
commenced.
Following successful completion of clinical research, applicants must submit clinical research
information and raw material samples to the provincial food and drug administration and the
pharmaceutical examination laboratories appointed by the provincial food and drug administration to
apply for approval to manufacture the new medicines. The provincial food and drug administration
authority will then examine the completeness, standardization and authenticity of the submission
materials and conduct an on-site inspection at the production premises of the applicants. The
pharmaceutical examination laboratories appointed by the provincial food and drug administration
will then exam three consecutive production batches of pharmaceutical samples collected by the
provincial food and drug administration. After investigation and assessment, the provincial food
and drug administration authority and the examination laboratories appointed by the provincial food
and drug administration authority will produce reports to the SFDA, and the SFDA will review the
submission materials and carry out a final review of the application of the subject new medicine.
Upon fulfillment of the relevant requirements and approval by the SFDA, the applicants will be
granted a new medicine certificate and a medicine approval document. The SFDA will then issue to
the applicant the Drug Quality Registration Standards with respect to the registered
pharmaceuticals which the manufacturer of such pharmaceuticals must strictly comply with.
Upon granting production approval of a new medicine, the SFDA may set a monitoring period of a
maximum of five years to continue monitoring the safety of the medicine, during which the relevant
pharmaceutical manufacturing company must regularly review the production technologies employed,
monitor the quality, stability, curative effects and unfavorable side-effects of the new medicine,
and report to the provincial level food and drug administration authority annually. During such a
monitoring period, the SFDA will not accept applications for new medicine certificates for the same
medicine by other pharmaceutical companies or approve the sale or import of the same medicine by
other pharmaceutical companies, except that, for any other application for the same new medicine
that had been approved by the SFDA to undergo clinical trials prior to the granting of a monitoring
period, the SFDA may approve the application for sale or import of the new medicine if it meets the
relevant requirements and will continue to monitor such new medicine. As a result, the monitoring
period in connection with a new medicine can limit the competition encountered by the manufacturer
of the new medicine. As of March 31, 2009, we held 47 new medicine certificates that are in effect
and have obtained 270 medicine approval documents.
37
Pre-clinical Research and Clinical Trials
In order to apply for a new medicine certificate, a pharmaceutical company must conduct a
series of pre-clinical research including research on the synthesis technology, extraction methods,
physical and chemical nature and purity, pharmaceutical forms, selection of prescriptions,
manufacturing technologies, examination methods, quality indicators, stability, pharmacology,
toxicology and animal pharmacokinetics of pharmaceuticals. This pre-clinical research should be
conducted in compliance with the relevant technological guidelines issued by the SFDA. In
particular, the safety evaluation research must be conducted in compliance with the Good Laboratory
Practice.
After completion of pre-clinical studies and obtaining the relevant approval from the SFDA,
clinical trials are conducted in compliance with the Good Clinical Practice. Clinical trials to be
conducted range from Phase I to IV, although under certain circumstances, only Phase II and III or
only Phase III clinical trials are required.
|
|
|
Phase I preliminary trial of clinical pharmacology and human safety evaluation
studies. The primary objective is to observe the pharmacokinetics and the tolerance
level of the human body to the new medicine as a basis for ascertaining the appropriate
methods of dosage. |
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|
|
Phase II preliminary exploration on the therapeutic efficacy. The purpose is to
assess preliminarily the efficacy and safety of pharmaceutical products on patients
within the target indication of the pharmaceutical products and to provide the basis
for the design research and dosage tests for Phase III. The design and methodology of
research in this phase generally adopts double-blind and random methods with limited
sample sizes. |
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Phase III confirm the therapeutic efficacy. The objective is to further verify
the efficacy and safety of pharmaceutical products on patients within the target
indication of the pharmaceutical products, to evaluate the benefits and risks and
finally to provide sufficient experimental proven evidence to support the registration
application of the pharmaceutical products. In general, the trial should adopt
double-blind, random methods with sufficient sample sizes. |
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Phase IV stage of application with research conducted by the applicants
themselves after the launch of a new pharmaceutical. The objective is to observe the
efficacy and adverse reaction of pharmaceutical products under extensive use, to
perform an evaluation of the benefits and risks of the application among ordinary or
special group of patients, and to ascertain and improve the appropriate dosage volume
for application. |
Continuing SFDA Regulation
A manufacturer of pharmaceutical products is subject to continuing regulation by the SFDA. If
an approved medicine, its labeling or its manufacturing process is significantly modified,
pre-market supplemental approval may be required. A manufacturer of pharmaceutical products is
subject to periodic re-inspection and market surveillance by the SFDA to determine compliance with
regulatory requirements. If the SFDA sees a reason to enforce its regulations and rules, the agency
can institute a wide variety of enforcement actions such as fines and injunctions, recalls or
seizure of products, imposition of operating restrictions, partial suspension or complete shutdown
of production and criminal prosecution.
An approval of pharmaceutical registration issued by the SFDA will be valid for a period of
five years. Within six months prior to expiration, the manufacturer may need to apply for
re-registration with the provincial drug administrative authorities. Relevant authorities will
review the application and renew the registration for such pharmaceutical if the relevant
requirements are fulfilled. For innovative pharmaceuticals, completion of Phase IV clinical trial
is required prior to the application for re-registration.
Pharmaceutical Distribution
A distributor of pharmaceutical products must obtain a pharmaceutical distribution permit from
the relevant provincial- or designated municipal- or county-level food and drug administration. The
grant of such permit is
38
subject to an inspection of the distributors facilities, warehouse, hygiene environment,
quality control systems, personnel and equipment. The pharmaceutical distribution permit is valid
for five years. In addition, a pharmaceutical distributor needs to obtain a business license from
the relevant administration for industry and commerce prior to commencing its business.
The most recent pharmaceutical distribution permits obtained by our subsidiaries, Shanghai
Simcere and Jiangsu Simcere, for wholesale and retail business operations were issued on December
20, 2004 and July 16, 2007, respectively, and we do not believe it would be difficult for us to
renew these certifications.
Restrictions on Foreign Ownership of Pharmaceutical Wholesale and Retail Businesses in China
The Administration Rules on Foreign Investment in Commercial Domains and the Catalogue of
Industries for Guiding Foreign Investment permit foreign companies to establish or invest in wholly
foreign-owned companies or joint ventures that engage in wholesale or retail sales of
pharmaceuticals in China. In relation to retail sales, the number and size of retail pharmacy
outlets that a foreign investor may establish remain subject to certain restrictions. Pharmacy
chains with more than 30 outlets and selling a variety of branded pharmaceutical products sourced
from different suppliers are limited to less than 50.0% foreign ownership. However, under the
Supplement Regulations for Administration Rules on Foreign Investment in Commercial Domains, a
service provider from Hong Kong or Macau may provide up to 65% of the capital contributions to such
pharmacy chains that it opens.
Good Supply Practices
GSP standards regulate pharmaceutical wholesale and retail distributors to ensure the quality
of distribution in China. The current applicable GSP standards require pharmaceutical distributors
to implement strict controls on the distribution of medicine products, including standards
regarding staff qualifications, distribution premises, warehouses, inspection equipment and
facilities, management and quality control. The GSP certificate is valid for five years.
Our subsidiaries, Shanghai Simcere and Jiangsu Simcere, obtained their respective most recent
GSP certificates on November 21, 2008 and July 2, 2008. Both certificates are valid for five years
and we do not believe it would be difficult for us to renew these certifications.
Product Liability and Protection of Consumers
Product liability claims may arise if the products sold have any harmful effect on the
consumers. The injured party can claim for damages or compensation. The General Principles of the
Civil Law of the PRC which was effective from January 1987 states that manufacturers and sellers
of defective products causing property damage or injury shall incur civil liabilities.
The Product Quality Law of the PRC was enacted in 1993 and amended in 2000 to strengthen
quality control of products and protect consumers rights. Under this law, manufacturers and
distributors who produce and sell defective products may be subject to the confiscation of earnings
from such sales, the revocation of business licenses and imposition of fines, and in severe
circumstances, may be subject to criminal liability.
The Law of the PRC on the Protection of the Rights and Interests of Consumers was
promulgated on October 31, 1993 and enacted from January 1, 1994 to protect consumers rights when
they purchase or use goods and accept services. All business operators must comply with this law
when they manufacture or sell goods and/or provide services to customers. In extreme situations,
pharmaceutical manufacturers and distributors may be subject to criminal liability if their goods
or services lead to the death or injuries of customers or other third parties.
Price Controls
The retail prices of certain pharmaceuticals sold in China, primarily those included in the
national and provincial Medical Insurance Catalogs and those pharmaceuticals whose production or
trading are deemed to constitute monopolies, are subject to price controls in the form of fixed
prices or price ceilings. Manufacturers and
39
distributors cannot set the actual retail price for any given price-controlled product above
the price ceiling or deviate from the fixed price imposed by the government. The prices of
medicines that are not subject to price controls are determined freely at the discretion of the
respective pharmaceutical companies, subject to notification to the provincial pricing authorities.
Sales of pharmaceutical products by pharmaceutical manufacturers in China to overseas markets are
not subject to any price control.
The retail prices of medicines that are subject to price controls are administered by the
Price Control Office of the National Development and Reform Commission, or the NDRC, and provincial
and regional price control authorities. The retail price, once set, also effectively determines the
wholesale price of that medicine. From time to time, the NDRC publishes and updates a list of
medicines that are subject to price controls. Fixed prices and price ceilings on medicines are
determined based on profit margins that the relevant government authorities deem reasonable, the
type and quality of the medicine, its production costs, the prices of substitute medicines and the
extent of the manufacturers compliance with the applicable GMP standards. The NDRC directly
regulates the price of a portion of the medicines on the list, and delegates to provincial and
regional price control authorities the authority to regulate the pricing of the rest of the
medicines on the list. Provincial and regional price control authorities have discretion to
authorize price adjustments based on the local conditions and the level of local economic
development. Currently, approximately 1,500 pharmaceuticals, or approximately 10.0% of the
pharmaceuticals available in China, are subject to price controls. Of those, the price controls for
the retail prices of approximately 600 pharmaceuticals are administered by the NDRC and the rest
are administered by provincial and regional price control authorities.
Only the manufacturer of a medicine may apply for an increase in the retail price of the
medicine and it must either apply to the provincial price control authorities in the province where
it is incorporated, if the medicine is provincially regulated, or to the NDRC, if the medicine is
centrally regulated. For a provincially regulated medicine, in cases where provincial price control
authorities approve an application, manufacturers must file the new approved price with the NDRC
for record and thereafter the new approved price will become binding and enforceable across China.
Since May 1998, the PRC government has ordered reductions in the retail prices of various
pharmaceuticals 24 times. The latest price reductions occurred in January, March, April and May of
2007 and affected a total of 466 different Chinese medicines and 614 different western
pharmaceuticals.
The NDRC may grant premium pricing status to certain pharmaceuticals that are under price
controls. The NDRC may set the retail prices of pharmaceuticals that have obtained premium pricing
status at a level that is significantly more than comparable products. Two of our branded generic
products, Zailin granules and Yingtaiqing capsules, have obtained premium pricing status from the
NDRC.
Tendering System for Medicines Purchased by Healthcare Institutions
Hospitals owned and controlled by counties or higher level governments must implement
collective tender processes for the purchase of medicines listed in the Medical Insurance Catalogs
and medicines that are consumed in large volumes and commonly prescribed for clinical uses. A
committee established by the hospitals consisting of recognized pharmaceutical experts must assess
the bids submitted by the pharmaceutical manufacturers, taking into consideration, among other
things, the quality and price of the medicine and the service and reputation of the manufacturers.
For the same type of pharmaceutical, the committee usually selects from among two to three
different brands. Any reduction in the pharmaceutical purchase price by these hospitals as a result
of the competitive bidding process is intended to bring about a corresponding reduction in the
retail price for the benefit of patients. At present, we understand that the extent of
implementation of such tender purchase system varies among different regions in China. Recently,
state-owned and state-controlled hospitals of certain provinces began to implement collective
tender processes through online bidding. Such online bidding process is expected to increase the
transparency and competitiveness of the tendering system. An increasing numbers of hospitals are
expected to adopt such online bidding procedures.
Reimbursement Under the National Medical Insurance Program
40
According to the PRC National Bureau of Statistics, as of December 31, 2008, 317.0 million
people in China were enrolled in the National Medical Insurance Program. Most program participants
are urban residents who are currently employed or retired. Participants of the National Medical
Insurance Program and their employers are required to contribute to the payment of insurance
premium on a monthly basis. Program participants are eligible for full or partial reimbursement of
the cost of medicines included in the national Medical Insurance Catalog, which is divided into two
tiers. Purchases of Tier A medicines are fully reimbursable, but certain Tier A medicines are only
reimbursable if the medicine is used for a particular stated purpose in the Medical Insurance
Catalogs. Purchasers of Tier B medicines are required to make a certain percentage of co-payments,
with the remaining amount being reimbursable. The percentage of reimbursement for Tier B medicines
varies in different regions in the PRC. Factors that affect the inclusion of medicines in the
Medical Insurance Catalogs include whether the medicine is consumed in large volumes and commonly
prescribed for clinical use in China and whether it is considered to be important in meeting the
basic healthcare needs of the general public. The Ministry of Human Resources, together with other
government authorities, has the power every two years to determine which medicines are included in
the national medicine catalog, under which of the two tiers the included medicine falls, and
whether an included medicine should be removed from the catalog. Provincial governments are
required to include all Tier A medicines listed on the national Medical Insurance Catalog in their
provincial Medical Insurance Catalogs. For Tier B medicines listed in the national Medical
Insurance Catalog, provincial governments have the discretion to adjust upwards or downwards by no
more than 15% from the number of Tier B medicines listed in the national Medical Insurance Catalog
that is to be included in the provincial Medical Insurance Catalogs. The total amount of
reimbursement for the cost of medicines, in addition to other medical expenses, for an individual
participant under the National Medical Insurance Program in a calendar year is capped to the
amounts in that participants individual account under the program. The amount in a participants
account varies, depending on the amount of contributions from the participant and his or her
employer. Generally, on average, participants under the National Medical Insurance Program who are
from relatively wealthier parts of China and metropolitan centers have greater amounts in their
individual accounts than those from less developed provinces.
PRC Patent Law
The PRC first allowed patents for the protection of proprietary rights, as set forth in the
PRC Patent Law, in 1985. Pharmaceutical inventions were not patentable under the PRC Patent Law
until 1993. Patents relating to pharmaceutical inventions are effective for 20 years from the
initial date the patent application was filed. An amendment to the PRC Patent Law was promulgated
on December 27, 2008, with the amendment becoming effective on October 1, 2009.
Patent Prosecution
The patent prosecution system in China is different from the U.S. system in a number of ways.
The patent system in China, like most countries other than the United States, adopts the principle
of first to file. This means that, where more than one person files a patent application for the
same invention, a patent will be granted to the person who first filed the application. The United
States uses a principle of first to invent to determine the granting of patents. In China, a patent
must possess novelty, inventiveness and practical application. Under the existing PRC Patent Law,
novelty means that before a patent application is filed, no identical invention or utility model
has been publicly disclosed in any publication in China or abroad or has been publicly used or made
known to the public by any other means in China, nor has any other person filed with the patent
authority an application which describes an identical invention or utility model and is published
after the filing date. Under the amended PRC Patent Law, novelty means that the invention or
utility model is not an existing technology, and prior to the date of application, no entity or
individual has filed an application with the patent authority describing the identical invention or
utility model and is published after the filing date. The term existing technology refers to
technology known to the general public both in China and abroad prior to the date of application.
Patents issued in the PRC are not enforceable in Hong Kong, Taiwan or Macau, each of which has
independent patent systems. Patents in the PRC are filed at the State Intellectual Property Office,
or SIPO, in Beijing.
Patent Enforcement
When a dispute arises as a result of infringement of the patent holders patent right, such
dispute should be settled first through consultation by the respective parties. However, if such
dispute cannot be settled through
41
consultation, such patent holder or an interested party who
believes the patent is being infringed may either file a civil legal suit or file an administrative
complaint with a provincial or municipal office of the SIPO. A PRC court may issue a preliminary
injunction upon the patent holders or an interested partys request before instituting any legal
proceedings or during the proceedings. Damages for infringement are calculated as either the loss
suffered by the patent holder arising from the infringement or the benefit gained by the infringer
from the infringement. If it is difficult to ascertain damages in this manner, damages may be
determined by using a reasonable multiple of the license fee under a contractual license. In
addition, under the amended PRC Patent Law, if damages can not be determined by either of the
method described above, the court may at its discretion, by taking into account factors such as the
type the patent or the nature and gravity of the infringement, determines a compensation in the sum
of not less than RMB10,000 but not more than RMB1.0 million. As in other jurisdictions, with one
notable exception, the patent holder in the PRC has the burden of proving that the patent is being
infringed. However, if the holder of a manufacturing process patent alleges infringement of such
patent, the alleged infringing party has the burden of proving that there has been no infringement.
Compulsory License
Under current PRC Patent Law, where a person possesses the means to utilize a patented
technology, but such person cannot obtain a license from the patent holder on reasonable terms and
in a reasonable period of time, such person is entitled to apply to the SIPO to authorize the
grant of a compulsory license three years following the grant of the patented technology. However,
under the amended PRC Patent Law, if a patent holder, after 3 years from the date when patent is
granted and after 4 years from the date when a patent application is filed, fails to exploit or to
fully exploit the patent without any good cause, the SIPO may, upon the application of an eligible
entity or individual, grant such other party a compulsory license to exploit the patent.
Furthermore, under the amended PRC Patent Law, if a patent holders act of exercising the patent
right is determined as a monopolizing act, a compulsory license may be granted in order to
eliminate or reduce the adverse consequences of monopoly. A compulsory license may also be
granted, under the current and the amended PRC Patent Law, where a national emergency or any
extraordinary state of affairs occurs or where public interest so requires. For the pharmaceutical
industry, the SIPO may, under the amended PRC Patent Law, grant a compulsory license for a
patented medicine to a country or region subject to provisions of the relevant international
treaty to which the PRC is a party in the interest of public health. We do not believe a
compulsory license has yet been granted by the SIPO.
International Patent Treaties
The PRC is also a signatory to all major intellectual property conventions, including the
Paris Convention for the Protection of Industrial Property, Madrid Agreement on the International
Registration of Marks and Madrid Protocol, Patent Cooperation Treaty, Budapest Treaty on the
International Recognition of the Deposit of Microorganisms for the Purposes of Patent Procedure and
the Agreement on Trade-Related Aspects of Intellectual Property Rights, or TRIPs.
Although patent rights are national rights, there is also a large degree of international
co-operation under the Patent Cooperation Treaty, or the PCT, to which China is a signatory. Under
the PCT, applicants in one country can seek patent protection for an invention simultaneously in a
number of other member countries by filing a single international patent application. The fact that
a patent application is pending is no guarantee that a patent will be granted, and even if granted,
the scope of a patent may not be as broad as the subject of the initial application.
Trademarks
The PRC Trademark Law was promulgated in 1982 (later amended on October 27, 2001) and the PRC
Trademark Implementing Regulations was promulgated on August 3, 2002. The PRC Trademark Office is responsible for the registration and administration of trademarks
throughout the country. Like patents, the PRC has adopted a first-to-file principle with respect
to trademarks.
PRC law provides that the following acts constitute infringement of the exclusive right to use
a registered trademark:
42
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use of a trademark that is identical with or similar to a registered trademark in
respect of the same or similar commodities without the authorization of the trademark
registrant; |
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sale of commodities infringing upon the exclusive right to use the trademark; |
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counterfeiting or making, without authorization, representations of a registered
trademark of another person, or sale of such representations of a registered
trademark; |
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changing a registered trademark and selling products on which the changed
registered trademark is used without the consent of the trademark registrant; and |
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otherwise infringing upon the exclusive right of another person to use a registered
trademark. |
In the PRC, a trademark owner who believes the trademark is being infringed has three options:
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The trademark owner can provide his trademark registration certificate and other
relevant evidence to the State or local Administration for Industry and Commerce, or
AIC, which can, at its discretion, launch an investigation. The AIC may take such
actions as: order the infringer to immediately cease the infringing behavior, seize
and destroy any infringing products and representations of the trademark in question,
close the facilities used to manufacture the infringing products or impose a fine. If
the trademark owner is dissatisfied with the State AICs decision, he may, within 15
days of receiving the AICs decision, institute civil proceedings in court. |
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The trademark owner may institute civil proceedings directly in court. Civil
redress for trademark infringement includes: |
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injunctions; |
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requiring the infringer to take steps to mitigate the damage (i.e. print
notices in newspapers); and |
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damages (i.e. compensation for the economic loss and injury to reputation as a
result of trademark infringement suffered by the trademark holder). |
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The amount of compensation is calculated according to either the gains acquired by the
infringer from the infringement during the infringement, or the loss suffered by the
trademark owner, including expenses incurred by the trademark holder to deter such
infringement. If it is difficult to determine the gains acquired by the infringer from the
infringement, or the loss suffered by the trademark owner, the court may elect to award
compensation of not more than RMB500,000. |
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If the case is so serious as to constitute a crime, the trademark owner may lodge a
complaint with the relevant public security organ and the infringer is subject to
investigation for criminal responsibility in accordance with PRC law. |
The PRC is a signatory to the Madrid Agreement and the Madrid Protocol. These agreements
provide a mechanism whereby an international registration produces the same effects as an
application for registration of the mark made in each of the countries designated by the applicant.
Foreign Exchange Regulation
Pursuant to the Foreign Currency Administration Rules promulgated in 1996 and as subsequently
amended from time to time and various regulations issued by SAFE and other relevant PRC government
authorities, the Renminbi is freely convertible only to the extent of current account items, such
as trade-related receipts and payments, interest and dividends. Foreign currencies received under
current account items can be either retained or sold to financial institutions engaged in the
foreign exchange settlement or sales business without prior approval from SAFE by complying with
relevant regulations. Capital account items, such as direct equity investments, loans,
43
repatriation
of investments and investments in stocks and bonds, require the prior approval from SAFE or its
local branch for conversion of Renminbi into a foreign currency, such as U.S. dollars, and
remittance of the foreign currency outside the PRC.
Payments for transactions that take place within the PRC must be made in Renminbi. Foreign
currencies received in respect of capital account items can be retained or sold to financial
institutions engaged in the foreign exchange settlement or sales business only with prior approval
from SAFE. Foreign-invested enterprises may retain foreign exchange in accounts with designated
foreign exchange banks subject to a cap set by SAFE or its local branch.
Pursuant to the SAFEs Notice on Relevant Issues Concerning Foreign Exchange Administration
for PRC Residents to Engage in Financing and Inbound Investment via Overseas Special Purpose
Vehicles, or SAFE Circular No. 75, issued on October 21, 2005, (i) a PRC citizen residing in the
PRC, or PRC resident, shall register with the local branch of SAFE before it establishes or
controls an overseas special purpose vehicle, or SPV, for the purpose of overseas equity financing
(including convertible debts financing); (ii) when a PRC resident contributes the assets of or its
equity interests in a domestic enterprise into an SPV, or engages in overseas financing after
contributing assets or equity interests into an SPV, such PRC resident shall register his or her
interest in the SPV and the change thereof with the local branch of SAFE; and (iii) when the SPV
undergoes a material event outside of China, such as a change in share capital or merger and
acquisition, the PRC resident shall, within 30 days from the occurrence of such event, register
such change with the local branch of SAFE. PRC residents who are shareholders of SPVs established
before November 1, 2005 were required to register with the local SAFE branch before March 31, 2006.
Under SAFE Circular No. 75, failure to comply with the registration procedures set forth above
may result in the penalties, including imposition of restrictions on a PRC subsidiarys foreign
exchange activities and its ability to distribute dividends to the SPV.
Our beneficial owners who are PRC residents have registered with the local branch of SAFE as
required under SAFE Circular No. 75.
Dividend Distribution Regulation
The principal laws and regulations governing dividends paid by our PRC operating subsidiaries
include the Company Law of the Peoples Republic of China (1993), amended and effective as of
January 1, 2006, Wholly Foreign Owned Enterprise Law (1986), as amended in 2000, and Wholly Foreign
Owned Enterprise Law Implementation Rules (1990), as amended in 2001. Under these laws and
regulations, each of our PRC subsidiaries, including WFOEs and domestic companies in China may pay
dividends only out of their accumulated profits, if any, determined in accordance with PRC
accounting standards and regulations. In addition, each of our PRC subsidiaries, including WFOEs
and domestic companies is required to set aside at least 10.0% of its after-tax profit based on PRC
accounting standards each year to its general reserves or statutory capital reserve fund until the
accumulative amount of such reserve reaches 50.0% of its respective registered capital. These
reserves are not distributable as cash dividends.
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C. |
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Organizational Structure |
The following diagram illustrates our corporate structure and the place of organization of
each of our subsidiaries as of the date of this annual report on Form 20-F.
44
We conduct substantially all of our operations through the following operating subsidiaries in
China:
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Simcere Pharmaceutical Co., Ltd., or Hainan Simcere, is our wholly owned subsidiary
that engages in the manufacturing of pharmaceutical products. Hainan Simcere is
currently authorized to manufacture 64 pharmaceutical products; |
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Nanjing Simcere Dongyuan Pharmaceutical Co., Ltd., or Nanjing Simcere, is our
wholly owned subsidiary that engages in the manufacturing of pharmaceutical products.
Nanjing Simcere is currently authorized to manufacture 87 pharmaceutical products; |
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Jiangsu Simcere Pharmaceutical Co., Ltd., or Jiangsu Simcere, and Shanghai Simcere
Pharmaceutical Co., Ltd., or Shanghai Simcere, are both our wholly owned subsidiaries
that engage in the marketing, sales and distribution of pharmaceutical products; |
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Jiangsu Simcere Pharmaceutical R&D Co., Ltd., or Simcere Research, is our wholly
owned subsidiary that engages in the research and development of pharmaceutical
products; |
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Sichuan Zigong Yirong Industrial Co., Ltd., or Sichuan Simcere, is our wholly owned
subsidiary that owns the mining right to a smectite mine in Sichuan Province and
engages in the extraction of smectite, a raw material used for the manufacturing of
one of our pharmaceutical products; |
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Hainan Qitian Pharmaceutical Co., Ltd., or Qitian Simcere, is our wholly owned
subsidiary that engages in the processing and refinement of smectite; |
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Shandong Simcere Medgenn Bio-Pharmaceutical Co., Ltd., or Shandong Simcere,
formerly known as Yantai Medgenn Co., Ltd., is our wholly owned subsidiary that
engages in the manufacturing of Endu |
45
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in China. We completed the acquisition of 80.0%
of the equity interest of Shandong Simcere in September 2006. We have since acquired
the remaining 20.0% of the equity interest in Shandong Simcere, which is now our
wholly owned subsidiary. In addition, Shandong Simcere owns a 40.0% equity interest in
Medgenn (Hong Kong) Co., Ltd., or Hong Kong Medgenn that was acquired for no cash
consideration. Hong Kong Medgenn has the exclusive right to engage in the development
and sale of Endu in any jurisdiction outside of the PRC until February 10, 2015. Hong
Kong Medgenn has not conducted any operations to date; |
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Jilin Boda Pharmaceutical Co., Ltd., or Jilin Boda, is our 51.0% owned subsidiary
that engages in the manufacturing and sale of pharmaceutical products. We completed
the acquisition of the 51.0% equity interest in Jilin Boda in October 2007; |
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Nanjing Tung Chit Pharmaceutical Company Limited, or Nanjing Tung Chit, is our
85.71% owned subsidiary that engages in the manufacturing and sale of pharmaceutical
products. We completed the acquisition of the 85.71% equity interest in Nanjing Tung
Chit in November 2007 through our purchase of 100% equity interest in Master Luck
Corporation Limited; and |
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Wuhu Simcere Zhong Ren Pharmaceutical Co., Ltd. is our 70.0% owned subsidiary that
engages in the manufacturing and sale of pharmaceutical products. We completed the
acquisition of the 70.0% equity interest in Wuhu Simcere Zhong Ren in April 2008. |
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Jiangsu Yanshen Biological Technology Stock Co., Ltd., or Jiangsu Yanshen, is our
37.5% owned subsidiary that engages in the manufacturing and sale of pharmaceutical
products. We completed the acquisition of the 37.5% equity interest in Jiangsu Yanshen
in May 2009. |
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D. |
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Property, Plant and Equipment |
Our headquarters and our research and development facility are located in Nanjing, Jiangsu
Province, on a parcel of land with an aggregate site area of approximately 193,100 square meters.
The land use right will expire in 2056. We have six GMP-approved manufacturing facilities that are
located in Nanjing in Jiangsu Province, Haikou in Hainan Province, Liaoyuan in Jilin Province,
Yantai in Shandong Province and Wuhu in Anhui Province. Our facilities in Nanjing are approximately
36,677 square meters in total, occupying four parcels of land with an aggregate site area of
approximately 309,788 square meters. The land use rights granted with respect of the lands will
expire in 2048, 2054 and 2054 and 2056. Our facility in Haikou, Hainan Province is approximately
17,000 square meters and occupies a parcel of land with an aggregate site area of approximately
40,000 square meters. The land use right will expire in 2067. The facility in Yantai, Shandong
Province is approximately 3,000 square meters and occupies a parcel of land with an aggregate site
area of approximately 48,000 square meters. The land use right will expire in 2053. The facility in
Liaoyuan, Jilin Province is approximately 33,410 square meters and occupies an aggregate site area
of approximately 67,207 square meters. The land use rights will expire in 2028 and 2056,
respectively. The facility in Wuhu, Anhui Province is approximately 2,118 square meters and
occupies a parcel of land with an aggregate site area of approximately 20,000 square meters. The
land use right will expire in 2052. In addition, we own the mineral exploration right relating to a
smectite mine that can produce 300,000 ton in total of smectite, a raw material used for the
manufacturing of our diarrhea medicine Biqi. We believe that our existing facilities, together with
the facilities under construction, are adequate for our current requirements.
Item 5. Operating and Financial Review and Prospects
You should read the following discussion and analysis of our financial condition and results
of operations in conjunction with our consolidated financial statements included elsewhere in this
annual report on Form 20-F . This discussion may contain forward-looking statements based upon
current expectations that involve risks and uncertainties. Our actual results may differ materially
from those anticipated in these forward-looking statements as a result of various factors,
including those set forth under Item 3. Key InformationD. Risk Factors or in other parts of
this annual report on Form 20-F.
46
Overview
We are a leading manufacturer and supplier of branded generic pharmaceuticals in the fast
growing China market. We focus our strategy on the development of first-to-market generic and
innovative pharmaceuticals. We currently manufacture and sell 45 principal pharmaceutical products
and are the exclusive distributor of three additional pharmaceutical products that are marketed
under our brand names. We market and sell our products directly or indirectly to approximately
1,700 pharmaceutical distributors who in turn sell these products to other distributors, hospitals
and retail pharmacies throughout China.
We commenced operations in March 1995 and operated our business mainly as a distributor of
pharmaceutical products. Since then, we have gradually built up our research and development and
manufacturing capabilities and have become one of the leading pharmaceutical companies in China
that develop, manufacture and sell branded generic pharmaceuticals. To date, we have introduced a
series of branded products, including our first-to-market generic anti-stroke medication Bicun, as
well as our innovative pharmaceutical Endu, the first recombinant human endostatin injection
approved for sale in China. Revenues from our Bicun, Zailin, Endu and Yingtaiqing products have
each exceeded RMB100.0 million ($14.7 million) in 2008, which we believe is evidence of wide market
acceptance of these products in the China market.
In May 2006, we entered into a purchase agreement to acquire an 80.0% equity interest in
Shandong Simcere, a PRC pharmaceutical company engaged in the research, development, manufacture
and sale of an anti-cancer drug under the name Endu. Prior to the completion of the acquisition, we
began to distribute Endu as Shandong Simceres exclusive distributor in July 2006. The acquisition
was completed in September 2006, after which we began to manufacture Endu. Through this
acquisition, we have also acquired the patents and the rights to manufacture and sell Endu in
China, as well as a GMP-certified manufacturing facility for the production of Endu. We have since
acquired the remaining 20.0% equity interest in Shandong Simcere, which is now our wholly owned
subsidiary. In October 2007, we completed the acquisition of a 51.0% equity interest in Jilin Boda,
which manufactures the only other edaravone injection available in China in addition to our
existing product Bicun at that time, and in November 2007, we completed the acquisition of an
85.71% equity interest in Nanjing Tung Chit, the manufacturer of nedaplatin injection, a
chemotherapy pharmaceutical that is marketed under the brand name Jiebaishu. In April 2008, we
acquired a 70.0% equity interest in Wuhu Simcere Zhong Ren, the manufacturer of sustained release
implants for the treatment of cancer that is marketed under the brand name Sinofuan.
We have experienced significant growth in our business in recent years. Our total revenues
increased from RMB950.6 million in 2006 to RMB1,368.7 million in 2007 and to RMB1,741.1 million
($255.2 million) in 2008, representing a CAGR of 35.3% from 2006 to 2008. Our net income increased
from RMB172.3 million in 2006 to RMB301.3 million in 2007 and to RMB350.2 million ($51.3 million)
in 2008, representing a CAGR of 42.6% from 2006 to 2008.
We believe that the most significant factors that affect our financial performance and results
of operations are:
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the growth of the pharmaceutical market in China; |
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our ability to successfully develop, acquire and launch first-to-market branded
generic and innovative pharmaceuticals; |
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the extent of inclusion of our pharmaceuticals in the Medical Insurance Catalogs; |
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our ability to compete in the tender processes for purchase of medicines by
state-owned and state-controlled Chinese hospitals; and |
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product pricing and price controls. |
47
The Growth of the Pharmaceutical Market in China
With approximately one-fifth of the worlds population and a fast-growing gross domestic
product, China represents a significant potential market for the pharmaceutical industry. We
believe the significant expected growth of the pharmaceutical market in China is due to factors
such as robust economic growth and increased pharmaceutical expenditure, aging population and
increased lifestyle-related diseases, government support of the pharmaceutical industry, the
relatively low research and development and clinical trial costs in China as compared to developed
countries, as well as the increased availability of funding for medical insurance and industry
consolidation in China.
Our business and revenue growth primarily depend on the size of the pharmaceutical products in
China. As a result, our revenue and profitability may be negatively affected by changes in
national, regional or local economic conditions and consumer confidence in China. In particular, as
we focus our expansion of retail stores in metropolitan markets, where living standards and
consumer purchasing power are higher than rural areas, we are especially susceptible to changes in
economic conditions, consumer confidence and customer preferences of the urban Chinese population.
External factors beyond our control that affect consumer confidence include unemployment rates,
levels of personal disposable income, national, regional or local economic conditions and acts of
war or terrorism. Changes in economic conditions and consumer confidence could adversely affect
consumer preferences, purchasing power and spending patterns. For example, the recent global
economic and financial market crisis has caused, among other things, lower customer spending across
China. As a result, sales of our premium priced high-end anti-cancer medication Endu, which is
currently excluded from national medical insurance catalogue, have declined and may continue to
decline as patients decrease their purchases as a result of worries about economic conditions or
reduced incomes. In addition, the timing and nature of any recovery in the credit and financial
markets remains uncertain, and there can be no assurance that market conditions will improve in the
near future or that our results will not continue to be materially and adversely affected.
Our Ability to Successfully Develop, Acquire and Launch First-to-Market Generic and Innovative
Pharmaceuticals
We believe that our proven ability to build a portfolio of first-to-market branded generic and
innovative pharmaceuticals is crucial for our long-term growth and profitability, as
first-to-market pharmaceuticals provide the advantage of rapid market penetration and higher profit
margins. Compared to other generic pharmaceuticals, which can be sold by other pharmaceutical
companies at a lower price, first-to-market generic pharmaceuticals, although not protected by
intellectual property rights, are often granted a monitoring period, or have been granted a
protection period under prior regulations, by the SFDA during which time the SFDA will not accept
applications for new medicine certificates for pharmaceuticals with the same chemical structure,
dosage form and indication. Innovative pharmaceuticals, which are protected by intellectual
property rights, enjoy an even longer period of exclusivity as the validity period for an invention
patent is 20 years. We believe that our ability to launch first-to-market generic and innovative
pharmaceuticals, the exclusive marketing period in relation to such pharmaceuticals, coupled with
our capabilities in marketing, branding and distribution, will continue to allow us to develop
products that gain widespread recognition quickly and contribute to the rapid increase of our
revenues and profitability.
The Extent of Inclusion of Our Pharmaceuticals in the Medical Insurance Catalogs
Eligible participants in the national basic medical insurance program in China, which consists
of mostly urban residents, are entitled to reimbursement from the social medical insurance fund for
up to the entire cost of medicines that are included in the national and provincial Medical
Insurance Catalogs. See Item 4. Information of the CompanyB. Business
OverviewRegulationReimbursement Under the National and Provincial Medical Insurance Programs.
Factors that affect the inclusion of medicines in the Medical Insurance Catalogs include whether
the medicine is consumed in large volumes and commonly prescribed for clinical use in China and
whether it is considered to be important in meeting the basic healthcare needs of the general
public. As of March 31, 2009, 24 of our 45 principal products that were manufactured and sold were
included in the national Medical Insurance Catalog and 15 were included in the Medical Insurance
Catalog of various provinces, municipalities and autonomous regions. The inclusion of a medicine in
the Medical Insurance Catalogs can substantially improve the sales volume of the medicine due to
the availability of third-party reimbursements. However, pharmaceuticals included in the Medical
Insurance Catalogs are subject to price controls in the form of fixed retail prices or retail
48
price
ceilings, and are subject to periodical price adjustments by the relevant regulatory authorities.
Such price controls, especially downward price adjustments, may negatively affect the unit price of
our products. See Product Pricing and Price Controls. On balance, we believe that the benefit
of the inclusion of our pharmaceuticals in the Medical Insurance Catalogs outweighs the cost of
such inclusion.
There can be no assurance that our products currently included in the Medical Insurance
Catalogs will continue to be included in the catalogs. The removal or exclusion of our products
from the Medical Insurance Catalogs may adversely affect the sales of these products. The
commercial success of our new and potential products is substantially dependent on whether and to
what extent reimbursement is or will be available. Our failure to obtain inclusion of our new and
potential products in the Medical Insurance Catalogs may adversely affect the future sales of those
products. See Item 3. Key InformationD. Risk FactorsRisks Related to Our CompanyThere is no
assurance that our existing products will continue to be included or new products developed by us
will be included in the Medical Insurance Catalogs.
Our Ability to Compete In the Tender Processes for Purchase of Medicines by State-Owned and
State-Controlled Chinese Hospitals
A substantial portion of the products we sell to our distributor customers are sold to
hospitals owned or controlled by counties or higher level government authorities in China. These
hospitals must implement collective tender processes for the purchase of medicines listed in the
Medical Insurance Catalogs and medicines that are consumed in large volumes and commonly prescribed
for clinical uses. Factors considered by these hospitals in assessing bids include, among other
things, the quality and price of the medicine and the service and reputation of the manufacturers.
The collective tender process for pharmaceuticals with the same chemical composition must be
conducted at least annually, and pharmaceuticals that have won in the collective tender processes
previously must participate and win in the collective tender processes in the following period
before new purchase orders can be issued. If we are unable to win purchase contracts through the
collective tender processes in which we decide to participate, we will lose market share to our
competitors, and our revenue and profitability will be adversely affected.
Product Pricing and Price Controls
Certain of our pharmaceutical products sold in China, primarily those included in the Medical
Insurance Catalogs, are subject to price controls in the form of fixed prices or price ceilings.
Controls over and adjustments to the retail price of a pharmaceutical may have a corresponding
impact on the wholesale price of that pharmaceutical. From time to time, the PRC government
publishes and updates a list of medicines that are subject to price controls, either at the
national level or the provincial or regional level. Fixed prices and price ceilings on medicines
are determined based on profit margins that the relevant government authorities deem reasonable,
the type and quality of the medicine, its production costs, the prices of substitute medicines and
the extent of the manufacturers compliance with the applicable GMP standards. See Item 4.
Information of the CompanyB. Business OverviewRegulationPrice Controls.
As of March 31, 2009, 24 of our 45 principal products that were manufactured and sold were
included in the national Medical Insurance Catalog and were subject to price controls at the
national level. In addition, 15 were included in the relevant provincial Medical Insurance Catalogs
and were subject to price controls within the respective province, municipality or autonomous
region. However, PRC government authorities impose no control over the prices at which
pharmaceutical manufacturers sell their products to their distributors. Nevertheless, the prices at
which pharmaceutical manufacturers such as us sell products to distributors are impacted by the
relevant fixed retail price or retail price ceilings.
Since May 1998, the relevant PRC government authorities have ordered price reductions of
various pharmaceuticals 24 times. The latest price reductions occurred in January, March, April and
May of 2007 and affected a total of 466 different Chinese medicines and 614 different western
pharmaceuticals. We expect the retail prices of additional pharmaceuticals to be adjusted
periodically in the future. Since January 1, 2006, the retail price of Faneng, Nanyuan and Zaiqi
were adjusted downward. Such retail price control, especially future downward price adjustments,
may negatively affect our revenues and profitability. The following table sets forth the relevant
information with respect to historical retail price adjustments of our products since January 1,
2006:
49
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Maximum Retail |
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Maximum Retail |
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Price Before |
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Price After |
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Adjustment |
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Dosage Form |
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Adjustment |
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(RMB) |
Herbal Cough Medicine
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Simcere Kechuanning
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Liquids (6 10ml vials per box)
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March 15, 2007
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16.9 |
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16.8 |
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Amlodipine maleate
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Ningliping
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Tablets (10 5mg tablets per box)
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January 26, 2007
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45.0 |
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38.8 |
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Benazepril hydrochloride
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Puliduo
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Tablets (14 10mg tablets per box)
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January 26, 2007
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47.0 |
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41.1 |
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Alfacalcidol
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Faneng
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Capsules (20 0.25ug
capsules)
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January 26, 2007
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52.0 |
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38.6 |
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Faneng
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Capsules (30 0.25ug
capsules)
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January 26, 2007
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78.0 |
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47.1 |
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Ribavirin dispersible
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Nanyuan
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Dispersible tablets
(24 0.1g packs)
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August 28, 2006
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18.2 |
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8.1 |
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Azithromycin
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Zaiqi
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Granules (6 0.1g
packs)
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October 10, 2005
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24.6 |
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12.5 |
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Two of our branded generic products, Zailin granules and Yingtaiqing capsules, have obtained
premium pricing status from the NDRC, which means the respective maximum retail prices of these
products are fixed by the NDRC at a level that is generally substantially higher than those of
comparable products. We believe that such premium pricing status has historically contributed to
our sales of Zailin and Yingtaiqing by allowing us to set higher unit prices for these products as
well as by ultimately increasing their sales volume as hospitals often assign higher points in
assessing bids for medicines that have obtained premium pricing status, as such premium pricing
status is deemed as recognition of high quality, strong efficacy and widespread market acceptance
of the pharmaceutical.
The prices of medicines that are not subject to price controls are determined freely at the
discretion of the respective pharmaceutical companies, subject to notification to the provincial
pricing authorities. As we sell our products exclusively to pharmaceutical distributors in China,
we price our pharmaceuticals that are not subject to price controls based on the prices of
competing pharmaceuticals, if any, in the market and our gross margin. For instance, currently Endu
is not subject to any price controls.
Acquisitions
On May 28, 2006, we entered into an agreement to acquire an 80.0% equity interest in Shandong
Simcere, a PRC pharmaceutical company engaged in the research, development, manufacture and sale of
an anti-cancer medication under the name Endu. Prior to the completion of the acquisition, we began
to market and sell Endu in July 2006 through Jiangsu Simcere as the exclusive distributor for
Shandong Simcere in China. Upon completion of the acquisition on September 30, 2006, we also began
to manufacture Endu in China. Under the share purchase agreement, we agreed to pay Shandong
Simceres existing shareholders a total purchase price of RMB196.6 million, payable in cash, of
which a total of RMB186.8 million has been paid as of December 31, 2006. According to the
agreement, the remaining balance of RMB9.8 million will be paid upon completion of the trial period
for certain quality control measures in relation to Endu, which are procedural in nature. In June
2007, we further acquired an additional 10.0% equity interest in Shandong Simcere for RMB27.1
million in cash. In January 2009, we acquired the remaining 10.0% equity interest in Shandong
Simcere for RMB30.1 million ($4.4 million) payable in cash. We believe that our current levels of
cash and cash flows from operations will be sufficient to meet our remaining payment obligation
with respect to the acquisition.
In September 2007, we entered into a definitive agreement to acquire a 51.0% equity interest
in Jilin Boda for a total of RMB123.1 million in cash. The acquisition was completed in October
2007. Jilin Boda manufactures the injectable stroke management medication, Yidasheng, the only
other edaravone injection currently available in China other than Bicun at that time. In November
2007, we acquired 100% equity interest in Master Luck
50
Corporation Limited, which in turns holds an
85.71% equity interest in Nanjing Tung Chit, the manufacturer of nedaplatin injection, a
chemotherapy pharmaceutical that is marketed under the brand name Jiebaishu. Total consideration
for the acquisition was RMB32.9 million in cash. We believe Jiebaishu, as a leading nedaplatin
product in China, further complements our current portfolio of anti-cancer pharmaceuticals that
already include our innovative pharmaceutical Endu, as well as provide us with a manufacturing
facility and production line for chemotherapy pharmaceuticals that is in compliance with GMP
standards. In April 2008,we acquired a 70.0% equity interest in Wuhu Simcere Zhong Ren, the
manufacturer of first-to-market 5-FU sustained release implants for the treatment of cancer under
the brand name of Sinofuan, with a total consideration of RMB65.1 million ($9.5 million) in cash.
The acquisition enhances our offerings in the anti-drug market and creates synergies with Endu, the
anti-tumor drug.
In May 2009, we entered into an agreement to indirectly acquire approximately 35% of the
equity interest of Shanghai Celgen for a total cash consideration of RMB140.0 million. Shanghai
Celgen has strong expertise in research and production of therapeutic antibodies and possesses an
antibody manufacturing facility in Shanghai, for which GMP certification is pending. Shanghai
Celgens major biogeneric drug candidate, an etanercept, has completed clinical trials and is
currently awaiting approval from the SFDA. In addition, we are entitled to unwind the acquisition
and the selling shareholders are required to return the amounts paid by us if the SFDA does not
approve Shanghai Celgens major biogeneric drug candidate within 24 months from the date of
agreement. The agreement is subject to certain closing conditions.
In May 2009, we entered into an agreement to acquire a 37.5% equity interest in Jiangsu
Yanshen, a China-based developer and manufacturer of vaccines, from existing shareholders for a
total cash consideration of approximately RMB195.5 million. Jiangsu Yanshens core products include
an influenza vaccine and a human use rabies vaccine (vero cell). Upon the closing of the
transaction, we are expected to be the largest shareholder in Jiangsu Yanshen. Jiangsu Yanshen has
received a new medicine certificate from the SFDA for its freeze-dried human use rabies vaccine
(vero cell) and has completed clinical trials of its purified hepatitis A inactivated vaccine (vero
cell). SFDA approval for the purified hepatitis A inactivated vaccine (vero cell) and GMP
certification for the associated new manufacturing facility are pending.
Revenues
We generate revenue mainly from the sales of our products. Our product revenues represent our
revenues from the sales of our products, less value-added taxes, or VAT. Our total revenues also
include other revenue, which primarily represent the refund of a portion of the VAT paid.
Our products include antibiotics, anti-stroke medications, anti-inflammatory drugs,
anti-cancer medications and other medicines. We generate a substantial portion of our revenue from
sales of Bicun, Zailin, Endu and Yingtaiqing, which in aggregate, accounted for 70.6%, 78.5% and
71.8% of our product revenues in 2006, 2007 and 2008, respectively.
The following table sets out a breakdown of our revenues for these major products, and each
item expressed as a percentage of our product revenues, for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2006 |
|
2007 |
|
2008 |
|
|
(in |
|
(% of |
|
(in |
|
(% of |
|
(in |
|
(% of |
|
|
thousands |
|
product |
|
thousands |
|
product |
|
thousands |
|
product |
|
|
of RMB) |
|
revenues) |
|
of RMB) |
|
revenues) |
|
of RMB) |
|
revenues) |
Bicun |
|
|
230,867 |
|
|
|
24.4 |
|
|
|
426,216 |
|
|
|
31.3 |
|
|
|
570,584 |
|
|
|
32.9 |
|
Zailin |
|
|
266,790 |
|
|
|
28.1 |
|
|
|
287,333 |
|
|
|
21.0 |
|
|
|
290,215 |
|
|
|
16.7 |
|
Endu |
|
|
34,726 |
|
|
|
3.7 |
|
|
|
216,193 |
|
|
|
15.9 |
|
|
|
239,439 |
|
|
|
13.8 |
|
Yingtaiqing |
|
|
136,754 |
|
|
|
14.4 |
|
|
|
140,824 |
|
|
|
10.3 |
|
|
|
146,660 |
|
|
|
8.4 |
|
We sell our products exclusively to pharmaceutical distributors as we believe this is the most
cost-effective way to reach a broad end-user base. We typically enter into written distribution
agreements with our distributor customers for one-year terms that are generally renewed annually.
Our sales are generally made on a purchase order basis, rather than under any long-term
commitments. We compete for desired distributors with other pharmaceutical
51
manufacturers. Any
disruption of our distribution network, including failure to renew existing distribution agreements
with desired distributors or establish relationships with important new distributors, could
negatively affect our ability to effectively sell our products, which could materially and
adversely affect our revenues and profitability. Furthermore, we have limited ability to manage the
activities of our distributors as they are independent from us. Our distributors may potentially
engage in actions that may violate the anti-corruption laws in China, engage in other illegal
practices or exhibit and damaging behaviors with respect to their sales or marketing of our
products, which could have a material adverse effect on our business, prospects and brand.
Our distributor customers are widely dispersed on both a geographic and revenues basis even
though each distributor is limited to its respective designated distribution areas as specified in
our distribution agreements. In 2006, 2007 and 2008, no single distributor contributed, on an
individual basis, 10.0% or more of our total revenues, and sales to our five largest distributors
accounted in aggregate for approximately 12.7%, 13.8% and 11.6%, respectively, of our product
revenues.
We grant credit to a portion of our distributor customers in the normal course of business
depending on the customers credit worthiness and the type of products we sell to them, although we
require some customers to make payment prior to shipment. We grant different credit terms to
different customers, depending on our assessment of their creditworthiness. We normally bill our
distributor customers upon shipment for credit sales, with a typical 30 to 90 days credit term from
the date of billing. Normally, collateral or other supporting securities are not required to
support such credit sales.
We allow a portion of our distributor customers to make payment by bills receivable. Bills
receivable primarily represents a short-term note receivable issued by a financial institution that
entitles us to receive the full face amount from the financial institution at maturity, which
generally ranges from 3 to 6 months from the date of issuance. Historically, we have not
experienced any losses on bills receivable.
In the past, we have experienced limited amounts of uncollectible accounts receivable. In
2006, 2007 and 2008, the provision for bad debt expense amounted to RMB1.4 million, RMB1.2 million
and RMB1.6 million ($0.2 million), respectively. Our allowance for doubtful accounts amounted to
RMB7.7 million and RMB8.1 million ($1.2 million), as of December 31, 2007 and 2008, respectively.
Cost of Materials and Production and Operating Expenses
The following table sets forth our cost of materials and production and operating expenses as
percentages of our total revenues for the period indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2006 |
|
2007 |
|
2008 |
|
|
(in percentages) |
Cost of materials and production |
|
|
20.0 |
|
|
|
17.6 |
|
|
|
18.4 |
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses |
|
|
3.6 |
|
|
|
4.9 |
|
|
|
4.9 |
|
Sales, marketing and distribution expenses |
|
|
46.6 |
|
|
|
46.4 |
|
|
|
45.0 |
|
General and administrative expenses |
|
|
10.3 |
|
|
|
11.8 |
|
|
|
11.2 |
|
Total operating expenses |
|
|
60.5 |
|
|
|
63.1 |
|
|
|
61.1 |
|
Our cost of materials and production increased from 2006 to 2008 as a result of our increased
sale of Bicun, Endu, Yidasheng and Sinofuan. However, our cost of materials and production declined
as a percentage of our total revenues from 2006 to 2008 as the cost of materials and production of
Bicun and Yidasheng as a percentage of their revenues is lower compared to those of our other major
products as we manufacture the raw materials used for the manufacturing of Bicun and Yidasheng
instead of purchasing such raw materials from third party suppliers. In addition, cost of materials
and production as a percentage of revenues is lower for Endu and Sinofuan as compared to those of
our generic pharmaceuticals. Our operating expenses as a percentage of our total revenues increased
from 2006 to 2007. This increase was due primarily to the increase in our research and development
expenses as a
52
percentage of our total revenues, which was due primarily to the increase in research
and development expenses associated with the Phase IV clinical trials for Endu and the continued
expansion of our research and development activities. Our operating expenses as a percentage of our
total revenues decreased from 2007 to 2008. The decrease was primarily due to the decrease in our
sales, marketing and distribution expenses as a percentage of our total revenues as a result of
improved economies of scale associated with the expansion of our operations. The increase from 2006
to 2008 in our general and administrative expenses associated with becoming a listed company in the
United States in April 2007.
Cost of Materials and Production
Our cost of materials and production primarily consists of:
|
|
|
costs of the pharmaceuticals in which we are the exclusive distributors of; |
|
|
|
|
costs of the necessary active ingredients and supporting ingredients of
pharmaceuticals we manufacture and various types of packaging materials; |
|
|
|
|
salaries and benefits for personnel directly involved in production activities; |
|
|
|
|
overhead costs, including utility, maintenance of production equipment and other
support expenses associated with the production of our products; and |
|
|
|
|
depreciation of property, plant and equipment used for production purposes.
Depreciation of property, plant and equipment attributable to production activities is
capitalized as part of inventory, and expensed as cost of materials and production
when products are sold. |
As we produce our pharmaceuticals in China and we source or manufacture a significant portion
of our raw materials in China, we currently have, and expect to continue to have in the foreseeable
future, a relatively low cost base compared to the pharmaceutical manufacturers in more developed
western countries. We expect the price of our raw materials to remain low as we are able to source
raw materials within China at a low cost as the market for the supply of raw materials for
pharmaceuticals is very competitive. As our business continues to expand and our economies of scale
increase, we expect our bargaining power to increase, which we believe will also help in keeping
our raw material costs low. Personnel costs in China have experienced a general upward trend, but
as China possesses significant labor resources, we do not expect personnel costs as a percentage of
total revenues to increase significantly in the near future. Overhead costs, on the other hand,
have been increasing due to the increases in utility prices. However, we expect increased
efficiencies in our manufacturing and production process to partially offset the increases in utility prices. We expect the
depreciation of property, plant and equipment used for production purposes to increase as we
continue to expand our production facilities, but we expect such increase to be in line with an
increase in our production volume, and our depreciation cost as a percentage of our total revenues
to remain relatively stable.
Research and Development Expenses
We concentrate our research and development efforts on the treatment of diseases with high
incidence and/or mortality rates and/or for which there is a clear demand for more effective
pharmacotherapy, such as cancer and cerebrovascular and infectious diseases. We believe such
research and development strategy will lead to the development of products that have a high
potential for commercialization and can maximize our growth rate and profit margin.
Our research and development expenses primarily consist of costs associated with the research
and development of our product candidates. To develop product candidates, we use our in-house
expertise as well as collaborate with leading universities and research institutions in China.
Expenses associated with our in-house research and development activities include costs of engaging
in market analysis to determine the commercial viability of potential pharmaceuticals, costs of
employee compensation, costs of clinical pharmaceutical supplies, other supplies and materials, and
intellectual property, travel and facilities costs. As to our collaboration
53
arrangements with
research institutions in China, we are generally responsible for the provision of funding and
research assistance for the joint development of new pharmaceuticals. If the pharmaceuticals are
successfully developed and new medicine certificates with respect to such pharmaceuticals are
obtained, we will generally hold the rights to commercializing such products and in limited
circumstances, will hold the rights to commercializing such products jointly with our research
partners.
We are developing a number of new pharmaceuticals through our in-house expertise and through
joint research and development efforts with universities and research institutions in China. As of
March 31, 2009, we had over 12 product candidates in various stages of development. Product
candidates that we believe have the highest potential for commercialization include palonosetron
for injection and iguratimod tablets, all of which we are currently seeking SFDA approval. See
C. Research and DevelopmentProduct Candidates. We plan to commence the manufacturing,
marketing and sales of these products as soon as we obtain the relevant SFDA approvals.
We entered into an agreement with Tsinghua University in February 2006 to establish a Joint
Laboratory for Drug Discovery to engage in the research and development of innovative
pharmaceuticals. The joint laboratory is operated under the direction of a management committee,
which consists of six members, with Tsinghua University and us each appointing three members. The
agreement has a term of three years. Under the agreement, we will provide funding of RMB1.7 million
for the daily operations of the joint laboratory. As of December 31, 2008, we have provided an
aggregate of RMB3.8 million that includes laboratory launch costs of RMB0.5 million, research and
development expenses for 2006 and 2007 of RMB0.8 million and RMB1.3 million, respectively, and
annual laboratory operation and maintenance expenses of RMB0.4 million for 2006, 2007 and 2008,
respectively. We will further provide additional research funding of RMB2.2 million once
appropriate research and development projects are identified and approved by the management
committee. However, we are not obligated to provide research funding if no such appropriate project
is identified or approved. As of December 31, 2008, a total of five research and development
projects were approved and engaged by the joint laboratory. The obligations, rights and benefits of
Tsinghua University and us as to each research and development project will be set out in a
separate technological agreement to be entered into with respect to each project when we have
determined that the results of such research and development project have commercialization
potential.
We also entered into an agreement in January 2007 with Advenchen, a pharmaceutical research
and development company in the United States as a research partner to engage in the research and
development of, clinical studies for, and the commercialization of an anti-cancer pharmaceutical
based on a chemical compound owned by Advenchen. Under the terms of the agreement, we agreed to
provide research assistance and funding of up to RMB30.0 million of which RMB2.0 million has been
provided in February 2007. We provided an additional RMB1.0 million upon receiving three successful
batches of anti-cancer pharmaceutical samples in July 2007. Another RMB1.0 million was paid upon
the launch of the pre-clinical study in July 2008. The remaining RMB26.0 million will be further
provided if additional milestones as set forth under the agreement are achieved. In addition, if
any government grants are received in relation to this research and development project, we agreed
to provide an amount equal to 10.0% of such grant to Advenchen to be used in research activities
that are related to the anti-cancer pharmaceutical covered under this agreement, such as the
research and development of delivery mechanisms for the anti-cancer pharmaceutical. We also have a
right to terminate the agreement if Advenchen cannot successfully obtain a valid invention patent
in China for the chemical compound it owns at which point we will terminate any further research
and development activities under the agreement, and Advenchen will refund half of the funding
already provided to it under the agreement. Pursuant to the agreement, we will be entitled to all
intellectual property rights, the right to commercialize and all interests in the anti-cancer
pharmaceutical in China, and will share equally with Advenchen the intellectual property rights
outside of China. In addition, we will pay Advenchen 3.5% of total revenues from the sales of the
anti-cancer pharmaceutical in China, deducting the costs of packing, transportation, advertising
and marketing, taxation, discounts and other relevant costs, until the expiration of its patent
period, provided that the anti-cancer pharmaceutical is successfully developed and commercialized.
We began in 2008 pre-clinical trials of the anti-cancer pharmaceutical under the agreement,
including the pharmacodynamics researches on lung cancer, animal pharmacokinetics researches and
safety evaluation researches. We estimate that such researches can be completed by the end of 2009
at which time we will apply with the SFDA for investigational new drug application.
54
On December 12, 2008, we entered into an agreement to collaborate on the co-development and
production of humanized RabMAb® antibody therapeutics for tumors with Epitomics, Inc., a provider
of humanized rabbit monoclonal antibodies for therapeutic use. Under the agreement, we and
Epitomics, Inc. will collaborate on pre-clinical and clinical trials, product manufacturing, and
product distribution in the international markets. We will have the exclusive production and
distribution rights in China. We agreed to pay a total funding of up to $5.0 million (RMB34.1
million) of which $1.0 million (RMB6.8 million) was paid to acquire the license rights of
in-process R&D materials in January 2009. The remaining $4.0 million (RMB27.3 million) will be
provided at various dates upon achievement of certain milestones as set forth under the agreement.
According to the agreement, we will hold the rights to commercialize the drug in China and
Epitomics, Inc. will hold the rights to commercialize the drug outside China. In addition, if the
anti-cancer pharmaceutical is successfully developed and commercialized, we will pay Epitomics,
Inc. royalties on the net sales derived from the sales of this drug in China upon achieving certain
agreed annual net sales level.
Prior to the drug entering Phase I clinical trial in the United States or Europe, we will
enjoy 40% of the income derived from the sale, transfer, assignment, license and/or disposition of
the drug outside China. After the drug entering Phase I clinical trail in the United States or
Europe, we will enjoy 50% of the income derived from the sale, transfer, assignment, license and/or
disposition of the drug outside China. However, this is subject to a condition that we are required
to share 50% of the related development costs, as defined in the agreement, incurred outside China. Also, we will enjoy 50% of the profit arising from the sales of the drug
outside China.
Our subsidiary Jilin Boda, which we acquired in October 2007, has entered into a licensing
agreement on September 27, 2005 with Jilin Medical Research Institute for the rights to use,
manufacture and sell Polaprezinc APIs and granules which are new medications for the treatment of
gastric ulcer. Under the terms of the agreement, Jilin Medical Research Institute agreed to
complete the application for the new medicine certificates and obtain the relevant production
approvals, which we currently expected to be completed before June 30, 2010. As of March 31, 2009,
Jilin Boda has paid an aggregate of RMB1.6 million of the total contractual amounts of RMB2.7
million. The remaining will be paid upon the approval of the new medicine certificates and when the
production approvals are obtained. However, if such production approvals are not obtained, Jilin
Boda will be entitled to the return of the already paid amount.
Our subsidiary Jilin Boda also entered into a licensing agreement for Qiyetongmai capsule, a
new anti-stroke pharmaceutical, with Jilin Province TCM Engineering Research Center on June 18,
2007. Qiyetong capsule is a new drug used in the therapy of stroke. Under the terms of the
agreement, Jilin Province TCM Engineering Research Center is to transfer the patents and the rights
to use, manufacture and sell Qiyetongmai capsules and its API. Jilin Province TCM Engineering
Research Center has also agreed under the agreement to complete the application for new medicine
certificate and obtain the relevant production approvals before July 1, 2010. Amount to be paid
under the agreement is RMB6.5 million. As of March 31, 2009, Jilin Boda has paid an aggregate of
RMB1.8 million. If Jilin Province TCM Engineering Research Centre fails to perform its obligations
under the agreement, Jilin Boda will be entitled to the return of the already paid amount.
In September 2007, our subsidiary Simcere Research entered into a technology development
agreement with China Pharmaceutical University to develop Endu as a long acting pharmaceutical
through the PEGylation process. The PEGylated Endu will reduce the number of times in which Endu is
required to be administered to once every week or two weeks. Amount to be paid under the agreement
is RMB2.9 million and as of March 31, 2009, Simcere Research has paid an aggregate of RMB0.8
million. In addition, Simcere Research has agreed under the agreement to transfer to China
Pharmaceutical University 0.5% of the total revenue deriving from the sales of this pharmaceutical
every year for three years upon successfully obtaining new medicine certificate. The PEGylated Endu
is currently undergoing pre-clinical studies.
The successful development of pharmaceutical products can be affected by many factors. Product
candidates that appear to be promising at their early phases of research and development may fail
to be commercialized for various reasons, including the failure to obtain the necessary regulatory
approvals. In addition, the research and development cycle for innovative pharmaceuticals for which
we may obtain an approval certificate is long. The process of conducting basic research and various
stages of tests and trials of a new innovative pharmaceutical before obtaining an approval
certificate and commercializing the product may require more than ten
55
years. There is no assurance that our research and development projects will produce a
commercially viable result. Even if such products can be successfully commercialized, they may not
achieve the level of market acceptance that we expect, and our business and profitability could be
materially and adversely affected. See Item 3. Key InformationD. Risk FactorsOur future
research and development projects may not be successful. Furthermore, as the research and
development cycle for innovative pharmaceuticals is long, our expenditures on current and future
research and development projects are subject to many uncertainties. The cost of research and
development projects may vary significantly over the life of a research and development project as
a result of a variety of factors, including:
|
|
|
the delay in research and development of certain projects preventing us to focus our
resources on more promising product candidates; |
|
|
|
|
the intended use of a product candidate, which affects the length and timing of the
research and development projects; |
|
|
|
|
the number of patients who participate in the clinical trials; |
|
|
|
|
the number of sites included in clinical trials; |
|
|
|
|
the length of time required to enroll clinical trial participants; |
|
|
|
|
the duration of patient treatment and follow-up during clinical trials; |
|
|
|
|
the costs of producing supplies of the product candidates needed for clinical
trials; and |
|
|
|
|
the requirement and timing of SFDA approvals. |
As a result of the uncertainties discussed above, we are unable to determine with any
significant degree of certainty the duration and the completion costs of our research and
development projects or when and to what extent we will generate revenues from the
commercialization and sale of any of our product candidates.
We expense research and development costs as and when incurred. These expenses include the
costs of our internal research and development activities and the costs of research and development
conducted by others on our behalf, such as through third-party collaboration arrangements discussed
above. Upfront payments for research and development costs in connection with third party research
and development collaboration arrangements prior to obtaining regulatory approval are recognized as
research and development expenses as the research and development activities are performed.
Refundable milestone payments made by us in advance to third parties under research and development
arrangements are recorded as research and development expense when the specific milestone is
achieved. Research and development costs incurred subsequent to obtaining regulatory approval are
capitalized and amortized over the shorter of the remaining license period and the patent
protection period for the product.
We have incurred research and development expenses of RMB34.3 million, RMB68.3 million and
RMB86.1 million ($12.6 million) in 2006, 2007 and 2008, respectively, representing 3.6%, 4.9% and
4.9% of our total revenues, respectively.
We are committed to increase our research and development capabilities, and expect to incur
higher research and development expenses as we plan to supplement our development of
first-to-market generic pharmaceuticals in China with increasing efforts in the research and
development of innovative pharmaceuticals. We have also received government grants for certain of
our projects and such grants have been recorded as a reduction of our research and development
expenses as disclosed in our consolidated financial statements.
Additionally, we have in the past sought, and may continue to seek, to acquire rights to
development stage clinical products, technologies or suitable businesses that complement our
expansion strategies and our existing products and products under development. To acquire these
rights, we are required to utilize significant financial
56
resources and incur increased in process research and development or intangibles amortization
expense. Our research and development expenses also included depreciation of our new research
facility after it was completed in January 2007.
We expect that our total research and development expenses will increase in absolute terms in
the future.
Sales, Marketing and Distribution Expenses
Sales, marketing and distribution expenses consist primarily of salaries and related expenses
for personnel engaged in sales, marketing, distribution and customer support functions and costs
associated with advertising and other marketing activities including expenses of engaging
professional promotion and marketing companies. We host in-person product presentations, conference
and seminars for physicians, other healthcare professionals and research scholars to promote and
generate awareness of our pharmaceuticals. For our OTC pharmaceuticals, we also carry out consumer
advertising and educational campaigns. As the pharmaceutical market in China continues to grow, we
plan to further develop and strengthen our sales, marketing and distribution network in order to
increase the market recognition of our products and our Simcere brand name. In 2006, 2007 and 2008,
sales, marketing and distribution expenses increased primarily as a result of the additional sales
and marketing activities carried out by an increased number of sales personnel and our increased
product offerings. In the near term, we expect our total sales, marketing and distribution expenses
to increase as we continue to broaden our market reach and increase revenues by introducing new
branded pharmaceuticals, such as our new innovative pharmaceutical Endu, and by enhancing and
strengthening the brand names and marketing efforts of our existing portfolio of pharmaceuticals.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and benefits for our
administrative, finance and human resources personnel, depreciation of equipment and facilities of
our administrative offices, amortization of rental facilities used for administrative purposes, bad
debt expense, fees and expenses of legal, accounting and other professional services and other
expenses associated with our administrative offices. We expect general and administrative expenses
to increase as we recruit additional professionals and incur additional costs related to the growth
of our business.
Share-Based Compensation Expenses
We adopted our 2006 share incentive plan on November 13, 2006, under which we issued to
certain members of our directors, senior management and key employees on November 15, 2006 options
to purchase 10.0 million ordinary shares at an exercise price of $4.20 per ordinary share. These
options vest over a five-year period, with 20.0% of them vesting on November 14 of each year
beginning in 2007. These options will expire on November 14, 2012. On March 29, 2007, we granted
1,045,000 options to our independent directors and certain employees with an exercise price equal
to $6.75. These options vest over a five-year period, with 20.0% of them vesting on March 28 of
each year beginning in 2008. On May 5, 2008, we granted 400,000 options to a senior executive
officer with an exercise price equal to $6.755. These options vest over 4.85 year, with 20.0% of
them vesting on March 8 of each year beginning in 2009. On December 24, 2008, we granted 100,000
options to a senior executive officer with an exercise price equal to $3.445. These options vest
over 4.69 year, with 20.0% of them vesting on August 31 of each year beginning in 2009. All of the
above options granted will also vest only if the option holder is still a director or an employee
of our company at the time of the relevant vesting or unless otherwise approved by our compensation
committee.
We account for share-based compensation expenses based on the fair value of the share options
on the date of the grant and recognize the amount over the requisite service period.
We recognized share-based compensation in the amount of RMB3.4 million, RMB30.8 million and
RMB25.5 million ($3.7 million) in 2006, 2007 and 2008, respectively. Share-based compensation
expenses are allocated among each of research and development expenses, sales, marketing and
distribution expenses and general and administrative expenses based on the nature of the work our
employees were assigned to perform.
57
On April 15, 2009, our compensation committee approved a share option exchange program that
offered our eligible directors, employees and consultants the right to exchange vested and unvested
outstanding share options to purchase our ordinary shares granted under the 2006 Share Incentive
Plan for our restricted shares. The exchange ratio was determined based on the fair value of
replacement restricted shares so that the fair value of the replacement restricted shares to be
issued upon exchange would be approximately equivalent to the fair value of the share options
surrendered by an individual. In addition, these replacement restricted shares are subject to
substantially the same vesting schedule as the options that are validly tendered in the exchange
offer. A total of 154 directors and employees accepted the offer, and tendered options to purchase
an aggregate of 9,802,400 ordinary shares in exchange for an aggregate of 4,750,018 restricted
shares, which were granted on May 7, 2009. The exchange of the share option awards for restricted
shares was accounted for as a modification for awards which involves a cancellation of the original
award and an issuance of a new award. We do not expect the effect of this award modification on
share-based compensation expense over the remaining requisite service period to be significant.
Taxation and Incentives
On March 16, 2007, the National Peoples Congress passed the new CIT law which became
effective as of January 1, 2008. The new CIT law provides that all enterprises in China, including
foreign-invested companies, are subject to a uniform 25% corporate income tax rate and all tax
reduction or exemption as well as incentives previously solely available to foreign-invested
enterprises are cancelled. However, the new CIT law provides a five-year transition period from its
effective date for those enterprises which were established before March 16, 2007 and were entitled
to a preferential lower tax rate under the then effective tax laws or regulations as well as
grandfathering tax holidays. The transitional tax rates are 18%, 20%, 22%, 24% and 25% for 2008,
2009, 2010, 2011 and 2012 onwards, respectively. In addition, entities previously entitled to a 2+3
tax holiday under the then effective tax laws and regulations shall continue to enjoy the tax
holidays until they expire.
Further, entities that qualify as Advanced and New Technology Enterprises or ANTEs under the
new CIT law are entitled to a preferential income tax rate of 15%. According to the Notice on
Prepayment of Corporate Income Tax issued by the State Administration of Taxation, an ANTE
recognized according to previous tax regulations prior to January 1, 2008 should be subject to a
corporate income tax rate of 25% before it is re-identified as an ANTE under the new CIT law.
On April 14, 2008, the Management Measures of Identifying Advanced and New Technology
Enterprises and its annex, Key Fields of New and High-Tech Supported by the State, were issued
jointly by the Ministry of Science and Technology, State Administration of Tax and the Ministry of
Finance that outlines the detailed procedures and measures to identify such ANTEs. In December
2008, Shandong Simcere and Boda were recognized by the Chinese government as ANTEs under the new
CIT law and entitled to the preferential income tax rate of 15% from 2008 to 2010. Under the new
CIT law, where the transitional preferential income tax policies and the preferential policies
prescribed under the new CIT law and its implementation rules overlap, an enterprise shall choose
to carry out the most preferential policy, but shall not enjoy multiple preferential policies.
Shandong Simcere has chosen to enjoy the 2+3 tax holiday grandfathering treatment until its
expiry in 2011.
Hainan Simcere and Nanjing Simcere were both converted from domestic companies into
foreign-invested enterprises in March 2006. In addition, Shandong Simcere and Tung Chit are
foreign-invested enterprises established in 1999 and 2001 respectively. Prior to January 1, 2008,
Hainan Simcere, Shandong Simcere, Nanjing Simcere and Tung Chit, being production-oriented foreign
investment enterprises, were each entitled to a 2+3 tax holiday. In addition, Hainan Simcere and
Shandong Simcere, being located in one of the Special Economic Zones and Economic and Technological
Development Zones, respectively, were entitled to a reduced income tax rate of 15%. Further,
Shanghai Simcere was located in KangQiao Industrial Area and was granted a reduced income tax rate
of 15% for 2007 by the local taxing authority.
Hainan Simcere, Nanjing Simcere and Tung Chit completed their two-year full income tax
exemption in 2007. As a result of these preferential tax treatments and other local tax incentives,
our effective income tax rates were 3.9%, 4.1% and 11.5% in 2006, 2007 and 2008, respectively.
58
The new CIT law also provides that enterprises established outside of China whose de facto
management bodies are located in China are considered resident enterprises and are generally
subject to the uniform 25% corporate income tax rate as to their worldwide income. Under the
implementation rules for the new CIT law issued by the PRC State Council, de facto management
body is defined as a body that has material and overall management and control over the
manufacturing and business operations, personnel and human resources, finances and treasury, and
acquisition and disposition of properties and other assets of an enterprise. Although
substantially all of our operational management is currently based in the PRC, it is unclear
whether PRC tax authorities would require (or permit) our overseas registered entities to be
treated as PRC resident enterprises.
Under the new CIT law and the implementation rules issued by the State Council, PRC income tax
at the rate of 10% is applicable to dividends payable to investors that are non-resident
enterprises, which do not have an establishment or place of business in the PRC, or which have
such establishment or place of business but the relevant income is not effectively connected with
the establishment or place of business, to the extent such dividends have their sources within the
PRC. Similarly, any gain realized on the transfer of ADSs or ordinary shares by such investors is
also subject to 10% PRC income tax if such gain is regarded as income derived from sources within
the PRC. If we are considered a PRC resident enterprise, it is unclear whether dividends we pay
with respect to our ordinary shares or ADSs, or the gain you may realize from the transfer of our
ordinary shares or ADSs, would be treated as income derived from sources within the PRC and be
subject to PRC income tax. It is also unclear whether, if we are considered a PRC resident
enterprise, holders of our ordinary shares or ADSs might be able to claim the benefit of income
tax treaties entered into between China and other countries.
Critical Accounting Policies and the Use of Estimates
We prepare our consolidated financial statements in accordance with U.S. GAAP, which requires
us to make judgments, estimates and assumptions that affect (i) the reported amounts of our assets
and liabilities, (ii) the disclosure of our contingent assets and liabilities at the end of each
reporting period and (iii) the reported amounts of revenues and expenses during each reporting
period. We continually evaluate these estimates based on our own historical experience, knowledge
and assessment of current business and other conditions, including the current economic
environment, our expectations regarding the future based on available information and reasonable
assumptions, which together form our basis for making judgments about matters that are not readily
apparent from other sources. Since the use of estimates is an integral component of the financial
reporting process, our actual results could differ from those estimates. We adjust such estimates
and assumptions including our estimates of future operations. As future events and their effects
cannot be determined with precision, actual results could differ significantly from these
estimates. Change in these estimates resulting from continuing changes in economic environment
will be reflected in the consolidated financial statements in future periods. The current economic
environment has increased the degree of uncertainty inherent in those estimates and assumptions.
Some of our accounting policies also require a higher degree of judgment than others in their
application.
When reading our financial statements, you should consider (i) our selection of critical
accounting policies, (ii) the judgment and other uncertainties affecting the application of such
policies, (iii) the sensitivity of reported results to changes in conditions and assumptions. We
believe the following accounting policies involve the most significant judgment and estimates used
in the preparation of our financial statements.
Allowance for Doubtful Accounts
We grant credit to a portion of our customers in the normal course of business depending on
the customers credit worthiness and the type of products we sell to them, although we require some
customers to make payment prior to shipment. We maintain an allowance for doubtful accounts for
estimated losses resulting from the inability of our customers to make required payments. We
determine the allowance by (1) analyzing specific customer accounts that have known or potential
collection issues and (2) applying historical loss rates to the aging of the remaining accounts
receivable balances. If circumstances related to specific customers change, our estimates of the
recoverability of receivables could be further adjusted. In the event that we believe a trade
receivable will become uncollectible, we record additional provision to increase the allowance for
doubtful accounts. The accounting effect of this entry is a charge to income. We believe our
allowance to doubtful accounts is sufficient to reflect the recoverability of our accounts
receivable. If our business grows, we expect our accounts receivable balance to increase, as could
our allowance for doubtful accounts. If the financial condition of our customers deteriorates, our
59
uncollectible accounts receivable could exceed our current or future allowances. See
Revenues. Our accounts and bills receivables increased as compared to December 31, 2007 as a
result of increased sales in the fourth quarter of 2008 and longer credit period granted to
customers.
The following table presents the movement of allowance for doubtful accounts in 2006, 2007 and
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2006 |
|
2007 |
|
2008 |
|
2008 |
|
|
RMB |
|
RMB |
|
RMB |
|
$ |
|
|
(in thousands) |
Balance at the beginning of the year |
|
|
5,556 |
|
|
|
6,834 |
|
|
|
7,709 |
|
|
|
1,130 |
|
Additions charged to bad debt expense |
|
|
1,433 |
|
|
|
1,203 |
|
|
|
1,576 |
|
|
|
231 |
|
Additions related to acquisitions of subsidiaries |
|
|
|
|
|
|
1,074 |
|
|
|
|
|
|
|
|
|
Write-off of accounts receivable charged against
the allowance |
|
|
(155 |
) |
|
|
(1,402 |
) |
|
|
(1,216 |
) |
|
|
(178 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the year |
|
|
6,834 |
|
|
|
7,709 |
|
|
|
8,069 |
|
|
|
1,183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
We value our finished goods inventory at the lower of cost, which consists of the cost of
direct labor and raw materials as well as allocation of variable and fixed production overheads,
and market value. Variable production overheads are allocated to each unit of production based on
the actual use of the production facilities and fixed production overheads are allocated to the
cost of conversion based on the normal capacity of the production facilities. We determine normal
capacity as being a reasonable level of production volume supported by sufficient customer demand
without any abnormal equipment downtime due to shortages of materials and labor. Expenses relating
to abnormal levels of idle or excess facilities, spoilage and similar costs are expensed as
incurred. In 2006, 2007 and 2008, we did not incur any significant abnormal amounts of idle
facility expenses or spoilage as our manufacturing facilities were operating at normal capacity.
Our inventory as of December 31, 2008 increased as compared to December 31, 2007 because of the
acquisition of the new product, Sinofuan, the launch of the new product, Anxin, and the build-up of
inventories to meet the anticipated customer demand in 2009.
We write down the cost of inventory that we specifically identify and consider as obsolete.
Finished goods inventory is considered obsolete when it has less than six months of remaining shelf
life. Our raw materials and packaging materials are not subject to significant risk of
obsolescence. We manage our inventory level based on our estimates of future demand within a
specific time period, generally three months or less based on existing customer orders and, to a
limited extent, forecasted customer orders. Given our manufacturing plan is primarily based on
existing customer orders, we have recorded minimal inventory write-downs in the past. Our inventory
write-downs for 2006, 2007 and 2008 were RMB2.1 million, RMB3.2 million and RMB3.0 million ($0.4
million), respectively.
Depreciation and Amortization
Our long-lived assets include property, plant and equipment, intangible assets such as
customer relationships, developed technology and product trademarks, manufacturing licenses and
goodwill.
Except for goodwill, we amortize our long-lived assets using the straight-line method over the
estimated useful lives of the assets. We make estimates of the useful lives of property, plant and
equipment (including the salvage values) and intangibles, in order to determine the amount of
depreciation and amortization expense to be recorded during any reporting period. We estimate the
useful lives at the time we acquire the assets based on our historical experience with similar
assets as well as anticipated technological or other changes. If technological changes were to
occur more rapidly than anticipated or in a different form than anticipated, we might shorten the
useful lives assigned to these assets, which will result in the recognition of increased
depreciation and amortization expense in future periods. There has been no change to the estimated
useful lives and salvage values in 2006, 2007 and 2008.
Long-Lived Assets and Goodwill
60
As of December 31, 2008, our intangible assets primarily consisted of developed technology and
customer relationships that we acquired in connection with our acquisitions of a 90.0% equity
interest in Shandong Simcere, a 51.0% equity interest in Jilin Boda, an 85.71% equity interest in
Nanjing Tung Chit and a 70.0% equity interest in Wuhu Simcere Zhong Ren during 2006, 2007 and 2008.
We allocate the cost of an acquired entity to the assets acquired and liabilities assumed based on
their estimated fair value on the date of acquisition. This process is commonly referred to as the
purchase price allocation. As part of the purchase price allocation, we are required to determine
the fair value of any intangible assets acquired. The determination of the fair value of the
intangible assets acquired involves certain judgments and estimates. These judgments can include,
but are not limited to, the cash flows that an asset is expected to generate in the future.
The fair values of developed technology and customer relationships were determined by us with
inputs from our independent appraisers.
The developed technology acquired in connection with our acquisitions represents the right to
use, manufacture, market and sell patented and generic pharmaceuticals. These pharmaceuticals
include the anti-cancer drug, Endu, the edaravone injection, Yidasheng, the nedaplatin injection,
Jiebaishu, and 5-FU sustained release implant, Sinofuan. We estimated the fair value of the
developed technology based on an income approach. Under this approach, fair value of an asset is
determined based on the present value of projected future net cash flows associated with the use of
the asset. The most significant estimates and assumptions inherent in the income approach when we
valued the developed technology include: the growth rate of our revenue from sales; the earnings
before interest and tax, or EBIT, margin derived from sales; the discount rate selected to measure
the risks inherent in future cash flows; and our assessment of the product life cycle. We also
considered competitive trends influencing the sales, including consideration of any technical,
legal, regulatory, and economic barriers to entry. Any material change in any of the key
assumptions would affect the fair value of the developed technology which would have an offsetting
effect on the amount of goodwill recognized from the acquisitions. Future events, such as market
acceptance, introduction of superior pharmaceuticals by our competitors, regulatory actions, safety
concerns as to our pharmaceuticals, and challenges to and infringement of our intellectual property
rights, could result in write-downs of the carrying value of the developed technology. We estimated
the economic useful life of the developed technology by taking into consideration the remaining
protection period of the underlying pharmaceuticals patent rights in China and the expected
competitive trend in the PRC market. We adopted a straight-line method of amortization for the
developed technology as the pattern in which its economic benefits are used up cannot be reliably
determined. Material changes in any of our key assumptions would affect the fair value of our
developed technology.
For customer relationships, the fair value was determined based on an excess earnings or
income approach which takes into consideration the projected cash flows to be generated from these
customers. Future cash flows are predominately based on the net income forecast of each project and
the historical pricing, margins and expense levels of similar products, taking into consideration
the relevant market size and growth factors, expected industry trends, individual pharmaceutical
product life cycles, and the valid period of each products underlying patent. The resulting cash
flows are then discounted at a rate approximating our weighted average cost of capital.
We evaluate long-lived assets, including property, plant and equipment and intangible assets
for impairment whenever events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. We assess recoverability by comparing the carrying amount of an asset
to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying
amount of an asset exceeds its estimated undiscounted future cash flows, we recognize an impairment
charge based on the amount by which the carrying amount of the asset exceeds the fair value of the
asset. We estimate the fair value of the asset based on the best information available, including
prices for similar assets and in the absence of an observable market price, the results of using a
present value technique to estimate the fair value of the asset. For the periods presented, no
impairment on our long-lived assets was recorded.
We evaluate goodwill at least annually for impairment, and more frequently if events and
circumstances indicate that it might be impaired. We evaluate the recoverability of goodwill using
a two-step impairment test approach at the reporting unit level at the end of each year. The first
step of the impairment test involves comparing the fair value of our reporting unit with the
reporting units carrying amount, including goodwill. Secondly, if the carrying amount of the
reporting unit exceeds its fair value, we then recognize an impairment loss for any excess of
61
the carrying amount of the reporting units goodwill over the implied fair value of that
goodwill. We determine the implied fair value of goodwill by allocating the fair value of the
reporting unit in a manner similar to a purchase price allocation. The residual fair value after
this allocation is the implied fair value of the reporting unit goodwill. As of December 31, 2007
and 2008, our goodwill balance was RMB161.5 million and RMB178.2 million ($26.1 million),
respectively. Our goodwill balance as of December 31, 2007 related to our acquisition of Nanjing
Simcere in 2003, our acquisition of 80.0% of Shandong Simcere in September 2006, the acquisition of
an additional 10.0% interest in Shandong Simcere in June 2007, the 51.0% interest in Jilin Boda and
the 100% interest in Master Luck. The increase in our goodwill balance in 2008 was primarily due to
the acquisition of a 70.0% interest in Wuhu Simcere Zhong Ren in April 2008. The fair value of
this reporting unit is determined using our market capitalization based on the quoted market price
of our ordinary shares for the purpose of testing goodwill for impairment. There have been no
impairment charges recognized for goodwill in 2006, 2007 and 2008.
Share-based Compensation
We adopted Statement of Financial Accounting Standards No. 123 (revised 2004), or SFAS No.
123R, on January 1, 2006. Under SFAS No. 123R, we are required to measure the cost of employee
services received in exchange for an award of equity instruments based on the grant-date fair value
of the award and recognize the cost as an expense in our consolidated statements of income over the
period during which an employee is required to provide service in exchange for the award.
We determined the fair value of options using the Black-Scholes option pricing model. Under
this option pricing model, certain assumptions, including the risk-free interest rate, the expected
term of the options, the expected dividends on the underlying ordinary shares, and the expected
volatility of the price of the underlying share for the expected term of the option, are required
in order to determine the fair value of the options. Additionally, our share price on the date of
the option grant influences the fair value of the option. Notwithstanding that the exercise price
of options approximates the estimated share price of our ordinary shares on the grant date, a
higher share price would result in a higher option value.
For the purpose of determining the estimated fair value of our share options granted in 2006
and 2007, we believe expected volatility and estimated share price of our ordinary shares are the
most sensitive assumptions since we were a privately held company at the time we granted our
options. Changes in the volatility assumption and the estimated share price of our ordinary shares
could significantly impact the estimated fair values of the options calculated by the Black-Scholes
option pricing model. Expected volatility is estimated based upon the latest five-year average
volatility of six guideline companies listed in the United States with similar business as ours,
all of which had been trading for at least five years. Guideline companies were used because we did
not have a trading history at the time the options were issued and prior to having sufficient share
price history to calculate our own historical volatility, we believe that the average volatility of
the guideline companies is a reasonable benchmark to use in estimating the expected volatility of
our ordinary shares. For options granted in 2008, we used the historical volatility of our shares
to estimate the expected volatility.
In determining the value of our ordinary shares for purposes of recording share-based
compensation for the options granted on November 15, 2006, we have considered the guidance
prescribed by the AICPA Audit and Accounting Practice Aid Valuation of Privately-Held-Company
Equity Securities Issued as Compensation, or the Practice Aid. Specifically, paragraph 16 of the
Practice Aid sets forth the preferred types of valuation that should be used. We have followed the
level A recommendation, the most preferred method of valuation recommended by the Practice Aid,
and established the fair value of our ordinary shares at the date of grant using a contemporaneous
valuation by an independent valuation firm, American Appraisal China Limited, or American
Appraisal, as of November 15, 2006. American Appraisal used a weighted average of equity value
derived by using a combination of the income approach, or the discounted cash flow method, and the
market approach, or the guideline company method. American Appraisal applied an equal weight for
both the market approach and the income approach to arrive at the fair value for our ordinary
shares. There was no significant difference between our enterprise value, or EV, derived using the
income approach and our EV derived using the market approach.
For the market approach, American Appraisal considered the market profile and performance of
the six guideline companies and used such information to derive market multiples. American
Appraisal then calculated the following three multiples for the guideline companies: EV to sales
multiple, EV to earnings before interest, tax,
62
depreciation and amortization, or EBITDA, multiple and EV to earnings before interest and tax,
or EBIT, multiple. Due to the different growth rates, profit margins and risk levels between us and
the guideline companies, price multiple adjustments were made. American Appraisal used the 2007
adjusted median price multiples of the guideline companies in the valuation of our ordinary shares.
For the income approach, American Appraisal utilized discounted cash flow, or DCF, analysis
based on our projected cash flows from 2006 through 2011. American Appraisal used a weighted
average cost of capital, or WACC, of 15.0%, based on the WACC of the guideline companies.
American Appraisal also applied a discount for lack of marketability of 11.0% to reflect the
fact that there was no ready market for shares in a closely held company like us. When determining
the discount for lack of marketability, the Black-Scholes option pricing model was used. Under this
option pricing method, the cost of the put option, which can hedge the price change before the
privately held shares can be sold, was considered as a basis to determine the discount for lack of
marketability. This option pricing method was used because it takes into account certain
company-specific factors, including our size and the volatility of the share price of the guideline
companies engaged in the same industry. Volatility of 40.0% was determined by using the mean of
volatility of the guideline companies used in the market approach.
The above assumptions used by American Appraisal in deriving the fair values were consistent
with our business plan and major milestones achieved by us. American Appraisal also applied other
general assumptions, including the following:
|
|
|
no material changes in the existing political, legal, fiscal and economic conditions
and pharmaceutical industry in China; |
|
|
|
|
no major changes in tax law in China or the tax rates applicable to our subsidiaries
and consolidated affiliated entities in China; |
|
|
|
|
exchange rates between the Renminbi and U.S. dollar will not differ materially from
current rates; |
|
|
|
|
our future growth will not be constrained by the lack of funding; |
|
|
|
|
our continuing ability to retain competent management and key personnel to support
our ongoing operations; and |
|
|
|
|
industry trends and market conditions for the pharmaceutical and related industries
will not deviate significantly from economic forecasts. |
With respect to the options granted on March 29, 2007, our board of directors determined that
the midpoint of the estimated price range for our initial public offering of $6.75 was a reasonable
measure of the fair value of our ordinary shares.
For the options granted on November 15, 2006, we used an expected volatility of 40.0%,
estimated share price of our ordinary shares of $4.16, expected term of the options of 5.5 years,
expected dividend yield of 0.0% and a risk-free interest rate of 5.11%, resulting in an estimated
fair value per option of $1.88. For the options granted on March 29, 2007, the same assumptions are
used except that the estimated share price of our ordinary shares used was $6.75, resulting in an
estimated fair value per option of $3.05.
For the options granted on May 5, 2008, we used the closing price of our ordinary shares of
$6.755, an expected volatility of 58.8%, expected term of the options of 5.35 years, expected
dividend yield of 0.0% and a risk-free interest rate of 3.69%, resulting in an estimated fair value
per option of $3.73.
For the options granted on December 24, 2008, we used the closing price of our ordinary shares
of $3.445, an expected volatility of 74.4%, expected term of the options of 5.19 years, expected
dividend yield of 0.0% and a risk-free interest rate of 1.54%, resulting in an estimated fair value
per option of $2.13.
63
Income tax uncertainties and realization of deferred tax assets
Our income tax provision, related deferred tax assets and deferred tax liabilities are
recognized and measured based on actual and expected future income, PRC statutory income tax rates,
PRC tax regulations and tax planning strategies. Significant judgment is required in interpreting
tax regulations in the PRC, evaluating uncertain tax positions, and assessing the likelihood of
realizing deferred tax assets. Actual results could differ materially from those judgments, and
changes in judgments could materially affect our consolidated financial statements.
At December 31, 2007 and 2008, we had total gross deferred tax assets of RMB36.1 million and
RMB35.6 million ($5.2 million), respectively. We record a valuation allowance to reduce our
deferred tax assets if, based on the weight of available evidence, we believe expected future
taxable income is not likely to support the use of a deduction or credit in that jurisdiction. We
evaluate the level of our valuation allowances quarterly, and more frequently if actual operating
results differ significantly from forecasted results. At December 31, 2007 and 2008, our deferred
tax asset valuation allowance was RMB26.1 million and RMB24.5 million ($3.6 million), respectively.
Our total income tax expense was increased/(decreased) by RMB4.2 million, RMB15.6 million and
(RMB1.6 million) (($0.2 million)) in 2006, 2007, and 2008, respectively, for changes in estimates
regarding the realization of our deferred tax assets.
The change in valuation allowance for 2008 consisted primarily of an increase of RMB9.6
million ($1.4 million) mainly for Jiangsu Simceres additional tax losses and a decrease of RMB11.1
million ($1.6 million) for release of Simcere Researchs 2007 valuation allowance, of which RMB10.1
million ($1.5 million) utilized in 2008, as it moved from a cumulative loss position to a
cumulative profit position. As of December 31, 2008, our management reassessed the valuation
allowance of Simcere Research and concluded that it was more likely than not that sufficient future
taxable income would be generated to realize its deferred tax assets.
On January 1, 2007, we adopted the provisions of Financial Accounting Standards Board (FASB)
Interpretation No. 48, Accounting for Uncertainty in Income Taxes or FIN 48. Upon adoption of FIN
48, we reclassified RMB14.2 million of unrecognized tax benefits for which a cash tax payment is
not expected within the next twelve months to long-term liabilities in 2007. Our adoption of FIN 48
did not result in a cumulative effect adjustment to the opening balance of our retained earnings.
Under FIN 48, we determine whether it is more likely than not that a tax position will be
sustained upon examination, including resolution of any related appeals or litigation processes,
based solely on the technical merits of the position. In evaluating whether a tax position has met
the more-likely-than-not recognition threshold, it is presumed that the position will be examined
by the appropriate taxing authority that has full knowledge of all relevant information. In
addition, a tax position that meets the more-likely-than-not recognition threshold is measured to
determine the amount of benefit to recognize in the financial statements. The tax position is
measured at the largest amount of benefit that is greater than 50 percent likely of being realized
upon settlement. The tax positions are regularly reevaluated based on the results of the
examination of income tax filings, statute of limitations expirations and changes in tax law that
would either increase or decrease the technical merits of a position relative to the more likely
than not recognition threshold.
In the normal course of business, we are regularly audited by the PRC tax authorities. The
settlement of any particular issue with the applicable taxing authority could have a material
impact on our consolidated financial statements.
Results of Operations
The following table sets forth a summary of our consolidated statements of income for the
periods indicated. Our historical results presented below are not necessarily indicative of the
results that may be expected for any other future period.
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2006 |
|
2007 |
|
2008 |
|
|
|
|
|
|
% of Total |
|
|
|
|
|
% of Total |
|
|
|
|
|
% of Total |
|
|
RMB |
|
Revenues |
|
RMB |
|
Revenues |
|
RMB |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
(in thousands, except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues |
|
|
947,797 |
|
|
|
99.7 |
|
|
|
1,363,014 |
|
|
|
99.6 |
|
|
|
1,736,832 |
|
|
|
99.8 |
|
Other revenue (1) |
|
|
2,809 |
|
|
|
0.3 |
|
|
|
5,734 |
|
|
|
0.4 |
|
|
|
4,311 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
950,606 |
|
|
|
100.0 |
|
|
|
1,368,748 |
|
|
|
100.0 |
|
|
|
1,741,143 |
|
|
|
100.0 |
|
Cost of materials and production |
|
|
(190,560 |
) |
|
|
(20.0 |
) |
|
|
(241,081 |
) |
|
|
(17.6 |
) |
|
|
(320,882 |
) |
|
|
(18.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
760,046 |
|
|
|
80.0 |
|
|
|
1,127,667 |
|
|
|
82.4 |
|
|
|
1,420,261 |
|
|
|
81.6 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses |
|
|
(34,289 |
) |
|
|
(3.6 |
) |
|
|
(68,295 |
) |
|
|
(4.9 |
) |
|
|
(86,089 |
) |
|
|
(4.9 |
) |
Sales, marketing and distribution expenses |
|
|
(442,757 |
) |
|
|
(46.6 |
) |
|
|
(634,449 |
) |
|
|
(46.4 |
) |
|
|
(782,960 |
) |
|
|
(45.0 |
) |
General and administrative expenses |
|
|
(98,249 |
) |
|
|
(10.3 |
) |
|
|
(161,061 |
) |
|
|
(11.8 |
) |
|
|
(194,233 |
) |
|
|
(11.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
575,295 |
|
|
|
(60.5 |
) |
|
|
(863,805 |
) |
|
|
(63.1 |
) |
|
|
(1,063,282 |
) |
|
|
(61.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
184,751 |
|
|
|
19.5 |
|
|
|
263,862 |
|
|
|
19.3 |
|
|
|
356,979 |
|
|
|
20.5 |
|
Interest income |
|
|
2,827 |
|
|
|
0.3 |
|
|
|
24,361 |
|
|
|
1.8 |
|
|
|
34,302 |
|
|
|
2.0 |
|
Interest expense |
|
|
(10,705 |
) |
|
|
(1.2 |
) |
|
|
(6,346 |
) |
|
|
(0.5 |
) |
|
|
(4,693 |
) |
|
|
(0.3 |
) |
Foreign currency exchange gains, net |
|
|
|
|
|
|
|
|
|
|
24,670 |
|
|
|
1.8 |
|
|
|
39,879 |
|
|
|
2.3 |
|
Other income (1) |
|
|
|
|
|
|
|
|
|
|
20,526 |
|
|
|
1.5 |
|
|
|
1,104 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes and minority
interests |
|
|
176,873 |
|
|
|
18.6 |
|
|
|
327,073 |
|
|
|
23.9 |
|
|
|
427,571 |
|
|
|
24.6 |
|
Income tax expense |
|
|
(6,952 |
) |
|
|
(0.7 |
) |
|
|
(13,527 |
) |
|
|
(1.0 |
) |
|
|
(49,285 |
) |
|
|
(2.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interests |
|
|
169,921 |
|
|
|
17.9 |
|
|
|
313,546 |
|
|
|
22.9 |
|
|
|
378,286 |
|
|
|
21.8 |
|
Minority interests |
|
|
2,337 |
|
|
|
0.3 |
|
|
|
(12,285 |
) |
|
|
(0.9 |
) |
|
|
(28,135 |
) |
|
|
(1.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (2)(3) |
|
|
172,258 |
|
|
|
18.2 |
|
|
|
301,261 |
|
|
|
22.0 |
|
|
|
350,151 |
|
|
|
20.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In 2007, in the Form 6-K furnished with the SEC on August 7, 2007 for the quarter ended June
30, 2007, an incentive payment of RMB20.5 million we received from our depositary in
connection with the establishment of the ADR program following our initial public offering was
erroneously classified as part of other revenue. Such incentive payment is reclassified as
other nonoperating income. |
|
(2) |
|
In 2007 and 2008, other income represented the incentive payment received from our depositary
in connection with the establishment of the ADR program following our initial public offering.
The incentive payment received in 2007 had the effect of increasing our 2007 net income by
RMB20.5 million or RMB0.17 per share on a basic basis and a diluted basis or RMB0.35 per ADS
on a basic basis and RMB0.34 on a diluted basis. The incentive payment received in 2008 had
the effect of increasing our 2008 net income by RMB1.1 million ($0.2 million) or RMB0.01
($0.001) per share on a basic basis and a diluted basis or RMB0.02 ($0.003) per ADS on a basic
basis and a diluted basis. |
|
(3) |
|
In 2006, two of our operating subsidiaries were eligible for 100% tax exemptions under 2+3
tax holiday. In 2007, four of our operating subsidiaries were eligible for 100% tax exemptions
under 2+3 tax holiday, three of which expired at the end of 2007. In 2008, one and three of
our operating subsidiaries were eligible for 100% and 50% tax exemptions from income tax,
respectively; and two of our operating subsidiaries were qualified as advanced and new
technology enterprises and eligible for a preferential income tax rate. The effect of the
income tax exemptions and the preferential tax rate for advanced and new technology
enterprises increased our net income for 2006, 2007 and 2008 by RMB38.8 million, RMB62.9
million and RMB57.7 million ($8.5 million), respectively, or RMB0.42, RMB0.54 and RMB0.46
($0.07) on the per share basis, respectively. Prior to 2006, there were no such tax exemptions
and preferential tax arrangements in place. |
Comparison of Years Ended December 31, 2007 and December 31, 2008
Total Revenues. Our total revenues include product revenues and other revenue. Product
revenues represent our revenues from the sales of our products, less VAT. Other revenue primarily
represents refund of a portion of the VAT paid. Our total revenues increased by 27.2% to RMB1,741.1
million ($255.2 million) in 2008 from RMB1,368.7 million in 2007. This increase was primarily due
to the increase in the sales of Bicun, Yidasheng, Sinofuan and Endu. Revenues from Bicun increased
to RMB570.6 million ($83.6 million) in 2008, representing 32.9% of our product revenues, from
RMB426.2 million in 2007, or 31.3% of our product revenues. Revenues from Yidasheng increased to
RMB80.6 million ($11.8 million) in 2008, representing 4.6% of our product revenues, from RMB17.2
million in 2007, or 1.3% of our product revenues. Revenues from Sinofuan increased to RMB41.4
million ($6.1 million) in 2008, representing 2.4% of our product revenues. Revenues from Endu
increased to RMB239.4 million ($35.1 million) in 2008, representing 13.8% of our product revenues,
from RMB216.2 million in 2007, or 15.9%. The significant increases in sales of Endu and Bicun were
resulted from the implementation of our strategy of focusing on marking and sales of innovative
pharmaceuticals such as Endu and first-to-market generic pharmaceuticals such as Bicun.
Gross Profit and Gross Margin. Our gross profit increased by 25.9% to RMB1,420.3 million
($208.2 million) in 2008 from RMB1,127.7 million in 2007. Our gross margin decreased to 81.6% in
2008 from 82.4% in 2007. This increase in gross profit was due primarily to the increase in the
sales of Bicun, Yidasheng, Sinofuan and
65
Endu as a percentage of our total revenues, as these products have relatively high gross
profits as compared to our other major products. The decrease of gross margin was due primarily to
the resale of generic drugs for other pharmaceutical companies at a relatively lower margin in
third quarter of 2008. Since we only acted as a distributor for these drugs manufactured by other
pharmaceutical companies. These resale activities have been ceased since then.
Operating Expenses. Our operating expenses increased by 23.1% to RMB1,063.3 million ($155.8
million) in 2008 from 863.8 million in 2007. Operating expenses as a percentage of our total
revenues decreased to 61.1% in 2008 from 63.1% in 2007.
|
|
|
Research and Development Expenses. Our research and development expenses increased
to RMB86.1 million ($12.6 million) in 2008 from RMB68.3 million in 2007. The increase
was primarily due to the increased staff costs associated with the Phase IV clinical
trials and research of Endu and the increased activity level of our research and
development team. Research and development expenses as a percentage of our total
revenues remained comparable between intervening years. |
|
|
|
|
Sales, Marketing and Distribution Expenses. Our sales, marketing and distribution
expenses increased by 23.4% to RMB783.0 million ($114.8 million) in 2008 from RMB634.4
million in 2007. The increase was mainly attributable to the increased marketing
service fees paid to professional marketing companies for the promotion of our
products. Sales, marketing and distribution expenses as a percentage of our total
revenues decreased to 45.0% in 2008 from 46.4% in 2007. This decrease was due primarily
to improved economies of scale associated with the expansion of our operations. |
|
|
|
|
General and Administrative Expenses. Our general and administrative expenses
increased by 20.6% to RMB194.2 million ($28.5 million) in 2008 from RMB161.1 million in
2007. This increase was primarily related to staff costs, expense related to
professional service fees associated with being a public company since April 2007.
General and administrative expenses as a percentage of our total revenues decreased to
11.2% in 2008 from 11.8% in 2007. |
Interest Income. Our interest income increased to RMB34.3 million ($5.0 million) in 2008 from
RMB24.4 million in 2007. This increase was due to the increased average balance of our cash and
cash equivalents and short-term investments following the completion of our initial public offering
in April 2007.
Interest Expense. Our interest expense decreased by 26.0% to RMB4.7 million ($0.7 million) in
2008 from RMB6.3 million in 2007. This decrease was due to the repayment of short-term bank loans
in 2007.
Foreign Currency Exchange Gains, Net. Our foreign currency exchange gains totaled RMB39.9
million ($5.8 million) in 2008 which represent unrealized gains resulting from the translation of
U.S. dollar denominated intercompany loans to our PRC subsidiaries that were converted to Renminbi
and realized gains resulting from the repayment of the above mentioned U.S. dollar denominated
intercompany loans to our PRC subsidiaries. As these intercompany loans are not considered
long-term investment in nature and given the functional currency of our company is U.S. dollars and
the functional currency of our PRC subsidiaries is Renminbi, gains arising from the translation of
the intercompany loans from U.S. dollars to Renminbi by our PRC subsidiaries is recognized in our
consolidated statements of income while losses arising from the translation of our companys U.S.
dollars financial statements to Renminbi for consolidation purpose is recognized in our
consolidated statement of shareholders equity and comprehensive income.
Other Income. We had other income of RMB1.1 million ($0.2 million) in 2008 compare to RMB20.5
million in 2007 which represents an incentive payment received from our depositary in connection
with the establishment of the ADR program following our initial public offering.
Income Tax Expense. Income tax expense increased to RMB49.3 million ($7.2 million) in 2008
from RMB13.5 million in 2007. Our effective income tax rates in 2007 and 2008 were 4.1% and 11.5%,
respectively. The increases in our income tax expense and our effective income tax rate was due
primarily to the expiration of the two-
66
year full income tax exemption portion of the 2+3 tax holidays enjoyed by three of our
operating subsidiaries in 2007.
Minority interests. Minority interests increased to RMB28.1 million ($4.1million) in 2008 from
RMB12.3 million in 2007. It primarily represented the minority share of the profits of Shandong
Simcere, Jilin Boda and Wuhu Simcere Zhong Ren. The increase was due primarily to the acquisition
of Jilin Boda in October 2007 and Wuhu Simcere Zhong Ren in April 2008.
Net Income. As a result of the foregoing, our net income increased by 16.2% to RMB350.2
million ($51.3 million), or RMB2.80 ($0.41) per share, in 2008 from RMB301.3 million, or RMB2.56
per share, in 2007, while net margin decreased to 20.1% in 2008 from 22.0% in 2007. The effect of
the 100% tax exemption enjoyed by our operating subsidiaries increased our net income by RMB48.8
million ($7.2 million), or RMB0.39 ($0.06) per share in 2008 and RMB62.9 million, or RMB0.54 per
share in 2007. The effect of the expiration of the 100% tax exemption enjoyed by three of our
operating subsidiaries in 2007 decreased our net margin by RMB31.0 million ($4.5 million) in 2008.
Comparison of Years Ended December 31, 2006 and December 31, 2007
Total Revenues. Our total revenues include product revenues and other revenue. Product
revenues represent our revenues from the sales of our products, less VAT. Other revenue primarily
represents refund of a portion of the VAT paid. Our total revenues increased by 44.0% to RMB1,368.7
million in 2007 from RMB950.6 million in 2006. This increase was primarily due to the increase in
the sales of Endu and Bicun. Revenues from Endu increased to RMB216.2 million in 2007, representing
15.8% of our product revenues, from RMB34.7 million in 2006. Revenue from Endu increased
significantly from 2006 to 2007 primarily due to the fact that Endu only began sale in September
2006. Revenues from Bicun increased to RMB426.2 million in 2007, representing 31.1% of our product
revenues, from RMB230.9 million in 2006, or 24.4% of our product revenues. The significant
increases in sales of Endu and Bicun were resulted from the implementation of our strategy of
focusing on marking and sales of innovative pharmaceuticals such as Endu and first-to-market
generic pharmaceuticals such as Bicun.
Gross Profit and Gross Margin. Our gross profit increased by 48.4% to RMB1,127.7 million in
2007 from RMB760.0 million in 2006. Our gross margin increased to 82.4% in 2007 from 80.0% in 2006.
This increase was due primarily to the increase in the sales of Bicun and Endu as a percentage of
our total revenues, as Bicun and Endu have lower cost of materials and production as compared to
our other major products.
Operating Expenses. Our operating expenses increased by 50.2% to RMB863.8 million in 2007 from
575.3 million in 2006. Operating expenses as a percentage of our total revenues increased to 63.1%
in 2007 from 60.5% in 2006.
|
|
|
Research and Development Expenses. Our research and development expenses increased
to RMB68.3 million in 2007 from RMB34.3 million in 2006. Research and development
expenses as a percentage of our total revenues increased to 4.9% in 2007 from 3.6% in
2006. This increase was due primarily to increased expenses associated with the Phase
IV clinical trials of Endu and the continued expansion of our research and development
activities. |
|
|
|
|
Sales, Marketing and Distribution Expenses. Our sales, marketing and distribution
expenses increased by 43.3% to RMB634.4 million in 2007 from RMB442.8 million in 2006.
The increase was mainly attributable to the increased marketing service fees paid to
professional marketing companies for the promotion of our products and market research
expenses incurred in connection with the promotion of the safety and effectiveness of
Endu. Sales, marketing and distribution expenses as a percentage of our total revenues
decreased to 46.4% in 2007 from 46.6% in 2006. This decrease was due primarily to
improved economies of scale associated with the expansion of our operations. |
|
|
|
|
General and Administrative Expenses. Our general and administrative expenses
increased by 63.9% to RMB161.1 million in 2007 from RMB98.2 million in 2006. General
and administrative expenses as a percentage of our total revenues increased to 11.8% in
2007 from 10.3% in 2006. This increase were |
67
|
|
|
primarily related to share-based compensation expenses, staff costs, expense related to
our initial public offering celebration event and professional service fees associated
with being a new public company since April 2007. |
Interest Income. Our interest income increased to RMB24.4 million in 2007 from RMB2.8 million
in 2006. This increase was due to the increased average balance of our cash and cash equivalents
and short-term investments following the completion of our initial public offering in April 2007.
Interest Expense. Our interest expense decreased by 40.7% to RMB6.3 million in 2007 from
RMB10.7 million in 2006. This decrease was due to a decrease in average balance of our short-term
bank borrowings in 2007 as compared to 2006.
Foreign Currency Exchange Gains, Net. Our foreign currency exchange gains totaled RMB24.7
million in 2007 which represent unrealized gains resulting from the translation of U.S. dollar
denominated intercompany loans to our PRC subsidiaries that were converted to Renminbi. As these
intercompany loans are not considered long-term investment in nature and given the functional
currency of our company is U.S. dollars and the functional currency of our PRC subsidiaries is
Renminbi, gains arising from the translation of the intercompany loans from U.S. dollars to
Renminbi by our PRC subsidiaries is recognized in our consolidated statements of income while
losses arising from the translation of our companys U.S. dollars financial statements to Renminbi
for consolidation purpose is recognized in our consolidated statement of shareholders equity and
comprehensive income. We may continue to experience foreign currency exchange gains in 2008 to the
extent the intercompany loans remain outstanding and the Renminbi continues to appreciate against
the U.S. dollar. We did not experience any foreign currency exchange gains in 2006.
Other Income. We recorded other income of RMB20.5 million in 2007 which represents an
incentive payment received from our depositary in connection with the establishment of the ADR
program following our initial public offering.
Income Tax Expense. Income tax expense increased to RMB13.5 million in 2007 from RMB7.0
million in 2006. Our effective income tax rates in 2006 and 2007 were 3.9% and 4.1%, respectively.
The increases in our income tax expense and our effective income tax rate was due primarily to the
recognition of additional deferred tax expense as a result of the change in enacted PRC tax rates
effective from January 1, 2008. We recognized additional deferred tax liabilities in the fourth
quarter of 2007 resulting from its application of the implementation guidance that was published by
the PRC government in December 2007 pertaining to certain provisions of the newly enacted tax laws.
Minority interests. Minority interests in 2007 was a debit of RMB12.3 million representing the
minority share of the profits of Shandong Simcere, Jilin Boda and Nanjing Tung Chit. Minority
interests in 2006 was a credit of RMB2.3 million representing the minority share of the loss of
Shandong Simcere.
Net Income. As a result of the foregoing, our net income increased by 74.9% to RMB301.3
million, or RMB2.56 per share, in 2007 from RMB172.3 million, or RMB1.86 per share, in 2006, while
net margin increased to 22.0% in 2007 from 18.2% in 2006. The incentive payment received from our
depositary in connection with the establishment of the ADR program following our initial public
offering had the effect of increasing our net income by RMB20.5 million, or RMB0.17 per share on a
basic basis and a diluted basis, in 2007 from 2006, and our net margin by 1.5% in 2007. The effect
of the 100% tax exemption enjoyed by our operating subsidiaries increased our net income by RMB62.9
million, or RMB0.54 per share, in 2007 and RMB38.8 million, or RMB0.42 per share, in 2006.
|
|
|
B. |
|
Liquidity and Capital Resources |
Liquidity and Capital Resources
Following is a summary of our net cash flows for the years indicated:
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2006 |
|
2007 |
|
2008 |
|
2008 |
|
|
RMB |
|
RMB |
|
RMB |
|
$ |
|
|
(in thousands) |
Net cash provided by operating activities |
|
|
118,951 |
|
|
|
150,415 |
|
|
|
147,158 |
|
|
|
21,568 |
|
Net cash (used in)/provided by investing
activities |
|
|
(259,196 |
) |
|
|
(695,974 |
) |
|
|
252,668 |
|
|
|
37,035 |
|
Net cash provided by/(used in) financing
activities |
|
|
156,212 |
|
|
|
938,383 |
|
|
|
(88,846 |
) |
|
|
(13,022 |
) |
Effect of exchange rate changes on cash and
cash equivalents |
|
|
|
|
|
|
(1,499 |
) |
|
|
4,482 |
|
|
|
657 |
|
Net increase in cash and cash equivalents |
|
|
15,967 |
|
|
|
391,325 |
|
|
|
315,462 |
|
|
|
46,238 |
|
Cash and cash equivalents at beginning of year |
|
|
90,060 |
|
|
|
106,027 |
|
|
|
497,352 |
|
|
|
72,899 |
|
Cash and cash equivalents at end of year |
|
|
106,027 |
|
|
|
497,352 |
|
|
|
812,814 |
|
|
|
119,137 |
|
To date, we have financed our operations primarily through cash flows from operations,
short-term bank borrowings, equity contributions by our shareholders and our initial public
offering in April 2007. We have been able to increase our revenue and net income and generate
positive cash flows from operations in each of 2006, 2007 and 2008. We were also able to repay our
obligations and bank borrowings when they became due. As of December 31, 2008, we had RMB6.0
million ($0.9 million) and RMB62.0 million ($9.1 million) in outstanding short-term borrowings and
outstanding long term-loans, respectively. The outstanding short-term borrowings represent a RMB3.0
million ($0.4 million) unsecured interest-free borrowing from a local district government in
Shandong Province which we obtained for working capital purposes and a 3.0 million ($0.4 million)
current-portion of long-term loan. The outstanding long-term debts represent a RMB10.0 million
($1.5 million) non-current portion of long -term loan from the local district government in
Shandong Province, which is secured and repayable over a 2-year period from 2010 to 2011, and a
floating interest rate long-term loan of RMB52.0 million ($7.6 million) from the local district
government in Jilin Province to finance the construction of a new production facility in Jilin
Province. The floating interest rate long-term loan is repayable over an 11-year period from 2010
to 2020. The weighted-average effective interest rate on long term debt outstanding as of December
31, 2008 was 6.90% per annum. As of December 31, 2008, we also had RMB812.8 million ($119.1
million) in cash and cash equivalents. Our cash and cash equivalents primarily consist of cash on
hand, cash deposited in banks and interest-bearing savings accounts.
We had benefited from the low interest rate, abundant credit environment pre-dating the
current economic environment that allowed our customers to obtain credit to purchase our products
and to finance their projects utilizing our products on attractive terms. Given the current
economic environment, particularly the tightening of the credit markets, we have extended the time
period before payments are due, which have created additional demands on our working capital. Our
accounts and bills receivables as of December 31, 2008 increased as compared to December 31, 2007
as a result of increased sales in the fourth quarter of 2008 and longer credit period granted to
customers.
In November 2008, our board of directors authorized a share repurchase program with a view to
demonstrate our commitment to maximize shareholder value. Under the share repurchase program, we
may repurchase up to $50.0 million worth of our issued and outstanding ADSs from the open market or
in block trades from time to time for a period of 12 months from the date of such authorization.
As of December 31, 2008, we have repurchased 3.0 million of our ordinary shares in the form of ADSs
for an aggregate cost of $10.0 million which included $0.1 million of handling charge. As of
December 31, 2008, all of the purchased ordinary shares have been retired.
From January 1, 2009 to May 31, 2009, we further repurchased an additional 7.0 million
ordinary shares in the form of ADSs for an aggregate cost of $22.6 million of which included $0.1
million of handling charge. All of the repurchased ordinary shares have been retired. The
repurchases were made on the open market at prevailing market prices or in block trades and subject
to restrictions relating to volume, price and timing. Any future repurchases, if any, will depend
on prevailing market conditions, our liquidity requirements and other factors.
69
We believe that our current levels of cash and cash flows from operations and bank borrowings
and loans will be sufficient to meet our anticipated cash needs and commitments, including our
working capital needs, for at least the next 12 months. However, we may need additional cash
resources in the future if we experience changed business conditions or other developments. We may
also need additional cash resources in the future if we find and wish to pursue opportunities for
investment, acquisition, strategic cooperation or other similar actions. If we ever determine that
our cash requirements exceed our amounts of cash and cash equivalents on hand, we may seek to issue
debt or equity securities or obtain a credit facility. Any issuance of equity securities could
cause dilution for our shareholders. Any incurrence of indebtedness could increase our debt service
obligations and cause us to be subject to restrictive operating and finance covenants. It is
possible that, when we need additional cash resources, financing will only be available to us in
amounts or on terms that would not be acceptable to us or financing will not be available at all.
Operating Activities
Net cash provided by operating activities decreased by 2.2% to RMB147.2 million ($21.6
million) in 2008 from RMB150.4 million in 2007. This decrease was due primarily to a slower rate of
cash collections from our customers. This was because more customers chose to make payments with
bills receivable instead of cash. Bills receivable are short-term notes receivable issued primarily
by a financial institution that entitle us to receive the full face amount at maturity, which
generally ranges from three to six months from the date of issuance. Although the increased use of
bills receivable by our customers has an adverse impact on the timing of our cash inflows from
operating activities, it significantly reduces our credit risk exposure. As our business continues
to expand, we expect more customers to make payments with bills receivable instead of cash. In
order to manage our liquidity and maintain our accounts receivable turnover days at a reasonable
level, we sold more bills receivable to financial institutions during 2008. The net decrease in
cash provided by operating activities was also due to the decrease in other payable and accrued
liabilities as a result of faster processing of sales and marketing expenses by sales agents and
employees in 2008 compared to 2007.
Net cash provided by operating activities increased by 26.5% to RMB150.4 million in 2007 from
RMB119.0 million in 2006. This increase was due primarily to the receipt of an incentive payment of
RMB20.5 million in 2007 from our depositary in connection with the establishment of our ADR
program, the decrease in cash payments for income taxes to RMB3.1 million in 2007 from RMB22.7
million in 2006 and the decrease in interest payments, which was partially offset by higher
accounts and bills receivable. The higher accounts and bills receivable was due primarily to higher
bills receivable which have longer settlement period between three to six months where normal
accounts receivable have a credit period of one to three months. Bills receivable is a short-term
notes receivable issued by a financial institution that entitles us to receive the full face amount
from the financial institution at maturity. As we expand our distribution network, we accept more
bills receivable even though the settlement period is longer because the credit risk is minimal.
Furthermore, although we accepted an increasing amount of bills receivable, the cash generated from
the significant increase in sales has more than offset the effect of a longer cash collection cycle
resulted from the higher bills receivable.
We do not expect any significant change to the credit terms offered to our customers or the
payment terms offered by our vendors that would affect the timing of customer receipts and vendor
payments in the foreseeable future periods. We expect cash provided from operating activities to
continue to be a major source of liquidity for us and the future trend will continue to be affected
by the factors described above.
Investing Activities
Investing activities provided net cash of RMB252.7 million ($37.0 million) during 2008, mainly
from the maturity of held-to-maturity investment securities investments of RMB470.0 million ($68.9
million), partially offset by payment for the acquisition of the 70% equity interest in Wuhu
Simcere Zhong Ren of RMB62.4 million ($9.1 million) and for purchases of property, plant and
equipment of RMB117.5 million ($17.2 million).
Net cash used in investing activities increased significantly to RMB696.0 million in 2007 from
RMB259.2 million in 2006. Net cash used in investing activities in 2007 consisted primarily of
increase in short-term investments of RMB470.0 million, aggregate cash payment of RMB158.6 million
in connection with our acquisitions of the 10.0% equity interest in Shandong Simcere, the 51.0%
equity interest in Jilin Boda and the
70
85.71% equity interest in Nanjing Tung Chit and cash payments totaling RMB98.6 million for the
costs of obtaining land use rights and the purchases of property, plant and equipment.
Financing Activities
Financing activities used net cash of RMB88.8 million ($13.0 million) during 2008, primarily
for the repurchase of our ordinary shares of RMB76.9 million ($11.3 million) and repayment of
short-term borrowings of RMB17.0 million ($2.5 million).
In November 2008, our board of directors authorized a share repurchase program that we may
purchase up to $50.0 million (RMB341.1 million) worth of our issued and outstanding ADSs. We
expect to implement this share repurchase program over the course of 12 months from the date of the
authorization and plan to fund the share repurchase program through our available cash received
from our initial public offering in April 2007.
Net cash provided by financing activities increased significantly to RMB938.4 million in 2007
from RMB156.2 million in 2006. Net cash provided by financing activities in 2007 mainly consisted
of cash received from our initial public offering in April, which was partially offset by increase
in repayment of bank borrowings. Net cash provided by financing activities in 2006 mainly consisted
of short-term bank and other borrowings and capital contribution, loans and advances from Assure
Ahead Investments Limited in connection with its investment in our company in March 2006 which were
partially offset by principal payments on bank borrowings and the distribution payment to New Good
Management Limited in connection with our reorganization.
Capital expenditures
In 2006, 2007 and 2008, our capital expenditures totaled RMB91.9 million, RMB98.6 million and
RMB136.8 million ($20.1 million), respectively. In past years, our capital expenditures consisted
primarily of the costs of obtaining land use rights and the purchases of property, plant and
equipment and our research and development facilities. We estimate that our capital expenditures in
2009 will be approximately RMB298.5 million, which we will use mainly for the purchase of equipment
in connection with the expansion of our research and development facilities, and new office
buildings in Jiangsu Province and Shanghai. We expect to use cash generated by operating
activities and our cash in hand to pay for our capital expenditures in 2009.
Recently Issued Accounting Pronouncements
On January 1, 2008, we adopted the provisions of Statement of Financial Accounting Standards
(SFAS) No. 157, Fair Value Measurements (SFAS No. 157), for fair value measurements of
financial assets and financial liabilities and for fair value measurements of nonfinancial items
that are recognized or disclosed at fair value in the financial statements on a recurring basis.
SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date.
SFAS No. 157 establishes a framework for measuring fair value and expands disclosures about fair
value measurements (note 20). The initial adoption of SFAS No. 157 had no impact on our financial
position and results of operations.
FASB Staff Position No. FAS No. 157-2, Effective Date of FASB Statement No. 157, (FSP FAS
157-2) delays the effective date of SFAS No. 157 until fiscal years beginning after November 15,
2008 for all nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at
fair value in the financial statements on a nonrecurring basis. In accordance with FSP FAS 157-2,
we have not applied the provisions of SFAS No. 157 to the intangible assets acquired in business
combinations during 2008 that have been recognized or disclosed at fair value for the year ended
December 31, 2008. On January 1, 2009, we will be required to apply the provisions of SFAS No. 157
to fair value measurements of nonfinancial assets and nonfinancial liabilities that are recognized
or disclosed at fair value in the financial statements on a nonrecurring basis. We do not expect
the initial impact of adopting FSP FAS 157-2 will have a material impact on our consolidated
financial statements.
In October 2008, the FASB issued FASB Staff Position No. FAS No. 157-3, Determining the Fair
Value of a Financial Asset When the Market for That Asset is Not Active (FSP FAS 157-3) which was
effective
71
immediately. FSP FAS 157-3 clarifies the application of SFAS No. 157 in cases where the market
for a financial instrument is not active and provides an example to illustrate key considerations
in determining fair value in those circumstances. We have considered the guidance provided by FSP
FAS 157-3 in its determination of estimated fair values during 2008.
In April 2009, the FASB issued FASB Staff Position No. FAS No. 157-4, Determining Fair Value
When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly (FSP FAS 157-4). FSP FAS 157-4 relates to
determining fair values when there is no active market or where the price inputs being used
represent distressed sales. It reaffirms what SFAS No. 157 states is the objective of fair value
measurementto reflect how much an asset would be sold for in an orderly transaction (as opposed
to a distressed or forced transaction) at the date of the financial statements under current market
conditions. Specifically, it reaffirms the need to use judgment to ascertain if a formerly active
market has become inactive and in determining fair values when markets have become inactive. This
guidance is effective for interim and annual periods ending after June 15, 2009, but entities may
adopt this guidance earlier for the interim and annual periods ending after March 15, 2009. We are
currently evaluating the impact that FSP FAS 157-4 will have on our consolidated financial
statements.
In December 2007, the FASB issued FASB Statement No. 141R, Business Combination (SFAS No.
141R), which replaces FASB Statement No. 141. SFAS No. 141R provides revised guidance on the
recognition and measurement of the consideration transferred, identifiable assets acquired,
liabilities assumed, noncontrolling interests and goodwill acquired in a business combination.
SFAS No. 141R also expands required disclosure surrounding the nature and financial effects of
business combinations. SFAS No. 141R applies prospectively to business combinations for which the
acquisition date is on or after January 1, 2009. We plan to adopt the provisions of SFAS No. 141R
on January 1, 2009. The adoption of SFAS No. 141R will impact the accounting for business
combinations completed by us on or after January 1, 2009.
In December 2007, the FASB issued FASB Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements an Amendment of ARB No. 51 (SFAS No. 160). SFAS No. 160
establishes accounting and reporting standards for the treatment of noncontrolling interests in a
subsidiary. Noncontrolling interests in a subsidiary will be reported as a component of equity in
the consolidated financial statements and any retained noncontrolling equity investment upon
deconsolidation of a subsidiary will initially be measured at fair value. SFAS No. 160 is
effective, on a prospective basis, for fiscal years beginning on or after December 15, 2008.
However, presentation and disclosure requirements must be retrospectively applied to comparative
financial statements. We plan to adopt the provisions of SFAS No. 160 on January 1, 2009. The
initial adoption of SFAS 160 is expected to only result in the reclassification and presentation of
minority interests as noncontrolling interests in our consolidated financial statements
In December 2007, the FASB issued Emerging Issues Task Force Issue No. 07-1, Accounting for
Collaborative Arrangements (EITF No. 07-1). EITF No. 07-1 provides guidance regarding financial
statement presentation and disclosure of collaborative arrangements, which includes arrangements
entered into regarding development and commercialization of products. It requires certain
transactions between collaborators to be recorded in the statements of income on either a gross or
net basis when certain characteristics exist in the collaborative relationship. EITF 07-1 became
effective for us on January 1, 2009. The initial adoption of EITF 07-1 is not expected to have an
effect on our financial position and results of operations. However, the adoption of EITF 07-1 may
have an effect on the presentation of collaborative arrangements in the consolidated statements of
income and could result in the reporting of lower amounts of product revenues and research and
development expenses.
In April 2008, the FASB issued FASB Staff Position No. FAS No. 142-3, Determination of the
Useful Life of Intangible Assets (FSP FAS 142-3). FSP FAS 142-3 provides guidance with respect to
estimating the useful lives of recognized intangible assets acquired on or after the effective date
and requires additional disclosure related to the renewal or extension of the terms of recognized
intangible assets. FSP FAS 142-3 is effective for fiscal years and interim periods beginning after
December 15, 2008. We do not expect the adoption of FSP FAS 142-3 to have a material impact on our
financial position and results of operations.
72
|
|
|
C. |
|
Research and Development, Patents and Licenses, etc. |
Our Strategy
We aim to balance our research and development efforts between the development of
first-to-market generic pharmaceuticals and innovative pharmaceuticals. We perform thorough market
analysis before commencing a research and development project to determine whether the
pharmaceutical is commercially viable, is able to achieve widespread acceptance in the marketplace,
and for new generic pharmaceuticals, whether such generic pharmaceutical will be the first generic
version on the market. We focus our research and development efforts on pharmaceuticals used to
treat diseases with a high incidence and/or mortality rate that, at the same time, lack effective
pharmacotherapy, such as cancer, cerebrovascular diseases, strokes, rheumatoid arthritis and
infectious diseases. We believe such research and development strategy will lead to the development
of products that have a high potential for commercialization and can maximize our growth rate and
profit margins. In addition, we will continue to enhance our existing portfolio of pharmaceuticals
by improving their convenience (such as the reduction in the frequency of administering medicines)
and/or their therapeutic benefits. Our research and development team also assists our production
department in resolving technical issues and improving manufacturing processes and techniques.
Our Capability
As of December 31, 2008, we had 205 research staff, 101 of which held masters degrees and 27
of which held Ph.D. degrees. Our research and development activities are primarily conducted by our
operating subsidiary in China, Simcere Research, located in Nanjing, Jiangsu Province. See Item 4.
Information of the CompanyB. Business Overview Our ProductsOur Innovative Pharmaceutical Endu
(Recombinant Human Endostatin Injection) for more information as to our anti-cancer research and
development activities. We have several technology platforms and are capable of conducting research
on both chemical pharmaceuticals and biopharmaceuticals. We have also established a post-doctoral
research program in December 2003 through our research facility in Nanjing, where we offer
post-doctoral researchers the opportunity to conduct innovative research and development projects
under the guidance of our internal and external research scientists. We believe our post-doctoral
program provides us with a means to attract top academic talent to join our company. As of December
31, 2008, we had 9 post-doctoral researchers participating in this program.
Collaboration in Research
We entered into an agreement with Tsinghua University in February 2006 to establish a Joint
Laboratory for Drug Discovery to engage in the research and development of innovative
pharmaceuticals. The joint laboratory is operated under the direction of a management committee,
which consists of six members, with Tsinghua University and us each appointing three members. The
agreement has a term of three years. Under the agreement, we will provide funding of RMB1.7 million
for the daily operations of the joint laboratory. We will also provide research funding when
appropriate research and development projects are identified and selected by the management
committee, but we are not obligated to provide research funding if no appropriate project is
identified or approved by the management committee. As of December 31, 2008, a total of five
research and development projects were approved and engaged by the joint laboratory. We will hold
the rights to commercialize any product developed by the joint laboratory. The obligations, rights
and benefits of Tsinghua University and us as to each research and development project will be set
out in a separate technological agreement to be entered into with respect to each project when we
have determined that the results of such research and development project have commercialization
potential.
We entered into an agreement in January 2007 with Advenchen as a research partner to engage in
the research and development of, clinical studies for, and the commercialization of an anti-cancer
pharmaceutical based on a chemical compound owned by Advenchen. Under the terms of the agreement,
we agreed to provide research assistance and funding of up to RMB30.0 million. RMB2.0 million was
provided in February 2007. We provided an additional RMB1.0 million upon receiving three successful
batches of anti-cancer pharmaceutical samples in July 2007. Another RMB1.0 million was paid upon
the launch of the pre-clinical study in July 2008. The remaining RMB26.0 million will be further
provided if additional milestones as set forth under the agreement are achieved. In addition, if
any government grants are received in relation to this research and development project, we agreed
to
73
provide an amount equal to 10.0% of such grant to Advenchen to be used in research activities
that are related to the anti-cancer pharmaceutical covered under this agreement, such as the
research and development of delivery mechanisms for the anti-cancer pharmaceutical. For additional
information, see A. Operating Results Cost of Materials and Production and Operating
Expenses Research and Development Expenses. We are currently conducting pre-clinical researches
of the anti-cancer pharmaceutical under the agreement, including the pharmacodynamics researches on
lung cancer, animal pharmacokinetics researches and safety evaluation researches. We estimate that
such researches can be completed by the end of 2009 at which time we will apply with the SFDA for
new drug application.
On December 12, 2008, we entered into an agreement to collaborate on the co-development and
production of humanized RabMAb® antibody therapeutics for tumors with Epitomics, Inc., a provider
of humanized rabbit monoclonal antibodies for therapeutic use. Under the agreement, we and
Epitomics, Inc. will collaborate on pre-clinical and clinical trials, product manufacturing, and
product distribution in the international markets. We will have the exclusive production and
distribution rights in China. We agreed to pay a total funding of up to $5.0 million (RMB34.1
million) of which $1.0 million (RMB6.8 million) was paid to acquire the license rights of
in-process R&D materials in January 2009. The remaining $4.0 million (RMB27.3 million) will be
provided at various dates upon the achievement of certain milestones as set forth under the
agreement.
According to the agreement, we will hold the rights to commercialize the drug in China and
Epitomics, Inc. will hold the rights to commercialize the drug outside China. In addition, if the
anti-cancer pharmaceutical is successfully developed and commercialized, we will pay Epitomics,
Inc. royalties on the net sales derived from the sales of this drug in China upon achieving certain
agreed annual net sales level.
Prior to the drug entering Phase I clinical trial in the United States or Europe, we will
enjoy 40% of the income derived from the sale, transfer, assignment, license and/or disposition of
the drug outside China. After the drug entering Phase I clinical trial in the United States or
Europe, we will enjoy 50% of the income derived from the sale, transfer, assignment, license and/or
disposition of the drug outside China. However, this is subject to a condition that we are required
to share 50% of the related development costs, as defined in the agreement, incurred outside China. Also, we will enjoy 50% of the profit arising
from the sales of the drug outside China.
We plan to increase our collaborations with international pharmaceutical and biotechnology
companies to develop and market new pharmaceutical products in China. Specifically, we are focused
on seeking strategic and commercial partners in anti-cancer, cardiovascular and cerebrovascular
field. We have engaged in active discussions with several biotechnology and pharmaceutical
companies from the United States, Canada and France and have signed several confidentiality
agreements for potential candidate projects on which we are now conducting further analysis and
evaluation. We believe international collaborations will enable us to gain valuable know-how and
experience, further strengthen our research and development capabilities, and expand our product
portfolio and pipeline.
Our research and development expenditures were RMB86.1 million ($12.6 million) in 2008,
representing 4.9% of our total revenues. Our research and development capabilities have been
recognized by various levels of the PRC government and we have received government funding in
recognition of our capabilities. From January 1, 2006 to December 31, 2008, we received
approximately RMB21.0 million in research grants from the PRC government.
Product Candidates
We are developing a number of new pharmaceuticals through our in-house expertise and through
joint research and development efforts with universities and research institutions in China.
As of December 31, 2008, we had 12 product candidates in various stages of development.
Details of the product candidates that we believe have the highest potential for commercialization
in the next two or three years are summarized below:
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potential |
|
|
Therapeutic Effects and |
|
|
|
|
|
Monitoring |
Product Candidate |
|
Scope of Applications |
|
Status |
|
Patentable |
|
Period |
Iguratimod tablets
|
|
Treatment of
osteoarthritis and
rheumatoid arthritis
|
|
New drug application
|
|
No
|
|
5 years |
|
|
|
|
|
|
|
|
|
Palonosetron for
injection
|
|
Nausea and vomiting
associated with
chemotherapy
|
|
New drug application
|
|
No
|
|
4 years |
Iguratimod Tablets. Iguratimod is a new disease-modifying anti-rheumatoid medication, or a
DMARD, which is a category of drugs used in many autoimmune disorders to slow down disease
progression and provide faster and more effective relief as compared to traditional DMARDs. We have
completed clinical trials and are in the process of applying with the SFDA for new drug
application.
Palonosetron for Injection. Palonosetron is used to prevent nausea and vomiting associated
with chemotherapy. We have developed a new delivery system for palonosetron for which we have
applied for an invention patent in China. The new delivery system allows for enhanced stability,
transportability and use of palonosetron. We have completed Phases I to III clinical trials for
palonosetron for injection and are in the process of applying for a new medicine certificate for
palonosetron for injection. Clinical test results demonstrated that patients who were given
palonosetron for injection experienced less acute chemotherapy-induced nausea and vomiting and
delayed chemotherapy-induced nausea and vomiting as compared to other currently available
pharmaceuticals. We are in the process of applying with the SFDA for new drug application.
Intellectual Property
We are committed to the development and protection of our intellectual property portfolio. We
rely primarily on a combination of patent, trademark and trade secret protections, as well as
employee and third party confidentiality agreements to safeguard our intellectual property. We own
and have applied for patents to protect the technologies, inventions and improvements that we
believe are significant to our business. As of March 31, 2009, we held 10 invention patents in
China, one invention patent in the United States and one invention patent in Australia. We also
held two utility model patents and 29 packaging design patents. In addition, we had 76 pending
patent applications in China and 5 pending patent application filed under the Patent Cooperation
Treaty, which provides a unified procedure for filing patent applications to protect inventions
internationally.
The validity period for our utility patents and packaging design patents are both 10 years and
the validity period for our invention patents is 20 years, starting from the date the application
was filed. All of these patents were issued in China. As with patent rights in most other
jurisdictions, a patent holder in China enjoys the exclusive right to exclude others from using,
licensing and otherwise exploiting the patent in China. However, there is no assurance that our
patents will not be challenged in China, which could be costly to defend and could divert our
management from their normal responsibilities. See Item 3. Key InformationD. Risk FactorsRisks
Related to Our CompanyLitigation to protect our intellectual property rights or defend against
third-party allegations of infringement may be costly. In addition, if such challenge is
successful, it could result in an adverse effect on our business.
We rely on trademarks to protect our branded generic pharmaceuticals, which constitute a
significant portion of our sales and are not protected by patents. As of March 31, 2009, we
maintained 324 trademark registrations in China, including the Chinese characters for Bicun,
Zailin, Yingtaiqing, Anqi and Biqi. We have also applied for an additional 400 trademarks. Under
PRC law, we have the exclusive right to use a trademark for products and services for which such
trademark has been registered with the PRC Trademark Office of the State Administration for
Industry and Commerce. Trademark registration is valid for ten years, starting from the day the
registration is approved. If we believe that a third party has infringed upon the exclusive right
of our registered trademark, we may, through appropriate administrative and civil procedures
prescribed, institute proceedings to request the relevant authority for an injunction or to resolve
the infringement through consultation. The relevant
75
authority can also impose fines, confiscate or destroy the infringing products or equipment
used to manufacture the infringing products.
We believe that certain of our trademarks are well-recognized in China among healthcare
professionals, pharmacists and patients. For example, our brand name Zailin was recognized as a
China Well-Known Trademark in 2004 and our brand name Yingtaiqing was named a China Well-Known
Trademark in 2008. Under PRC law, if we believe such well-known trademark is registered by a third
party as its company name, and that such registration might result in confusion to the general
public, we may also apply to the relevant administrative authority for an injunction prohibiting
such use and to compel the third party to cancel its registration. As our brand names are becoming
more recognized in the pharmaceutical market in China, we are devoting additional resources to
increasing and enforcing our trademark rights, which is critical to our overall branding strategy
and reputation.
Some elements of our pharmaceutical composition, formulation, delivery as well as
manufacturing methods or processes involve unpatented, proprietary technology, processes, know-how
or data. With respect to such proprietary know-how that is not patentable and processes for which
patents are difficult to enforce, we rely on trade secret protection and confidentiality agreements
in order to safeguard our interests. All of our research and development personnel have entered
into confidentiality, non-competition and proprietary information agreements with us. These
agreements address issues involving the protection of our intellectual property and require such
employees to assign to us all of their inventions, designs and technologies that they may develop
during their periods of employment with us. In addition, there is a strict segregation of duties
among personnel involved in different stages of our production process. This serves to reduce the
risk of any single staff member obtaining the technical know-how relating to the entire production
process. We also take other precautions, such as internal document controls and network assurance
procedures, including the use of a separate dedicated server for technical data.
If our trademarks are challenged, our brand name is damaged and/or our trade secrets become
known by our competitors, there could be an adverse effect on our business. See Item 3. Key
InformationD. Risk FactorsRisks Related to Our CompanyOur trademarks, patents and other
non-patented intellectual property are valuable assets and if we are unable to protect them from
infringement, our business prospects may be harmed.
Please refer to A. Operating ResultsOverview for a discussion of the most significant
recent trends in our production, sales, costs and selling prices. In addition, please also refer to
discussions included in this Item for a discussion of known trends, uncertainties, demands,
commitments or events that we believe are reasonably likely to have a material effect on our net
operating revenues, income from continuing operations, profitability, liquidity or capital
resources, or that would cause reported financial information not necessarily to be indicative of
future operating results or financial condition.
|
|
|
E. |
|
Off-Balance Sheet Arrangements |
We do not have any outstanding interest rate swap transactions or foreign currency forward
contracts. We do not engage in trading activities involving non-exchange traded contracts. In the
ordinary course of our business, we do not enter into transactions involving, or otherwise form
relationships with, unconsolidated entities or financial partnerships that are established for the
purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited
purposes.
|
|
|
F. |
|
Tabular Disclosure of Contractual Obligations |
The following table sets forth our contractual obligations at December 31, 2008:
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations |
|
|
Less than |
|
|
|
|
|
|
|
|
|
More than |
|
|
|
|
1 Year |
|
1-3 Years |
|
3-5 Years |
|
5 Years |
|
Total |
|
|
RMB |
|
RMB |
|
RMB |
|
RMB |
|
RMB |
|
|
(in thousands) |
Short-term borrowings and current
installments of long-term debt |
|
|
6,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,000 |
|
Interest payments |
|
|
4,486 |
|
|
|
7,857 |
|
|
|
5,558 |
|
|
|
8,679 |
|
|
|
26,580 |
|
Payable for acquisitions |
|
|
9,830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,830 |
|
Long-term debt excluding current
installments |
|
|
|
|
|
|
19,700 |
|
|
|
9,400 |
|
|
|
32,900 |
|
|
|
62,000 |
|
Liabilities for uncertain tax position |
|
|
|
|
|
|
20,529 |
|
|
|
|
|
|
|
|
|
|
|
20,529 |
|
Operating lease commitments |
|
|
2,327 |
|
|
|
622 |
|
|
|
6 |
|
|
|
37 |
|
|
|
2,992 |
|
Research and development projects |
|
|
13,159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,159 |
|
Capital commitments |
|
|
19,578 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,578 |
|
Purchase commitments |
|
|
15,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
71,130 |
|
|
|
48,708 |
|
|
|
14,964 |
|
|
|
41,616 |
|
|
|
176,418 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inflation
In recent years, China has not experienced significant inflation, and thus inflation has not
had a material impact on our results of operations. According to the PRC National Bureau of
Statistics, the change in Consumer Price Index in China was 1.5%, 4.8% and 5.9% in 2006, 2007 and
2008, respectively.
This annual report contains forward-looking statements that relate to our current expectations
and views of future events. The forward-looking statements relate to events that involve known and
unknown risks, uncertainties and other factors, including those listed under Item 3. Key
InformationD. Risk Factors, which may cause our actual results, performance or achievements to
be materially different from any future results, performance or achievements expressed or implied
by the forward-looking statements.
In some cases, these forward-looking statements can be identified by words or phrases such as
may, will, expect, anticipate, aim, estimate, intend, plan, believe, potential,
continue, is/are likely to or other similar expressions. We have based these forward-looking
statements largely on our current expectations and projections about future events and financial
trends that we believe may affect our financial condition, results of operations, business strategy
and financial needs. These forward-looking statements include, among other things, statements
relating to:
|
|
|
our anticipated growth strategies; |
|
|
|
|
our future business development, results of operations and financial condition; |
|
|
|
|
market acceptance of our products and product candidates; |
|
|
|
|
our ability to effectively protect our intellectual property and trade secrets and
not infringe on the intellectual property and trade secrets of others; |
|
|
|
|
the sufficiency of our existing and future intellectual property right protections; |
|
|
|
|
our ability to obtain regulatory approval for products that we develop; |
|
|
|
|
our ability to successfully develop and improve products; |
77
|
|
|
changes in the healthcare industry in China, including increased availability of
funding for medical insurance coverage and the inclusion of additional medicines in the
national and provincial Medical Insurance Catalogs; |
|
|
|
|
our ability to manage our expansion of operations; |
|
|
|
|
environmental compliance costs and liabilities; |
|
|
|
|
competition from other manufacturers of pharmaceutical products; |
|
|
|
|
the expected growth for the pharmaceutical industry in China; |
|
|
|
|
our ability to obtain permits and licenses to carry on our business; and |
|
|
|
|
fluctuations in general economic and business conditions in China. |
The forward-looking statements made in this annual report relate only to events or information
as of the date on which the statements are made in this annual report. Except as required by law,
we undertake no obligation to update or revise publicly any forward-looking statements, whether as
a result of new information, future events or otherwise, after the date on which the statements are
made or to reflect the occurrence of unanticipated events. You should read this annual report on
Form 20-F and the documents that we reference in this annual report and have filed as exhibits to
the registration statement, of which this annual report is a part, completely and with the
understanding that our actual future results may be materially different from what we expect.
Item 6. Directors, Senior Management and Employees
A. |
|
Directors and Senior Management |
Directors and Executive Officers
The following table sets forth information regarding our directors and executive officers as
of May 31, 2009.
|
|
|
|
|
|
|
Name |
|
Age |
|
Position/ Title |
Jinsheng Ren
|
|
|
47 |
|
|
Chairman of the board of directors and chief executive officer |
Guoqiang Lin (1)(3)
|
|
|
66 |
|
|
Independent director |
Hongquan Liu (1)(2)(3)
|
|
|
50 |
|
|
Independent director |
Gary Siu Kwan Sik (1)(2)
|
|
|
42 |
|
|
Independent director |
John Huan Zhao
|
|
|
46 |
|
|
Director |
Jindong Zhou
|
|
|
47 |
|
|
Executive vice president |
Xiaojin Yin
|
|
|
50 |
|
|
Senior vice president of research and development |
Frank Zhigang Zhao
|
|
|
49 |
|
|
Chief financial officer |
Qingsen Li
|
|
|
48 |
|
|
Vice president of human resources |
Jialun Tian
|
|
|
43 |
|
|
Vice president of hospital sales |
Xiaohua Yang
|
|
|
43 |
|
|
Vice president of hospital sales |
Huaping Fu
|
|
|
44 |
|
|
Vice president of commercial sales |
Peng Wang
|
|
|
50 |
|
|
Chief Scientific Officer |
Haibo Qian
|
|
|
46 |
|
|
Secretary to the board of directors and company secretary |
|
|
|
(1) |
|
Audit committee members. |
|
(2) |
|
Compensation committee members. |
|
(3) |
|
Corporate governance and nominating committee members. |
78
Mr. Jinsheng Ren is our founder, chairman of our board of directors and our chief executive
officer. Prior to founding our company in March 1995, he was a department manager at Jiangsu
Pharmaceutical Industries Co., Ltd. from 1992 to 1995. From 1982 to 1992, he was the vice general
manager of Qidong Gaitianli Medicines Co., Ltd. Mr. Ren graduated from the Nanjing University of
Traditional Chinese Medicine in 1982 majoring in Chinese Medicine, and received a masters degree
in Economics from University of Macquarie in Australia in 2003. He is currently a guest professor
at the Nanjing University of Traditional Chinese Medicine and an adjunct professor of Northwest
University in China.
Professor Guoqiang Lin is an independent director of our company. Prof. Lin is a member of the
Chinese Academy of Sciences. Prof. Lin serves as the dean of the Department of Chemical Science of
the National Nature Science Foundation of China since 2006 and is a researcher for the Shanghai
Institute of Organic Chemistry of the Chinese Academy of Sciences from 1989. Prof. Lin also served
as the head of the Shanghai Institute of Organic Chemistry of the Chinese Academy of Sciences from
1993 to 1999. In addition, he has taught as an adjunct professor at Nankai University since 1998
and at Fudan University since 1997. He was also an adjunct professor for the University of Science
and Technology of China and Southwest University and was a visiting professor for Guizhou
University in 2000. Prof. Lin received a bachelors degree in Chemistry from Shanghai University of
Science and Technology (now Shanghai University) in 1964, a masters degree in Organic Chemistry
from the Shanghai Institute of Organic Chemistry of the Chinese Academy of Sciences in 1968 and was
appointed as an academician to the Department of Chemical Science of the National Nature Science
Foundation of China in 2001.
Mr. Hongquan Liu is an independent director of our company. Mr. Liu is also currently the
managing director of Sino-Swed Pharmaceutical Corp., Ltd. since 2000. In 2000, he served as the
general manager of Wuxi Pharmaceutical Company of Jiangsu CTD Import & Export Co., Ltd. From 1998
to 2000, he was the managing director of Pharmacia Corporation. From 1996 to 1998, he was the chief
marketing and business officer of Pharmacia Corporation. From 1995 to 1996, he was the chief
financial officer of Pharmacia Corporation. From 1992 to 1995, he was a general manager of
Sino-Swed Pharmaceutical Corp., Ltd. Mr. Liu received a bachelors degree from Shanxi College of
Finance and Economics in 1983 and an EMBA degree from China Europe International Business School in
2000.
Mr. Gary Siu Kwan Sik is an independent director of our company. Mr. Sik is also currently the
financial consultant of CY Group Limited. He was the managing director of DBS Asia Capital Pte Ltd.
from 2007 to 2008 and the managing director and head of corporate finance for Mitsubishi UFJ
Securities (HK) Limited from 2005 to 2007. Prior to joining Mitsubishi UFJ Securities (HK) Limited
in 2005, he served in various senior positions in ICEA Capital Limited (formally NatWest Markets
Corporate Finance Asia Limited) from 1995 to 1998 and from 2001 to 2005. His last position in ICEA
Capital Limited was managing director and head of the investment banking department. Mr. Sik
received a bachelors degree in engineering science from the University of Oxford, UK in 1989. He
qualified as an associate member of the Institute of Chartered Accountants in England and Wales
since 1992.
Mr. John Huan Zhao is a director of our company. Mr. Zhao also serves as the chief executive
officer of Hony Capital Limited and a vice president at Legend Holdings Limited. Prior to joining
Hony Capital Limited and Legend Holdings Limited in 2003, Mr. Zhao was the advisor to the chief
executive officer of UTStarcom Inc. and Lenovo Group Ltd. from 2002 to 2003. From 2001 to 2002, he
was a managing director of eGarden Ventures, Ltd. Prior to that, he was the chairman, president and
chief executive officer of Infolio, the chairman, president and chief executive officer of Vadem
Ltd. and senior manager of U.S. Robotics, Inc. and Shure Brothers, Inc. Mr. Zhao received a
bachelors degree in Physics from Nanjing University in 1984, dual masters degrees in Electric
Engineering and Physics from Northern Illinois University in 1990, and a MBA degree from the
Kellogg School of Management at Northwestern University in 1996.
Mr. Jindong Zhou is our executive vice president and has worked in our company since 1996.
From 2001 to 2006, Mr. Zhou was the general manager of Simcere Pharmaceuticals Co., Ltd. From 2000
to 2001, he was the deputy general manager of Jiangsu Simcere Pharmaceuticals Co., Ltd. Mr. Zhou
graduated from the Nanjing University of Traditional Chinese Medicine majoring in Chinese Medicine
in 1982 and received a masters degree in Economics from University of Macquarie in Australia in
2008.
Mr. Xiaojin Yin is our senior vice president of research and development. From 2003 to 2006,
Mr. Yin was the general manager of Jiangsu Simcere Pharmaceutical R&D Co., Ltd., and Simcere
Research. From 2000 to 2003,
79
he was the general manager assistant of Simcere Pharmaceutical Co., Ltd. and manager of
Simcere Research. From 1992 to 2000, he was the head of the medical research department of the
China Pharmaceutical University in Nanjing. From 1991 to 1992, Mr. Yin was the general manager of
the medicine production facility at China Pharmaceutical University. Mr. Yin received a bachelors
degree in Medical Sciences from China Pharmaceutical University in 1982 and a masters degree in
Industrial Engineering from the Nanjing University of Science and Technology in 2001.
Mr. Frank Zhigang Zhao is our chief financial officer. Mr. Zhao joined our company in October
2006. From 2005 to 2006, Mr. Zhao was the chief financial officer of Sun New Media Inc. From 2003
to 2005, he was the vice president of finance at Faro Technologies, Inc. From 1996 to 2002, he was
the vice president of finance at Resort Reservation Network. From 1993 to 1996, he was a senior
accountant at PricewaterhouseCoopers. Mr. Zhao received a bachelors degree in Economics from
Beijing University in 1985 and a MBA degree from University of Hartford in 2003. He is a certified
public accountant in the United States.
Mr. Qingsen Li is our vice president of human resources. Prior to joining our company in 2008,
Mr. Li was the General Manager of Human Resources and the General Manager of the Training Center of
Taikang Life Insurance Co., Ltd., since 2004. From 1997 to 2004, he served as the Vice President
and Director of Human Resources of Beijing Novartis Pharma., Ltd. From 1992 to 1996, he was the
Deputy General Manager and he was the Director of Human Resources & Administration of Beijing Ciba
Geigy Pharma., Ltd. from 1994 to 1996. From 1981 to 1991, he held various positions at Beijing
No. 3 Pharmaceutical Factory. Mr. Li graduated from Beijing Chemical College in 1981 with a degree
in pharmaceutical engineering, and then graduated with a bachelors degree in Pharmacy from Beijing
Medical University in 1989. Mr. Li received a MBA degree from China Europe International Business
School in 1998.
Mr. Jialun Tian is our vice president of hospital sales. From 2000 to 2008, he held various
positions at our company, including as assistant to the Chief Executive Officer. Prior to joining
our company, Mr. Tian was the manager of financial department of Nanjing Kokhai Biotechnical Co.,
Ltd., an assistant production manager of Nanjing Luhe Pharmaceutical Factory, and the manager of
financial department of Nanjing C&O Pharmaceutical Co., Ltd. Mr. Tian graduated from Jiangsu Radio
and TV University with a degree in Accounting. He received a MBA degree from Hong Kong Baptist
University in 2008.
Mr. Xiaohua Yang is our vice president of hospital sales. Since joining our company in 1993,
Mr. Yang has held various roles at our group, including as sales director, general manager of
Jiangsu Simcere, general manager of hospital cooperation department, assistant to the Chief
Executive Officer, regional pharmaceutical sales representative, district manager and regional
manager. From 1989 to 1993, he worked with the Zhenjiang Hospital of Traditional Chinese Medicine.
Mr. Yang received a bachelors degree in Chinese Pharmacology from Nanjing University of
Traditional Chinese Medicine in 1989 and an MBA degree from Renmin University of China in 2003.
Mr. Huaping Fu is our vice president of commercial sales. Since joining our company in 1994,
Mr. Fu has held various roles at our group, including as sales director, general manager of
marketing department and assistant to the Chief Executive Officer. From 1987 to 1994, he worked
with Yangzhou Chemical Engineering Design Institute and Nanjing Applied Chemistry Institute. Mr. Fu
received a bachelors degree in Applied Chemistry from Huazhong Science and Technology University
in 1987, a master of science degree in Organic Chemistry from Nanjing University in 1993 and an MBA
from Renmin University of China in 2003.
Dr. Peng Wang is our chief scientific officer. He has 19 years experience in pharmaceutical
research and development, most recently served as the Vice President of Discovery Biology at Wuxi
AppTec Co., Ltd. ( formerly as Wuxi PharmaTech Co., Ltd.). Prior to WuXi AppTec, Dr. Wang was a
research fellow at Schering-Plough Research Institute where he worked for 18 years. Dr. Wang
received his Ph.D. degree in Biochemistry from the University of Tokyo in 1990.
Dr. Haibo Qian is the secretary to our board of directors and our company secretary. From 1993
to the present, he has held various roles at our group, including chief inspector, special
assistant to the chief executive officer, market strategy department manager, and department
general manager. In 2005, he was also the special assistant to the chief executive officer of
Shanghai Fosun Pharmaceutical (Group) Co., Ltd. From 1986 to 1993, he was the director at the
Health Economics Department of Nanjing Medical University. He received a bachelors
80
degree in Law from Nanjing Normal University in 1986, graduated from Shanghai Medical
University in 1993 majoring in Health Economics, received a MBA from Nanjing University in 2002 and
received a Ph.D. degree in Management and Social Medicine from the China Pharmaceutical University
in 2007. Dr. Qian is a certified pharmacist.
The address of our directors and executive officers is c/o Simcere Pharmaceutical Group, No.
699-18 Xuan Wu Avenue, Xuan Wu District, Nanjing, Jiangsu Province 210042, Peoples Republic of
China.
Compensation of Directors and Executive Officers
In 2008, the aggregate cash compensation to our executive officers, including all the
directors, was RMB12.1 million ($1.8 million). For share-based compensation, see 2006 Share
Incentive Plan.
2006 Share Incentive Plan
The 2006 share incentive plan was adopted by our shareholders on November 13, 2006 . Our share
incentive plan provides for the grant of options, limited share appreciation rights, and other
share-based awards such as restricted shares, referred to as awards. The purpose of the plan is
to aid us in recruiting and retaining key employees, directors or consultants of outstanding
ability and to motivate such employees, directors or consultants to exert their best efforts on
behalf of our company by providing incentives through the granting of awards. Our board of
directors believes that our companys long-term success is dependent upon our ability to attract
and retain superior individuals who, by virtue of their ability, experience and qualifications,
make important contributions to our business.
Termination of Awards. Options and restricted shares shall have specified terms set forth in
an award agreement. The compensation committee will determine in the relevant award agreement
whether options granted under the award agreement will be exercisable following the recipients
termination of services with us. If the options are not exercised or purchased on the last day of
the period of exercise, they will terminate.
Administration. Our 2006 share incentive plan is administered by the compensation committee of
our board of directors. The committee is authorized to interpret the plan, to establish, amend and
rescind any rules and regulations relating to the plan, and to make any other determinations that
it deems necessary or desirable for the administration of the plan. The committee will determine
the provisions, terms and conditions of each award, including, but not limited to, the exercise
price for an option, vesting schedule of options and restricted shares, forfeiture provisions, form
of payment of exercise price and other applicable terms.
Option Exercise. The term of options granted under the 2006 share incentive plan may not
exceed six years from the date of grant. The consideration to be paid for our ordinary shares upon
exercise of an option or purchase of shares underlying the option may include cash, check or other
cash-equivalent, ordinary shares, consideration received by us in a cashless exercise, or any
combination of the foregoing methods of payment.
Third-party Acquisition. If a third-party acquires us through the purchase of all or
substantially all of our assets, a merger or other business combination, the compensation committee
may decide that all outstanding awards that are unexercisable or otherwise unvested or subject to
lapse restrictions will automatically be deemed exercisable or otherwise vested or no longer
subject to lapse restrictions, as the case may be, as of immediately prior to such acquisition. The
compensation committee may also, in its sole discretion, decide to cancel such awards for fair
value, provide for the issuance of substitute awards that will substantially preserve the otherwise
applicable terms of any affected awards previously granted, or provide that affected options will
be exercisable for a period of at least 15 days prior to the acquisition but not thereafter.
Amendment and Termination of Plan. Our board of directors may at any time amend, alter or
discontinue our 2006 share incentive plan. Amendments or alterations to our 2006 share incentive
plan are subject to shareholder approval if they increase the total number of shares reserved for
the purposes of the plan or change the maximum
81
number of shares for which awards may be granted to any participant, or if shareholder
approval is required by law or by stock exchange rules or regulations. Any amendment, alteration or
termination of our 2006 share incentive plan must not adversely affect awards already granted
without written consent of the recipient of such awards. Unless terminated earlier, our 2006 share
incentive plan shall continue in effect for a term of ten years from the date of adoption.
Our board of directors and shareholders authorized the issuance of up to 12,000,000 ordinary
shares upon exercise of awards granted under our 2006 share incentive plan. On November 15, 2006,
we granted 10,000,000 options to our senior management and key employees with an exercise price of
$4.20 per share. On March 29, 2007, we granted 1,045,000 options to our independent directors and
certain of our employees with an exercise price equal to $6.75. On May 5, 2008, we granted 400,000
options to one of our officers with an exercise price equal to $6.755. On December 24, 2008, we
also granted 100,000 options to one of our officers with an exercise price equal to $3.445.
On April 15, 2009, our compensation committee approved a share option exchange program that
offered our eligible directors, employees and consultants the right to exchange vested and unvested
outstanding share options to purchase our ordinary shares granted under the 2006 Share Incentive
Plan for our restricted shares. The exchange ratio was determined based on the fair value of
replacement restricted shares so that the fair value of the replacement restricted shares to be
issued upon exchange would be approximately equivalent to the fair value of the share options
surrendered by an individual. In addition, these replacement restricted shares are subject to
substantially the same vesting schedule as the options that were validly tendered in the exchange
offer. A total of 154 directors and employees accepted the offer, and tendered options to purchase
an aggregate of 9,802,400 ordinary shares in exchange for an aggregate of 4,750,018 restricted
shares, which were granted on May 7, 2009. The exchange of the share option awards for restricted
shares was accounted for as a modification for awards which involves a cancellation of the original
award and an issuance of a new award. We do not expect the effect of this award modification on
share-based compensation expense over the remaining requisite service period to be significant.
This exchange program is expected to provide additional incentive and retention value. The
replacement restricted shares to our directors, officers and employees as listed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Restricted |
|
Date of Grant of |
|
Date of Grant of |
|
End of Vesting |
Name |
|
Shares Granted |
|
Restricted Shares |
|
Cancelled Option |
|
Period |
Jinsheng Ren |
|
2,665,988 |
|
May 7, 2009 |
|
November 15, 2006 |
|
November 14, 2011 |
Frank Zhigang Zhao |
|
*(1) |
|
May 7, 2009 |
|
November 15, 2006 |
|
November 14, 2011 |
Jindong Zhou |
|
*(1) |
|
May 7, 2009 |
|
November 15, 2006 |
|
November 14, 2011 |
Xiaojin Yin |
|
*(1) |
|
May 7, 2009 |
|
November 15, 2006 |
|
November 14, 2011 |
Huaping Fu |
|
*(1) |
|
May 7, 2009 |
|
November 15, 2006 |
|
November 14, 2011 |
Jialun Tian |
|
*(1) |
|
May 7, 2009 |
|
November 15, 2006 |
|
November 14, 2011 |
Xiaohua Yang |
|
*(1) |
|
May 7, 2009 |
|
November 15, 2006 |
|
November 14, 2011 |
Guoqiang Lin |
|
*(1) |
|
May 7, 2009 |
|
March 29, 2007 |
|
March 28, 2012 |
Hongquan Liu |
|
*(1) |
|
May 7, 2009 |
|
March 29, 2007 |
|
March 28, 2012 |
Gary Siu Kwan Sik |
|
*(1) |
|
May 7, 2009 |
|
March 29, 2007 |
|
March 28, 2012 |
Qingsen Li |
|
*(1) |
|
May 7, 2009 |
|
December 24, 2008 |
|
August 31, 2013 |
Other employees as a group(2) |
|
849,552 |
|
May 7, 2009 |
|
November 15, 2006 |
|
November 14, 2011 |
Other employees as a group(2) |
|
12,024 |
|
May 7, 2009 |
|
March 29, 2007 |
|
March 28, 2012 |
|
|
|
(1) |
|
Beneficially own less than 1.0% of our outstanding ordinary shares. |
|
(2) |
|
None of these employees is our director or executive officer. |
2008 Share Incentive Plan
The 2008 share incentive plan was adopted by our shareholders on July 31, 2008 . Our share
incentive plan provides for the grant of options, limited share appreciation rights, and other
share-based awards such as restricted shares, referred to as awards. The purpose of the plan is
to aid us in recruiting and retaining key employees, directors or consultants of outstanding
ability and to motivate such employees, directors or consultants to exert their best efforts on
behalf of our company by providing incentives through the granting of awards. Our
82
board of directors believes that our companys long-term success is dependent upon our ability
to attract and retain superior individuals who, by virtue of their ability, experience and
qualifications, make important contributions to our business.
Termination of Awards. Options and restricted shares shall have specified terms set forth in
an award agreement. The compensation committee will determine in the relevant award agreement
whether options granted under the award agreement will be exercisable following the recipients
termination of services with us. If the options are not exercised or purchased on the last day of
the period of exercise, they will terminate.
Administration. Our 2008 share incentive plan is administered by the compensation committee of
our board of directors. The committee is authorized to interpret the plan, to establish, amend and
rescind any rules and regulations relating to the plan, and to make any other determinations that
it deems necessary or desirable for the administration of the plan. The committee will determine
the provisions, terms and conditions of each award, including, but not limited to, the exercise
price for an option, vesting schedule of options and restricted shares, forfeiture provisions, form
of payment of exercise price and other applicable terms.
Option Exercise. The term of options granted under the 2008 share incentive plan may not
exceed ten years from the date of grant. The consideration to be paid for our ordinary shares upon
exercise of an option or purchase of shares underlying the option may include cash, check or other
cash-equivalent, ordinary shares, consideration received by us in a cashless exercise, or any
combination of the foregoing methods of payment.
Third-party Acquisition. If a third-party acquires us through the purchase of all or
substantially all of our assets, a merger or other business combination, the compensation committee
may decide that all outstanding awards that are unexercisable or otherwise unvested or subject to
lapse restrictions will automatically be deemed exercisable or otherwise vested or no longer
subject to lapse restrictions, as the case may be, as of immediately prior to such acquisition. The
compensation committee may also, in its sole discretion, decide to cancel such awards for fair
value, provide for the issuance of substitute awards that will substantially preserve the otherwise
applicable terms of any affected awards previously granted, or provide that affected options will
be exercisable for a period of at least 15 days prior to the acquisition but not thereafter.
Amendment and Termination of Plan. Our board of directors may at any time amend, alter or
discontinue our 2008 share incentive plan. Amendments or alterations to our 2008 share incentive
plan are subject to shareholder approval if they increase the total number of shares reserved for
the purposes of the plan or change the maximum number of shares for which awards may be granted to
any participant, or if shareholder approval is required by law or by stock exchange rules or
regulations. Any amendment, alteration or termination of our 2008 share incentive plan must not
adversely affect awards already granted without written consent of the recipient of such awards.
Unless terminated earlier, our 2008 share incentive plan shall continue in effect for a term of ten
years from the date of adoption.
Our board of directors and shareholders authorized the issuance of up to 6,250,000 ordinary
shares upon exercise of awards granted under our 2008 share incentive plan. As of the date of this
annual report on Form 20-F, no awards have been granted under our 2008 share incentive plan.
Employee Pension and Other Retirement Benefits
Pursuant to the relevant PRC regulations, we are required to make contributions for each
employee at a rate of 20% of a standard salary base as determined by the local social security
bureau to a defined contribution retirement scheme organized by the local social security bureau.
Contributions of RMB7.1 million ($1.0 million) was paid for the year ended December 31, 2008 which
was charged to expense. We have no other obligation to make payments in respect of retirement
benefits of our employees.
Duties of Directors
83
Under Cayman Islands law, our directors have a fiduciary duty to act honestly, in good faith
and with a view to our best interests. Our directors also have a duty to exercise the skill they
actually possess and such care and diligence that a reasonably prudent person would exercise in
comparable circumstances. In fulfilling their duty of care to us, our directors must ensure
compliance with our memorandum and articles of association, as amended and re-stated from time to
time. A shareholder has the right to seek damages if a duty owed by our directors is breached.
The functions and powers of our board of directors include, among others:
|
|
|
convening shareholders annual general meetings and reporting its work to
shareholders at such meetings; |
|
|
|
|
declaring dividends and distributions; |
|
|
|
|
appointing officers and determining the term of office of officers; |
|
|
|
|
exercising the borrowing powers of our company and mortgaging the property of our
company; and |
|
|
|
|
approving the transfer of shares of our company, including the registering of such
shares in our share register. |
Our board of directors has established an audit committee, a compensation committee and a
corporate governance and nominating committee upon completion of our initial public offering in
April 2007.
Audit Committee
Our audit committee consists of Messrs. Gary Siu Kwan Sik, Guoqiang Lin and Hongquan Liu, each
of whom satisfies the requirements of New York Stock Exchange Listed Company Manual, or NYSE
Manual, Section 303A. Mr. Gary Siu Kwan Sik will be the chairman of our audit committee and meets
the criteria of an audit committee financial expert as set forth under the applicable rules of the
SEC. All members of the audit committee will be an independent director within the meaning of
NYSE Manual Section 303A(2) and will meet the criteria for independent set forth in Section
10A(m)(3) of the United States Securities Exchange Act of 1934, as amended, or the Exchange Act.
The audit committee oversees our accounting and financial reporting processes and the audits of the
financial statements of our company. The audit committee is responsible for, among other things:
|
|
|
selecting our independent registered public accounting firm and pre-approving all
auditing and non-auditing services permitted to be performed by our independent
registered public accounting firm; |
|
|
|
|
reviewing with our independent registered public accounting firm any audit problems
or difficulties and managements response; |
|
|
|
|
reviewing and approving all proposed related-party transactions, as defined in Item
404 of Regulation S-K under the Securities Act; |
|
|
|
|
discussing the annual audited financial statements with management and our
independent registered public accounting firm; |
|
|
|
|
reviewing major issues as to the adequacy of our internal controls and any special
audit steps adopted in light of significant control deficiencies; |
|
|
|
|
annually reviewing and reassessing the adequacy of our audit committee charter; |
|
|
|
|
such other matters that are specifically delegated to our audit committee by our
board of directors from time to time; and |
84
|
|
|
meeting separately and periodically with management and our internal auditor and
independent registered public accounting firm. |
Compensation Committee
Our compensation committee consists of Messrs. Hongquan Liu and Gary Siu Kwan Sik, both of
whom will be independent directors within the meaning of NYSE Manual Section 303A(2). Our
compensation committee assists the board in reviewing and approving the compensation structure of
our directors and executive officers, including all forms of compensation to be provided to our
directors and executive officers. Members of the compensation committee are not prohibited from
direct involvement in determining their own compensation. Our chief executive officer may not be
present at any committee meeting during which his compensation is deliberated. The compensation
committee is responsible for, among other things:
|
|
|
approving and overseeing the compensation package for our executive officers; |
|
|
|
|
reviewing and making recommendations to the board with respect to the compensation
of our directors; and |
|
|
|
|
reviewing periodically any long-term incentive compensation or equity plans,
programs or similar arrangements, annual bonuses, employee pension and welfare benefit
plans and granting our executive officers awards under such plans. |
Corporate Governance and Nominating Committee
Our corporate governance and nominating committee consists of Messrs. Guoqiang Lin and
Hongquan Liu, both of whom will be independent directors within the meaning of NYSE Manual
Section 303A(2). The corporate governance and nominating committee assists the board of directors
in identifying individuals qualified to become our directors and in determining the composition of
the board and its committees. The corporate governance and nominating committee is responsible for,
among other things:
|
|
|
identifying and recommending to the board nominees for election or re-election to
the board, or for appointment to fill any vacancy; |
|
|
|
|
reviewing annually with the board the current composition of the board in light of
the characteristics of independence, age, skills, experience and availability of
service to us; |
|
|
|
|
advising the board periodically with respect to significant developments in the law
and practice of corporate governance as well as our compliance with applicable laws and
regulations, and making recommendations to the board on all matters of corporate
governance and on any corrective action to be taken; and |
|
|
|
|
monitoring compliance with our code of business conduct and ethics, including
reviewing the adequacy and effectiveness of our procedures to ensure proper compliance. |
Terms of Directors and Executive Officers
Our executive officers are elected by and serve at the discretion of the board of directors.
Our directors are not subject to a term of office and hold office until such time as they resign or
are removed from office without cause by special resolution or the unanimous written resolution of
all shareholders or with cause by ordinary resolution or the unanimous written resolutions of all
shareholders. A director will be removed from office automatically if, among other things, the
director (i) becomes bankrupt or makes any arrangement or composition with his creditors; or (ii)
dies or is found by our company to be or becomes of unsound mind.
Employment Agreements
85
We have entered into employment agreements with all of our executive officers. Under these
agreements, each of our executive officers is employed for a specified time period. We may
terminate his or her employment for cause at any time, with prior written notice, for certain acts
of the employee, including but not limited to a conviction to a felony, or willful gross misconduct
by the employee in connection with his employment, and in each case if such acts have resulted in
material and demonstrable financial harm to us. An executive officer may, with prior written
notice, terminate his or her employment at any time for any material breach of the employment
agreement by us that is not remedied promptly after receiving the remedy request from the employee.
Furthermore, either party may terminate the employment agreement at any time without cause upon
advance written notice to the other party. Upon termination, the employee is generally entitled to
a severance pay of at least one months salary.
Each executive officer has agreed to hold, both during and subsequent to the terms of his or
her agreement, in confidence and not to use, except in pursuance of his or her duties in connection
with the employment, any of our confidential information, technological secrets, commercial secrets
and know-how. Our executive officers have also agreed to disclose to us all inventions, designs and
techniques resulted from work performed by them, and to assign us all right, title and interest of
such inventions, designs and techniques.
Interested Transactions
A director may vote in respect of any contract or transaction in which he or she is
interested, provided that the nature of the interest of any directors in such contract or
transaction is disclosed by him or her at or prior to its consideration and any vote in that
matter.
Remuneration and Borrowing
The directors may determine remuneration to be paid to the directors. The compensation
committee assists the directors in reviewing and approving the compensation structure for the
directors. The directors may exercise all the powers of the company to borrow money and to mortgage
or charge its undertaking, property and uncalled capital, and to issue debentures or other
securities whether outright or as security for any debt obligations of our company or of any third
party.
We had 1,838, 2,615 and 2,759 employees as of December 31, 2006, 2007 and 2008, respectively.
The following table sets forth the number of our employees for each of our areas of operation and
as a percentage of our total workforce as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
Percentage |
|
|
Employees |
|
of total |
Marketing and brand management |
|
|
963 |
|
|
|
34.9 |
% |
Manufacturing and quality control |
|
|
1,010 |
|
|
|
36.6 |
% |
General and administration |
|
|
581 |
|
|
|
21.1 |
% |
Research and development |
|
|
205 |
|
|
|
7.4 |
% |
|
|
|
|
|
|
|
|
|
Total |
|
|
2,759 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
We are required under PRC law to make contributions to our employee benefit plans based on
specified percentages of the salaries, bonuses, housing funds and certain allowances of our
employees, up to a maximum amount specified by the respective local government authorities where we
operate our businesses. The total amount of contributions we made to employee benefit plans in
2006, 2007 and 2008, was RMB2.7 million, RMB5.1 million and RMB7.1 million ($1.0 million),
respectively.
Our employees are not covered by any collective bargaining agreement. We believe that we have
a good relationship with our employees.
86
The following table sets forth information with respect to the beneficial ownership of our
ordinary shares as of May 31, 2009, the latest practicable date, by:
|
|
|
each of our directors and executive officers; and |
|
|
|
|
each person known to us to own beneficially more than 5.0% of our ordinary shares. |
|
|
|
|
|
|
|
|
|
|
|
Shares Beneficially |
|
|
|
Owned(1)(2) |
|
|
|
Number |
|
|
% |
|
Directors and Executive Officers: |
|
|
|
|
|
|
|
|
Jinsheng Ren(3) |
|
|
51,447,964 |
|
|
|
43.6 |
|
Guoqiang Lin |
|
|
* |
|
|
|
* |
|
Hongquan Liu |
|
|
* |
|
|
|
* |
|
Gary Siu Kwan Sik |
|
|
* |
|
|
|
* |
|
John Huan Zhao(4) |
|
|
17,924,692 |
|
|
|
15.3 |
|
Jindong Zhou |
|
|
* |
|
|
|
* |
|
Xiaojin Yin |
|
|
* |
|
|
|
* |
|
Frank Zhigang Zhao |
|
|
* |
|
|
|
* |
|
Qingsen Li |
|
|
* |
|
|
|
* |
|
Jialun Tian |
|
|
* |
|
|
|
* |
|
Xiaohua Yang |
|
|
* |
|
|
|
* |
|
Huaping Fu |
|
|
* |
|
|
|
* |
|
Peng Wang |
|
|
* |
|
|
|
* |
|
Haibo Qian |
|
|
* |
|
|
|
* |
|
All directors and executive officers as a group |
|
|
69,727,984 |
|
|
|
58.9 |
|
|
|
|
|
|
|
|
|
|
Principal Shareholders: |
|
|
|
|
|
|
|
|
New Good Management Limited(5) |
|
|
50,381,556 |
|
|
|
43.1 |
|
Assure Ahead Investments Limited(6) |
|
|
17,924,692 |
|
|
|
15.3 |
|
King View Development International Limited(7) |
|
|
11,820,000 |
|
|
|
10.1 |
|
|
|
|
* |
|
Upon exercise of all options granted, would beneficially own less than 1.0% of our
outstanding ordinary shares. |
|
(1) |
|
Beneficial ownership is determined in accordance with Rule 13d-3 of the General Rules and
Regulations under the Exchange Act, and includes voting or investment power with respect to
the securities. |
|
(2) |
|
The number of shares outstanding in calculating the percentages for each listed person
includes, as applicable, (i) the ordinary shares underlying share options exercisable by such
person, and (ii) restricted shares awarded to such person that are vested but yet to be duly
registered or that can be vested, in each case within 60 days of the date of this annual
report. Percentage of beneficial ownership of each listed person is based on 116,926,380
ordinary shares outstanding as of May 31, 2009 and, as applicable, (i) the ordinary shares
underlying share options exercisable by such person and (ii) restricted shares awarded to such
person that are vested but yet to be duly registered or that can be vested, in each case
within 60 days of the date of this annual report. |
|
(3) |
|
Includes 50,381,556 ordinary shares directly held by New Good Management Limited, a British
Virgin Islands company, which is controlled by Mr. Ren, and 1,066,408 restricted shares that
have vested as of the date hereof. Mr. Ren is the chairman of the board of directors and the
controlling shareholder of New Good Management Limited. |
|
(4) |
|
Represents 17,924,692 ordinary shares directly held by Assure Ahead Investments Limited. Mr.
Zhao, a director of Assure Ahead Investments Limited, disclaims beneficial ownership of shares
held by Assure Ahead Investments Limited except to the extent of his pecuniary interests in
those shares. |
|
(5) |
|
New Good Management Limited is a British Virgin Islands company that is controlled by Mr.
Jinsheng Ren and beneficially owned by Messrs. Jinsheng Ren, Yat Ming Chu, Jindong Zhou,
Feifei Gao, Zhiyong Fu, Jinzheng Hao, Chuan Li, Xiaoxia Chen, Weidong Ren, Qimin Xu, Bingdong
Lu, Xiaojin Yin, Yizhong Wu, Minze Li, Haibo Qian and Suqin Peng. Mr. Ren is the chairman of
the board of directors and the controlling shareholder of New Good Management Limited. The
address of New Good Management Limited is at the offices of Offshore Incorporations Limited,
P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands. |
87
|
|
|
(6) |
|
Assure Ahead Investments Limited is a British Virgin Islands company that is 100.0% owned by
Hony Capital II, L.P., an exempted limited partnership formed under the laws of the Cayman
Islands; Hony Capital II, L.P.s general partner is Hony Capital II GP Ltd., which is wholly
owned by Legend Holdings Limited, an investment holding company incorporated in the Peoples
Republic of China. Legend Holdings Limited is 65.0% owned by the Chinese Academy of Sciences,
a national academic and research institution owned and controlled by the PRC government. The
address for Assure Ahead Investments Limited is at the offices of Offshore Incorporations
Limited, P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin
Islands. The directors of Assure Ahead Investments Limited, Messrs. John Huan Zhao, Shunlong
Wang and Yonggang Cao have voting and investment power over the shares that this shareholder
beneficially owns. |
|
(7) |
|
King View Development International Limited is a British Virgin Islands company and a wholly
owned subsidiary of Trustbridge Partners II, L.P., a limited partnership whose general partner
is TB Partners GP2, L.P. The general partner of TB Partners GP2, L.P. is TB Partners GP
Limited. The address of King View Development International Limited is 2701B, Azia Center,
1233 Lujiazui Ring Road, Shanghai, Peoples Republic of China. The investment committee of
Trustbridge Partners II, L.P. has voting and investment power over the shares that this
shareholder beneficially owns. |
In connection with New Good Managements private sale of 11,820,000 of our ordinary shares to
King View Development International Limited in May 2008, New Good Management repurchased some of
its own shares from some of its shareholders other than Mr. Ren and reduced the number of its total
outstanding shares. Also in May 2008, Mr. Ren transferred some of his shares in New Good Management
to Suqin Peng. As a result of the foregoing, Mr. Rens percentage of beneficial ownership in New
Good Management increased from approximately 49.1% to approximately 51.1% in May 2008 and Mr. Ren
became the controlling shareholder of New Good Management. According to Rule 13d-3 of the General
Rules and Regulations under the Exchange Act, Mr. Ren is deemed to have acquired indirect
beneficial ownership of all of our ordinary shares that are directly held by New Good Management in
May 2008.
As of May 31, 2009, other than the 29.4% of our ordinary shares underlying our ADSs which were
held by our custodian, the Hong Kong office of The Hong Kong and Shanghai Banking Corporation
Limited, on behalf of The Bank of New York Mellon, the depositary, none of our ordinary shares were
held in the United States. None of our shareholders has different voting rights from other
shareholders. We are not aware of any arrangement that may, at a subsequent date, result in a
change of control of our company.
Item 7. Major Shareholder and Related Party Transactions
Please refer to Item 6. Directors, Senior Management and EmployeesE. Share Ownership.
|
|
|
B. |
|
Related Party Transactions |
Transactions with Companies in Which a Major Shareholder had Equity Interests
We purchased packaging materials from Hainan Zhicheng Color Printing Co., Ltd., formerly Sanya
Zhicheng Color Printing Co., Ltd., in which certain shareholders of New Good Management Limited
held equity interest prior to December 2007, amounting to RMB7.4 million and RMB7.3 million in 2006
and 2007, respectively.
We also sold pharmaceutical products to Jiangsu Simcere Chain Drug Store Co., Ltd., or Simcere
Chain Drug Store, in which certain shareholders of New Good Management Limited have an equity
interest. In 2006, 2007 and 2008, we sold pharmaceutical products to this related party amounting
to RMB1.4 million, RMB3.0 million and RMB6.8 million ($1.0 million), respectively. We also
purchased raw materials amounting to RMB0.1 million ($0.02 million) from Simcere Chain Drug Store
in 2008. We purchase the packaging materials, raw materials and sell the pharmaceutical products in
the normal course of business at prices determined on an arms length basis. In addition, we sold
properties located in Nanjing to Simcere Chain Drug Store for RMB18.6 million in 2007.
Transactions with a Minority Shareholder
In 2008, we provided an RMB20.0 million secured loan to the minority shareholder of Wuhu
Simcere Zhong Ren for its operating purpose. The loan has a one-year term with an option to extend
for a maximum of two years, bears a floating interest rate and is secured by the minority
shareholders entire equity interest in Wuhu
88
Simcere Zhong Ren. The secured loan has been classified as non-current as of December 31, 2008
because we expect the loan to be renewed and extended beyond 12 months from December 31, 2008.
Reorganization and Private Placement
Since our inception, through organic growth and acquisition, we formed a group of
pharmaceutical companies that develops, manufactures and markets a range of branded generic and
innovative pharmaceuticals. To raise capital from investors outside of China, we established State
Good Group Limited in the British Virgin Islands on October 12, 2005. We then transferred our
operating subsidiaries to SGG in March 2006 as part of a series of corporate reorganization
activities. On March 28, 2006, through a private placement, SGG issued ordinary shares to Assure
Ahead Investments Limited, a British Virgin Islands investment vehicle owned by a group of
financial investors including Hony Capital II, L.P., The Goldman Sachs Group, Inc., Crystal Lena
International Limited, Excel Team Investments Limited, Enspire Investments Limited, Premier Goal
Company Limited and Right Lane Limited, for an aggregate consideration of $26.4 million. Upon
completion of this private placement, our existing shareholder, New Good Management Limited, became
our 69.0% shareholder and our new shareholder, Assure Ahead Investments Limited became our 31.0%
shareholder.
We incorporated Simcere Pharmaceutical Group in the Cayman Islands as a listing vehicle on
August 4, 2006. Simcere Pharmaceutical Group became our ultimate holding company when it issued an
aggregate of 100.0 million ordinary shares to existing shareholders of SGG on September 29, 2006,
in exchange for all of the ordinary shares that these shareholders held in SGG.
Share Incentives
See Item 6. Directors, Senior Management and EmployeesB. Compensation of Directors and
Executive Officers2006 Share Incentive Plan.
Registration Rights Agreements
Set forth below is a description of the registration rights we granted to Assure Ahead
Investments Limited, one of the selling shareholders, on November 20, 2006:
|
|
|
Demand Registration Rights. At any time commencing the earlier of November 20, 2008
or six months after our initial public offering, shares held by Assure Ahead
Investments Limited or its transferees and assignees have the right to demand that we
file a registration statement under the Securities Act covering the offer and sale of
their securities, so long as the aggregate amount of securities to be sold under the
registration statement exceeds $20.0 million. We are obligated under the registration
rights agreement to use our best efforts to register our ordinary shares for resale if
Assure Ahead Investments Limited makes such request. However, we are not required to
provide for any payment or transfer any other consideration to Assure Ahead Investments
Limited in the event of non-performance. We have the ability to delay or withdraw the
filing of a registration statement for up to 90 days if we furnish to Assure Ahead
Investments Limited or their transferees and assignees a certificate signed by our
chief executive officer or our chairman of the board of directors stating that, board
of directors determines it would be seriously detrimental to us or our shareholders for
a registration statement to be filed in the near future. We are not obligated to affect
such demand registrations on more than two occasions. |
|
|
|
|
Form F-3 or S-3 Registration Rights. Upon our company becoming eligible for use of
Form F-3 or S-3, Assure Ahead Investments Limited or their transferees and assignees
have the right to request that we file a registration statement under Form F-3 or S-3,
so long as the aggregate amount of securities to be sold under the registration
statement exceeds $1.0 million. Such requests for registrations are not counted as
demand registrations. |
|
|
|
|
Piggyback Registration Rights. If we propose to file a registration statement with
respect to an offering for our own account or for the account of any person that is not
Assure Ahead Investments Limited or their transferees and assignees, we must offer
Assure Ahead Investments Limited or their transferees |
89
|
|
|
and assignees the opportunity to include their securities in the registration statement.
We must use our reasonable best efforts to cause the underwriters in any underwritten
offering to permit any such shareholder who so requests to include their securities on
the same terms and conditions as the securities of our company. |
|
|
|
Expenses of Registration. We will pay all expenses relating to any demand or
piggyback registration, whether or not such registrations become effective, except that
shareholders shall bear the expense of any brokers commission or underwriters
discount or commission relating to registration and sale of their securities. |
Set forth below is a description of the registration rights we granted to King View
Development International Limited, one of the selling shareholders, on May 12, 2008. The
registration rights were granted to cover the resale of 11,820,000 ordinary shares purchased by
King View Development International Limited from New Good Management in a private sale:
|
|
|
Pursuant to the registration rights agreement entered into among us, New Good
Management and King View Development International Limited on May 12, 2008, we agree to
file as promptly as practicable but in any event no later than thirty (30) days after
the earlier of (i) June 30, 2008 and (ii) the date on which we file our annual report
on Form 20-F for the fiscal year ended December 31, 2007 with the SEC, a shelf
registration statement for an offering to be made on a delayed or continuous basis
pursuant to Rule 415 registering the resale from time to time by holders of all of the
registrable securities. New Good Management will bear all costs associated with the
filing of such registration statements. |
In July 2008, we filed a registration statement under Form F-3 (File No. 333-152101), as
amended, for the sale of an aggregate of 10,166,454 ADSs representing 20,332,908 ordinary shares,
consisting of 11,820,000 ordinary shares held by King View Development International Limited and
8,512,908 ordinary shares held by certain transferees of Assure Ahead Investments Limited.
|
|
|
C. |
|
Interests of Experts and Counsel |
Not applicable.
Item 8. Financial Information
A. Consolidated Statements and Other Financial Information
See Item 18. Financial Statements.
Legal and Administrative Proceedings
We are currently not a party to any material legal or administrative proceedings, and we are
not aware of any threatened material legal or administrative proceedings against us. We may from
time to time become a party to various legal or administrative proceedings arising in the ordinary
course of our business.
Dividend Policy
Our board of directors has complete discretion on whether to pay dividends. Even if our board
of directors decides to pay dividends, the form, frequency and amount will depend upon our future
operations and earnings, capital requirements and surplus, general financial condition, contractual
restrictions and other factors that the board of directors may deem relevant.
Since our incorporation, we have never declared or paid any dividends, nor do we currently
have any present plan to pay any cash dividends on our ordinary shares in the foreseeable future.
We currently intend to retain most, if not all, of our available funds and any future earnings to
operate and expand our business.
90
If we pay any dividends, we will pay our ADS holders to the same extent as holders of our
ordinary shares, subject to the terms of the deposit agreement, including the fees and expenses
payable thereunder. Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.
We have not experienced any significant changes since the date of our audited consolidated
financial statements included in this annual report.
Item 9. The Offer and Listing
A. |
|
Offering and Listing Details |
Our ADSs, each representing two of our ordinary shares, have been listed on the New York Stock
Exchange since April 20, 2007 under the symbol SCR. For the period from April 20, 2007 to June
15, 2009, the trading price of our ADSs on New York Stock Exchange ranged from $4.41 to $19.18 per
ADS.
The following table provides the high and low trading prices for our ADSs on the New York
Stock Exchange for the period indicated.
|
|
|
|
|
|
|
|
|
|
|
Sales Price |
|
|
High |
|
Low |
2008 |
|
$ |
15.88 |
|
|
$ |
4.41 |
|
Quarterly High and Low |
|
|
|
|
|
|
|
|
First Quarter 2008 |
|
$ |
13.99 |
|
|
$ |
9.98 |
|
Second Quarter 2008 |
|
$ |
15.88 |
|
|
$ |
10.42 |
|
Third Quarter 2008 |
|
$ |
13.96 |
|
|
$ |
8.05 |
|
Fourth Quarter 2008 |
|
$ |
8.94 |
|
|
$ |
4.41 |
|
First Quarter 2009 |
|
$ |
9.13 |
|
|
$ |
4.76 |
|
|
|
|
|
|
|
|
|
|
Monthly Highs and Lows |
|
|
|
|
|
|
|
|
December 2008 |
|
$ |
7.35 |
|
|
$ |
5.70 |
|
January 2009 |
|
$ |
9.13 |
|
|
$ |
6.21 |
|
February 2009 |
|
$ |
7.38 |
|
|
$ |
5.70 |
|
March 2009 |
|
$ |
6.01 |
|
|
$ |
4.76 |
|
April 2009 |
|
$ |
7.15 |
|
|
$ |
5.05 |
|
May 2009 |
|
$ |
8.43 |
|
|
$ |
5.87 |
|
June 2009 (through June 15) |
|
$ |
8.23 |
|
|
$ |
7.44 |
|
Not applicable.
Our ADSs, each representing two of our ordinary shares, have been listed on the New York Stock
Exchange since April 20, 2007 under the symbol SCR.
Not applicable.
Not applicable.
91
Not applicable.
Item 10. Additional Information
Not applicable.
|
|
|
B. |
|
Memorandum and Articles of Association |
We incorporate by reference into this annual report the description of our second amended and
restated memorandum of association contained in our F-1 registration statement (File No.
333-141539), as amended, filed with the Commission on March 23, 2007. Our shareholders adopted our
amended and restated memorandum and articles of association by unanimous resolutions on March 23,
2007.
We have not entered into any material contracts other than in the ordinary course of business
and other than those described in Item 4. Information of the Company or elsewhere in this annual
report on Form 20-F.
Foreign Currency Exchange
Foreign currency exchange regulation in China is primarily governed by the following rules:
|
|
|
Foreign Currency Administration Rules (1996), as amended, or the Exchange Rules; and |
|
|
|
|
Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996),
or the Administration Rules; |
Under the Exchange Rules, the Renminbi is convertible for current account items, including
interest payments and trade and service-related foreign exchange transactions. Conversion of
Renminbi for capital account items, such as direct investment, loan, security investment and
repatriation of investment, however, is still subject to the approval of the SAFE.
Under the Administration Rules, foreign-invested enterprises in China, may only buy, sell
and/or remit foreign currencies at those banks authorized to conduct foreign exchange business
after providing valid commercial documents and, in the case of capital account item transactions,
obtaining approval from the SAFE. Capital investments by foreign-invested enterprises outside of
China are also subject to limitations, which include approvals by the SAFE and other relevant
government authorities.
Cayman Islands Taxation
The Cayman Islands currently levy no taxes on individuals or corporations based upon profits,
income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate
duty. No Cayman Islands stamp duty will be payable unless an instrument is executed in, brought to,
or produced before a court of the Cayman Islands. The Cayman Islands are not parties to any double
tax treaties. There are no exchange control regulations or currency restrictions in the Cayman
Islands.
Peoples Republic of China Taxation
92
The new CIT law provides that enterprises established outside of China whose de facto
management bodies are located in China are considered resident enterprises and are generally
subject to the uniform 25% corporate income tax rate as to their worldwide income. Under the
implementation rules for the new CIT law issued by the PRC State Council, de facto management
body is defined as a body that has material and overall management and control over the
manufacturing and business operations, personnel and human resources, finances and treasury, and
acquisition and disposition of properties and other assets of an enterprise. Although substantially
all of our operational management is currently based in the PRC, it is unclear whether PRC tax
authorities would require (or permit) us to be treated as a PRC resident enterprise.
Under the new CIT law and the implementation rules issued by the State Council, PRC income tax
at the rate of 10% is applicable to dividends payable to investors that are non-resident
enterprises, which do not have an establishment or place of business in the PRC, or which have
such establishment or place of business but the relevant income is not effectively connected with
the establishment or place of business, to the extent such dividends have their sources within the
PRC. Similarly, any gain realized on the transfer of ADSs or ordinary shares by such investors is
also subject to 10% PRC income tax if such gain is regarded as income derived from sources within
the PRC. If we are considered a PRC resident enterprise, it is unclear whether dividends we pay
with respect to our ordinary shares or ADSs, or the gain you may realize from the transfer of our
ordinary shares or ADSs, would be treated as income derived from sources within the PRC and be
subject to PRC tax. It is also unclear whether, if we are considered a PRC resident enterprise,
holders of our ordinary shares or ADSs might be able to claim the benefit of income tax treaties
entered into between China and other countries.
United States Federal Income Taxation
The following discussion describes certain U.S. federal income tax consequences to U.S.
Holders (defined below) under present law of an investment in the ADSs or ordinary shares
subsequently received in exchange for ADSs. This summary applies only to U.S. Holders that hold the
ADSs or ordinary shares as capital assets and that have the U.S. dollar as their functional
currency. This discussion is based on the Internal Revenue Code of 1986, as amended (the Code) as
in effect on the date of this annual report on Form 20-F and on U.S. Treasury regulations in effect
or, in some cases, proposed, as of the date of this annual report on Form 20-F, as well as judicial
decisions and administrative interpretations thereof available on or before such date. All of the
foregoing authorities are subject to change, which change could apply retroactively and could
affect the tax consequences described below. As used herein, the term U.S. Holder means a holder
of an ADS or ordinary share that is for United States federal income tax purposes:
|
|
|
an individual citizen or resident of the United States; |
|
|
|
|
a corporation (or other entity treated as a corporation for United States federal
income tax purposes) created organized in or under the laws of the United States, any
state thereof or the District of Columbia; |
|
|
|
|
an estate the income of which is subject to United States federal income taxation
regardless of its source; or |
|
|
|
|
a trust that (1) is subject to the primary supervision of a court within the United
States and one or more U.S. persons control all substantial decisions of the trust or
(2) has a valid election in effect under applicable U.S. Treasury regulations to be
treated as a U.S. person. |
The following discussion does not represent a detailed description of the United States
federal income tax consequences applicable to persons subject to special treatment under United
States federal income tax laws such as:
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a dealer in securities or currencies; |
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certain financial institutions; |
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insurance companies; |
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a regulated investment company; |
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a real estate investment trust; |
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broker dealers; |
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U.S. expatriates; |
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traders that elect to mark to market; |
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tax-exempt entities; |
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persons liable for alternative minimum tax; |
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persons holding an ADS or ordinary share as part of a straddle, constructive sale,
hedging, conversion or integrated transaction; |
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persons whose functional currency is not the U.S. dollar; |
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persons that actually or constructively own 10.0% or more of our voting stock; or |
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persons holding ADSs or ordinary shares through partnerships or other pass-through
entities. |
If you are a partner in partnership or other entity taxable as a partnership that holds ADSs
or ordinary shares, your tax treatment generally will depend on your status and the activities of
the partnership. If you are a partner of a partnership holding the ADSs or ordinary shares, you
should consult your own tax advisors.
The discussion below does not contain a detailed description of all the United States federal
income tax consequences to you in light of your particular circumstances nor does it addresses any
United States federal tax laws other than United States federal income tax laws. If you are
considering the purchase of the ADSs or ordinary shares, you should consult your own tax advisors
concerning the particular United States federal income tax consequences to you of your acquisition,
ownership and disposition of the ADSs or ordinary shares, as well as the consequences to you
arising under the laws of any other taxing jurisdiction.
The discussion below assumes that the representations contained in the deposit agreement are
true and that the obligations in the deposit agreement and any related agreement will be complied
with in accordance with their terms. If you hold ADSs, you should be treated as the holder of the
underlying ordinary shares represented by those ADSs for U.S. federal income tax purposes.
Exchanges of ordinary shares for ADSs and ADSs for ordinary shares generally will not be subject to
U.S. federal income tax.
The U.S. Treasury has expressed concerns that parties to whom ADSs are pre-released may be
taking actions that are inconsistent with the claiming, by U.S. Holders of ADSs, of foreign tax
credits for U.S. federal income tax purposes. Such actions would also be inconsistent with the
claiming of the reduced rate of tax applicable to dividends received by certain non-corporate U.S.
Holders, as described below. Accordingly, the analysis of the creditability of PRC taxes, if any,
and the availability of the reduced tax rate for dividends received by certain non-corporate U.S.
Holders, each described below, could be affected by future actions that may be taken by the U.S.
Treasury or parties to whom ADSs are pre-released.
ADSs
If you hold ADSs, for United States federal income tax purposes, you generally will be treated
as the owner of the underlying shares that are represented by such ADSs (subject to a possible
challenge of this treatment by the Internal Revenue Service, as discussed under Distributions on ADSs
or Ordinary Shares). Accordingly, deposits or withdrawals of ordinary shares for ADSs will not be
subject to United States federal income tax.
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Taxation of Dividends and Other Distributions on the ADSs or Ordinary Shares
In the event that we are deemed to be a PRC resident enterprise under PRC tax law, you may
be subject to PRC withholding taxes on dividends payable to you with respect to the ADSs or
ordinary shares. In that case, however, you may be able to obtain a reduced rate of PRC withholding
taxes under the treaty between the United States and the PRC if certain requirements are met,
although no assurances can be given in this regard. In addition, subject to certain conditions and
limitations, PRC withholding taxes on dividends, if any, may be treated as foreign taxes eligible
for credit against your U.S. federal income tax liability. For purposes of calculating the foreign
tax credit, dividends paid to you with respect to the ADSs or ordinary shares will be treated as
income from sources outside the United States and will generally constitute passive category
income. The rules governing the foreign tax credit are complex. You are urged to consult your tax
advisors regarding the availability of the foreign tax credit under your particular circumstances.
To the extent that the amount of the distribution exceeds our current and accumulated earnings
and profits, it will be treated first as a tax-free return of your tax basis in your ADSs or
ordinary shares, and to the extent the amount of the distribution exceeds your tax basis, the
excess will be taxed as capital gain. We do not intend to calculate our earnings and profits under
U.S. federal income tax principles. Therefore, a U.S. Holder should expect that a distribution will
generally be treated as a dividend.
Taxation of Disposition of ADSs or Ordinary Shares
Subject to the passive foreign investment company rules discussed below, you will recognize
taxable gain or loss on any sale, exchange or other taxable disposition of an ADS or ordinary share
equal to the difference between the amount realized for the ADS or ordinary share and your tax
basis in the ADS or ordinary share. The gain or loss generally will be capital gain or loss. If you
are a non-corporate U.S. Holder, including an individual U.S. Holder, who has held the ADS or
ordinary share for more than one year, you will be eligible for reduced tax rates. The
deductibility of capital losses is subject to limitations. Any such gain or loss that you recognize
will generally be treated as U.S. source income or loss for foreign tax credit limitation purposes.
However, in the event that we are deemed to be a PRC resident enterprise under PRC tax law, we
may be eligible for the benefits of the income tax treaty between the United States and the PRC.
Under that treaty, if any PRC tax were to be imposed on any gain from the disposition of the ADSs
or ordinary shares, the gain may be treated as PRC-source income. You are urged to consult your tax
advisors regarding the tax consequences if a foreign withholding tax is imposed on a disposition of
ADSs or ordinary shares, including the availability of the foreign tax credit under your particular
circumstances.
Passive Foreign Investment Company
We believe that we were not a passive foreign investment company, or PFIC, for U.S. federal
income tax purposes for our taxable year ending on December 31, 2008, and we do not expect to
become one for our current taxable year or in the future, although there can be no assurance in
this regard.
A non-U.S. corporation is considered to be a PFIC for any taxable year if either:
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at least 75% of its gross income is passive income; or |
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at least 50% of the value of its assets (based on an average of the quarterly
values of the assets during a taxable year) is attributable to assets that produce or
are held for the production of passive income. |
Passive income generally includes dividends, interest, royalties, rents (other than certain
rents and royalties derived in the active conduct of a trade or business), annuities and gain from
assets that produce passive income. We will be treated as owning our proportionate share of the assets and
earning our proportionate share of the income of any other corporation in which we own, directly or
indirectly, more than 25% (by value) of the stock.
We must make a separate determination each year as to whether we are a PFIC. Accordingly, it
is possible that we may become a PFIC in the current or any future taxable year due to changes in
our income or asset
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composition. As a result, our PFIC status may change. In particular, because we
have valued our goodwill based on the market value of our ADSs and ordinary shares, our PFIC status
may be determined in large part based on the market price of our ADSs and ordinary shares which is
likely to fluctuate after the offering. Accordingly, fluctuations in the market price of the ADSs
and ordinary shares may result in our being a PFIC for any year. In addition, the composition of
our income and assets will be affected by how, and how quickly, we spend the cash we raise in this
offering. If we are a PFIC for any year during which you hold ADSs or ordinary shares, we generally
will continue to be treated as a PFIC for all succeeding years during which you hold ADSs or
ordinary shares.
If we are a PFIC for any taxable year during which you hold ADSs or ordinary shares, you will
be subject to special tax rules with respect to any excess distribution that you receive and any
gain you realize from a sale or other disposition (including a pledge) of the ADSs or ordinary
shares, unless you make a mark-to-market election as discussed below. Distributions you receive
in a taxable year that are greater than 125% of the average annual distributions you received
during the shorter of the three preceding taxable years or your holding period for the ADSs or
ordinary shares will be treated as an excess distribution. Under these special tax rules:
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the excess distribution or gain will be allocated ratably over your holding period
for the ADSs or ordinary shares; |
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the amount allocated to the current taxable year, and any taxable year prior to the
first taxable year in which we became a PFIC, will be treated as ordinary income; and |
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the amount allocated to each other year will be subject to the highest tax rate in
effect for that year and the interest charge generally applicable to underpayments of
tax will be imposed on the resulting tax attributable to each such year. |
The tax liability for amounts allocated to years prior to the year of disposition or excess
distribution cannot be offset by any net operating losses for such years, and gains (but not
losses) realized on the sale of the ADSs or ordinary shares cannot be treated as capital, even if
you hold the ADSs or ordinary shares as capital assets.
Alternatively, a U.S. Holder of marketable stock (as defined below) in a PFIC may make a
mark-to-market election for such stock of a PFIC to elect out of the tax treatment discussed in the
two preceding paragraphs. If you make a mark-to-market election for the ADSs or ordinary shares,
you will include in income each year an amount equal to the excess, if any, of the fair market
value of the ADSs or ordinary shares as of the close of your taxable year over your adjusted basis
in such ADSs or ordinary shares. You are allowed a deduction for the excess, if any, of the
adjusted basis of the ADSs or ordinary shares over their fair market value as of the close of the
taxable year. However, deductions are allowable only to the extent of any net mark-to-market gains
on the ADSs or ordinary shares included in your income for prior taxable years. Amounts included in
your income under a mark-to-market election, as well as gain on the actual sale or other
disposition of the ADSs or ordinary shares, are treated as ordinary income. Ordinary loss treatment
also applies to the deductible portion of any mark-to-market loss on the ADSs or ordinary shares,
as well as to any loss realized on the actual sale or disposition of the ADSs or ordinary shares,
to the extent that the amount of such loss does not exceed the net mark-to-market gains previously
included for such ADSs or ordinary shares. Your basis in the ADSs or ordinary shares will be
adjusted to reflect any such income or loss amounts. The tax rules that apply to distributions by
corporations that are not PFICs would apply to distributions by us.
In addition, notwithstanding any election you make with regard to the ADSs or ordinary shares,
dividends that you receive from us will not constitute qualified dividend income to you if we are a
PFIC either in the taxable year of the distribution or the preceding taxable year. Moreover, your
ADSs or ordinary shares will be treated as stock in a PFIC if we were a PFIC at any time during
your holding period in your ADSs or ordinary shares, even if we are not currently a PFIC. For
purposes of this rule, if you make a mark-to-market election with respect to your shares or ADSs,
you will be treated as having a new holding period in your shares or ADSs beginning on the first
day of the first taxable year beginning after the last taxable year for which the mark-to-market
election applies. Dividends that you receive that do not constitute qualified dividend income are
not eligible for taxation at the 15% maximum rate applicable to qualified dividend income. Instead,
you must include the gross amount of any such
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dividend paid by us out of our accumulated earnings
and profits (as determined for U. S. federal income tax purposes) in your gross income, and it will
be subject to tax at rates applicable to ordinary income.
The mark-to-market election is available only for marketable stock, which is stock that is
regularly traded in other than de minimis quantities on at least 15 days during each calendar
quarter on a qualified exchange, including the New York Stock Exchange, or other market, as defined
in applicable U.S. Treasury regulations. We expect that the ADSs will be listed and regularly
traded on the New York Stock Exchange. It should also be noted that it is intended that only the
ADSs, and not the ordinary shares, will be listed on the New York Stock Exchange. Consequently, if
you are a holder of ADSs, but not of ordinary shares, the mark-to-market election would be
available to you were we to be or become a PFIC.
Alternatively, you can sometimes avoid the rules described above by electing to treat us as a
qualified electing fund under Section 1295 of the Internal Revenue Code of 1986, as amended. This
option is not available to you because we do not intend to comply with the requirements necessary
to permit you to make this election.
If you hold ADSs or ordinary shares in any year in which we are a PFIC, you will be required
to file Internal Revenue Service Form 8621 regarding distributions received on the ADSs or ordinary
shares and any gain realized on the disposition of the ADSs or ordinary shares.
You are urged to consult your tax advisor regarding the application of the PFIC rules to your
investment in ADSs or ordinary shares.
Information Reporting and Backup Withholding
Dividend payments with respect to ADSs or ordinary shares and proceeds from the sale, exchange
or redemption of ADSs or ordinary shares may be subject to information reporting to the Internal
Revenue Service, unless you are an exempt recipient such as a corporation. A backup withholding tax
may apply, however, backup withholding will not apply to a U.S. Holder who furnishes a correct
taxpayer identification number and makes any other required certification or who is otherwise
exempt from backup withholding. U.S. Holders who are required to establish their exempt status
generally must provide such certification on Internal Revenue Service Form W-9. You are urged to
consult your tax advisors regarding the application of the U.S. information reporting and backup
withholding rules.
Backup withholding is not an additional tax. Amounts withheld as backup withholding may be
credited against your U.S. federal income tax liability, if any, and you may obtain a refund of any
excess amounts withheld under the backup withholding rules by filing the appropriate claim for
refund with the Internal Revenue Service and furnishing any required information.
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Dividends and Paying Agents |
We have filed this annual report on Form 20-F, including exhibits, with the SEC. As allowed by
the SEC, in Item 19 of this annual report, we incorporate by reference certain information we filed
with the SEC. This means that we can disclose important information to you by referring you to
another document filed separately with the SEC.
You may read and copy this annual report, including the exhibits incorporated by reference in
this annual report, at the SECs Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 and at the SECs
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regional offices in New York, New York and Chicago, Illinois. You can also
request copies of this annual report, including the exhibits incorporated by reference in this
annual report, upon payment of a duplicating fee, by writing information on the operation of the
SECs Public Reference Room.
The SEC also maintains a website at www.sec.gov that contains reports, proxy statements and
other information regarding registrants that file electronically with the SEC. Our annual report
and some of the other information submitted by us to the SEC may be accessed through this web site.
As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing
the furnishing and content of quarterly reports and proxy statements, and officers, directors and
principal shareholders are exempt from the reporting and short-swing profit recovery provisions
contained in Section 16 of the Exchange Act.
Our financial statements have been prepared in accordance with U.S. GAAP.
We will furnish our shareholders with annual reports, which will include a review of
operations and annual audited consolidated financial statements prepared in conformity with U.S.
GAAP.
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Subsidiary Information |
For a listing of our subsidiaries, see Item 4. Information of the CompanyC. Organizational
Structure in this annual report.
Item 11. Quantitative and Qualitative Disclosures about Market Risk
Foreign Currency Exchange Risk
Our revenues, costs and expenses are currently denominated primarily in Renminbi. As a result,
fluctuations in the value of Renminbi against other currencies may affect the price competitiveness
of our products versus competitor products from multinational pharmaceutical companies. Although
the conversion of the Renminbi is highly regulated in China, the value of the Renminbi against the
value of the U.S. dollar or any other currency nonetheless may fluctuate and be affected by, among
other things, changes in Chinas political and economic conditions. Under the currency policy in
effect in China today, the Renminbi is permitted to fluctuate in value within a narrow band against
a basket of certain foreign currencies. China is currently under significant international
pressures to liberalize this government currency policy, and if such liberalization were to occur,
the value of the Renminbi could appreciate or depreciate against the U.S. dollar.
We use Renminbi as the reporting currency for our financial statements. Through March 31,
2007, the functional currency of our companys and our subsidiary outside of China was Renminbi.
From April 1, 2007, our company and our subsidiary outside of China changed their functional
currency to U.S. dollar due to our listing on the New York Stock Exchange, which resulted in our
companys financing and operating activities being predominately denominated in, and is expected to
be continued to be predominately denominated in, U.S. dollar. The corresponding adjustment
attributable to current-rate translation of non-monetary assets as of the date of the change was
immaterial and has been recorded as other comprehensive loss, a separate component within the line
item shareholders equity. The functional currency of our subsidiaries in China is Renminbi.
All transactions of our company through March 31, 2007 and those of our subsidiaries in China
denominated in currencies other than Renminbi during the year are recorded at the exchange rates
prevailing on the respective relevant dates of such transactions. Monetary assets and liabilities
existing at the balance sheet date denominated in currencies other than Renminbi are re-measured at
the exchange rates prevailing on such date. Exchange differences are recorded in our consolidated
income statement. Foreign currency exchange rate gains and losses are recorded in our consolidated
income statement. In 2008, our company has used a substantial portion of the proceeds from our
initial public offering to provide U.S. dollar denominated intercompany loans to our PRC
subsidiaries where such funds were converted into Renminbi. As these intercompany loans are not
considered long-term investment in nature and given that the functional currency of our company is
U.S. dollars and the functional
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currency of our PRC subsidiaries is Renminbi, gains arising from
the translation of the intercompany loans from U.S. dollars to Renminbi by our PRC subsidiaries is
recognized in our consolidated statements of income while losses arising from the translation of
our companys U.S. dollars financial statements to Renminbi for consolidation purpose is recognized
in our consolidated statement of shareholders equity and comprehensive income. We recognized
foreign currency exchange gains of RMB24.7 million in 2007 and RMB39.9 million ($5.8 million) in
2008 which represent realized and unrealized gains recognized by our PRC subsidiaries from the
translation of U.S. dollar denominated intercompany loans.
Effective from April 1, 2007, assets and liabilities of our company and our subsidiary outside
of China, whose functional currency are not Renminbi, are translated into Renminbi at the exchange
rates at the balance sheet dates. Income and expense items are translated at the average rates of
exchange prevailing during the period after April 1, 2007. The adjustment resulting from
translating the financial statements of such entities is reflected as a component of accumulated
other comprehensive income (loss) within shareholders equity.
Fluctuations in exchange rates may affect our financial performance. Appreciation of Renminbi
against the U.S. dollar would have an adverse effect on Renminbi amount that we receive from the
conversion. Conversely, if we decide to convert Renminbi into U.S. dollars for the purpose of
making payments for dividends on our ordinary shares or ADSs or for other business purposes,
appreciation of the U.S. dollar against Renminbi would have a negative effect on the U.S. dollar
amount available to us. Considering the amount of our cash balance as of December 31, 2007 and
2008, a 1.0% change in the exchange rates between Renminbi and the U.S. dollar will result in an
increase or decrease of RMB0.4 million and RMB1.6 million ($0.2 million), respectively, for our
total amount of cash balance.
The fluctuation in foreign exchange may impose certain exchange rate risks on us. Our exposure
to foreign exchange risk primarily relates to cash and cash equivalents denominated in U.S. dollars
as a result of our past issuances of preferred shares through a private placement and proceeds from
the initial public offering in April 2007. We have not hedged exposures in foreign currencies or
enter into any other derivative financial instruments. Although in general, our exposure to foreign
exchange risks should be limited, the value of your investment in our ADSs will be affected by the
foreign exchange rate between U.S. dollars and RMB because the value of our business is effectively
denominated in RMB, while the ADSs will be traded in U.S. dollars.
Interest Rate Risk
Our risk exposure from changes in interest rates relates primarily to the interest expenses
associated with our short-term bank loans and borrowings, long term borrowings as well as the
interest income generated by excess cash invested in demand and savings deposits and fixed income
investments. We currently do not, have not historically used, and do not expect to use in the
future, any derivative financial instruments to manage our interest risk exposure. Interest-bearing
investments and interest-bearing borrowings carry a degree of interest rate risk. If there were a
25 basis point increase or decrease in interest rates, the expected adverse impact on net income
related to our financial instruments would be RMB1.9 million ($0.3 million).
Credit Risk with Financial Institutions
We are exposed to counterparty risks related to certain financial assets including cash and
cash equivalents and investment securities. As of December 31, 2007 and 2008, RMB931.2 million and
RMB774.9 million ($113.6 million), respectively, in cash and cash equivalents and investment
securities were held in uninsured accounts at financial institutions located in the PRC.
Item 12. Description of Securities Other Than Equity Securities
Not Applicable.
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PART II
Item 13. Defaults, Dividend Arrearages And Delinquencies
None of these events occurred in any of the years ended December 31, 2006, 2007 and 2008.
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
See Item 10. Additional Information for a description of the rights of securities holders,
which remain unchanged.
We completed our initial public offering of 31,250,000 ordinary shares, in the form of ADSs,
at $14.50 per ADS on April 20, 2007, after our ordinary shares and American Depositary Receipts
were registered under the Securities Act. The effective date of our registration statement on Form
F-1 (File number: 333-141539) was April 20, 2007. Goldman Sachs (Asia) L.L.C. acted as the sole
global coordinator and the sole bookrunner for this offering.
In 2008, we have used the net proceeds received from our initial public offering as follows:
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approximately RMB17.0 million ($2.5 million) to repay the short-term bank loans and
borrowings; |
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approximately RMB65.1 million ($9.5 million) for the acquisition of a 70.0% equity
interest in Wuhu Simcere Zhong Ren; and |
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approximately RMB93.9 million ($13.8 million) to fund our research and development
efforts. |
Item 15. Controls and Procedures
Disclosure Controls and Procedures
As of the end of the period covered by this annual report, an evaluation has been carried out
under the supervision and with the participation of our management, including our chief executive
officer and our chief financial officer, of the effectiveness of the design and operation of our
disclosure controls and procedures, as such term is defined under Rules 13a-14(c) and 15d-14(c)
promulgated under the Exchange Act. Based on that evaluation, our chief executive officer and chief
financial officer have concluded that our disclosure controls and procedures are effective.
Managements Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act, for our
company. Internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of consolidated
financial statements for external reporting purposes in accordance with generally accepted
accounting principles and includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of a companys assets, (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of consolidated financial statements in accordance with
generally accepted accounting principles, and that a companys receipts and expenditures are being
made only in accordance with authorizations of a companys management and directors, and (3)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use, or disposition of a companys assets that could have a material effect on the consolidated
financial statements.
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Because of its inherent limitations, a system of internal control over financial reporting can
provide only reasonable assurance with respect to consolidated financial statements preparation and
presentation and may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
As required by Section 404 of the Sarbanes-Oxley Act of 2002 and related rules as promulgated
by the SEC, management assessed the effectiveness of the internal control over financial reporting
as of December 31, 2008 using criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We acquired a controlling interest in Wuhu Zhong Ren Pharmaceutical Company Limited (Wuhu
Simcere Zhong Ren) during 2008 and our management excluded from its assessment of the
effectiveness of our internal control over financial reporting as of December 31, 2008, Wuhu
Simcere Zhong Rens internal control over financial reporting associated with total assets of
RMB74.1 million and total revenue of RMB2.6 million included in our consolidated financial
statements as of and for the year ended December 31, 2008. If adequately disclosed, companies are
allowed to exclude acquisitions from their assessment of internal control over financial reporting
during the first year of an acquisition while integrating the acquired company under guidelines
established by the U.S. Securities and Exchange Commission.
Based on this assessment, management concluded that the our internal control over financial
reporting was effective as of December 31, 2008 based on the criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
The effectiveness of internal control over financial reporting as of December 31, 2008 has
been audited by KPMG, an independent registered public accounting firm, who has also audited our
consolidated financial statements for the year ended December 31, 2008.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during
the period covered by this annual report that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Simcere Pharmaceutical Group:
We have audited Simcere Pharmaceutical Groups internal control over financial reporting as of
December 31, 2008, based on criteria established in Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Simcere
Pharmaceutical Groups management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Managements Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the Companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
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A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Simcere Pharmaceutical Group maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2008, based on criteria established in
Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
Simcere Pharmaceutical Group acquired a controlling financial interest in Wuhu Zhong Ren
Pharmaceutical Company Limited (Wuhu Simcere Zhong Ren) during 2008 and management excluded from
its assessment of the effectiveness of Simcere Pharmaceutical Groups internal control over
financial reporting as of December 31, 2008, Wuhu Simcere Zhong Rens internal control over
financial reporting associated with total assets of RMB74.1 million and total revenue of RMB2.6
million included in the consolidated financial statements of Simcere Pharmaceutical Group and
subsidiaries as of and for the year ended December 31, 2008. Our audit of internal control over
financial reporting of Simcere Pharmaceutical Group also excluded an evaluation of the internal
control over financial reporting of Wuhu Simcere Zhong Ren.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Simcere Pharmaceutical Group
and subsidiaries as of December 31, 2007 and 2008, and the related consolidated statements of
income, shareholders equity and comprehensive income, and cash flows for each of the years in the
three-year period ended December 31, 2008, and our report dated June 16, 2009 expressed an
unqualified opinion on those consolidated financial statements.
/s/ KPMG
Hong Kong, China
June 16, 2009
ITEM 16A. Audit Committee Financial Expert
Our board of directors has determined that Gary Siu Kwan Sik qualify as audit committee
financial expert as defined in Item 16A of Form 20-F. Each of the members of the Audit Committee
is an independent director as defined in the listing rules of New York Stock Exchange.
Item 16B. Code of Ethics
Our board of directors has adopted a code of ethics that applies to our directors, officers,
employees and agents, including certain provisions that specifically apply to our chief executive
officer, chief financial officer, vice presidents and any other persons who perform similar
functions for us. We have filed our code of business conduct and ethics as an exhibit to this
annual report on Form 20-F. We hereby undertake to provide to any person without
102
charge, a copy of
our code of business conduct and ethics within ten working days after we receive such persons
written request.
ITEM 16C. Principal Accountant Fees and Services
The following table sets forth the aggregate fees by categories specified below in connection
with certain professional services rendered by KPMG, our principal external auditors, for the
periods indicated. We did not pay any other fees to our auditors during the periods indicated
below.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Audit fees(1) |
|
$ |
1,035 |
|
|
$ |
1,929 |
|
Audit-related fees(2) |
|
|
481 |
|
|
|
163 |
|
Tax fees |
|
|
|
|
|
|
|
|
Other fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,516 |
|
|
$ |
2,092 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Audit fees represent the aggregate fees billed for each of the fiscal years listed for
professional services rendered by our principal auditors for the audit of our annual financial
statements or services that are normally provided by the auditors in connection with statutory
and regulatory filings or engagements. |
|
(2) |
|
Audit-related fees represent the aggregate fees billed in each of the fiscal years listed
for assurance and related services by our principal auditors for services rendered that are
reasonably related to the performance of the audit or review of our consolidated financial
statements and are not reported under Audit fees. Services comprising the fees disclosed
under the category of Audit-related fees in 2008 involve principally limited reviews
performed on our consolidated financial statements. |
The policy of our audit committee is to pre-approve all audit and non-audit services provided
by KPMG, including audit services, audit-related services, tax services and other services as
described above, other than those for de minimus services which are approved by the Audit Committee
prior to the completion of the audit.
ITEM 16D. Exemptions from the Listing Standards for Audit Committees
Not applicable.
ITEM 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
In November 2008, our board of directors authorized a share repurchase program, under which we
may repurchase up to $50.0 million worth of our issued and outstanding ADSs from the open market or
in block trades from time to time for a period of 12 months from the date of such authorization.
As of December 31, 2008, we have repurchased 3.0 million of our ordinary shares in the form of ADSs
for an aggregate cost of $10.0 million which included $0.1 million of handling charge. As of
December 31, 2008, all of the purchased ordinary shares have been retired.
From January 1, 2009 to May 31, 2009, we further repurchased an additional 7.0 million
ordinary shares in the form of ADSs for an aggregate cost of $22.6 million of which included $0.1
million of handling charge. All of the repurchased ordinary shares have been retired. The
repurchases were made on the open market at prevailing market prices or in block trades and subject
to restrictions relating to volume, price and timing. Any future repurchases, if any, will depend
on prevailing market conditions, our liquidity requirements and other factors.
Item 16F. Change in Registrants Certifying Accountant
Application of this Item does not apply until our annual report for the fiscal year ending December
31, 2009.
Item 16G. Corporate Governance
103
We are a foreign private issuer (as such term is defined in Rule 3b-4 under the Exchange
Act), and our ADSs, each representing two ordinary shares, are listed on the New York Stock
Exchange. Under Section 303A of the New York Stock Exchange Listed Company Manual, New York Stock
Exchange listed companies that are foreign private issuers are permitted to follow home country
practice in lieu of the corporate governance provisions specified by the New York Stock Exchange
with limited exceptions. The following summarizes some significant ways in which our corporate
governance practices differ from those followed by domestic companies under the listing standards
of the New York Stock Exchange.
|
|
|
The New York Stock Exchange standards for domestic companies require that
non-management directors meet at regularly scheduled executive sessions without
management. Our non-management directors have not met in executive sessions without
management, and there is no requirement under the laws of the Cayman Islands that our
non-management directors meet in executive sessions. |
104
PART III
Item 17. Financial Statements
We have elected to provide financial statements pursuant to Item 18.
Item 18. Financial Statements
The following financial statements are filed as part of this Annual Report on Form 20-F,
together with the reports of the independent auditors:
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
Page |
Report of Independent Registered Public Accounting Firm |
|
F-2 |
Consolidated Balance Sheets as of December 31, 2007 and 2008 |
|
F-3 |
Consolidated Statements of Income for the years ended December 31, 2006, 2007 and 2008 |
|
F-4 |
Consolidated Statements of Shareholders Equity and Comprehensive Income for the years ended December 31, 2006, 2007 and 2008 |
|
F-5 |
Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2007 and 2008 |
|
F-6 |
Notes to the Consolidated Financial Statements |
|
F-8 |
Item 19. Exhibits
|
|
|
Exhibit Number |
|
Description of Document |
1.1
|
|
Second Amended and Restated Memorandum and Articles of Association of the Registrant |
2.1
|
|
Registrants Form of American Depositary Receipt |
2.2
|
|
Registrants Specimen Certificate for Ordinary Shares |
2.3
|
|
Form of Deposit Agreement among the Registrant, the depositary and Owners and
Beneficial Owners of the American Depositary Shares issued thereunder |
2.4
|
|
Registration Rights Agreement among Simcere Pharmaceutical Group, New Good
Management Limited and Assure Ahead Investments Limited, dated November 20, 2006 |
2.5
|
|
Share Purchase Agreement among Luo Yongzhang, Zhou Bing and State Good Group
Limited, dated May 28, 2006 |
2.6
|
|
Share Purchase Agreement among Yantai Rongchang Pharmaceutic Co., Ltd., Beijing
Scientific Town Development Co., Ltd., Yantai Ruikang Biochemical Drugs LLC and
Simcere Pharmaceutical Company Limited, dated May 28, 2006 |
2.7
|
|
Registration Rights Agreement among Simcere Pharmaceutical Group, New Good
Management Limited and King View Development International Limited, dated May 12,
2008 |
4.1
|
|
Form of Indemnification Agreement with the Registrants directors |
4.2
|
|
Form of Employment Agreement of senior executive officers |
4.3
|
|
Form of Non-Disclosure, Non-Competition and Proprietary Information Agreement |
4.4
|
|
2006 Share Incentive Plan adopted as of November 13, 2006 |
4.5
|
|
Cooperation Agreement on the Incorporation of Medgenn (Hong Kong) Ltd. entered into
between Bestspeed Investments Limited (BVI) and Yantai Medgenn Co., Ltd., dated
February 10, 2005 |
4.6
|
|
Implementation Rules of Supplementary Agreement on Cooperation Agreement on the
Incorporation of Medgenn (Hong Kong) Ltd. entered into between Yantai Medgenn Co.,
Ltd. and Medgenn (Hong Kong) Co., Ltd., dated August 6, 2005 |
4.7
|
|
Joint Research Agreement on Anti-Tumor Drug AL6802 entered into between Jiangsu
Simcere Pharmaceutical R&D Co., Ltd. and Advenchen Laboratories LLC, dated January
8, 2007 |
8.1*
|
|
Subsidiaries of the Registrant |
11.1
|
|
Code of Business Conduct and Ethics |
12.1*
|
|
CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
12.2*
|
|
CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
13.1*
|
|
CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
13.2*
|
|
CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
15.1*
|
|
Consent of KPMG |
105
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F
and that it has duly caused and authorized the undersigned to sign this annual report on its
behalf.
|
|
|
|
|
|
Simcere Pharmaceutical Group
|
|
|
By: |
/s/ Jinsheng Ren
|
|
|
|
Name: |
Jinsheng Ren |
|
|
|
Title: |
Chief Executive Officer |
|
|
Date: June 18, 2009
106
SIMCERE PHARMACEUTICAL GROUP AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
Contents |
|
Page |
|
|
F-2 |
|
|
F-3 |
|
|
F-4 |
|
|
F-5 |
|
|
F-6 to 9 |
|
|
F-10 |
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Simcere Pharmaceutical Group:
We have audited the accompanying consolidated balance sheets of Simcere Pharmaceutical Group and
subsidiaries (the Company) as of December 31, 2007 and 2008, and the related consolidated
statements of income, shareholders equity and comprehensive income, and cash flows for each of the
years in the three-year period ended December 31, 2008. These consolidated financial statements are
the responsibility of the Companys management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Simcere Pharmaceutical Group and subsidiaries as of
December 31, 2007 and 2008, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 2008, in conformity with U.S. generally
accepted accounting principles.
The accompanying consolidated financial statements as of and for the year ended December 31, 2008
have been translated into United States dollars solely for the convenience of the reader. We have
audited the translation and, in our opinion, such consolidated financial statements expressed in
Renminbi have been translated into United States dollars on the basis set forth in Note 2(c) to the
consolidated financial statements.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Simcere Pharmaceutical Groups internal control over financial reporting as
of December 31, 2008, based on criteria established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our
report dated June 16, 2009 expressed an unqualified opinion on the effectiveness of Simcere
Pharmaceutical Groups internal control over financial reporting.
/s/ KPMG
Hong Kong, China
June 16, 2009
F-2
Simcere Pharmaceutical Group and Subsidiaries
Consolidated Balance Sheets
(Amounts expressed in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
Note |
|
2007 |
|
2008 |
|
2008 |
|
|
|
|
RMB |
|
RMB |
|
US$ |
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
|
|
497,352 |
|
|
|
812,814 |
|
|
|
119,137 |
|
Pledged bank deposits |
|
2(d) |
|
|
910 |
|
|
|
952 |
|
|
|
139 |
|
Held-to-maturity investment securities |
|
2(e) |
|
|
470,000 |
|
|
|
|
|
|
|
|
|
Accounts and bills receivables, net |
|
3 |
|
|
488,374 |
|
|
|
748,997 |
|
|
|
109,783 |
|
Inventories |
|
4, 19 |
|
|
65,241 |
|
|
|
95,948 |
|
|
|
14,063 |
|
Prepaid expenses and other current assets |
|
|
|
|
26,037 |
|
|
|
43,431 |
|
|
|
6,366 |
|
Amounts due from related parties |
|
19 |
|
|
7,503 |
|
|
|
4,365 |
|
|
|
640 |
|
Deferred tax assets |
|
10(d) |
|
|
1,736 |
|
|
|
1,252 |
|
|
|
184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
|
|
1,557,153 |
|
|
|
1,707,759 |
|
|
|
250,312 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount due from a related party |
|
19 |
|
|
|
|
|
|
20,000 |
|
|
|
2,931 |
|
Property, plant and equipment, net |
|
5 |
|
|
377,637 |
|
|
|
478,850 |
|
|
|
70,187 |
|
Land use rights |
|
6 |
|
|
116,386 |
|
|
|
114,624 |
|
|
|
16,801 |
|
Intangible assets, net |
|
7 |
|
|
251,221 |
|
|
|
275,244 |
|
|
|
40,344 |
|
Goodwill |
|
7 |
|
|
161,496 |
|
|
|
178,211 |
|
|
|
26,121 |
|
Deferred tax assets |
|
10(d) |
|
|
8,315 |
|
|
|
3,534 |
|
|
|
518 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
|
|
2,472,208 |
|
|
|
2,778,222 |
|
|
|
407,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings and current installments of long-term debt |
|
8, 9 |
|
|
29,000 |
|
|
|
6,000 |
|
|
|
879 |
|
Accounts and bills payables |
|
|
|
|
23,711 |
|
|
|
25,219 |
|
|
|
3,696 |
|
Accrued payroll and employee benefits |
|
|
|
|
29,634 |
|
|
|
28,436 |
|
|
|
4,168 |
|
Other payables and accrued liabilities |
|
11 |
|
|
255,777 |
|
|
|
251,843 |
|
|
|
36,913 |
|
Income taxes payable |
|
10 |
|
|
4,515 |
|
|
|
23,290 |
|
|
|
3,414 |
|
Deferred tax liabilities |
|
10(d) |
|
|
|
|
|
|
225 |
|
|
|
33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
|
|
342,637 |
|
|
|
335,013 |
|
|
|
49,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, excluding current installments |
|
9 |
|
|
52,000 |
|
|
|
62,000 |
|
|
|
9,088 |
|
Deferred tax liabilities |
|
10(d) |
|
|
61,690 |
|
|
|
59,358 |
|
|
|
8,700 |
|
Other liabilities |
|
10(b) |
|
|
19,928 |
|
|
|
20,529 |
|
|
|
3,009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
|
|
476,255 |
|
|
|
476,900 |
|
|
|
69,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interests |
|
|
|
|
12,137 |
|
|
|
48,297 |
|
|
|
7,079 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares US$0.01 par value: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
500,000,000 shares authorized, 125,006,200 and 122,227,318
shares issued and outstanding as of December 31, 2007 and 2008,
respectively |
|
18 |
|
|
9,840 |
|
|
|
9,624 |
|
|
|
1,411 |
|
Additional paid-in capital |
|
|
|
|
1,550,697 |
|
|
|
1,505,252 |
|
|
|
220,631 |
|
Accumulated other comprehensive loss |
|
21 |
|
|
(46,849 |
) |
|
|
(82,130 |
) |
|
|
(12,038 |
) |
Retained earnings |
|
|
|
|
470,128 |
|
|
|
820,279 |
|
|
|
120,231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
|
|
1,983,816 |
|
|
|
2,253,025 |
|
|
|
330,235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, minority interests and shareholders equity |
|
|
|
|
2,472,208 |
|
|
|
2,778,222 |
|
|
|
407,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-3
Simcere Pharmaceutical Group and Subsidiaries
Consolidated Statements of Income
(Amounts expressed in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
Note |
|
2006 |
|
2007 |
|
2008 |
|
2008 |
|
|
|
|
RMB |
|
RMB |
|
RMB |
|
US$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues |
|
16, 19 |
|
|
947,797 |
|
|
|
1,363,014 |
|
|
|
1,736,832 |
|
|
|
254,574 |
|
Other revenue |
|
2(k) |
|
|
2,809 |
|
|
|
5,734 |
|
|
|
4,311 |
|
|
|
632 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
|
|
950,606 |
|
|
|
1,368,748 |
|
|
|
1,741,143 |
|
|
|
255,206 |
|
Cost of materials and production |
|
19 |
|
|
(190,560 |
) |
|
|
(241,081 |
) |
|
|
(320,882 |
) |
|
|
(47,033 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
760,046 |
|
|
|
1,127,667 |
|
|
|
1,420,261 |
|
|
|
208,173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses |
|
|
|
|
(34,289 |
) |
|
|
(68,295 |
) |
|
|
(86,089 |
) |
|
|
(12,618 |
) |
Sales, marketing and distribution expenses |
|
|
|
|
(442,757 |
) |
|
|
(634,449 |
) |
|
|
(782,960 |
) |
|
|
(114,762 |
) |
General and administrative expenses |
|
|
|
|
(98,249 |
) |
|
|
(161,061 |
) |
|
|
(194,233 |
) |
|
|
(28,469 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
|
|
184,751 |
|
|
|
263,862 |
|
|
|
356,979 |
|
|
|
52,324 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
|
|
2,827 |
|
|
|
24,361 |
|
|
|
34,302 |
|
|
|
5,028 |
|
Interest expense |
|
5 |
|
|
(10,705 |
) |
|
|
(6,346 |
) |
|
|
(4,693 |
) |
|
|
(688 |
) |
Foreign currency exchange gains, net |
|
21 |
|
|
|
|
|
|
24,670 |
|
|
|
39,879 |
|
|
|
5,845 |
|
Other income |
|
14(d) |
|
|
|
|
|
|
20,526 |
|
|
|
1,104 |
|
|
|
162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes and minority interests |
|
|
|
|
176,873 |
|
|
|
327,073 |
|
|
|
427,571 |
|
|
|
62,671 |
|
Income tax expense |
|
10(a) |
|
|
(6,952 |
) |
|
|
(13,527 |
) |
|
|
(49,285 |
) |
|
|
(7,224 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interests |
|
|
|
|
169,921 |
|
|
|
313,546 |
|
|
|
378,286 |
|
|
|
55,447 |
|
Minority interests |
|
|
|
|
2,337 |
|
|
|
(12,285 |
) |
|
|
(28,135 |
) |
|
|
(4,124 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
172,258 |
|
|
|
301,261 |
|
|
|
350,151 |
|
|
|
51,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
15 |
|
|
1.86 |
|
|
|
2.56 |
|
|
|
2.80 |
|
|
|
0.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
15 |
|
|
1.86 |
|
|
|
2.48 |
|
|
|
2.80 |
|
|
|
0.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-4
Simcere Pharmaceutical Group and Subsidiaries
Consolidated Statements of Shareholders Equity and Comprehensive Income
(Amounts expressed in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
Additional |
|
other |
|
|
|
|
|
shareholders |
|
|
|
|
|
|
Contributed |
|
ordinary |
|
Par value |
|
paid-in |
|
comprehensive |
|
Retained |
|
equity |
|
Comprehensive |
|
|
Note |
|
capital |
|
shares |
|
amount |
|
capital |
|
loss |
|
earnings |
|
(note 13) |
|
income |
|
|
|
|
RMB |
|
|
|
|
|
RMB |
|
RMB |
|
RMB |
|
RMB |
|
RMB |
|
RMB |
Balance as of
January 1, 2006 |
|
|
|
|
60,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
132,337 |
|
|
|
192,537 |
|
|
|
|
|
Distribution to
shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,303 |
) |
|
|
(1,303 |
) |
|
|
|
|
Effect of
reorganization: |
|
1(c) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of
ordinary shares
to NGM |
|
|
|
|
(60,200 |
) |
|
|
69,000,000 |
|
|
|
5,457 |
|
|
|
54,743 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution to
NGM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(134,425 |
) |
|
|
(134,425 |
) |
|
|
|
|
Issuance of
ordinary shares
to AAI |
|
|
|
|
|
|
|
|
31,000,000 |
|
|
|
2,452 |
|
|
|
207,784 |
|
|
|
|
|
|
|
|
|
|
|
210,236 |
|
|
|
|
|
Share-based
compensation |
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,437 |
|
|
|
|
|
|
|
|
|
|
|
3,437 |
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
172,258 |
|
|
|
172,258 |
|
|
|
172,258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
172,258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
December 31, 2006 |
|
|
|
|
|
|
|
|
100,000,000 |
|
|
|
7,909 |
|
|
|
265,964 |
|
|
|
|
|
|
|
168,867 |
|
|
|
442,740 |
|
|
|
|
|
Issuance of
ordinary shares in
connection with
public offering,
net of issuance
costs of RMB46,099 |
|
|
|
|
|
|
|
|
25,000,000 |
|
|
|
1,931 |
|
|
|
1,253,778 |
|
|
|
|
|
|
|
|
|
|
|
1,255,709 |
|
|
|
|
|
Share-based
compensation |
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,764 |
|
|
|
|
|
|
|
|
|
|
|
30,764 |
|
|
|
|
|
Issuance of
ordinary shares
upon exercise of
share options |
|
17 |
|
|
|
|
|
|
6,200 |
|
|
|
|
|
|
|
191 |
|
|
|
|
|
|
|
|
|
|
|
191 |
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
301,261 |
|
|
|
301,261 |
|
|
|
301,261 |
|
Foreign currency
translation
adjustments, net of
nil tax |
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46,849 |
) |
|
|
|
|
|
|
(46,849 |
) |
|
|
(46,849 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
254,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
December 31, 2007 |
|
|
|
|
|
|
|
|
125,006,200 |
|
|
|
9,840 |
|
|
|
1,550,697 |
|
|
|
(46,849 |
) |
|
|
470,128 |
|
|
|
1,983,816 |
|
|
|
|
|
Share-based
compensation |
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,536 |
|
|
|
|
|
|
|
|
|
|
|
25,536 |
|
|
|
|
|
Issuance of
ordinary shares
upon exercise of
share options |
|
17 |
|
|
|
|
|
|
198,000 |
|
|
|
14 |
|
|
|
5,722 |
|
|
|
|
|
|
|
|
|
|
|
5,736 |
|
|
|
|
|
Repurchase of
ordinary shares |
|
18 |
|
|
|
|
|
|
(2,976,882 |
) |
|
|
(230 |
) |
|
|
(76,703 |
) |
|
|
|
|
|
|
|
|
|
|
(76,933 |
) |
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
350,151 |
|
|
|
350,151 |
|
|
|
350,151 |
|
Foreign currency
translation
adjustments, net of
nil tax |
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35,281 |
) |
|
|
|
|
|
|
(35,281 |
) |
|
|
(35,281 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
314,870 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
December 31, 2008 |
|
|
|
|
|
|
|
|
122,227,318 |
|
|
|
9,624 |
|
|
|
1,505,252 |
|
|
|
(82,130 |
) |
|
|
820,279 |
|
|
|
2,253,025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
December 31,
2008 US$ |
|
|
|
|
|
|
|
|
|
|
|
|
1,411 |
|
|
|
220,631 |
|
|
|
(12,038 |
) |
|
|
120,231 |
|
|
|
330,235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-5
Simcere Pharmaceutical Group and Subsidiaries
Consolidated Cash Flow Statements
(Amounts expressed in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
Note |
|
2006 |
|
2007 |
|
2008 |
|
2008 |
|
|
|
|
RMB |
|
RMB |
|
RMB |
|
US$ |
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
172,258 |
|
|
|
301,261 |
|
|
|
350,151 |
|
|
|
51,323 |
|
Adjustments to reconcile net income to
net cash provided by operating
activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bad debt expense |
|
|
|
|
1,433 |
|
|
|
1,203 |
|
|
|
1,576 |
|
|
|
231 |
|
Inventory write-downs |
|
|
|
|
2,143 |
|
|
|
3,213 |
|
|
|
3,000 |
|
|
|
440 |
|
Depreciation of property, plant and
equipment |
|
|
|
|
17,202 |
|
|
|
27,770 |
|
|
|
39,791 |
|
|
|
5,832 |
|
Amortization of intangible assets |
|
|
|
|
4,812 |
|
|
|
15,084 |
|
|
|
29,433 |
|
|
|
4,314 |
|
Acquired in-process research and
development |
|
|
|
|
|
|
|
|
884 |
|
|
|
|
|
|
|
|
|
Gain on disposal of property, plant and
equipment |
|
|
|
|
(513 |
) |
|
|
(2,526 |
) |
|
|
(21 |
) |
|
|
(3 |
) |
Minority interests |
|
|
|
|
(2,337 |
) |
|
|
12,285 |
|
|
|
28,135 |
|
|
|
4,124 |
|
Deferred tax (benefit)/expense |
|
|
|
|
(2,124 |
) |
|
|
11,009 |
|
|
|
(2,770 |
) |
|
|
(406 |
) |
Share-based compensation expense |
|
|
|
|
3,437 |
|
|
|
30,764 |
|
|
|
25,536 |
|
|
|
3,743 |
|
Unrealized foreign currency exchange
gains |
|
|
|
|
|
|
|
|
(45,350 |
) |
|
|
(39,763 |
) |
|
|
(5,828 |
) |
Changes in assets and liabilities, net of
effects from acquisitions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in accounts and bills receivables |
|
|
|
|
(33,242 |
) |
|
|
(316,010 |
) |
|
|
(257,135 |
) |
|
|
(37,689 |
) |
Decrease/(increase) in inventories |
|
|
|
|
2,002 |
|
|
|
(14,304 |
) |
|
|
(32,648 |
) |
|
|
(4,786 |
) |
(Increase)/decrease in prepaid expenses
and other current assets |
|
|
|
|
(18,609 |
) |
|
|
47,704 |
|
|
|
(15,241 |
) |
|
|
(2,234 |
) |
Decrease in prepaid land use rights |
|
|
|
|
1,458 |
|
|
|
1,956 |
|
|
|
2,486 |
|
|
|
364 |
|
Decrease in amounts due from related
parties |
|
|
|
|
869 |
|
|
|
166 |
|
|
|
3,138 |
|
|
|
460 |
|
(Decrease)/increase in accounts and bills
payables |
|
|
|
|
(1,416 |
) |
|
|
1,084 |
|
|
|
1,275 |
|
|
|
187 |
|
Increase/(decrease) in accrued payroll
and employee benefits |
|
|
|
|
6,189 |
|
|
|
4,946 |
|
|
|
(1,424 |
) |
|
|
(209 |
) |
(Decrease)/increase in other payables and
accrued liabilities |
|
|
|
|
(17,246 |
) |
|
|
67,644 |
|
|
|
(7,737 |
) |
|
|
(1,135 |
) |
(Decrease)/increase in income taxes
payable and other long-term liabilities |
|
|
|
|
(17,474 |
) |
|
|
2,984 |
|
|
|
19,376 |
|
|
|
2,840 |
|
Increase/(decrease) in amounts due to
related parties |
|
|
|
|
109 |
|
|
|
(1,352 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
|
|
118,951 |
|
|
|
150,415 |
|
|
|
147,158 |
|
|
|
21,568 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment for purchase of land use rights |
|
|
|
|
(2,142 |
) |
|
|
(20,449 |
) |
|
|
(926 |
) |
|
|
(136 |
) |
Payment for purchase of intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
(2,554 |
) |
|
|
(374 |
) |
Purchase of property, plant and equipment |
|
|
|
|
(85,676 |
) |
|
|
(78,143 |
) |
|
|
(117,541 |
) |
|
|
(17,228 |
) |
Payment of deposits for purchase of
property, plant and equipment |
|
|
|
|
(4,056 |
) |
|
|
|
|
|
|
(15,791 |
) |
|
|
(2,316 |
) |
Proceeds from disposal of property, plant
and equipment and land use right |
|
|
|
|
2,417 |
|
|
|
|
|
|
|
1,942 |
|
|
|
285 |
|
Payments for acquisitions of additional
equity interests |
|
7(b), (c) |
|
|
(10,927 |
) |
|
|
(27,064 |
) |
|
|
|
|
|
|
|
|
F-6
Simcere Pharmaceutical Group and Subsidiaries
Consolidated Cash Flow Statements
(Amounts expressed in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
Note |
|
2006 |
|
2007 |
|
2008 |
|
2008 |
|
|
|
|
RMB |
|
RMB |
|
RMB |
|
US$ |
Payment for acquisition of Shandong
Simcere |
|
|
|
|
(177,959 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Payment for acquisition of Boda |
|
7(b) |
|
|
|
|
|
|
(101,735 |
) |
|
|
|
|
|
|
|
|
Payment for acquisition of Master Luck |
|
7(b) |
|
|
|
|
|
|
(29,776 |
) |
|
|
|
|
|
|
|
|
Payment for acquisition of Wuhu Zhong Ren |
|
7(a) |
|
|
|
|
|
|
|
|
|
|
(62,420 |
) |
|
|
(9,149 |
) |
(Increase)/decrease in held-to-maturity
investment securities |
|
|
|
|
|
|
|
|
(470,000 |
) |
|
|
470,000 |
|
|
|
68,890 |
|
(Increase)/decrease in pledged bank
deposits |
|
|
|
|
(15,787 |
) |
|
|
19,877 |
|
|
|
(42 |
) |
|
|
(6 |
) |
Proceeds from repayments of loans and
advances due from related parties |
|
19 |
|
|
40,351 |
|
|
|
212 |
|
|
|
|
|
|
|
|
|
Proceeds from disposal of property, plant
and equipment, and land use right to
related parties |
|
19 |
|
|
|
|
|
|
11,104 |
|
|
|
|
|
|
|
|
|
Loans and advances made to related parties |
|
19 |
|
|
(5,417 |
) |
|
|
|
|
|
|
(20,000 |
) |
|
|
(2,931 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in)/provided by investing
activities |
|
|
|
|
(259,196 |
) |
|
|
(695,974 |
) |
|
|
252,668 |
|
|
|
37,035 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of ordinary shares |
|
|
|
|
|
|
|
|
1,301,808 |
|
|
|
|
|
|
|
|
|
Proceeds from exercise of share options |
|
|
|
|
|
|
|
|
191 |
|
|
|
5,736 |
|
|
|
841 |
|
Payments for repurchase of ordinary shares |
|
|
|
|
|
|
|
|
|
|
|
|
(76,933 |
) |
|
|
(11,276 |
) |
Payments for offering costs |
|
|
|
|
(6,753 |
) |
|
|
(39,346 |
) |
|
|
|
|
|
|
|
|
Proceeds from short-term bank loans and
other borrowings |
|
|
|
|
291,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal repayments of bank loans and
other borrowings |
|
|
|
|
(174,800 |
) |
|
|
(314,000 |
) |
|
|
(17,000 |
) |
|
|
(2,492 |
) |
Repayment of loans and advances due to
related parties |
|
19 |
|
|
(158,489 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from loans and advances due to
related parties |
|
|
|
|
81,579 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from repayment of loans and
advances due from related parties |
|
|
|
|
49,338 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital contribution from AAI in
connection with Reorganization |
|
|
|
|
210,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution to NGM in connection with
Reorganization |
|
|
|
|
(134,425 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Distribution to shareholders |
|
|
|
|
(1,474 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Distribution by a subsidiary to its
minority shareholder |
|
|
|
|
|
|
|
|
(10,270 |
) |
|
|
(649 |
) |
|
|
(95 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by/(used in) financing
activities |
|
|
|
|
156,212 |
|
|
|
938,383 |
|
|
|
(88,846 |
) |
|
|
(13,022 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-7
Simcere Pharmaceutical Group and Subsidiaries
Consolidated Cash Flow Statements
(Amounts expressed in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
|
2006 |
|
2007 |
|
2008 |
|
2008 |
|
|
|
|
RMB |
|
RMB |
|
RMB |
|
US$ |
Effect of exchange rate changes on
cash and cash equivalents |
|
|
|
|
|
|
|
|
(1,499 |
) |
|
|
4,482 |
|
|
|
657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash
equivalents |
|
|
|
|
15,967 |
|
|
|
391,325 |
|
|
|
315,462 |
|
|
|
46,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at
beginning of year |
|
|
|
|
90,060 |
|
|
|
106,027 |
|
|
|
497,352 |
|
|
|
72,899 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
year |
|
|
|
|
106,027 |
|
|
|
497,352 |
|
|
|
812,814 |
|
|
|
119,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Supplemental cash flow and
non-cash information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents paid
during the period for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
|
|
|
22,730 |
|
|
|
3,056 |
|
|
|
40,401 |
|
|
|
5,922 |
|
Interest, net of capitalized interest |
|
|
|
|
12,303 |
|
|
|
6,418 |
|
|
|
4,693 |
|
|
|
688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing transactions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payable and accruals for acquisition
of property, plant and equipment and
land use right |
|
|
|
|
68,276 |
|
|
|
39,791 |
|
|
|
32,890 |
|
|
|
4,820 |
|
Payable for acquisition of Shandong
Simcere |
|
|
|
|
9,830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Payable for acquisition of Boda |
|
|
|
|
|
|
|
|
8,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash financing transactions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued offering costs |
|
|
|
|
11,775 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b) Analysis of net cash outflow in
respect of acquisitions is as
follow: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
i) Acquisition of an 80% equity
interest of Shandong Simcere in 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RMB |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash consideration paid |
|
|
|
|
(186,769 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents acquired |
|
|
|
|
8,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash outflow in respect of
acquisition of Shandong Simcere |
|
|
|
|
(177,959 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ii) Acquisition of Boda in 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash consideration paid |
|
7(b) |
|
|
(114,738 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents acquired |
|
|
|
|
13,003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash outflow in respect of
acquisition of Boda |
|
|
|
|
(101,735 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-8
Simcere Pharmaceutical Group and Subsidiaries
Consolidated Cash Flow Statements
(Amounts expressed in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
|
2006 |
|
2007 |
|
2008 |
|
2008 |
|
|
|
|
RMB |
|
RMB |
|
RMB |
|
US$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
iii) Acquisition of Master Luck in
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash consideration paid |
|
7(b) |
|
|
(32,927 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents acquired |
|
|
|
|
3,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash outflow in respect of
acquisition of Master Luck |
|
|
|
|
(29,776 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
iv) Acquisition of Wuhu Zhong Ren in
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash consideration paid |
|
7(a) |
|
|
(65,090 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents acquired |
|
|
|
|
2,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash outflow in respect of
acquisition of Wuhu Zhong Ren |
|
|
|
|
(62,420 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-9
Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
1 |
|
Principal activities, significant concentrations and risks, organization and basis of
presentation |
|
|
Simcere Pharmaceutical Group (the Company) and its subsidiaries, namely State Good Group
Limited (SGG), Simcere Pharmaceutical Co., Ltd. (formerly Hainan Simcere Pharmaceutical
Co., Ltd., Hainan Simcere), Nanjing Simcere Dongyuan Pharmaceutical Co., Ltd. (Nanjing
Simcere), Hainan Qitian Pharmaceutical Co., Ltd. (Qitian Simcere), Sichuan Zigong Yirong
Industrial Co., Ltd. (Sichuan Simcere), Jiangsu Simcere Pharmaceutical Co., Ltd.
(Jiangsu Simcere), Shanghai Simcere Pharmaceutical Co., Ltd. (Shanghai Simcere),
Jiangsu Simcere Pharmaceutical R&D Co., Ltd. (Simcere Research), Shandong Simcere Medgenn
Bio-Pharmaceutical Co., Ltd. (Shandong Simcere) (formerly Yantai Medgenn Co., Ltd.),
Jilin Province Boda Pharmaceutical Co., Ltd. (Boda), Master Luck Corporation Ltd.
(Master Luck), Nanjing Tung Chit Pharmaceutical Co., Ltd. (Tung Chit), and Wuhu Simcere
Zhong Ren Pharmaceutical Co., Ltd. (Simcere Zhong Ren) are principally engaged in the
research, development, manufacture and distribution of pharmaceutical products in the
Peoples Republic of China (the PRC). The Company and its subsidiaries are collectively
referred to as the Group. |
|
(b) |
|
Significant concentrations and risks |
|
|
Revenue concentrations |
|
|
|
The Group sells its products to pharmaceutical distributors in the PRC. Sales to
distributors account for substantially all of the Groups revenues. The Group does not have
long-term distribution agreements and competes for desired distributors with other
pharmaceutical manufacturers. Consequently, maintaining relationships with existing
distributors and replacing distributors may be costly, difficult and time-consuming. Any
disruption of the Groups distribution network, including its failure to renew existing
distribution agreements with desired distributors, could negatively affect its ability to
effectively sell its products and could materially and adversely affect its business,
financial condition and results of operations. As of and for the years ended December 31,
2006, 2007 and 2008, no single customer contributed, on an individual basis, 10% or more of
the Groups total revenues or gross accounts receivable. |
|
|
|
The Group derives a substantial portion of its revenue from the sales of four products,
namely Bicun, Zailin, Endu, and Yingtaiqing, of which revenues were over RMB100,000
(US$14,657) individually for the year ended December 31, 2008. Aggregate sales of these
products accounted for 70.6%, 78.5% and 71.8% of the Groups product revenues for the years
ended December 31, 2006, 2007 and 2008, respectively. Prior to December 2007, one of the
Groups top selling products, Bicun, was subject to a protection period. During this
period, no application for new medicine certificates for the same product is allowed.
Since then, a few competitors have entered into the edaravone market in China and the Group
may face more severe competition and price pressure in the near future. As the Group
expects the sales of these products to continue to comprise a substantial portion of
revenues in the future, any factors adversely affecting the sales of any of these products
will have a material adverse effect on the Groups business, financial condition and
results of operations. |
|
|
|
Price control by PRC government authorities |
|
|
|
Certain medical products sold in the PRC, primarily those included in the PRCs published
Medical Insurance Catalogue and those pharmaceutical products whose production or trading
are deemed to constitute monopolies by the PRC government, are subject to retail price
controls in the form of fixed prices or price ceilings. The fixed prices or the price
ceilings of such medicines are published by the national and provincial price
administration authorities from time to time. Although the Group only sells its products
through distributors, the controls over retail prices could have a corresponding effect on
the wholesale prices. The prices of medicines that are not
subject to price controls are determined freely at the discretion of the respective
pharmaceutical companies, subject, in certain cases, to notification to the provincial
pricing authorities. Certain of the Groups products are subject to price controls and
accordingly, the price of such |
F-10
Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
|
|
products could not be increased at the Groups discretion
above the relevant controlled price ceiling without prior governmental approval. In
addition, the price of such products may also be adjusted downward by the relevant
government authorities in the future. Such price control, especially downward price
adjustment, may negatively affect the Groups revenue and profitability. For the years
ended December 31, 2006, 2007 and 2008, the percentages of the Groups revenues from
products that were subject to government pricing controls were 77%, 73% and 72.0%,
respectively. |
|
|
Concentration of suppliers |
|
|
|
The Group sources raw materials, as well as packaging materials, from various
independent suppliers in the PRC. Historically, the majority of the Groups raw materials
have been readily available. The Group generally maintains two vendors for each major raw
material in order to diversify its vendor base and help to ensure a reliable supply of raw
materials at reasonable prices. The Group also maintains a supplier evaluation scheme
through which potential vendors are evaluated based on a number of factors including
quality, timely delivery, cost and technical capability. For the years ended December 31,
2006, 2007 and 2008, the Group purchased 50.9%, 50.9% and 40.3%, respectively, of its total
supply of raw materials from its five largest suppliers. |
|
|
|
Cash, cash equivalents and investment concentrations |
|
|
|
As of December 31, 2007 and 2008, RMB931,167 and RMB774,881 (US$113,577), respectively, in
cash, cash equivalents and investment securities were held in uninsured accounts at
financial institutions located in the PRC, cash, cash equivalents and investment securities
of RMB36,185 and RMB4,009 (US$588), respectively, were held in insured accounts at major
financial institutions located in the Hong Kong Special Administrative Region (the HK
SAR) with full coverage, and cash, cash equivalents and investment securities of nil and
RMB33,924 (US$4,964), respectively, were held in insured accounts at major financial
institutions located in the United States of America (the U.S.) and were insured up to
US$2,000. Further, as of December 31, 2007 and 2008, the Groups cash and cash equivalents
balances included U.S. dollar denominated bank deposits of US$22 and US$18,477
(RMB126,057), respectively, in uninsured accounts at financial institutions located in the
PRC, nil and US$4,964 (RMB33,924), respectively, in insured accounts at major financial
institutions located in the U.S. and were insured up to US$2,000, and US$4,692 and US$388
(RMB2,648), respectively, in insured accounts at major financial institutions located in
the HK SAR. Management believes that these major financial institutions are of high credit
quality. |
|
|
The Company was incorporated in the Cayman Islands and established in August 2006 under the
Cayman Islands Companies Law as part of a series of corporate reorganization activities
(the Reorganization) in the preparation of the Companys initial public offering (IPO).
In connection with the Reorganization, Assure Ahead Investments Limited (AAI) and New
Good Management Company Limited (NGM), the two shareholders of State Good Group Limited
(SGG), transferred their respective equity interests in SGG in exchange for the ordinary
shares of the Company. Upon the issuance of the Companys shares, the ownership interests
in the Company held by AAI and NGM were identical to their respective ownership interests
in SGG prior to the share exchange. |
|
|
|
SGG was established in the British Virgin Islands in October 2005 in connection with the
reorganization of Simcere Hainan Investment Group Ltd. (Simcere Investment) to
facilitate the raising of capital from investors outside of the PRC. Simcere Investment,
through its operating subsidiaries (the Predecessor Operations), was an integrated
pharmaceutical company that
developed, manufactured and marketed a range of branded generic and other pharmaceutical
products in the PRC. |
|
|
|
In March 2006, Simcere Investment transferred all of its equity interests in the
Predecessor Operations to SGG through a newly formed holding company, NGM, in exchange for
34,500 ordinary shares of SGG and cash payable of US$16,800. Concurrently, AAI subscribed
for 15,500 ordinary shares of SGG for cash of US$26,400.
|
F-11
Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
|
|
On April 20, 2007, the Companys shares were listed on the New York Stock Exchange
following the completion of IPO of 15,625,000 American Depositary Shares (ADSs),
representing 31,250,000 ordinary shares, at a price of US$14.5 per ADS. Each ADS presents
two ordinary shares of the Company. The offering consisted of 12,500,000 ADSs, representing
25,000,000 ordinary shares, newly issued by the Company and 3,125,000 ADSs, representing
6,250,000 ordinary shares, sold by certain selling shareholders. The Company raised net
proceeds of approximately US$168,563 from the offering. |
|
|
|
On April 25, 2007, the underwriters exercised the option to purchase an aggregate of
2,343,700 additional ADSs, representing 4,687,400 ordinary shares, at an initial public
offering price of US$14.5 less the underwriting discount from the selling shareholders. |
|
|
|
Upon the completion of the IPO in April 2007, NGM and AAI held 51.75% and 23.25% equity
interests in the Company, respectively. |
|
(d) |
|
Basis of presentation |
|
|
The accompanying consolidated financial statements have been prepared in accordance with
U.S. generally accepted accounting principles (U.S. GAAP). |
|
|
|
As the Reorganization was completed for the sole purpose of establishing the legal
structure of the Company to facilitate the IPO, and as the transfer of the equity interests
in the Predecessor Operations was between entities under common control, the transfer of
these entities have been accounted for and presented in the accompanying consolidated
financial statements in a manner similar to pooling-of-interests. |
|
|
|
Accordingly, the assets and liabilities of the Predecessor Operations transferred to SGG,
and then subsequently to the Company, have been initially recognized at their historical
carrying amounts and the accompanying consolidated financial statements as of and for the
year ended December 31, 2006 present the financial condition and the results of the Group
as if the Predecessor Operations were transferred to the Company as of the beginning of
2006. The cash distribution of US$16,800 (RMB134,425) paid in connection with the
Reorganization has been accounted for as an equity transaction in the consolidated
statements of shareholders equity and comprehensive income. |
2 |
|
Summary of significant accounting policies |
|
|
The consolidated financial statements include the financial statements of the Company and
its majority-owned subsidiaries. All significant intercompany balances and transactions
have been eliminated upon consolidation. For consolidated subsidiaries where the Companys
ownership is less than 100%, the outside shareholders interests are shown as minority
interests. |
|
|
The preparation of the consolidated financial statements in conformity with U.S. GAAP
requires management of the Group to make a number of estimates and assumptions affect the
reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could differ from
those estimates. Significant items subject to such estimates and assumptions include
recoverability of the carrying amount of property, plant and equipment, goodwill and
intangible assets; the allocation of the purchase price for the Groups acquisitions;
allowances for doubtful receivables and deferred income tax assets; depreciation and
amortizable lives; recoverability of inventories; and amounts recorded for contingencies.
The current economic environment has increased the degree of uncertainty inherent in those
estimates and assumptions. |
F-12
Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
|
(c) |
|
Foreign currency translation |
|
|
The reporting currency of the Group is Renminbi (RMB). |
|
|
|
Through March 31, 2007, the Companys and SGGs functional currency was RMB. Effective from
April 1, 2007, the Company and SGG changed their functional currency to United States
dollar (U.S. dollar) due to the significant changes in the Companys and SGGs economic
facts and circumstances upon the completion of the Companys listing on the New York Stock
Exchange, which resulted in the Companys financing and operating activities being
predominately denominated in U.S. dollar. The corresponding adjustment attributable to
current-rate translation of non-monetary assets as of the date of the change was immaterial
and has been recorded as other comprehensive loss, a separate component within
shareholders equity. |
|
|
|
The functional currency of the Companys PRC subsidiaries is RMB. RMB is not a fully
convertible currency. All foreign exchange transactions involving RMB must take place
either through the Peoples Bank of China (PBOC) or other institutions authorized to buy
and sell foreign exchange. The exchange rates adopted for the foreign exchange transactions
are the rates of exchange quoted by the PBOC, which are determined largely by supply and
demand. |
|
|
|
Transactions of the Company through March 31, 2007 and of the Companys PRC subsidiaries
denominated in currencies other than RMB are translated into RMB at the exchange rates
quoted by the PBOC prevailing at the dates of the transactions. Monetary assets and
liabilities denominated in foreign currencies including U.S. dollar intercompany loans that
are not long-term investment in nature are translated into RMB using the applicable
exchange rates quoted by the PBOC at the balance sheet dates. The resulting exchange
differences are recorded in the consolidated statements of income. |
|
|
|
Effective from April 1, 2007, assets and liabilities of the Company and SGG, whose
functional currency is not the RMB, are translated into RMB at the exchange rates at the
balance sheet dates. Income and expense items are translated at the average rates of
exchange prevailing during the period from April 1, 2007 through December 31, 2007. The
adjustment resulting from translating the financial statements of such entities is
reflected as a component of accumulated other comprehensive income (loss) within
shareholders equity. |
|
|
|
For the U.S. dollar convenience translation amounts included in the accompanying financial
statements, the RMB amounts were translated into U.S. dollars at the rate of
US$1.00=RMB6.8225, representing the noon buying rate in The City of New York for cable
transfers of RMB on December 31, 2008 as certified for Customs purposes by the Federal
Reserve Bank of New York. No representation is made that the RMB amounts could have been,
or could be, converted into U.S. dollars at that rate or at any other rate on December 31,
2008 or on any other date. |
|
(d) |
|
Cash and cash equivalents and pledged bank deposits |
|
|
Cash and cash equivalents consist of cash on hand, cash in bank accounts, interest-bearing
savings accounts, money market funds, time deposits and short-term fixed income investments
with original maturities of three months or less at the date of purchase. Cash that is
restricted as to withdrawal for use or pledged as security is disclosed separately on the
face of the balance sheet, and is not included in the cash and cash equivalents total in
the consolidated statements of cash flows. The pledged bank deposits represent cash
maintained at a bank as security for short-term bills payable issued by a subsidiary of the
Company to third party suppliers. These pledged bank deposits are restricted as to
withdrawal or use by the pledged subsidiary for as long as the related short-term bills
payable of the subsidiary that is using the bills payable facility are outstanding. Upon
maturity of the bills payable which generally ranges from three to six months, the cash is
available for use by the Group. |
F-13
Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
|
(e) |
|
Held-to-maturity investment securities |
|
|
The Group invests in short-term fixed income investments offered by banks and financial
institutions. These investments are classified as held-to-maturity and measured at
amortized cost in the consolidated balance sheets because the Company has the intent and
ability to hold these investments to maturity. All held-to-maturity investment securities
as at December 31, 2007 were denominated in RMB, and had maturity terms ranging from six to
twelve months and fixed interest rates ranging from 4.4% to 6.4% per annum. Given the short
duration of these investments, the carrying values of these short-term investments
approximate at their fair values. |
|
(f) |
|
Accounts receivable and bills receivable |
|
|
Accounts receivable are recorded at the invoiced amount and do not bear interest. The Group
maintains an allowance for doubtful accounts for estimated losses resulting from inability
of its customers to make required payments. The allowance for doubtful accounts is based on
a review of specifically identified accounts, aging data and historical write-off
experience. Judgments are made with respect to the collectibility of accounts receivable
based on historical experience, customer specific facts and current economic conditions.
Account balances are charged off against the allowance after all means of collection have
been exhausted and the potential for recovery is considered remote. Apart from those
disclosed in note 14(e), the Group does not have any off-balance-sheet credit exposure
related to its customers. |
|
|
|
To reduce the Groups credit risk, the Group has required certain customers to pay for the
sale of the Groups products by bills receivable. A bill receivable primarily represents a
short-term note receivable issued by a financial institution that entitles the Group to
receive the full face amount from the financial institution at maturity, which generally
ranges from 3 to 6 months from the date of issuance. Historically, the Group has not
experienced any collection losses on bills receivable and therefore no allowance for
doubtful accounts has been provided. |
|
|
Inventories are stated at the lower of cost or market value. Cost is determined using the
weighted average cost method. Costs of work-in-progress and finished goods comprise direct
materials, direct labor and related manufacturing overhead based on normal operating
capacity. |
|
|
Property, plant and equipment |
|
|
|
Property, plant, and equipment are stated at cost. Depreciation is provided over the
estimated useful lives of the assets, using the straight-line method. When items are
retired or otherwise
disposed of, income is charged or credited for the difference between net book value and
proceeds realized thereon. Ordinary maintenance and repairs are charged to expense as
incurred, and replacements and betterments are capitalized. The estimated useful lives of
property, plant and equipment are as follows: |
|
|
|
Building and leasehold improvements |
|
20 - 50 years |
Machinery and equipment |
|
3 - 10 years |
Motor vehicles
|
|
3 - 8 years |
Furniture, fixtures and office equipment |
|
3 - 5 years |
|
|
No depreciation expense is provided in respect of construction-in-progress. |
|
|
|
Depreciation of property, plant and equipment attributable to manufacturing activities is
capitalized as part of the cost of inventory, and expensed to cost of materials and
production when the inventory is sold.
|
F-14
Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
|
|
Goodwill and other intangible assets |
|
|
|
Goodwill represents the excess of the Companys acquisition cost over the fair value of the
net assets acquired. Goodwill is not amortized but instead is tested for impairment at
least annually. |
|
|
|
Intangible assets are amortized on a straight-line basis over the estimated useful lives of
the respective assets. The Groups intangible assets and their respective estimated useful
lives are as follows: |
|
|
|
Customer relationships |
|
4 - 11 years |
Developed technology |
|
10 - 16 years |
Product trademarks |
|
6 - 10 years |
Manufacturing and supply licenses
|
|
1 - 5 years |
|
|
Impairment of long-lived assets |
|
|
|
Long-lived assets including property, plant and equipment, and intangible assets are
reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the asset. If the carrying
amount of an asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the fair value
of the asset. Assets to be disposed of are reported at the lower of carrying amount or fair
value less costs to sell, and are no longer depreciated. |
|
|
|
Goodwill is tested annually for impairment, and is tested for impairment more frequently if
events and circumstances indicate that the asset might be impaired. This determination is
made at the reporting unit level and consists of two steps. The Group as a whole is
considered the reporting unit for purposes of goodwill impairment testing. The first step
of the impairment test involves comparing the fair value of the reporting unit with its
carrying amount, including goodwill. Second, if the carrying amount of a reporting unit
exceeds its fair value, an impairment loss is recognized for any excess of the carrying
amount of the reporting units goodwill over the implied fair value of that goodwill. The
implied fair value of goodwill is determined by allocating the fair value of the reporting
unit in a manner similar to a purchase price allocation. The residual fair value after this
allocation is the implied fair value of the reporting unit goodwill. The Group uses
its market capitalization based on the quoted market price of its ordinary shares in
determining the fair value of its reporting unit. For the years ended December 31, 2006,
2007 and 2008, management performed its annual impairment review of goodwill and concluded
that there was no impairment. |
|
|
A land use right in the PRC represents an exclusive right to occupy, use, develop, lease,
transfer a piece of land during the contractual term of the land use right. Land use rights
are usually paid in one lump sum at the date the right is granted. The prepayment usually
covers the entire duration period of the land use right. The lump sum advance payments are
capitalized as land use right assets and then charged to expenses on a straight-line basis
over the respective periods of the rights of 24-75 years. |
|
|
Income taxes are accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to temporary differences
between the financial statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. A valuation allowance is
provided to reduce the amount of deferred tax assets if it is considered more likely than not that
some portion or all of the deferred tax assets will not be realized. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or settled. |
F-15
Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
|
|
The effect on deferred tax assets and liabilities of a change in tax rates is recognized in
consolidated statements of income in the period that includes the enactment date. |
|
|
|
On January 1, 2007, the Company adopted the provisions of Financial Accounting Standards
Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes an
Interpretation of FASB Statement No. 109 (FIN 48). Under this Interpretation, management
determines whether it is more likely than not that a tax position will be sustained upon
examination, including resolution of any related appeals or litigation processes, based
solely on the technical merits of the position. In evaluating whether a tax position has
met the more-likely-than-not recognition threshold, it is presumed that the position will
be examined by the appropriate taxing authority that has full knowledge of all relevant
information. In addition, a tax position that meets the more-likely-than-not recognition
threshold is measured to determine the amount of benefit to recognize in the financial
statements. The tax position is measured at the largest amount of benefit that is greater
than 50 percent likely of being realized upon settlement. The tax positions are regularly
reevaluated based on the results of the examination of income tax filings, statute of
limitations expirations and changes in tax law that would either increase or decrease the
technical merits of a position relative to the more likely than not recognition threshold.
The Groups policy is to accrue interest and penalties related to unrecognized tax benefits
as a component of income tax expense. Upon adoption of FIN 48 on January 1, 2007,
management evaluated the Groups income tax position and reclassified RMB14,195 of
unrecognized tax benefits from current liabilities to non-current other liabilities. Prior
to the adoption of FIN 48, the Group recognized the effect of income tax positions only if
such positions were probable of being sustained. |
|
|
Sales of pharmaceutical products represent the invoiced value of products sold, net of
value added taxes (VAT). The Group recognizes revenue from the sale of products when the
following criteria are met: 1) persuasive evidence of an arrangement exits (sales
agreements and customer purchase orders are used to determine the existence of an
arrangement); 2) delivery of the product has occurred and risks and benefits of ownership
have been transferred, which is when the product is received by the customer at its or a
designated location in accordance with the sales terms; 3) the sales price is fixed or
determinable; and 4) collectibility is probable. The Groups sales agreements do not
provide the customer the right of return, unless the products are defective in which case
the Group allows for an exchange of products or return. For the periods presented,
defective product returns were immaterial. |
|
|
|
In the PRC, VAT at a general rate of 17% on invoice amount is collected on behalf of tax
authorities in respect of the sales of products and is not recorded as revenue. VAT
collected from customers, net of VAT paid for purchases, is recorded as a liability in the
consolidated balance sheets until it is paid to the authorities. |
|
|
|
Nanjing Simcere and Shanghai Simcere operate in special economic zones of the PRC and are
eligible to receive an annual refund of a portion of the VAT paid to local tax authorities.
The refund is included in other revenue in the consolidated statements of income, as it is
akin to a government operating subsidy, and is recognized as revenue upon receipt since the
refund amount is discretionary and the amount varies year to year based on the availability
of government funds as determined by the provincial tax bureau of the Jiangsu Province and
Shanghai Municipality. |
|
|
Government grants are recognized when there is reasonable assurance that the Group will
comply with the conditions attaching to them, and the grants are receivable. Grants that
compensate research and development expenses are recorded as a reduction to the related
research and development expenses. Grants that compensate the Group for the cost of
property, plant and equipment and land use rights are recorded as a reduction of the cost
of the related asset and are recognized over the useful life of the asset by way of reduced
depreciation expense or lease payment. |
F-16
Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
|
|
For the years ended December 31, 2006, 2007 and 2008, RMB2,183, RMB10,000, and RMB2,697
(US$395), respectively, have been recognized as a reduction of research and development
expenses. |
|
(m) |
|
Research and development |
|
|
Research and development costs are expensed as incurred. These expenses include the costs
of the Groups internal research and development activities and the costs of research and
development conducted by others on behalf of the Group, such as through third-party
collaboration arrangements. Research and development costs in connection with third-party
research and development collaboration arrangements prior to regulatory approval are
incurred as the research and development activities are performed. Once a regulatory
approval is obtained, subsequent milestone payments are recorded as intangible assets, less
accumulated amortization and, unless the assets are determined to have an indefinite life,
amortized over the remaining agreement terms or the expected product life cycle, whichever
is shorter. |
|
|
|
The costs of acquired technology know-how (drugs in a development stage) that are purchased
from others for a particular research and development project either singly, or as part of
a group of assets, or as part of a business combination, and that have no alternative
future uses (in other research and development projects or otherwise), are expensed as
research and development costs. Management has determined that for an acquired technology
know-how to have an alternative future use, it should be (a) reasonably expected that the
Group will use the technology in an alternative manner for an economic benefit and (b) the
Groups use of the technology is not contingent on further development subsequent to
acquisition (that is, it can be used in an alternative manner at the acquisition date).
None of the Groups acquired technology know-how during the periods presented was
determined to have an alternative future use at the acquisition date since technological
feasibility was not established and regulatory approval from the State Food and Drug
Administration of China (SFDA) was not obtained. Further subsequent development,
including additional clinical testing, was required to obtain the necessary regulatory
approval before the products could be launched onto the market for sale. |
|
|
Advertising costs are expensed as incurred and included in sales, marketing and
distribution expenses. Advertising costs for the years ended December 31, 2006, 2007 and
2008 amounted to RMB78,701, RMB31,016, and RMB41,816 (US$6,129), respectively. |
|
(o) |
|
Shipping and handling fees and costs |
|
|
Costs incurred by the Group for shipping and handling, including costs paid to third-party
transportation companies, to transport and deliver products to customers, are included in
sales, marketing and distribution expenses. Shipping and handling fees and costs for the
years ended December 31, 2006, 2007 and 2008 amounted to RMB13,819, RMB11,912 and RMB12,408
(US$1,819), respectively. |
|
(p) |
|
Retirement and other postretirement benefits |
|
|
Contributions to defined contribution retirement plans are charged to the consolidated
statements of income as and when the related employee service is provided. The Group does
not have any defined benefit retirement plans. |
|
|
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised
2004), Share-based Payment (SFAS No. 123R) beginning January 1, 2006. The Company
measures the cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award and recognize the cost as
expense on a straight-line basis over the requisite service period for the entire award in
the Companys consolidated statements of income. |
F-17
Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
|
(r) |
|
Commitments and contingencies |
|
|
In the normal course of business, the Group is subject to loss contingencies, such as legal
proceedings and claims arising out of its business, that cover a wide range of matters,
including, among others, government investigations, shareholder lawsuits, product and
environmental liability, and tax matters. In accordance with SFAS No. 5, Accounting for
Contingencies, the Group records accruals for such loss contingencies when it is probable
that a liability will be incurred and the amount of loss can be reasonably estimated.
Historically, the Group has experienced no product liability claims. |
|
|
In accordance with SFAS No.128, Computation of Earnings per Share (SFAS No. 128), basic
earnings per share is computed by dividing net income by the weighted average number of
ordinary shares outstanding during the period. Diluted earnings per share is computed by
dividing net income by the weighted average number of ordinary shares and dilute ordinary
equivalent shares outstanding during the period. Ordinary equivalent shares consist of the
ordinary shares issuable upon the exercise of outstanding share options calculated using
the treasury stock method. Ordinary equivalent shares in the diluted earnings per share
computation are excluded to the extent that their effect is anti-dilutive. As a result of
the Reorganization as described in note 1(c), for purposes of calculating basic earnings
per share for the year ended December 31, 2006, the weighted average number of shares used
in the calculation reflects the 69,000,000 ordinary shares issued to NGM and 31,000,000
ordinary shares issued to AAI in September 2006 as if these shares were issued as of March
28, 2006. |
|
|
The Group has no operating segments, as that term is defined by SFAS No. 131, Disclosure
About Segments of an Enterprise and Related Information. All of the Groups operations and
customers are located in the PRC. Consequently, no geographic information is presented. |
|
(u) |
|
Fair value measurement |
|
|
On January 1, 2008, the Group adopted the provisions of SFAS No. 157, Fair Value
Measurements (SFAS No. 157), for fair value measurements of financial assets and
financial liabilities and for fair value measurements of nonfinancial items that are
recognized or disclosed at fair value in the financial statements on a recurring basis.
SFAS No. 157 defines fair value as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market participants at the
measurement date. SFAS No. 157 establishes a framework for measuring fair value and expands
disclosures about fair value measurements (note 20). The initial adoption of SFAS No. 157
had no impact on the Groups financial position and results of operations. |
|
|
|
In October 2008, the FASB issued FASB Staff Position No. FAS No. 157-3, Determining the
Fair Value of a Financial Asset When the Market for That Asset is Not Active (FSP FAS
157-3) which was effective immediately. FSP FAS 157-3 clarifies the application of SFAS
No. 157 in cases where the market for a financial instrument is not active and provides an
example to illustrate key considerations in determining fair value in those circumstances.
Management has considered the guidance provided by FSP FAS 157-3 in its determination of
estimated fair values during 2008. |
|
|
|
FASB Staff Position No. FAS No. 157-2, Effective Date of FASB Statement No. 157, (FSP FAS
157-2) delays the effective date of SFAS No. 157 until fiscal years beginning after
November 15, 2008 for all nonfinancial assets and nonfinancial liabilities that are
recognized or disclosed at fair value in the financial statements on a nonrecurring basis.
In accordance with FSP FAS 157-2, the Company has not applied the provisions of SFAS No.
157 to the intangible assets acquired in business combinations during 2008 (note 7(a)) that
have been recognized or disclosed at fair value for the year ended December 31, 2008. On
January 1, 2009, the Company will be required to apply the provisions of SFAS No. 157 to
fair value measurements of nonfinancial assets and nonfinancial liabilities that are
recognized or disclosed at fair value in the financial statements on a nonrecurring basis.
Management does not expect the initial impact of adopting FSP FAS 157-2 will have a
material impact on the Groups consolidated financial statements. |
F-18
Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
|
|
In April 2009, the FASB issued FASB Staff Position No. FAS No. 157-4, Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly (FSP FAS 157-4). FSP FAS
157-4 relates to determining fair values when there is no active market or where the price
inputs being used represent distressed sales. It reaffirms what SFAS No. 157 states is the
objective of fair value measurementto reflect how much an asset would be sold for in an
orderly transaction (as opposed to a distressed or forced transaction) at the date of the
financial statements under current market conditions. Specifically, it reaffirms the need
to use judgment to ascertain if a formerly active market has become inactive and in
determining fair values when markets have become inactive. This guidance is effective for
interim and annual periods ending after June 15, 2009, but entities may adopt this guidance
earlier for the interim and annual periods ending after March 15, 2009. Management is
currently evaluating the impact that FSP FAS 157-4 will have on the consolidated financial
statements. |
|
(v) |
|
Recently issued accounting standards |
FASB Statement No. 141R (SFAS No. 141R)
|
|
In December 2007, the FASB issued SFAS No. 141R, Business Combination, which replaces FASB
Statement No. 141. SFAS No. 141R provides revised guidance on the recognition and
measurement of the consideration transferred, identifiable assets acquired, liabilities
assumed, noncontrolling interests and goodwill acquired in a business combination. SFAS
No. 141R also expands required disclosure surrounding the nature and financial effects of
business combinations. SFAS No. 141R applies prospectively to business combinations for
which the acquisition date is on or after January 1, 2009. The Group plans to adopt the
provisions of SFAS No. 141R on January 1, 2009. The adoption of SFAS No. 141R will impact
the accounting for business combinations completed by the Group on or after January 1,
2009. |
FASB Statement No. 160 (SFAS No. 160)
|
|
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements an Amendment of ARB No. 51. SFAS No. 160 establishes accounting and
reporting standards for the treatment of noncontrolling interests in a subsidiary.
Noncontrolling interests in a subsidiary will be reported as a component of equity in the
consolidated financial statements and any retained noncontrolling equity investment upon
deconsolidation of a subsidiary will initially be measured at fair value. SFAS No. 160 is
effective, on a prospective basis, for fiscal years beginning on or after December 15,
2008. However, presentation and disclosure requirements must be retrospectively applied to
comparative financial statements. The Group plans to adopt the provisions of SFAS No. 160
on January 1, 2009. The initial adoption of SFAS 160 is expected to only result in the
reclassification and presentation of minority interests as noncontrolling interests in the
Groups consolidated financial statements. |
Emerging Issues Task Force Issue No. 07-1 (EITF No. 07-1)
|
|
In December 2007, the FASB issued EITF No. 07-1, Accounting for Collaborative
Arrangements. EITF No. 07-1 provides guidance regarding financial statement presentation
and disclosure of collaborative arrangements, which includes arrangements entered into
regarding development and commercialization of products. It requires certain transactions
between collaborators to be recorded in the statements of income on either a gross or net
basis when certain characteristics exist in the collaborative relationship. EITF 07-1
became effective for the Group on January 1, 2009. The initial adoption of EITF 07-1 is not
expected to have an effect on the Groups financial position and results of operations.
However, the adoption of EITF 07-1 may have an effect on the presentation of collaborative
arrangements in the consolidated statements of income and could result in the reporting of
lower amounts of product revenues and research and development expenses. |
F-19
Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
FASB Staff Position No. FAS No. 142-3 (FSP FAS 142-3)
|
|
In April 2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of
Intangible Assets. FSP FAS 142-3 provides guidance with respect to estimating the useful
lives of recognized intangible assets acquired on or after the effective date and requires
additional disclosure related to the renewal or extension of the terms of recognized
intangible assets. FSP FAS 142-3 is effective for fiscal years and interim periods
beginning after December 15, 2008. Management does not expect the adoption of FSP FAS 142-3
to have a material impact on the Groups financial position and results of operations. |
3 |
|
Accounts and bills receivables, net |
|
|
|
Accounts and bills receivables, net are summarized as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2007 |
|
2008 |
|
2008 |
|
|
RMB |
|
RMB |
|
US$ |
Accounts receivable |
|
|
175,495 |
|
|
|
317,213 |
|
|
|
46,495 |
|
Less: allowance for doubtful accounts |
|
|
(7,709 |
) |
|
|
(8,069 |
) |
|
|
(1,183 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
167,786 |
|
|
|
309,144 |
|
|
|
45,312 |
|
Bills receivable, net |
|
|
320,588 |
|
|
|
439,853 |
|
|
|
64,471 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
488,374 |
|
|
|
748,997 |
|
|
|
109,783 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The movements of the allowance for doubtful accounts are as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
2006 |
|
2007 |
|
2008 |
|
2008 |
|
|
RMB |
|
RMB |
|
RMB |
|
US$ |
Balance at the beginning of the year |
|
|
5,556 |
|
|
|
6,834 |
|
|
|
7,709 |
|
|
|
1,130 |
|
Additions charged to bad debt
expense |
|
|
1,433 |
|
|
|
1,203 |
|
|
|
1,576 |
|
|
|
231 |
|
Additions related to acquisitions
of subsidiaries |
|
|
|
|
|
|
1,074 |
|
|
|
|
|
|
|
|
|
Write-off of accounts receivable
charged against the allowance |
|
|
(155 |
) |
|
|
(1,402 |
) |
|
|
(1,216 |
) |
|
|
(178 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the year |
|
|
6,834 |
|
|
|
7,709 |
|
|
|
8,069 |
|
|
|
1,183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As part of its ongoing control procedures, management monitors the creditworthiness of its
customers to which it grants credit terms in the normal course of business. Credit terms
are normally 30 to 90 days from the date of billing. The Group does not normally require
collateral or other security to support credit sales. |
|
|
|
Several subsidiaries of the Group transfer with recourse certain of its bills receivable to
third party financial institutions. Under this arrangement, control over the transferred
bills receivable is surrendered and the subsidiaries do not retain beneficial interests in
the transferred bills receivables. All of the transferred bills receivables were accounted
for as sales and derecognized upon transfer pursuant to the provisions of SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities. |
|
|
For the years ended December 31, 2006, 2007 and 2008, the Group received proceeds from the
sale of bills receivable amounting to RMB8,321, RMB51,720 and RMB274,183 (US$40,188),
respectively. In addition, the Group recorded discounts amounting to RMB56, RMB521 and
RMB2,993 (US$439) in respect of bills receivable sold for the years ended December 31,
2006, 2007 and 2008, respectively, which have been included in interest expense. |
F-20
Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
4 |
|
Inventories |
|
|
|
Inventories by major categories are summarized as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2007 |
|
2008 |
|
2008 |
|
|
RMB |
|
RMB |
|
US$ |
Raw materials |
|
|
15,548 |
|
|
|
14,537 |
|
|
|
2,131 |
|
Consumables and packaging materials |
|
|
10,445 |
|
|
|
12,914 |
|
|
|
1,893 |
|
Work-in-progress |
|
|
4,337 |
|
|
|
17,924 |
|
|
|
2,627 |
|
Finished goods |
|
|
34,911 |
|
|
|
50,573 |
|
|
|
7,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,241 |
|
|
|
95,948 |
|
|
|
14,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory write-downs amounting to RMB2,143, RMB3,213 and RMB3,000 (US$440) were recognized
in cost of materials and production in the consolidated statements of income during the
years ended December 31, 2006, 2007 and 2008, respectively. |
5 |
|
Property, plant and equipment, net |
|
|
|
Property, plant and equipment, net consist of the following: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2007 |
|
2008 |
|
2008 |
|
|
RMB |
|
RMB |
|
US$ |
|
Buildings and leasehold improvements |
|
|
253,354 |
|
|
|
326,120 |
|
|
|
47,800 |
|
Machinery and equipment |
|
|
110,987 |
|
|
|
165,958 |
|
|
|
24,325 |
|
Motor vehicles |
|
|
29,184 |
|
|
|
38,058 |
|
|
|
5,578 |
|
Furniture, fixtures and office equipment |
|
|
26,828 |
|
|
|
31,766 |
|
|
|
4,656 |
|
Construction-in-progress |
|
|
79,541 |
|
|
|
64,927 |
|
|
|
9,517 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
499,894 |
|
|
|
626,829 |
|
|
|
91,876 |
|
Less: accumulated depreciation and
amortization |
|
|
(125,836 |
) |
|
|
(163,770 |
) |
|
|
(24,004 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
374,058 |
|
|
|
463,059 |
|
|
|
67,872 |
|
Deposits for purchase of property,
plant and equipment |
|
|
3,579 |
|
|
|
15,791 |
|
|
|
2,315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
377,637 |
|
|
|
478,850 |
|
|
|
70,187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Group capitalizes interest cost as a component of the cost of construction in progress.
The following is a summary of interest cost incurred during the years ended December 31,
2006, 2007 and 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
2006 |
|
2007 |
|
2008 |
|
2008 |
|
|
RMB |
|
RMB |
|
RMB |
|
US$ |
Interest cost capitalized |
|
|
1,550 |
|
|
|
763 |
|
|
|
2,133 |
|
|
|
313 |
|
Interest cost charged to income |
|
|
10,705 |
|
|
|
6,346 |
|
|
|
4,693 |
|
|
|
688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest cost incurred |
|
|
12,255 |
|
|
|
7,109 |
|
|
|
6,826 |
|
|
|
1,001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-21
Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
|
|
Land use rights consist of the following items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2007 |
|
2008 |
|
2008 |
|
|
RMB |
|
RMB |
|
US$ |
Land use rights: |
|
|
|
|
|
|
|
|
|
|
|
|
non-current portion |
|
|
116,386 |
|
|
|
114,624 |
|
|
|
16,801 |
|
current portion |
|
|
2,473 |
|
|
|
2,472 |
|
|
|
362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total land use rights |
|
|
118,859 |
|
|
|
117,096 |
|
|
|
17,163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 |
|
Acquisitions, goodwill and intangible assets |
|
|
Acquisition of a 70% equity interest in Wuhu Zhong Ren |
|
|
|
On May 5, 2008, the Group completed the acquisition of 70% of the outstanding equity
interest in Wuhu Zhong Ren, a PRC company based in Wuhu, for cash consideration of
RMB65,090 (US$9,540). Wuhu Zhong Ren a PRC-based drug manufacturer specialized in the
production of a 5-FU sustained release anti-tumor implant, Sinofuan. Sinofuan is the only
sustained release anti-tumor implant approved by the State Food and Drug Administration.
The acquisition furthers the Groups growth strategy, enhances the offerings in the
anti-tumor drug market and creates synergies with Endu, the Groups anti-tumor drug. In
particular, it can achieve economies of scales through increased utilization of the Groups
existing distribution channels. The acquisition of Wuhu Zhong Ren was accounted for as a
business combination and the purchase price was allocated to the assets acquired and
liabilities assumed on the basis of their respective estimated fair values on the
acquisition date. The financial results of Wuhu Zhong Ren have been consolidated and
included in the Companys consolidated financial statements from May 1, 2008 onwards. |
|
|
|
The following table summarizes the purchase price allocation of the assets acquired and
liabilities assumed at the date of acquisition: |
|
|
|
|
|
|
|
Amount |
|
|
RMB |
Cash and cash equivalents |
|
|
1,869 |
|
Other current assets |
|
|
5,808 |
|
Deferred tax assets |
|
|
2,415 |
|
Property, plant and equipment |
|
|
6,985 |
|
Developed technology |
|
|
45,542 |
|
Manufacturing license |
|
|
763 |
|
Other non-current assets, primarily land use right |
|
|
154 |
|
Goodwill |
|
|
16,715 |
|
|
|
|
|
|
Total assets acquired |
|
|
80,251 |
|
Current liabilities |
|
|
(5,783 |
) |
Deferred tax liabilities |
|
|
(9,378 |
) |
|
|
|
|
|
Net assets acquired |
|
|
65,090 |
|
|
|
|
|
|
|
|
The estimated useful lives of the identifiable intangible assets acquired in the
acquisition of Wuhu Zhong Ren are 12 years for developed technology, and 1.1 years for
manufacturing license. The intangible assets acquired have a weighted-average useful life
of 11.8 years from the date of acquisition. Goodwill and the amortization of these
intangibles assets are not deductible for tax purposes. |
F-22
Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
|
|
Acquisition of an additional 10% equity interest in Shandong Simcere |
|
|
|
On June 13, 2007, upon receiving relevant regulatory approval, the Group completed its
acquisition of an additional 10% equity interest in Shandong Simcere for RMB27,064. The
Group accounted for this transaction as a step acquisition using the purchase method of
accounting. |
|
|
|
The following table summarizes the purchase price allocation of the assets acquired and
liabilities assumed at the date of acquisition: |
|
|
|
|
|
|
|
Amount |
|
|
RMB |
|
|
|
|
|
Cash and cash equivalents |
|
|
590 |
|
Other current assets |
|
|
2,011 |
|
Property, plant and equipment |
|
|
1,830 |
|
Developed technology |
|
|
17,358 |
|
Manufacturing license |
|
|
104 |
|
Customer relationship |
|
|
1,254 |
|
Other non-current assets, primarily land use right |
|
|
1,569 |
|
Goodwill |
|
|
10,576 |
|
|
|
|
|
|
Total assets acquired |
|
|
35,292 |
|
|
|
|
|
|
Current liabilities |
|
|
(4,527 |
) |
Deferred tax liabilities |
|
|
(3,701 |
) |
|
|
|
|
|
|
|
|
|
|
Net assets acquired |
|
|
27,064 |
|
|
|
|
|
|
|
|
The estimated useful lives of the identifiable intangible assets acquired in the
acquisition of the additional 10% interest in Shandong Simcere are 5.6 years for customer
relationship, 15 years for the developed technology, and 3.8 years for manufacturing
license. The intangible assets acquired have a weighted-average useful life of 14.3 years
from the date of acquisition. Goodwill and the amortization of these intangible assets are
not deductible for tax purposes. |
|
|
|
Acquisition of 51% equity interest of Boda |
|
|
|
On October 18, 2007, the Group completed its acquisition of 51% of the outstanding equity
interest in Boda, a PRC based company that manufactures and sells pharmaceutical products
in the PRC, for RMB123,061. Boda is the manufacturer of injectable stroke management
medication, Yidasheng, the edaravone injection. Yidasheng is the only other edaravone
injection currently available in the PRC other than Bicun, the Groups product. The
acquisition of Boda helps the Group capture the majority share of the edaravone injection
market in the PRC and will create synergies with Bicun and the Groups other existing
products. RMB114,738 of the consideration was paid in 2007 with the remaining balance paid
in 2008. The acquisition of Boda was accounted for as a business combination and the
purchase price was allocated to the assets acquired and liabilities assumed on the basis of
their respective estimated fair values on the acquisition date. The financial results of
Boda have been consolidated and included in the Companys consolidated financial statements
from October 1, 2007 onwards. |
|
|
|
The acquisition of the 51% equity interest in Boda resulted in the recognition of goodwill
of RMB46,105 and intangible assets of RMB76,031. Goodwill and the amortization of these
intangible assets are not deductible for tax purposes. The following table summarizes the
purchase price allocation of the assets acquired and liabilities assumed at the date of
acquisition:
|
F-23
Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
|
|
|
|
|
|
|
Amount |
|
|
RMB |
|
|
|
|
|
Cash and cash equivalents |
|
|
6,632 |
|
Other current assets |
|
|
17,937 |
|
Property, plant and equipment |
|
|
27,349 |
|
Developed technology |
|
|
59,981 |
|
Manufacturing license |
|
|
719 |
|
Customer relationship |
|
|
15,331 |
|
Other non-current assets, primarily land use right |
|
|
7,711 |
|
Goodwill |
|
|
46,105 |
|
|
|
|
|
|
Total assets acquired |
|
|
181,765 |
|
|
|
|
|
|
Current liabilities |
|
|
(37,540 |
) |
Deferred tax liabilities |
|
|
(21,164 |
) |
|
|
|
|
|
|
|
|
|
|
Net assets acquired |
|
|
123,061 |
|
|
|
|
|
|
|
|
The estimated useful lives of the identifiable intangible assets acquired in the
acquisition of Boda are 5 years for customer relationship, 12 years for developed
technology, and 2.7 years for manufacturing license. The intangible assets acquired have a
weighted-average useful life of 10.5 years from the date of acquisition. |
|
|
|
Unaudited proforma financial information |
|
|
|
The following unaudited pro forma financial information represents the results of
operations of the Group as if the acquisition of Boda had occurred as of the beginning of
2006 and 2007. The unaudited pro forma financial information is not necessarily indicative
of what the Companys consolidated results of operations actually would have been had it
completed the acquisition at the beginning of 2006 and 2007. In addition, the unaudited pro
forma financial information does not attempt to project the future results of operations of
the combined entity. |
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
2006 |
|
2007 |
|
|
RMB |
|
RMB |
|
|
(unaudited) |
|
(unaudited) |
|
|
|
|
|
|
|
|
|
Product revenues |
|
|
983,910 |
|
|
|
1,414,439 |
|
Income from operations |
|
|
179,014 |
|
|
|
272,833 |
|
Net income |
|
|
163,695 |
|
|
|
299,054 |
|
Earnings per share |
|
|
|
|
|
|
|
|
Basic |
|
|
1.77 |
|
|
|
2.54 |
|
Diluted |
|
|
1.77 |
|
|
|
2.46 |
|
|
|
Acquisition of a 100% equity interest in Master Luck |
|
|
|
On November 21, 2007, the Group acquired 100% of the outstanding ordinary shares of Master
Luck, an investment holding company which owns 85.71% of the outstanding equity interest in
Tung Chit, a PRC company based in Nanjing that manufactures and sells pharmaceutical
products in the PRC, for cash consideration of RMB32,927. Tung Chit is the manufacturer of
nedaplatin injection, a chemotherapy pharmaceutical that is marketed under the brand name
Jiebaishu. This acquisition further complements the Groups current portfolio of products and will create
synergies with the Groups existing antineoplastic pharmaceuticals. The acquisition of
Master Luck was accounted for by the Group under the purchase method. |
|
|
|
The following table summarizes the purchase price allocation of the assets acquired and
liabilities assumed:
|
F-24
Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
|
|
|
|
|
|
|
Amount |
|
|
RMB |
|
|
|
|
|
Cash and cash equivalents |
|
|
2,701 |
|
Other current assets |
|
|
4,122 |
|
Property, plant and equipment |
|
|
14,119 |
|
Developed technology |
|
|
5,691 |
|
Manufacturing license |
|
|
1,363 |
|
Customer relationship |
|
|
1,089 |
|
Other non-current assets, primarily land use right |
|
|
10,369 |
|
Goodwill |
|
|
8,230 |
|
|
|
|
|
|
Total assets acquired |
|
|
47,684 |
|
|
|
|
|
|
Current liabilities |
|
|
(12,798 |
) |
Deferred tax liabilities |
|
|
(1,959 |
) |
|
|
|
|
|
|
|
|
|
|
Net assets acquired |
|
|
32,927 |
|
|
|
|
|
|
|
|
The estimated useful lives of the identifiable intangible assets acquired in the
acquisition of Tung Chit are 4 years for customer relationship, 10 years for developed
technology, and 2 years for manufacturing license. Goodwill and the amortization of these
intangibles assets are not deductible for tax purposes. |
|
|
In July 2006, the Group acquired 10%, 15.96%, 5%, 20% and 22.23% of the equity interest in
Shanghai Simcere, Sichuan Simcere, Qitian Simcere, Simcere Research and Jiangsu Simcere,
respectively. In September 2006, the Group also completed its acquisition of 80% of the
equity interest in Shandong Simcere. |
|
|
|
The acquisition of Shandong Simcere was accounted for as a purchase business combination.
The results of operations of Shandong Simcere have been consolidated and included in the
consolidated statements of income from September 30, 2006 onwards. The following table
summarizes the purchase price allocation of the assets acquired and liabilities assumed at
the date of acquisition: |
|
|
|
|
|
|
|
Amount |
|
|
RMB |
|
|
|
|
|
Cash and cash equivalents |
|
|
7,048 |
|
Other current assets |
|
|
7,669 |
|
Property, plant and equipment |
|
|
15,228 |
|
Developed technology |
|
|
142,684 |
|
Manufacturing license |
|
|
577 |
|
Other non-current assets, primarily land use right |
|
|
12,170 |
|
Goodwill |
|
|
86,453 |
|
|
|
|
|
|
Total assets acquired |
|
|
271,829 |
|
|
|
|
|
|
Current liabilities |
|
|
(51,638 |
) |
Deferred tax liabilities |
|
|
(17,922 |
) |
Minority share of Shandong Simceres equity deficit |
|
|
(5,670 |
) |
|
|
|
|
|
Net assets acquired |
|
|
196,599 |
|
|
|
|
|
|
F-25
Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
|
|
The estimated useful economic lives of the identifiable intangible assets acquired in the
acquisition of Shandong Simcere are 16 years for developed technology right, and 4.8 years
for manufacturing license. Goodwill recognized in this transaction amounted to RMB86,453. |
|
|
|
Unaudited proforma financial information |
|
|
|
The following unaudited pro forma financial information represents the results of
operations of the Group as if the acquisition of Shandong Simcere had occurred as of the
beginning of 2006. The unaudited pro forma financial information is not necessarily
indicative of what the Companys consolidated results of operations actually would have
been had it completed the acquisition at the beginning of 2006. In addition, the unaudited
pro forma financial information does not attempt to project the future results of
operations of the combined entity. |
|
|
|
|
|
|
|
Year ended December 31, |
|
|
2006 |
|
|
RMB |
|
|
(unaudited) |
|
|
|
|
|
Product revenues |
|
|
953,343 |
|
Income from operations |
|
|
178,813 |
|
Net income |
|
|
164,982 |
|
Earnings per share |
|
|
|
|
Basic |
|
|
1.78 |
|
Diluted |
|
|
1.78 |
|
F-26
Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
|
|
The Groups intangible assets related to the Groups acquisitions consisted of the
following: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
|
|
Gross |
|
|
|
|
|
|
Amortization |
|
carrying |
|
Accumulated |
|
Net carrying |
|
|
period |
|
amount |
|
amortization |
|
amount |
|
|
Years |
|
RMB |
|
RMB |
|
RMB |
Customer relationships |
|
4-11 |
|
|
37,418 |
|
|
|
(7,476 |
) |
|
|
29,942 |
|
Developed technology |
|
10-16 |
|
|
232,302 |
|
|
|
(16,202 |
) |
|
|
216,100 |
|
Product trademarks |
|
6-10 |
|
|
4,303 |
|
|
|
(1,606 |
) |
|
|
2,697 |
|
Manufacturing and
supply licenses |
|
2-5 |
|
|
3,581 |
|
|
|
(1,099 |
) |
|
|
2,482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
277,604 |
|
|
|
(26,383 |
) |
|
|
251,221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
|
Gross |
|
|
|
|
|
|
Amortization |
|
carrying |
|
Accumulated |
|
Net carrying |
|
|
period |
|
amount |
|
amortization |
|
amount |
|
|
Years |
|
RMB |
|
RMB |
|
RMB |
Customer relationships |
|
4-11 |
|
|
37,418 |
|
|
|
(12,900 |
) |
|
|
24,518 |
|
Developed technology |
|
10-16 |
|
|
284,995 |
|
|
|
(38,174 |
) |
|
|
246,821 |
|
Product trademarks |
|
6-10 |
|
|
4,303 |
|
|
|
(2,077 |
) |
|
|
2,226 |
|
Manufacturing and
supply licenses |
|
1-5 |
|
|
4,344 |
|
|
|
(2,665 |
) |
|
|
1,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
331,060 |
|
|
|
(55,816 |
) |
|
|
275,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total US$ |
|
|
|
|
48,525 |
|
|
|
(8,181 |
) |
|
|
40,344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate amortization expenses for intangible assets for the years ended December 31,
2006, 2007 and 2008, were RMB4,812, RMB15,084 and RMB29,433 (US$4,314), respectively.
Amortization expense of customer relationships is recorded in sales, marketing and
distribution expenses and amortization expense for developed technology, product trademarks
and manufacturing and supply licenses is recorded in cost of materials and production. As
of December 31, 2008, the estimated amortization expense for the years ended December 31 is
as follows: |
|
|
|
|
|
|
|
RMB |
|
2009 |
|
|
28,052 |
|
2010 |
|
|
26,981 |
|
2011 |
|
|
26,596 |
|
2012 |
|
|
25,175 |
|
2013 |
|
|
22,091 |
|
F-27
Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
|
|
The changes in the carrying amount of goodwill for the years ended December 31, 2007 and
2008 are as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
2007 |
|
2008 |
|
2008 |
|
|
RMB |
|
RMB |
|
US$ |
Balance at the beginning of the year |
|
|
100,634 |
|
|
|
161,496 |
|
|
|
23,671 |
|
Acquisition of Shandong Simcere |
|
|
10,576 |
|
|
|
|
|
|
|
|
|
Minority interest share in the post
acquisition income of Shandong
Simcere |
|
|
(4,049 |
) |
|
|
|
|
|
|
|
|
Acquisition of Boda |
|
|
46,105 |
|
|
|
|
|
|
|
|
|
Acquisition of Tung Chit |
|
|
8,230 |
|
|
|
|
|
|
|
|
|
Acquisition of Wuhu Zhong Ren |
|
|
|
|
|
|
16,715 |
|
|
|
2,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of year |
|
|
161,496 |
|
|
|
178,211 |
|
|
|
26,121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, short-term borrowings included an aggregate of RMB19,000 unsecured
and interest-free loans from a local district government in Shandong, PRC, which the Group
obtained for working capital needs and a RMB10,000 loan from a third party, that was
non-interest bearing and unsecured. During the year ended December 31, 2008, the Group
repaid RMB10,000 (US$1,466) and RMB3,000 (US$440) of the third party loan and government
loans, respectively, and renewed the remaining RMB16,000 (US$2,345) of the government loan
into two borrowings. RMB3,000 (US$440) of the government loan is an unsecured interest free
short-term borrowing which is repayable on demand and a RMB13,000 (US$1,906) secured
long-term loan (note 10) of which RMB3,000 (US$440) is payable in 2009. The weighted
average effective interest rates on short-term borrowings outstanding as of December 31,
2007 and 2008, were 5.97% and nil per annum, respectively. |
|
|
|
As of December 31, 2007 and 2008, the Group had unutilized banking facilities of RMB390,000
and RMB50,000 (US$7,329), respectively, with various banks available to be drawn upon. |
|
|
As of December 31, 2007 and 2008, long-term debt include a floating interest loan of
RMB52,000 (US$7,622) which is repayable over an 11-year period from 2010 to 2020. Interest
is payable on a quarterly basis. The loan was obtained from a local district government in
Jilin, PRC, to finance the construction of a new production plant in a city in Jilin
Province. The 2008 balance also includes RMB10,000 (US$1,466) representing the long-term
loan portion (due on 2010 and 2011) of the RMB13,000 (US$1,906) secured long term loan from
a local district government in Shandong, PRC (note 8) which bears a fixed interest rate at
5.40% per annum. The weighted-average effective interest rates on long-term loans
outstanding as of December 31, 2007 and 2008 were 7.03% and 6.90% per annum, respectively.
The loan agreements do not require the Group to comply with any financial covenants. |
|
|
|
Principal repayments required on the long-term loan outstanding as of December 31, 2008,
are RMB3,000 in 2009, RMB8,000 in 2010, RMB11,700 in 2011, RMB4,700 in 2012 and, RMB4,700
in 2013 and RMB32,900 thereafter. |
F-28
Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
|
|
Cayman Islands and British Virgin Islands |
|
|
|
Under the current laws of the Cayman Islands and British Virgin Islands, the Company and
SGG are not subject to tax on their income or capital gains. In addition, upon any payment
or dividend paid by these companies, no Cayman Islands or British Virgin Islands
withholding tax is imposed. |
|
|
|
Peoples Republic of China |
|
|
|
The Companys subsidiaries incorporated in the PRC file separate income tax returns. |
|
|
|
Prior to January 1, 2008, the PRCs statutory income tax rate was 33%, consisting of 30%
state tax and 3% local tax. Hainan Simcere, Shandong Simcere, Nanjing Simcere and Tung
Chit, being production-oriented foreign investment enterprises, were each entitled to a tax
holiday of a two-year 100% exemption followed by a three-year 50% exemption commencing from
the first profit-making year after offsetting accumulated tax losses (2+3 tax holiday).
In addition, Hainan Simcere and Shandong Simcere, being located in one of the Special
Economic Zones and Economic and Technological Development Zones, respectively, were
entitled to a reduced income tax rate of 15%. Further, Shanghai Simcere was located in
KangQiao Industrial Area and was granted a reduced income tax rate of 15% for 2007 by the
local taxing authority. |
|
|
|
On March 16, 2007, the National Peoples Congress passed the Corporate Income Tax Law of
the PRC (new CIT law), which unified the income tax rate to 25% for all enterprises. The
new CIT law was effective as of January 1, 2008. The new CIT law provides a five-year
transition period from its effective date for those enterprises which were established
before March 16, 2007 and which were entitled to a preferential lower tax rate under the
then effective tax laws and regulations, as well as grandfathering tax holidays. The
transitional tax rates are 18%, 20%, 22%, 24% and 25% for 2008, 2009, 2010, 2011 and 2012
onwards, respectively. In addition, entities that were previously entitled to the 2+3 tax
holidays under the then effective tax laws and regulations shall continue to enjoy the tax
holidays until they expire. Further, entities that qualify as Advanced and New Technology
Enterprises (ANTEs) under the new CIT law are entitled to a preferential income tax rate
of 15%. However, the new recognition criteria and procedures for ANTEs under the new CIT
law were not issued until April 14, 2008. |
|
|
|
In December 2008, Shandong Simcere and Boda were recognized by the Chinese government as
ANTEs under the new CIT law and entitled to the preferential income tax rate of 15% from
2008 to 2010. Under the new CIT law, where the transitional preferential income tax
policies and the preferential policies prescribed under the new CIT law and its
implementation rules overlap, an enterprise shall choose to carry out the most preferential
policy, but shall not enjoy multiple preferential policies. Shandong Simcere has chosen to
enjoy the 2+3 tax holiday grandfathering treatment until its expiry in 2011. |
|
|
|
Based on the above, the Companys major PRC subsidiaries are subject to the following tax
rates: |
|
|
|
Jiangsu Simcere and Simcere Research are subject to income tax at 33% in
2006 and 2007, and at 25% from 2008 onwards. |
|
|
|
|
Hainan Simcere commenced its 2+3 tax holiday in 2006 and is subject to
income tax at 0%, 0%, 9%, 10%, 11%, 24% and 25% for 2006, 2007, 2008, 2009, 2010, 2011
and 2012 onwards, respectively. |
|
|
|
|
Shandong Simcere commenced its 2+3 tax holiday in 2007 and is subject to
income tax at 0%, 0%, 10%, 11%, 12% and 25% for 2007, 2008, 2009, 2010, 2011 and 2012
onwards, respectively. |
|
|
|
|
Nanjing Simcere and Tung Chit commenced their 2+3 tax holidays in 2006 and
are subject to income tax at 0% for 2006 and 2007, 12.5% from 2008 to 2010 and 25%
from 2011 onwards. |
F-29
Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
|
|
|
Shanghai Simcere is subject to income tax at 33%, 15% and 25% for 2006,
2007 and 2008 onwards, respectively. |
|
|
|
|
Boda is subject to income tax at 33% in 2006 and 2007. As of December 31,
2007, the applicable tax rate used in measuring its deferred tax assets and
liabilities was 25% since Boda had not been recognized as an ANTE under the new CIT
law. Upon the receipt of the approved ANTE status in December 2008, Boda is entitled
to the preferential income tax rate of 15% retroactively from January 1, 2008 to
December 31, 2010. Thereafter, the income tax rate is 25%. |
|
|
|
|
Simcere Zhong Ren is subject to income tax at 25% from 2008 onwards. |
|
|
The new CIT law also imposes a withholding tax at 10%, unless reduced by a tax treaty or
agreement, for dividends distributed by a PRC-resident enterprise to its immediate holding
company outside China for earnings generated beginning on January 1, 2008 and undistributed
earnings generated prior to January 1, 2008 are exempt from such withholding tax. As of
December 31, 2008, the Group has not provided for income taxes on accumulated earnings
generated by its PRC subsidiaries for 2008 since the Group planned to indefinitely reinvest
these earnings in the PRC. It is not practicable to estimate the amount of additional
taxes that might be payable on such undistributed earnings. |
F-30
Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
|
|
The components of earnings (losses) before income taxes and minority interests are as
follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
2006 |
|
2007 |
|
2008 |
|
2008 |
|
|
RMB |
|
RMB |
|
RMB |
|
US$ |
Cayman Islands |
|
|
(3,454 |
) |
|
|
(409 |
) |
|
|
(30,377 |
) |
|
|
(4,452 |
) |
British Virgin Islands |
|
|
22,819 |
|
|
|
(7,795 |
) |
|
|
(1,080 |
) |
|
|
(158 |
) |
PRC |
|
|
157,508 |
|
|
|
335,277 |
|
|
|
459,028 |
|
|
|
67,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earnings before
income taxes and
minority interests |
|
|
176,873 |
|
|
|
327,073 |
|
|
|
427,571 |
|
|
|
62,671 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) consists of the following: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
2006 |
|
2007 |
|
2008 |
|
2008 |
|
|
RMB |
|
RMB |
|
RMB |
|
US$ |
PRC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
9,076 |
|
|
|
2,518 |
|
|
|
52,055 |
|
|
|
7,630 |
|
Deferred |
|
|
(2,124 |
) |
|
|
11,009 |
|
|
|
(2,770 |
) |
|
|
(406 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
6,952 |
|
|
|
13,527 |
|
|
|
49,285 |
|
|
|
7,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b) |
|
Income tax contingencies |
|
|
The following table summarizes the movement of unrecognized tax benefits: |
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2007 |
|
2008 |
|
|
RMB |
|
RMB |
Balance at January 1 |
|
|
14,195 |
|
|
|
19,928 |
|
Increase related to current year tax positions |
|
|
5,733 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31 |
|
|
19,928 |
|
|
|
19,928 |
|
|
|
|
|
|
|
|
|
|
Balance at December 31 US$ |
|
|
|
|
|
|
2,921 |
|
|
|
|
|
|
|
|
|
|
|
|
The balance of total unrecognized tax benefits as of each year end, if recognized, would
affect the Groups effective income tax rate. No interest and penalties were provided as of
January 1, 2007, and for the year ended December 31, 2007. During 2008, the Group has
accrued RMB601 (US$88) of interest related to unrecognized tax benefits. Management does
not expect that the total amount of unrecognized tax benefits as of December 31, 2008 will
significantly change over the next twelve months. |
|
|
|
According to the PRC Tax Administration and Collection Law, the statute of limitations is
three years if the underpayment of taxes is due to computational errors made by the
taxpayer or the withholding agent. The statute of limitations is extended to five years
under special circumstances where the underpayment of taxes is more than RMB100 (US$15). In
the case of transfer pricing issues, the statute of limitations is ten years. There is no
statute of limitation in the case of tax evasion. Accordingly, the PRC tax returns for the
Companys PRC subsidiaries are open to examination by the PRC state and local authorities
for the tax years beginning in 2003. |
F-31
Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
|
(c) |
|
Reconciliation of expected income tax to actual income tax expense |
|
|
The actual income tax expense reported in the consolidated statements of income differs
from the amounts computed by applying the PRC statutory income tax rate to earnings before
income taxes and minority interests as a result of the following: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
Note |
|
2006 |
|
2007 |
|
2008 |
|
2008 |
|
|
|
|
|
|
RMB |
|
RMB |
|
RMB |
|
US$ |
PRC statutory tax rate |
|
|
|
|
|
|
33 |
% |
|
|
33 |
% |
|
|
25 |
% |
|
|
25 |
% |
Computed expected income tax expense |
|
|
|
|
|
|
58,367 |
|
|
|
107,935 |
|
|
|
106,893 |
|
|
|
15,668 |
|
Non-deductible expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
|
|
|
|
7,228 |
|
|
|
958 |
|
|
|
|
|
|
|
|
|
Advertising and promotion expense |
|
|
|
|
|
|
11,322 |
|
|
|
2,862 |
|
|
|
1,915 |
|
|
|
281 |
|
Research and development expense |
|
|
|
|
|
|
|
|
|
|
2,871 |
|
|
|
1,509 |
|
|
|
221 |
|
Others |
|
|
|
|
|
|
1,207 |
|
|
|
1,026 |
|
|
|
4,224 |
|
|
|
619 |
|
Non-taxable income |
|
|
|
|
|
|
(62 |
) |
|
|
(1,735 |
) |
|
|
(252 |
) |
|
|
(37 |
) |
Tax rate differential |
|
|
(a |
) |
|
|
(31,116 |
) |
|
|
(70,782 |
) |
|
|
(23,980 |
) |
|
|
(3,515 |
) |
Effect of tax holiday |
|
|
(b |
) |
|
|
(38,775 |
) |
|
|
(63,539 |
) |
|
|
(56,407 |
) |
|
|
(8,267 |
) |
Non-PRC entities not subject to income tax |
|
|
|
|
|
|
(6,390 |
) |
|
|
2,707 |
|
|
|
7,864 |
|
|
|
1,152 |
|
Change in valuation allowance |
|
|
|
|
|
|
4,161 |
|
|
|
15,619 |
|
|
|
13,111 |
|
|
|
1,922 |
|
Tax rebate |
|
|
|
|
|
|
(769 |
) |
|
|
(4,888 |
) |
|
|
|
|
|
|
|
|
Tax credit for purchase of domestic
equipment |
|
|
|
|
|
|
|
|
|
|
(2,124 |
) |
|
|
(4,255 |
) |
|
|
(624 |
) |
Tax benefit resulting from intercompany
transfers of intellectual properties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(188 |
) |
|
|
(28 |
) |
Change in enacted tax rates or tax status |
|
|
|
|
|
|
1,779 |
|
|
|
22,617 |
|
|
|
(1,149 |
) |
|
|
(168 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual income tax expense |
|
|
|
|
|
|
6,952 |
|
|
|
13,527 |
|
|
|
49,285 |
|
|
|
7,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes: |
|
(a) |
|
The provision for income tax for the Companys PRC subsidiaries is based on a
statutory rate of 33% in 2006 and 2007 and 25% in 2008 of the assessable income of the
Companys PRC subsidiaries as determined in accordance with the relevant income tax
rules and regulations of the PRC, except for certain subsidiaries which are subject to
tax holidays or taxed at preferential rates as discussed above. |
|
(b) |
|
The effect of tax holiday increased the Groups net income by RMB38,775,
RMB62,916 and RMB55,675 (US$8,160) for the years ended December 31, 2006, 2007 and
2008, respectively. Consequently, the effect of the tax holiday also increased the
Groups basic and diluted earnings per share for such periods as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
2006 |
|
2007 |
|
2008 |
|
2008 |
|
|
RMB |
|
RMB |
|
RMB |
|
US$ |
Increase in earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
0.42 |
|
|
|
0.54 |
|
|
|
0.45 |
|
|
|
0.07 |
|
Diluted |
|
|
0.42 |
|
|
|
0.52 |
|
|
|
0.45 |
|
|
|
0.07 |
|
F-32
Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
|
|
The tax effects of the Groups temporary differences that give rise to significant portions
of the deferred tax asset and liabilities are as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2007 |
|
2008 |
|
2008 |
|
|
RMB |
|
RMB |
|
US$ |
Deferred tax assets |
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment |
|
|
3,131 |
|
|
|
4,356 |
|
|
|
638 |
|
Accounts receivable |
|
|
2,639 |
|
|
|
2,168 |
|
|
|
318 |
|
Inventories |
|
|
680 |
|
|
|
467 |
|
|
|
68 |
|
Research and development |
|
|
3,414 |
|
|
|
2,797 |
|
|
|
410 |
|
Tax loss carryforwards |
|
|
26,272 |
|
|
|
25,768 |
|
|
|
3,777 |
|
Others |
|
|
|
|
|
|
65 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets |
|
|
36,136 |
|
|
|
35,621 |
|
|
|
5,221 |
|
Valuation allowance |
|
|
(26,085 |
) |
|
|
(24,481 |
) |
|
|
(3,588 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets |
|
|
10,051 |
|
|
|
11,140 |
|
|
|
1,633 |
|
Deferred tax liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets |
|
|
(61,491 |
) |
|
|
(65,403 |
) |
|
|
(9,586 |
) |
Property, plant and equipment |
|
|
(199 |
) |
|
|
(534 |
) |
|
|
(78 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(61,690 |
) |
|
|
(65,937 |
) |
|
|
(9,664 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities |
|
|
(51,639 |
) |
|
|
(54,797 |
) |
|
|
(8,031 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In assessing the realizability of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary differences become
deductible and tax loss carryforwards are utilized. Management considers the scheduled
reversal of deferred tax liabilities (including the impact of available carryforward
periods), projected future taxable income, and tax planning strategies in making this
assessment. |
|
|
|
The increase/(decrease) in the valuation allowance during the years ended December 31,
2006, 2007 and 2008 were RMB4,161, RMB15,619 and (RMB1,604) ((US$235)), respectively. As of
December 31, 2007, full valuation allowances were provided against the deferred tax assets
of Jiangsu Simcere and Simcere Research, which were at cumulative loss positions. The
increase in the valuation allowance for 2007 was mainly due to the increase in the deferred
tax assets relating to tax loss carryforwards of these subsidiaries. The net change in the
total valuation allowance in 2008 was primarily due to an increase in valuation allowance
to fully offset the additional deferred tax assets in Jiangsu Simcere, which was offset by
a reduction of valuation allowance in Simcere Research, of which RMB14,715 was utilized by
the significant earnings in 2008 arising from the intercompany sale transactions that had
been eliminated upon consolidation and such tax benefit is recognized in consolidation as
the transferred intellectual properties are amortized. |
|
|
|
The amount of the deferred tax assets considered realizable, however, could be reduced in
the near term if estimates of future taxable income during the carryforward period are
reduced. |
|
|
|
Tax loss carryforwards of the Groups PRC subsidiaries amounted to RMB104,846 as of
December 31, 2008, of which RMB89, RMB778, RMB63,803 and RMB40,176 will expire if unused by
December 31, 2010, 2011, 2012 and 2013, respectively. |
|
|
|
11 |
|
Other payables and accrued liabilities |
F-33
Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
|
|
Other payables and accrued liabilities consist of the following: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2007 |
|
2008 |
|
2008 |
|
|
RMB |
|
RMB |
|
US$ |
Accrued traveling and conference expenses |
|
|
85,452 |
|
|
|
90,760 |
|
|
|
13,303 |
|
VAT payable |
|
|
31,062 |
|
|
|
36,562 |
|
|
|
5,359 |
|
Accrued construction costs for property,
plant and equipment |
|
|
33,276 |
|
|
|
29,606 |
|
|
|
4,339 |
|
Security deposits from employees and
agents (note (a)) |
|
|
16,067 |
|
|
|
21,714 |
|
|
|
3,183 |
|
Government grants (note (b)) |
|
|
3,777 |
|
|
|
12,753 |
|
|
|
1,869 |
|
Customer receipts in advance |
|
|
10,685 |
|
|
|
11,239 |
|
|
|
1,647 |
|
Payable for acquisitions (note (c)) |
|
|
18,153 |
|
|
|
9,830 |
|
|
|
1,441 |
|
Accrued research and development expenses |
|
|
11,839 |
|
|
|
6,929 |
|
|
|
1,016 |
|
Payable for acquisition of property,
plant and equipment and land use right |
|
|
6,515 |
|
|
|
3,284 |
|
|
|
481 |
|
Accrued legal and professional fees |
|
|
5,437 |
|
|
|
1,555 |
|
|
|
228 |
|
Other accrued liabilities (note (d)) |
|
|
33,514 |
|
|
|
27,611 |
|
|
|
4,047 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
255,777 |
|
|
|
251,843 |
|
|
|
36,913 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes: |
|
(a) |
|
The amounts represent refundable cash security deposits received from certain employees and
from third party marketing agents. |
|
(b) |
|
The amounts represent the deferred portion of the conditional and refundable government
grants received but not recognized since the conditions are subject to future events. |
|
(c) |
|
The outstanding balance related to the acquisition of 80% of Shandong Simcere will be paid
upon completion of the trial period of certain quality control procedures in relation to Endu,
which are procedural in nature. |
|
(d) |
|
Other accrued liabilities relate to accruals for purchase of technology know-how, selling
expenses, utilities expenses and other miscellaneous expenses. |
|
|
Under PRC rules and regulations, the Companys operating subsidiaries are required to
provide for certain statutory reserves. Details of the statutory reserves are set out as
follows: |
Statutory surplus reserve
|
|
According to the respective Articles of Association, the Companys operating subsidiaries
are required to transfer 10% of the net profit, as determined in accordance with PRC GAAP,
to a statutory surplus reserve until the reserve balance reaches 50% of the registered
capital of the
respective companies. The transfer to this reserve must be made before distribution of
dividends to shareholders can be made. |
|
|
|
The statutory surplus reserve can be used to make good previous years losses, if any, and
may be converted into share capital by the issue of new shares to shareholders in
proportion to their existing shareholdings or by increasing the par value of the shares
currently held by the shareholders, provided that the balance after such issue is not less
than 25% of the registered capital. |
Statutory public welfare fund
|
|
Effective from January 1, 2006, following the change of the Company Law of the PRC, the
Companys operating subsidiaries are no longer required to contribute to the statutory
public welfare fund and the balance of the fund carried over from 2005 has been transferred
to the statutory surplus reserve. |
F-34
Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
|
|
For the years ended December 31, 2006, 2007 and 2008, the Companys subsidiaries made
appropriation to these statutory reserve funds of RMB4,617, RMB45,450 and RMB38,614
(US$5,660), respectively. The accumulated balance of the statutory reserve funds maintained
at the Companys operating subsidiaries as of December 31, 2007 and 2008 were RMB95,317 and
RMB133,931 (US$19,631), respectively. |
|
|
|
13 |
|
Pension and other postretirement benefits |
|
|
Pursuant to the relevant PRC regulations, the Group is required to make contributions for
each employee at a rate of 20% on a standard salary base as determined by the local Social
Security Bureau, to a defined contribution retirement scheme organized by the local Social
Security Bureau in respect of the retirement benefits for the Groups employees in the PRC.
Contributions of RMB2,704, RMB5,149 and RMB7,062 (US$1,035) for the years ended December
31, 2006, 2007 and 2008, respectively, were charged to expense. The Group has no other
obligation to make payments in respect of retirement benefits of the employees. |
|
|
|
14 |
|
Commitments and contingencies |
|
(a) |
|
Operating lease commitments |
|
|
The Group leases certain laboratories, offices and warehouses under various operating lease
arrangements. The rental expense under the operating leases was approximately RMB819,
RMB1,812 and RMB3,304 (US$484) for the years ended December 31, 2006, 2007 and 2008,
respectively. In the normal course of business, leases that expire are renewed or replaced
by leases on other properties. As of December 31, 2008, the Group was obligated under
non-cancellable operating leases requiring future minimum rental payment as follows: |
|
|
|
|
|
|
|
December 31, |
|
|
2008 |
|
|
RMB |
2009 |
|
|
2,327 |
|
2010 |
|
|
470 |
|
2011 |
|
|
152 |
|
2012 |
|
|
3 |
|
2013 |
|
|
3 |
|
Thereafter |
|
|
37 |
|
|
|
|
|
|
|
|
|
2,992 |
|
|
|
|
|
|
|
(b) |
|
Capital and purchase commitments |
|
|
As of December 31, 2008, the Groups capital commitments for the construction projects and
purchase of machinery and equipment amounted to RMB19,578 (US$2,870). |
|
|
|
As of December 31, 2008, the Group had commitments of approximately RMB15,750 (US$2,309) to
purchase certain pharmaceutical products from third party suppliers in 2009. |
|
(c) |
|
Research and developments commitments |
|
|
As of December 31, 2008, the Group had funding commitments for co-operative research and
developments projects with third parties amounting to RMB13,159 (US$1,929) payable in 2009. |
F-35
Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
|
(d) |
|
Depositary receipt facility |
|
|
During the years ended December 31, 2007 and 2008, the Company received an incentive
payment of RMB 20,526 and RMB1,104 (US$162) respectively, which is recognized as other
non-operating income in the consolidated statements of income, from a bank in order to
provide that bank with the exclusive right to manage the Companys American Depositary
Receipt (ADR) program. Under the terms of the depositary receipt facility with the bank,
the Company has a contingent obligation to compensate the bank in the event the Company
terminates the ADR program or the number of ADRs outstanding declines by more than 50%. |
|
(e) |
|
Sales of bills receivable commitments |
|
|
As of December 31, 2007 and 2008, outstanding bills discounted with third party financial
institutions for which the Group has retained a recourse obligation amounting to RMB198 and
RMB103,965 (US$15,239), respectively. The fair value of the recourse obligation is based on
historical payment patterns and appropriate discount rate as applicable. The Group has not
historically experienced credit losses with respect to bills receivables sold with full
recourse and as such, no recourse liability was recognized as of December 31, 2007 and 2008
as the estimated fair value of the recourse obligation retained was immaterial. |
|
|
As the Company did not legally exist with outstanding share capital until the share
exchange as described in note 1(c), for the purposes of calculating basic earnings per
share for the years ended December 31 2006, the number of weighted average number of
ordinary shares used in the calculation reflects the 69,000,000 ordinary shares issued to
NGM and the 31,000,000 ordinary shares issued to AAI in September 2006 as if these shares
were issued as of March 28, 2006. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
2006 |
|
2007 |
|
2008 |
|
2008 |
|
|
RMB |
|
RMB |
|
RMB |
|
US$ |
Numerator for basic and diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
172,258 |
|
|
|
301,261 |
|
|
|
350,151 |
|
|
|
51,323 |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average number of ordinary shares
outstanding |
|
|
92,695,890 |
|
|
|
117,534,566 |
|
|
|
124,921,934 |
|
|
|
124,921,934 |
|
Effect of dilutive options |
|
|
|
|
|
|
4,132,941 |
|
|
|
83,869 |
|
|
|
83,869 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average number of ordinary shares
outstanding |
|
|
92,695,890 |
|
|
|
121,667,507 |
|
|
|
125,005,803 |
|
|
|
125,005,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
|
1.86 |
|
|
|
2.56 |
|
|
|
2.80 |
|
|
|
0.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
|
1.86 |
|
|
|
2.48 |
|
|
|
2.80 |
|
|
|
0.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2006, the Companys potentially dilutive securities consist
of 10,000,000 share options (see note 17). The computation of diluted earnings per share
for the year ended December 31, 2006 did not assume conversion of the share options because
the exercise prices of the share options were greater than or equal to the average price of
the ordinary shares, and therefore their inclusion would have been anti-dilutive. |
|
|
Product revenues by product category are summarized as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
2006 |
|
2007 |
|
2008 |
|
2008 |
|
|
RMB |
|
RMB |
|
RMB |
|
US$ |
Anti-stroke medication |
|
|
230,867 |
|
|
|
443,446 |
|
|
|
651,164 |
|
|
|
95,444 |
|
Antibiotics |
|
|
389,843 |
|
|
|
390,107 |
|
|
|
395,721 |
|
|
|
58,002 |
|
F-36
Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-cancer |
|
|
34,726 |
|
|
|
217,867 |
|
|
|
322,862 |
|
|
|
47,323 |
|
Anti-inflammatory drugs |
|
|
174,899 |
|
|
|
168,497 |
|
|
|
147,765 |
|
|
|
21,658 |
|
Other medicines |
|
|
117,462 |
|
|
|
143,097 |
|
|
|
219,320 |
|
|
|
32,147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
947,797 |
|
|
|
1,363,014 |
|
|
|
1,736,832 |
|
|
|
254,574 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17 |
|
Share-based compensation |
|
|
On November 13, 2006, the shareholders of the Company adopted the 2006 Share Incentive Plan
(the 2006 Share Incentive Plan) which provides for the granting of options, limited share
appreciation rights, and other share-based awards such as restricted shares to the
directors and employees of the Group. The board of directors and shareholders of the
Company authorized up to 12,000,000 ordinary shares upon exercise of awards granted under
the 2006 Share Incentive Plan. On July 31, 2008, the Company adopted a new Share Incentive
Plan (the 2008 Share Incentive Plan) that allows the board of directors to grant options,
limited share appreciation rights and other share-based awards such as restricted shares to
directors, employees and consultants of the Group to purchase up to an aggregate of
6,250,000 ordinary shares upon exercise of awards granted under the 2008 Share Incentive
Plan. |
|
|
|
The following is a summary of share options granted in the years ended December 31, 2006,
2007 and 2008 under the 2006 Share Incentive Plan. No option was issued under the 2008
Share Incentive Plan. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
2006 |
|
2007 |
|
2008 |
Total no. of
share options
granted |
|
|
10,000,000 |
|
|
|
1,045,000 |
|
|
|
500,000 |
|
Weighted average
exercise price
per share |
|
|
US$4.200 |
|
|
|
US$6.750 |
|
|
|
US$6.093 |
|
Weighted average
vesting period
(in years) |
|
|
5.00 |
|
|
|
5.00 |
|
|
|
4.82 |
|
Weighted average
contractual life
(in years) |
|
|
6.00 |
|
|
|
6.00 |
|
|
|
5.82 |
|
|
|
Management has determined, based on the Black-Scholes option pricing model, that the
weighted average grant-date fair value per option was approximately RMB14.69 (US$1.88),
RMB22.25 (US$3.05) and RMB23.27 (US$3.41), or an aggregate of RMB146,000, RMB23,251 and
RMB11,637 (US$1,706) for the years ended December 31, 2006, 2007 and 2008, respectively. |
|
|
|
The assumptions used in determining the fair value of the share options granted on each
respective date are, shown at their weighted average values, as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
2006 |
|
2007 |
|
2008 |
Valuation assumptions |
|
|
|
|
|
|
|
|
|
|
|
|
Expected life (in years) |
|
|
5.5 |
|
|
|
5.5 |
|
|
|
5.19-5.35 |
|
Expected volatility |
|
|
40% |
|
|
|
40% |
|
|
|
59%-74% |
|
Expected dividend yield |
|
|
0% |
|
|
|
0% |
|
|
|
0% |
|
Risk-free interest rate |
|
|
5.11% |
|
|
|
5.11% |
|
|
|
1.54%-3.69% |
|
|
|
For options granted prior to 2007, the expected volatility was estimated based upon the
average volatility of several comparable U.S. listed companies in the pharmaceutical
industry. Since the Company did not have a trading history at the time the options were
issued, management estimated the potential volatility of its ordinary share price by
referring to the average volatility of these comparable companies because |
F-37
Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
|
|
management believes that the average volatility of such companies was a reasonable
benchmark to use in estimating the expected volatility of the Companys ordinary shares.
For the 2008 options, the historical volatility of the Companys shares was used to
estimate the volatility of the Companys shares. |
|
|
|
Because the Companys share options have certain characteristics that are significantly
different from traded options, and because changes in the subjective assumptions can
materially affect the estimated value, in managements opinion, the existing valuation
model may not provide an accurate measure of the fair value of the Companys employee stock
options. Although the fair value of share options is determined in accordance with SFAS No.
123R using the Black-Scholes option pricing model, that value may not be indicative of the
fair value observed in a willing buyer/willing seller market transaction. |
|
|
|
The amount of compensation cost recognized for these share options was RMB3,437, RMB30,764
and RMB25,536 (US$3,743) for the years ended December 31, 2006, 2007 and 2008,
respectively. |
|
|
|
Share-based compensation cost is included in the following captions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
2006 |
|
2007 |
|
2008 |
|
2008 |
|
|
RMB |
|
RMB |
|
RMB |
|
US$ |
Research and development expenses |
|
|
204 |
|
|
|
1,733 |
|
|
|
1,512 |
|
|
|
222 |
|
Sales, marketing and distribution
expenses |
|
|
365 |
|
|
|
2,871 |
|
|
|
2,665 |
|
|
|
391 |
|
General and administrative expenses |
|
|
2,868 |
|
|
|
26,160 |
|
|
|
21,359 |
|
|
|
3,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,437 |
|
|
|
30,764 |
|
|
|
25,536 |
|
|
|
3,743 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008, there was RMB77,390 (US$11,343) of total unrecognized compensation
cost related to non-vested share options and the cost is expected to be recognized on a
straight-line basis over a weighted average period of 3.06 years. The total fair value of
share options vested during the years ended December 31, 2006, 2007 and 2008 was nil,
RMB103,394 and RMB50,524 (US$7,406), respectively. The aggregate intrinsic values of
options exercised during the years ended December 31, 2006, 2007 and 2008 were nil, RMB102
and RMB3,331 (US$488), respectively. |
|
|
|
A summary of stock option activity is as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
Weighted |
|
average |
|
|
|
|
|
|
|
|
average |
|
remaining |
|
Aggregate |
|
|
Number of |
|
exercise |
|
contractual |
|
intrinsic |
|
|
Options |
|
price |
|
term |
|
value |
|
|
|
|
|
|
US$ |
|
Years |
|
US$ |
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2007 |
|
|
10,000,000 |
|
|
|
4.20 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
1,045,000 |
|
|
|
6.75 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(6,200 |
) |
|
|
4.20 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(41,000 |
) |
|
|
4.20 |
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007 |
|
|
10,997,800 |
|
|
|
4.44 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
500,000 |
|
|
|
6.09 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(198,000 |
) |
|
|
4.20 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(1,361,800 |
) |
|
|
5.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
|
9,938,000 |
|
|
|
4.33 |
|
|
|
3.95 |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2008 |
|
|
3,696,400 |
|
|
|
4.22 |
|
|
|
3.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On November 4, 2008, the board of directors of the Company approved a share repurchase
program that the Company may purchase up to US$50,000 (RMB341,125) worth of its issued and
outstanding ADSs. The |
F-38
Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
|
|
Company expects to implement this share repurchase program over the course of the next 12
months and plans to fund the share repurchase program through its available cash. As of
December 31, 2008, the Company repurchased and cancelled an aggregate of 1.5 million ADSs
under the current repurchase program at an average per share price of US$3.31 (RMB22.59)
and an aggregate cost of US$9,961 (RMB67,959) of which included US$105 (RMB716) of handling
charges. |
|
|
|
19 |
|
Related party transactions |
|
|
For the years presented, the principal related party transactions and amounts due from and
due to related parties are summarized as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31 |
|
|
2006 |
|
2007 |
|
2008 |
|
2008 |
|
|
RMB |
|
RMB |
|
RMB |
|
US$ |
Purchase of packaging and raw materials from
related parties (note (a)) |
|
|
7,420 |
|
|
|
7,335 |
|
|
|
109 |
|
|
|
16 |
|
Sales of products to a related party (note (b)) |
|
|
1,432 |
|
|
|
2,966 |
|
|
|
6,775 |
|
|
|
993 |
|
Sales of property, plant and equipment and
land use right to a related party (note (c)) |
|
|
|
|
|
|
18,551 |
|
|
|
|
|
|
|
|
|
Interest income from a loan due to a related
party (note (d)) |
|
|
|
|
|
|
|
|
|
|
1,108 |
|
|
|
162 |
|
Loan to a related party (note (d)) |
|
|
|
|
|
|
|
|
|
|
20,000 |
|
|
|
2,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2007 |
|
2008 |
|
2008 |
|
|
RMB |
|
RMB |
|
US$ |
Due from related parties: |
|
|
|
|
|
|
|
|
|
|
|
|
Current portion |
|
|
7,503 |
|
|
|
4,365 |
|
|
|
640 |
|
Non-current portion |
|
|
|
|
|
|
20,000 |
|
|
|
2,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due from related parties (note (d)) |
|
|
7,503 |
|
|
|
24,365 |
|
|
|
3,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes: |
|
(a) |
|
The Company purchased packaging and raw materials from companies in which a major shareholder
of the Company has an equity interest. Management believes that the materials purchased by the
Company were in the normal course of business at prices determined on an arms length basis. |
|
(b) |
|
The Company sold pharmaceutical products to a company in which a major shareholder has an
equity interest. Management believes that the sales were conducted in the normal course of
business at prices determined on an arms length basis. |
|
(c) |
|
The Company sold property, plant and equipment and land use right to a company in which a
major shareholder has an equity interest. Management believes that the sale price was
negotiated on an arms length basis. |
|
(d) |
|
The current portion of amounts due from related parties related to transactions described in
note (b) and note (c) above as of December 31, 2007 and 2008 were RMB7,503, and RMB3,257
(US$478), respectively. These amounts were interest-free, unsecured and repayable on demand.
The current portion as of December 31, 2008 also included accrued interest of RMB1,108
(US$162) in respect of a RMB20,000 (US$2,931) secured loan included in the non-current portion
of amounts due from related parties. The RMB20,000 (US$2,931) secured loan was provided to a
minority shareholder of a subsidiary and has a one-year term with an option to extend for a
maximum of two years, bears a floating interest rate equal to RMB benchmark lending rates of
financial institutions multiplied by 110% and is secured by the minority shareholders entire
equity interest in the subsidiary. The secured loan has been classified as non-current as of
December 31, 2008 because management expects the loan to be renewed and extended beyond 12
months from the balance sheet date. |
|
|
|
20 |
|
Fair value of financial instruments |
|
|
The Group adopted SFAS No. 157 on January 1, 2008 for fair value measurements of financial
assets and financial liabilities and for fair value measurements of nonfinancial items that
are recognized or disclosed at |
F-39
Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
|
|
fair value in the financial statements on a recurring basis. SFAS No. 157 establishes a
fair value hierarchy that prioritizes the inputs to valuation techniques used to measure
fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (Level 1 measurements) and the lowest priority
to measurements involving significant unobservable inputs (Level 3 measurements). The three
levels of the fair value hierarchy are as follows: |
|
|
|
Level 1 inputs are quoted prices (unadjusted) in active markets for identical
assets or liabilities that the Company has the ability to access at the measurement
date. |
|
|
|
|
Level 2 inputs are inputs other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly or indirectly. |
|
|
|
|
Level 3 inputs are unobservable inputs for the asset or liability. |
|
|
The level in the fair value hierarchy within which a fair measurement in its entirety falls
is based on the lowest level input that is significant to the fair value measurement in its
entirety. |
|
(b) |
|
Fair value of financial instruments |
|
|
Management used the following methods and assumptions to estimate the fair value of
financial instruments as the relevant balance sheet date: |
|
|
|
Short-term financial instruments (cash equivalents, pledged bank deposits,
held-to-maturity investment securities, trade accounts receivable, bills receivable and
other receivables, amounts due from related parties, short-term borrowings, trade
accounts payable, amounts due to related parties, and other payables and accrued
liabilities) their carrying amounts approximated their respective fair values because
of the short maturity period. |
|
|
|
|
Long-term loans and long-term loan receivable their fair values are based on the
amount of future cash flows associated with these instruments discounted at the
borrowing and lending rates currently available for similar instruments of comparable
terms. Their carrying values of the long-term loans and long-term receivable
approximated their fair values as all these instruments carry variable interest rates
which approximated rates currently offered by the Companys financial institutions for
similar instruments of comparable maturities. |
|
|
As of December 31, 2008, the Group did not have any assets and liabilities that are measured
at fair value on a recurring basis in periods subsequent to initial recognition. |
|
|
|
21 |
|
Foreign currency exchange risk |
|
|
The fluctuation in foreign currency exchange rates may impose certain risks on the Group.
The Groups exposure to foreign currency exchange risk primarily relates to cash and cash
equivalents denominated in U.S. dollars as a result of the Companys past issuances of
ordinary shares through a private placement and proceeds from the initial public offering
in April 2007. |
|
|
|
The Company has used a substantial portion of the proceeds from the initial public offering
to provide U.S. dollar denominated loans to its PRC subsidiaries which have converted the
funds into RMB. As these intercompany loans are not considered long-term investment in
nature and given the functional currency of the Company is U.S. dollars and the functional
currency of the PRC subsidiaries is RMB, the gain arising from the translation of the
intercompany loans from U.S. dollars to RMB by the PRC subsidiaries is recognized in the
consolidated statements of income and the loss arising from the translation of the
Companys U.S. dollars financial statements to RMB for consolidation purpose is recognized
in the consolidated statement of shareholders equity and comprehensive income. |
F-40
Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
|
|
The Group has not hedged exposures in foreign currencies or entered into any other
derivative financial instruments. |
|
(a) |
|
Acquisition of the remaining 10% of the outstanding shares of Shandong
Simcere |
|
|
On January 6, 2009, the Group completed an acquisition of the remaining 10% of the
outstanding shares of Shandong Simcere for a cash consideration of approximately RMB30,128
(US$4,416). Following the acquisition, Shandong Simcere became a wholly-owned subsidiary of
the Group. |
|
(b) |
|
Approval of a share option exchange program |
|
|
On April 15, 2009, the Compensation Committee of the Company approved a share option
exchange program that offered the directors, employees and consultants the right to
exchange vested and unvested outstanding share options to purchase ordinary shares of the
Company under the 2006 Share Incentive Plan for the Companys restricted shares. The
exchange ratio is determined based on the fair value of replacement restricted shares so
that the fair value of the replacement restricted shares to be issued upon exchange will be
approximately equivalent to the fair value of the share options surrendered by an
individual. A total of 154 directors and employees accepted the offer and tendered an
aggregate of 9,802,400 ordinary shares in exchange for an aggregate of 4,750,018 restricted
shares. The exchange of the share option awards for restricted shares was accounted for as
a modification for awards which involves a cancellation of the original award and an
issuance of a new award. The replacement restricted shares were granted on May 7, 2009.
Management does not expect the effect of this award modification on share-based
compensation expense over the remaining requisite service period to be significant. |
|
(c) |
|
Acquisition of approximately 35 % of the equity interest of Shanghai Celgen |
|
|
On May 18, 2009, the Group entered into a definitive share purchase agreement to indirectly
acquire approximately 35% of the equity interest of Shanghai Celgen Bio-Pharmaceutical Co.,
Ltd. (Shanghai Celgen) for a total cash consideration of RMB140,000. Shanghai Celgen has
expertise in research and production of therapeutic antibodies and possesses an antibody
manufacturing facility in Shanghai, for which GMP certification is pending. Under the
agreement, the Group is entitled to unwind the acquisition and the selling shareholders are
required to return the amounts paid by the Group if the SFDA does not approve Shanghai
Celgens major biogeneric drug candidate within 24 months from the date of the agreement.
The agreement is also subject to certain closing conditions. The Group will account for its
interest of approximately 35% in Shanghai Celgen under the equity accounting method. |
|
(d) |
|
Acquisition of 37.5% of the equity interest of Jiangsu Yanshen |
|
|
On May 20, 2009, the Group entered into a definitive share purchase agreement to acquire a
37.5% equity interest in Jiangsu Yanshen Biological Technology Stock Co., Ltd. (Jiangsu
Yanshen), a China-based developer and manufacturer of vaccines, for a total cash
consideration of approximately RMB195,540. Jiangsu Yanshens core products include an
influenza vaccine and a human use rabies vaccine (vero cell). The Group will account for
its interest of 37.5% in Jiangsu Yanshen under the equity accounting method. |
F-41