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Shanghai Pharmaceuticals: Growth in Pharmaceutical Business Picked Up in 2017 with Improvement in Quality and Efficiency of Business Development

Shanghai Pharmaceuticals Holding Co., Ltd. (hereinafter referred to as “Shanghai Pharmaceuticals”, 601607.SH; 2607.HK), a leading integrated pharmaceutical company in the China’s pharmaceutical products manufacturing and services market, published the annual report for 2017 at night in 23 March 2018. According to statistics, during the reporting period, the Company recorded an operating income of RMB130.847 billion, representing a YOY growth of 8.35%. The Company recorded a net profit attributable to the shareholders of the listed companies of RMB3.521 billion, representing a YOY growth of 10.14%. The Company recorded a net operating cash inflow of RMB2.649 billion, representing a YOY growth of 36.07%. In 2017, the Company speeded up intensive development, innovation development, international development and development of integration of finance and industry, thus its overall performance indicators realized higher growth than the average level of the industry. The manufacturing and services segments have made tremendous breakthroughs, which helped to consolidate its leading position in the industry.

In respect of the pharmaceutical manufacturing segment, Shanghai Pharmaceuticals recorded sales revenue of RMB14.987 billion in 2017, representing a YOY growth of 20.71%. Shanghai Pharmaceuticals recorded a profit margin of 53.86%, representing a YOY growth of 3.3 percentage points over the same period last year. Shanghai Pharmaceuticals recorded a net operating cash inflow of RMB2.649 billion, representing a YOY growth of 36.07%. Mainly benefitted from the sales growth in key products of the Company and gradually forming of relative complete management platform with research, production and sales integrated and featured with intensive resources and efficient coordination, the growth of the operating income of pharmaceutical manufacturing was expedited and its gross profit margin was improved remarkably.

Shanghai Pharmaceuticals attached great importance to its marketing system construction. Through implementing product focus and lean management, the marketing capability was significantly improved and the number of key species, sales and gross profit margin of the Company all recorded continuous increase. During the reporting period, the Company recorded a sales revenue of RMB7.979 billion from its 60 key species, representing a YOY growth of 14.42%. Of which, there were 37 species, each with higher or equal sales revenue growth than or to species of their own kinds (source: IQVIA market data, similarly hereinafter). There were up to 28 products generating more than RMB100 million of sales revenue during the year, representing a YOY growth of 2. The gross profit margin of key species was 56.92%, representing a YOY growth of 0.75 percentage points. In particular, by building up refined business soliciting channel and increasing the coverage of the business soliciting markets, sales revenue of Albuterol Inhaler in 2017 amounted to RMB120 million, representing a YOY growth of 141.63%, with market shares of 50.18%. Through commencing the marketing model with academic promotion on rheumatism and immunity, revenue of hydroxychloroquine sulfate tablets of large varieties amounted to RMB550 million in 2017, representing a YOY growth of 13.4% and surpassing the revenue growth of original research products.   

In addition, Shanghai Pharmaceuticals attached great importance to development of the R&D innovation-driven business and constantly stepped up the efforts in R&D, thus making good progress in R&D of new drugs. According to statistics, the input R&D expenditure reached RMB790 million in 2017, representing a YOY growth of 20.79% and accounting for 5.27% of the sales revenue from pharmaceutical business. During the reporting period, the Company was also shortlisted for Top 20 Best Industrial Enterprises in China’s Medical R&D Product Line. Various new drugs in which huge investment has been made for their research and development were making progress in phases, including -MCC-DM1 Antibody-Drug Conjugates – Recombinant anti HER2 humanized monoclonal antibody for Injection (intended for second-line treatment for Her2 positive advanced breast cancer), Recombinant anti HER2 humanized monoclonal antibody Composition for Injection (intended for first-line treatment for Her2 positive advanced breast cancer and preoperative adjuvant therapy) and Hydroxyl Triptolide (intended for treatment for chronic abnormal immune activation of AIDS), which have all been approved for clinical trials.  SPH3127 has completed Phase 1 clinical trial and entered into Phase II clinical trial. The clinical trial application of SPH3348 crude agent preparation has been accepted. The Company has also applied for 6 approvals for producing Parecoxib Sodium and Crestor Calcium and obtained 4 approvals for producing Trypsin for Injection. By virtue of these, the Company has constructed step by step the forward-looking innovative drug R&D product chain and improved innovative drug product chain with clinical values and technology features, thus, further enriching the Company’s product lines. Meanwhile, the Company has gathered advantageous resources to fully push forward the evaluation of consistence of the generic’s quality and its curative effect. The Company has conducted such evaluation work for 70 species (97 approvals) in total, of which, 21 species (26 approvals) are outside 289 catalog. As to Fluoxitine Hydrochloride Capsules and Captopril Tablets, their evaluation work has been completed and applied to China Food and Drug Administration. Nearly 1/3 products have entered into clinical research stage. Moreover, the Company actively pushed forward international certification and registration of preparations and crude drugs so as to expand overseas markets. The Company has commenced the construction of the USA R&D center in order to facilitate innovative cooperation and obtain domestic and foreign approvals for generic drugs and new preparations. During the reporting period, the Company has been allowed to sell its Rosuvastatin Calcium Tablets in the United States. As to Eslicarbazepine Acetate, the Company’s application for USA ANDA has been accepted and is striving for first generic. Pregabalin has obtained European CEP certification. As to Lenalidomide and Sofosbuvir, the Company has submitted USA DMF.

With the rapid development of pharmaceutical manufacturing, the large-scaled pharmaceutical services segment of Shanghai Pharmaceuticals has also shifted to pursue quality development. According to the announcement, during the reporting period, sales revenue of the pharmaceutical distribution business amounted to RMB116.150 billion, representing a YOY growth of 6.93%. The Company actively seized the opportunities to lead the industry to integration and upgrades, improved the network layout across China and enhanced terminal coverage by acquiring 100% equity interests in Cardinal Health China at US$576 million, 99% equity interests in Xuzhou Pharmaceutical Co., Ltd. at RMB579 million and 51% equity interest in Sichuan Shenyu Pharmaceutical Co., Ltd. at RMB279 million. Through the above mergers and acquisitions, the Company achieved breakthroughs in Sichuan, Chongqing, Guizhou and Tianjin, with direct coverage being expanded to 24 provinces. This has significantly increased the breadth and depth of the network coverage of pharmaceutical distribution across China. Meanwhile, with further advancement of the national two-invoice system policies, the business and profit structure of the services segment were optimized on a continuous basis. The Company’s hospital net sales ratio increased to 62.35% from 60.79% at the end of last year while gross profit margin was 6.12%, representing an increase of 0.23 percentage points over the same period last year. Operating profit margin was 2.61%, representing an increase of 0.14 percentage points over the same period last year.

It is worth noting that upon completion of merger and acquisition of Cardinal Health China, Shanghai Pharmaceuticals went up to second in the ranking of domestic pharmaceutical circulation scale. In addition, such merger and acquisition also consolidated the Company’s leading position in subdivision fields such as imported drug agency, medical equipment agency, third party professional logistics services etc., thereby enabling the Company to become the largest imported drug agency in China (total number of product species distributed) and the largest chain pharmacy for new and miracle drug professional brand DTP in China with over 70 stores in total.

In respect of the retail segment, the Company made proactive efforts in preparing for prescription drugs outflows and providing supports to hierarchical treatment system. As a result, the medical e-commerce business witnessed rapid development. During the reporting period, the Company’s recorded sales revenue of RMB5.640 billion, representing a YOY growth of 9.44% and a gross profit margin of 16.36%, representing a YOY growth of 0.84 percentage points. According to the announcement, in 2017, Shanghai Pharmaceuticals has had 1,892 branded chain retail pharmacies, of which 1,247 are direct-sale stores. The Company owns 54 pharmacies located in close proximity to medical institutions and hospitals, of which, 14 are newly opened. Meanwhile, Shanghai Pharmaceuticals actively participated in Shanghai community’s comprehensively reformed prescription extension projects, which currently cover 146 community hospitals and health service centers in Shanghai, to provide direct services to patients so as to drastically shorten the time for follow-up medical consultation and purchasing drugs. In addition, as an “Internet+” business platform of Shanghai Pharmaceuticals for the development of new retail of prescription drugs, Shanghai Pharmaceuticals Cloud Health has preliminarily formed a closed loop of new retail value chain of prescription drugs from access to, management, implementation, distribution and value-added service of prescription. During the reporting period, there were 214 medical institutions at all levels joining the electronic prescription circulation end, and more than 2 million pieces of electronic prescriptions were handled. At value-added service of prescription end, the Company tried to provide innovative medical payment solutions for individuals. Therefore, it joined hands with AstraZeneca to launch Tagrisso ® financial installment payment program, aiming to relief the short-term cash pressure of the family of the patients. The Company also cooperated with Bristol-Myers Squibb to launch China’s first “payment based on curative effect” project, which is an innovative insurance project with an emphasis on curative effect.

Furthermore, according to dividend distribution proposal of the Company, Shanghai Pharmaceuticals proposed to distribute a cash dividend of RMB3.8 for every 10 Shares in 2017, with the total dividend distributed in an amount of approximately RMB1.08 billion. According to prior dividend distribution, Shanghai Pharmaceuticals has constantly given back to shareholders by way of payment of cash dividend for 5 consecutive years since 2012 and average annual dividend distributed accounts for over 30% of the net profit attributable to equity holders of listed company.

In the new development period, Shanghai Pharmaceuticals said that it would actively grasp the national strategic opportunities and follow the development trend of the industry. Besides, driven by innovation development, intensive development, international development and development of integration of finance and industry and with an industrial focus on treatment sector and high-end generic drugs, it will promote synergistic development of new drug, establish an internationally competitive integrated health service platform at the national level so as to foster international vision and landscape, maintain a leading position in the pharmaceutical industry in China and strive to enter into the top 500 enterprises in the world by the end of the 13th Five-Year period.

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