Shanghai Pharmaceuticals Holding Co., Ltd.

627 Pages·2011·4.78 MB·English

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CONTENTS
This Web Proof Information Pack contains the following information relating to the Company
extracted from an amended version of the post-hearing proof of the draft document:
• Summary
• Definitions
• Glossary of Technical Terms
• Forward-Looking Statements
• Risk Factors
• Directors and Supervisors
• Corporate Information
• Industry Overview
• History, Restructuring and Corporate Structure
• Business
• Financial Information
• Future Plans
• Directors, Supervisors and Senior Management
• Relationship with the Controlling Shareholders and Directors
• Regulation
• Appendix I – Accountants’ Report of the Company
• Appendix IIA – Accountants’ Report of China Health System Ltd.
• Appendix IIB – Accountants’ Report of Shanghai New Asiatic Pharmaceuticals Co., Ltd. and
Shanghai Asia Pioneer Huakang Pharmaceuticals Co., Ltd.
• Appendix V – Property Valuation
• Appendix VI – Taxation and Foreign Exchange
• Appendix VII – Summary of Principal Legal and Regulatory Provisions
• Appendix VIII – Summary of Articles of Association
• Appendix IX – Statutory and General Information
YOU SHOULD READ THE SECTION HEADED “WARNING” ON THE COVER OF THIS WEB PROOF
INFORMATION PACK.
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SUMMARY
BUSINESS OVERVIEW
As a national pharmaceutical group headquartered in Shanghai, we are the only integrated
pharmaceutical company in the PRC that has leading positions in both pharmaceutical product and
distributionmarkets.Ourverticallyintegratedbusinessmodelenablesustobenefitfrommajorstages
of the pharmaceutical industry value chain, as well as enjoy the potential synergies arising from our
coordinated efforts across business segments. We believe our market leadership will enhance our
ability to increase market share through both organic growth and acquisitions, as well as provide us
with sufficient resources to continue developing new products and distribution services to drive our
future growth and profitability.
We primarily operate in the following three business segments in the PRC:
• Pharmaceutical business. We are engaged in the research and development, manufacture and
sales of a broad range of pharmaceutical and healthcare products.
• Pharmaceutical distribution and supply chain solutions. We provide distribution, warehousing,
logistics and other value-added pharmaceutical supply chain solutions and related services to
pharmaceutical manufacturers and dispensers, such as hospitals, distributors and retail
pharmacies.
• Pharmaceutical retail. We operate and franchise a network of retail pharmacies across nine
provinces, municipalities and autonomous regions.
We have experienced significant growth in our revenue in recent years. In particular, our revenue
increased from RMB27,440.8 million in 2008 to RMB31,228.2 million in 2009, and to RMB37,381.6
millionin2010.Ournetprofit,definedasafter-taxprofitattributabletoourequityholders,increased
from RMB697.0 million in 2008 to RMB1,296.8 million in 2009, and to RMB1,368.3 million in 2010.
Theincreaseinnetprofitin2009partlyreflectedaonetimepre-taxgainofRMB536.4milliononthe
disposal of our equity interest in Lianhua Supermarket in 2009. In 2010, segment revenue of our
pharmaceutical business, pharmaceutical distribution and supply chain solutions and retail business
was RMB8,075.2 million, RMB29,149.9 million and RMB1,725.5 million, respectively, representing
21.6%, 78.0% and 4.6% of our revenue, respectively. Unless otherwise indicated, the term
“segment revenue” used in this Document refers to the revenue of a business segment before
inter-segment elimination.
Pharmaceutical Business
We were the third largest pharmaceutical company in the PRC in terms of revenue of pharmaceutical
business in 2009, according to the NFS Report. We manufacture and market a broad range of
pharmaceutical products, spanning chemical drugs, modern Chinese medicines, biopharmaceutical
products and other pharmaceutical products, including approximately 70.0% of the drugs on the
National List of Essential Drugs. The majority of our pharmaceutical products are prescription drugs.
We manufacture many products in therapeutic areas with significant current market demand or
future market potential, such as cardiovascular system, alimentary tract and metabolism, central
nervous system, antiinfectives for systemic use and antineoplastic and immunomodulating agents.
According to the NFS Report, in terms of 2009 sales, drugs that fall within the top five therapeutic
areas of the PRC chemical and biopharmaceutical drugs market represented 78.5% of the total sales
of chemical and biopharmaceutical drugs in the PRC, and drugs that fall within the top five
therapeutic areas of the PRC modern Chinese medicine market represented 79.1% of the total sales
of modern Chinese medicines in the PRC. As of December 31, 2010, 446, or over 46%, of our
pharmaceutical products fall within these therapeutic areas.
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SUMMARY
As of December 31, 2010, we had 53 major products (including two products of Techpool
Bio-Pharma), which, in aggregate, accounted for 52.4% of the segment revenue of our
pharmaceuticalbusinessin2010.Ourportfolioofmajorproductswillexpandtoincludesixadditional
products, including four antibiotics products, upon the completion of our pending acquisitions of
Shanghai New Asiatic and Shanghai Huakang (collectively, the antibiotics business), from the
Controlling Shareholders. We examine and adjust our product portfolio and manufacturing and
marketing resources from time to time to adapt to changing customer demand, as well as to focus
on products that have higher profit margin, greater market potential and demand, and higher
barriers-to-entry.
We manufacture our products according to stringent quality standards and have obtained necessary
PRCGMPcertificationsforallofouractivepharmaceuticalproductionfacilities,certainofwhichhave
also been certified pursuant to the cGMP standards of the United States or the GMP standards of the
European Union. We market and sell many of our products under widely recognized brand names,
including Well-Known Trademarks recognized by the PRC trademark authority, such as “Sine ( ),”
“Leishi ( ),” “Longhu ( ),” “Qingchunbao ( ),” “Huqingyutang ( )” and
“Cangsong ( ).” The strength of our brands, together with the quality of our products, enable us
to market our products effectively.
Our pharmaceutical business has been supported by our strong research and development team
through a robust pipeline of commercially viable new products. Our research and development
capabilities are well-recognized in the industry and by the government as demonstrated by our
participationin,orundertakingof,numerousgovernment-sponsoreddrugresearchanddevelopment
programs. We target to develop and commercialize first-to-market generic drugs and innovative
drugs to address unmet medical needs in the PRC, which we believe will provide high margins and
offer substantial growth opportunities.
Pharmaceutical Distribution and Supply Chain Solutions
We were the second largest distributor of pharmaceutical products in the PRC in terms of revenue in
2009, according to the NFS Report. We operate a national distribution network comprising 41
subsidiaries and branches, as well as 32 logistics centers and warehouses located strategically across
the Eastern China Region, the Northern China Region and the Southern China Region. These three
regional markets, in aggregate, accounted for 67.0% of the entire PRC pharmaceutical distribution
market in terms of sales in 2009, according to the NFS Report. The Eastern China Region, the most
affluent, in terms of per capita GDP, and the most populated region in the PRC, alone represented
39.1% of the PRC pharmaceutical distribution market in terms of sales in 2009, according to the NFS
Report. We had a market share of 11.0% in the Eastern China Region in 2009. We continue to
expand our distribution network in the PRC. In April 2011, we acquired CITIC Pharma, a leading
pharmaceutical distributor in Beijing in terms of revenue in 2009. The addition of CITIC Pharma will
significantly expand our operations and market share in the Northern China Region.
In 2010, we derived 58.8% of the external revenue of our pharmaceutical distribution and supply
chain solutions from sales of imported medicines and those manufactured by subsidiaries of
internationalpharmaceuticalcompaniesinthePRC.Inaddition,wespecializeindistributingproducts
directly to hospitals and other medical institutions, including community healthcare centers and
clinics, which generally have higher margin than sales to other distributors. We directly sell our
products to over 7,600 hospitals and other medical institutions in the PRC, including 229, or 63.8%
of, Class III hospitals and 879, or 55.7% of, Class II hospitals in the Eastern China Region. In 2010,
our direct sales accounted for 61.9% of the external revenue of our pharmaceutical distribution and
supply chain solutions. We extend our reach to other customers throughout the PRC through sales
to other distributors. We manage our distribution logistics operations with the goal of facilitating
smooth and efficient movement of products and minimizing our inventory holding costs.
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SUMMARY
We distinguish ourselves as a pharmaceutical product distributor in part through the value-added
servicesweprovidetobothoursuppliersandcustomers,suchasinventorytrackingandmanagement
system, access to valuable market data and information and vendor managed inventory systems. Our
value-added services help our customers to increase operational efficiency and reduce inventory and
fulfillment costs and other operational expenses, and, at the same time enhance our ability to retain
customers. Our value-added services can also benefit our suppliers by helping them manage their
businesses more efficiently, as well as tailoring their marketing activities to target customers.
Pharmaceutical Retail
We operate a retail pharmacy network in nine provinces, municipalities and autonomous regions in
thePRC.AsofDecember31,2010,ourretailpharmacynetworkconsistedof1,682retailpharmacies,
among which 1,187 were directly operated retail pharmacies (including 363 retail pharmacies we
operated through our jointly-controlled entity, Jiangxi Nanhua) and 495 were franchise pharmacies.
We were the largest pharmacy chain in the Eastern China Region in terms of revenue in 2009,
according to the NFS Report. Our retail pharmacies operate under nationally or regionally well-known
brandnames,suchas“Huashi( )”and“Leiyunshang( ).”Ourretailpharmaciesregularlycarry
over 10,000 types of products, including prescription pharmaceutical products, over-the-counter
drugs, and personal healthcare products. We seek out new products, services and business models
to meet our customers’ changing demands, such as offering traditional Chinese medicine diagnoses
and prescription services at some of our Chinese medicine pharmacies.
Integration and Synergy
Ourpharmaceuticalbusinessandourpharmaceuticaldistributionandsupplychainsolutionsbusiness
work closely together to expand the sales of our products. In doing so, our pharmaceutical business
benefits from additional sales of our products through the national distribution network of our
pharmaceutical distribution and supply chain solutions, particularly our direct sales network of
hospitals and other medical institutions in the Eastern China Region. Our pharmaceutical distribution
and supply chain solutions business, on the other hand, benefits by gaining access to a vast portfolio
of high-quality pharmaceutical products manufactured by us, and from increases in revenue from
distributing such products.
Compared with third party manufacturers and distributors, our manufacturing and distribution
businesses enjoy greater flexibility in making coordinated sales efforts, allowing us to price our
products and services more competitively or offer other benefits to customers, including increased
supplier stability and efficiency. The ability to leverage the resources of and coordination between
business segments enables us to generate additional business and revenue as well as increase market
share. In 2010, 13.2% of our pharmaceutical business segment revenue was derived from products
sold through our pharmaceutical distribution and supply chain solutions, and we expect this
percentage to increase over time.
Price Control
AsubstantialportionofthepharmaceuticalproductsmanufacturedbyusareincludedintheNational
Medical Insurance Drugs Catalog and are subject to retail price control imposed by the PRC
government in the form of fixed prices or maximum retail prices. In addition, a product included in
a Provincial Medical Insurance Drugs Catalog is also subject to governmental price controls in the
relevant province. These controls indirectly affect the price at which we sell our products to
distributors. Controls over and adjustments to the retail price of a pharmaceutical product, if
significant,couldhaveacorrespondingimpactonthepriceatwhichwesellourproducts,whichmay
have an adverse impact on our revenue and profitability.
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SUMMARY
INDUSTRY OVERVIEW
The PRC healthcare industry is one of the largest components of its GDP. According to the China
HealthStatisticsYearbook2010,PRC’stotalhealthcarespendinggrewfromRMB866.0billionin2005
to RMB1.7 trillion in 2009, representing a CAGR of 18.7%. The increase in PRC’s total healthcare
spending has been reflected in the significant growth in both the PRC pharmaceutical product and
distribution markets. In the PRC, the rapid growth of the healthcare industry as a whole, as well as
each of the PRC pharmaceutical product and distribution markets, were mainly driven by a number
of favorable socioeconomic factors, such as: (i) fast growing GDP and disposable income; (ii) growth,
aging and increased life expectancy of the population; (iii) increasing urbanization; (iv) rising health
awareness and healthcare spending; and (v) government initiatives and spending related to the PRC
healthcare industry. Supported by these factors, the PRC’s total healthcare spending is expected to
grow to RMB3.3 trillion by 2014, representing a CAGR of 13.7% from 2009 to 2014, according to
the NFS Report.
As an integral part of the PRC healthcare industry, the PRC pharmaceutical product market had a
rapid growth from RMB313.1 billion in 2005 to RMB619.4 billion in 2009, representing a CAGR of
18.6%, and is expected to further grow to RMB1.7 trillion by 2014, representing a CAGR of 22.4%
from 2009 to 2014, according to the NFS Report. Specifically, the PRC chemical and
biopharmaceutical drugs market grew from RMB210.3 billion in 2005 to RMB410.3 billion in 2009,
representing a CAGR of 18.2%, and the modern Chinese medicine market grew from RMB102.8
billion in 2005 to RMB209.1 billion in 2009, representing a CAGR of 19.4%, according to the NFS
Report.
ThePRCpharmaceuticaldistributionmarkethasalsoexperiencedarapidgrowthinrecentyears,from
RMB300.0 billion in 2005 to RMB568.4 billion in 2009, representing a CAGR of 17.3%, according to
the CAPC, and is expected to further grow to RMB1,629.5 billion by 2014, representing a CAGR of
23.4% from 2009 to 2014, according to the NFS Report.
Retail pharmacy sales is an important part of pharmaceutical retail sales in the PRC, in addition to
retail sales by hospitals and other medical institutions. The PRC retail pharmaceutical sales market
experienced a steady growth between 2005 and 2009, from RMB79.0 billion to RMB148.7 billion,
representing a CAGR of 17.1%, and is expected to increase to RMB325.0 billion in 2014,
representing a CAGR of 16.9%, according to the NFS Report.
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SUMMARY
OUR STRENGTHS
We believe the following competitive strengths contribute to our success and distinguish us from our
competitors:
• leading position in the high-growth PRC pharmaceutical industry;
• aleadingpharmaceuticalcompanywithawiderangeofhigh-qualityproductsandstrongbrand
recognition;
• strong research and development capabilities with a proven track record and a robust product
pipeline;
• national distribution network with a focus on direct sales to hospitals;
• vertically integrated business model creating substantial synergies across business segments;
• dedicated international initiatives offering significant benefits; and
• experienced and professional management team.
OUR STRATEGIES
Our goal is to continue strengthening our position as a nationally leading vertically integrated
pharmaceutical company and to become a consolidator of the fragmented PRC pharmaceutical
industrybyadheringtotheprinciplesofmaximizingshareholdervalueandbeingsociallyresponsible.
To accomplish this goal, we plan to implement the following strategies:
• continue to optimize our product portfolio, consolidate our manufacturing resources and raise
our manufacturing standards;
• continue to enhance our research and development capabilities;
• continue to enhance our leading position in pharmaceutical distribution and supply chain
solutions;
• continue to enhance cross-segment and operational integration;
• expand our business through selective strategic acquisitions, investments or partnerships; and
• continue to enhance our international initiatives.
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SUMMARY
SUMMARY HISTORICAL FINANCIAL INFORMATION
The following summary historical consolidated income statement data, revenue breakdown by
business segment and other summary consolidated financial data for the years ended December 31,
2008, 2009 and 2010 and the summary historical consolidated balance sheet data as of December
31, 2008, 2009 and 2010 have been derived from the Accountants’ Report received from
PricewaterhouseCoopersandincludedinAppendixItothisDocument.Youshouldreadthesummary
historical financial information below in conjunction with our consolidated financial statements
included in Appendix I — ”Accountants’ Report of the Company,” which have been prepared in
accordance with HKFRS, together with the accompanying notes.
Summary Historical Consolidated Income Statement Data
Year ended December 31,
2008 2009 2010
(in thousands of RMB, except per share data)
Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,440,761 31,228,163 37,381,568
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . (22,266,666) (25,411,979) (30,723,323)
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . 5,174,095 5,816,184 6,658,245
Distribution and selling expenses . . . . . . . . . . (2,448,535) (2,625,374) (3,006,095)
General and administrative expenses . . . . . . . (1,722,534) (1,838,417) (1,843,345)
Operating profit . . . . . . . . . . . . . . . . . . . . . 1,003,026 1,352,393 1,808,805
Other income. . . . . . . . . . . . . . . . . . . . . . . . . 125,462 86,346 165,677
Gains on disposal of subsidiaries and
associates. . . . . . . . . . . . . . . . . . . . . . . . . . 1,103 550,677 17,479
Other gains — net. . . . . . . . . . . . . . . . . . . . . 48,519 1,034 63,877
Finance income . . . . . . . . . . . . . . . . . . . . . . . 42,556 55,014 45,846
Finance cost. . . . . . . . . . . . . . . . . . . . . . . . . . (302,922) (223,299) (212,619)
Share of profit of jointly controlled entities . . 18,572 28,754 12,296
Share of profit of associates. . . . . . . . . . . . . . 269,186 279,125 271,174
Profit before income tax. . . . . . . . . . . . . . . 1,205,502 2,130,044 2,172,535
Income tax expense . . . . . . . . . . . . . . . . . . . . (210,193) (464,854) (393,550)
Profit for the year. . . . . . . . . . . . . . . . . . . . 995,309 1,665,190 1,778,985
Profit attributable to:
Equity holders of the Company . . . . . . . . . . . 696,992 1,296,789 1,368,253
Non-controlling interests . . . . . . . . . . . . . . . . 298,317 368,401 410,732
995,309 1,665,190 1,778,985
Earnings per share attributable to the
equity holders of the Company during
the year (expressed in RMB per share)(1)
— Basic and diluted . . . . . . . . . . . . . . . . . . 0.35 0.65 0.69
Note:
(1) Earningspersharearecalculatedbasedontheassumptionthat1,992,643,338Shares,including1,423,470,454Shares
issued in 2010 in connection with the 2009 Restructuring, were in issue throughout each period.
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SUMMARY
Revenue Breakdown by Business Segment
YearendedDecember31,
2008 2009 2010
Inter- Inter- Inter-
External segment Segment External segment Segment External segment Segment
revenue revenue revenue revenue revenue revenue revenue revenue revenue
(inthousandsofRMB)
Segments:
Pharmaceuticalbusiness . . . . . . . 6,014,432 832,288 6,846,720 6,369,666 952,961 7,322,627 7,011,995 1,063,169 8,075,164
Pharmaceuticaldistributionandsupply
chainsolutions . . . . . . . . . . 19,683,695 530,522 20,214,217 23,117,630 650,884 23,768,514 28,348,117 801,810 29,149,927
Pharmaceuticalretail. . . . . . . . . 1,413,818 – 1,413,818 1,521,524 – 1,521,524 1,725,546 – 1,725,546
Otherbusinessoperations. . . . . . . 328,816 67,979 396,795 219,343 62,017 281,360 295,910 38,975 334,885
Inter-segmentelimination. . . . . . . – (1,430,789) (1,430,789) – (1,665,862) (1,665,862) – (1,903,954) (1,903,954)
Total . . . . . . . . . . . . . . . 27,440,761 – 27,440,761 31,228,163 – 31,228,163 37,381,568 – 37,381,568
Other Summary Consolidated Financial Data
Year ended December 31,
2008 2009 2010
Gross margin(1) . . . . . . . . . . . . . . . . . . . . . 18.9% 18.6% 17.8%
Pharmaceutical business. . . . . . . . . . . . . . 47.4 50.3 51.4
Pharmaceutical distribution and
supply chain solutions. . . . . . . . . . . . . . 7.9 7.8 7.1
Pharmaceutical retail . . . . . . . . . . . . . . . . 22.7 23.7 23.5
Operating margin(2) . . . . . . . . . . . . . . . . . 3.7 4.3 4.8
Pharmaceutical business. . . . . . . . . . . . . . 9.6 11.6 13.8
Pharmaceutical distribution and
supply chain solutions. . . . . . . . . . . . . . 1.3 2.1 2.2
Pharmaceutical retail . . . . . . . . . . . . . . . . 0.1 0.7 1.5
Net margin(3). . . . . . . . . . . . . . . . . . . . . . . 2.5% 4.2% 3.7%
Notes:
(1) Gross margin, expressed as a percentage, equals gross profit divided by revenue.
(2) Operating margin, expressed as a percentage, equals operating profit divided by revenue.
(3) Net margin, expressed as a percentage, equals profit attributable to our equity holders divided by revenue.
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SUMMARY
Summary Historical Consolidated Balance Sheet Data
As of December 31,
2008 2009 2010
(in thousands of RMB)
ASSETS
Non-current assets
Land use rights . . . . . . . . . . . . . . . . . . . . . . . 793,996 805,161 782,933
Investment properties. . . . . . . . . . . . . . . . . . . 551,533 600,033 261,056
Property, plant and equipment. . . . . . . . . . . . 4,077,385 4,051,959 4,100,592
Intangible assets. . . . . . . . . . . . . . . . . . . . . . . 171,246 134,900 516,432
Investments in jointly controlled entities. . . . . 202,867 197,941 204,695
Investments in associates . . . . . . . . . . . . . . . . 1,246,454 842,296 1,062,201
Deferred income tax assets. . . . . . . . . . . . . . . 101,666 119,243 150,167
Available-for-sale financial assets . . . . . . . . . . 402,836 443,590 383,716
Other non-current receivables . . . . . . . . . . . . 25,790 2,735 –
Other long-term prepayments . . . . . . . . . . . . – – 816,236
7,573,773 7,197,858 8,278,028
Current assets
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . 3,431,341 3,700,720 5,040,729
Trade and other receivables . . . . . . . . . . . . . . 5,499,186 6,078,319 8,580,616
Financial assets at fair value through
profit or loss. . . . . . . . . . . . . . . . . . . . . . . . 10,396 10,445 3,234
Restricted cash. . . . . . . . . . . . . . . . . . . . . . . . 80,983 110,717 298,764
Cash and cash equivalents. . . . . . . . . . . . . . . 3,185,370 4,776,503 6,039,573
12,207,276 14,676,704 19,962,916
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . 19,781,049 21,874,562 28,240,944
Equity attributable to owners of the
parent
Share capital . . . . . . . . . . . . . . . . . . . . . . . . . 569,173 569,173 1,992,643
Share premium. . . . . . . . . . . . . . . . . . . . . . . . 4,300,235 4,760,996 3,282,151
Other reserves . . . . . . . . . . . . . . . . . . . . . . . . 831,583 766,795 742,742
Retained earnings . . . . . . . . . . . . . . . . . . . . . 1,361,594 2,185,046 3,117,023
7,062,585 8,282,010 9,134,559
Non-controlling interests . . . . . . . . . . . . . . 1,759,959 2,153,134 2,749,704
Total equity. . . . . . . . . . . . . . . . . . . . . . . . . 8,822,544 10,435,144 11,884,263
LIABILITIES
Non-current liabilities
Borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . 113,389 84,297 66,098
Deferred income tax liabilities . . . . . . . . . . . . 15,658 33,407 43,520
Termination benefit obligations . . . . . . . . . . . 106,166 98,064 79,835
Other non-current liabilities . . . . . . . . . . . . . . 138,877 246,117 224,717
374,090 461,885 414,170
Current liabilities
Trade and other payables. . . . . . . . . . . . . . . . 6,684,588 7,460,901 10,912,154
Current income tax liabilities . . . . . . . . . . . . . 129,007 184,682 211,980
Borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . 3,770,820 3,331,950 4,818,377
10,584,415 10,977,533 15,942,511
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . 10,958,505 11,439,418 16,356,681
Total equity and liabilities . . . . . . . . . . . . . . 19,781,049 21,874,562 28,240,944
Net current assets . . . . . . . . . . . . . . . . . . . . 1,622,861 3,699,171 4,020,405
Total assets less current liabilities. . . . . . 9,196,634 10,897,029 12,298,433
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