Corporate Information BOARD OF DIRECTORS Chairman Simon TO, BSc, ACGI, MBA Executive Directors Christian HOGG, BSc, MBA Chief Executive Officer Johnny CHENG, BEc, CA Chief Financial Officer Non-executive Directors Shigeru ENDO, BA Christian SALBAING, BA, LLL, JD Edith SHIH, BSE, MA, MA, EdM, Solicitor, FCIS, FCS (PE) REMUNERATION COMMITTEE Simon TO (Chairman) Michael HOWELL Christopher NASH TECHNICAL COMMITTEE Christopher HUANG (Chairman) Simon TO Christian HOGG COMPANY SECRETARY Edith SHIH NOMINATED ADVISER Panmure Gordon (UK) Limited Independent Non-executive Directors Christopher NASH, BSc, MBA, ACGI CORPORATE BROKERS Panmure Gordon (UK) Limited Senior Independent Director Michael HOWELL, MA, MBA, HonFCGI Christopher HUANG, BA, BMBCh, PhD, DM, DSc, FSB UBS Limited AUDITOR PricewaterhouseCoopers AUDIT COMMITTEE Michael HOWELL (Chairman) Christopher HUANG Christopher NASH 1 Contents Corporate Information Contents Our Business Highlights Chairman’s Statement Operations Review Biographical Details Of Directors Report Of The Directors Corporate Governance Report Independent Auditor’s Report Consolidated Income Statement Consolidated Statement Of Comprehensive Income Consolidated Statement Of Financial Position Consolidated Statement Of Changes In Equity Consolidated Statement Of Cash Flows Notes To The Accounts 1 2 3 5 8 31 33 38 47 48 49 50 52 54 55 Information For Shareholders 112 * This Annual Report is in English and Chinese. In case of any inconsistency, the English version shall prevail. 2 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report Our Business Chi-Med is the holding company of a healthcare group based primarily in China. It is focused on researching, developing, manufacturing and selling pharmaceuticals and health oriented consumer products. China Healthcare We have three companies o p e r a t i n g i n t h e f a s t growing China Healthcare market. These companies are increasingly strong cash generators from the development, manufacture and marketing of both prescription and over-the- counter pharmaceuticals and health supplements. Drug Research and Development T h r o u g h H u t c h i s o n M e d i P h a r m a L i m i t e d , Chi-Med researches and develops botanical and small molecule drugs for t h e g l o b a l m a r k e t . W e focus on the oncology and immunology therapeutic areas. Consumer Products Chi-Med is engaged in the development of a health oriented consumer products business. This includes several brands of botanical, natural, and organic food and personal care products primarily in the China and Asian markets. 3 3 Highlights Consolidated Group Results Revenue from continuing operations up 106% to $46.0 million (2012: $22.4m), not including sales at the JV level which totalled $390.6 million (2012: $345.3m). Operating profit up 65% to $9.6 million (2012: $5.8m) including non-recurring charge of $2.0 million. Net profit attributable to Chi-Med equity holders up 63% to $5.9 million (2012: $3.6m). Cash and cash equivalents at the Chi-Med Group level of $46.9 million (31 December 2012: $30.8m) in addition, and not included at the Group level, cash and cash equivalents held at the JV level totalled $99.0 million (31 December 2012: $62.4m). China Healthcare Division – Continuing strong growth Sales of subsidiaries and joint ventures (“JVs”) up 13% to $394.6 million (2012: $350.5m). Organic expansion of own brands (up 14% to $343.0m) with both prescription and over-the-counter (“OTC”) cardiovascular drug sales being the strongest. Third party OTC drug distribution business up only 2% to $51.6 million due to shedding of lower margin activity. Net profit attributable to Chi-Med equity holders up 20% to $18.6 million (2012: $15.5m). Entered into an agreement to establish a new 51% Chi-Med owned JV, subject to regulatory approval, with Sinopharm Group Co. Ltd. (HKSE:1099) (“Sinopharm”) to provide sales, distribution, and marketing services to major Chinese and multi-national third party pharmaceutical manufacturers. Drug R&D Division – Step-change developments approaching Revenue up 327% to $29.5 million (2012: $6.9m) as a result of $22.2 million in upfront and milestone income and $7.3 million in service income from our partners. Secured $54.8 million in third-party cash injections for Hutchison MediPharma Limited’s (“HMP”) activities during 2013, bringing the total to $103.6 million since 2010. Net loss attributable to Chi-Med equity holders of $2.4 million (2012: net profit $2.8m) due primarily to the consolidation of $8.8 million (2012: nil) non-cash share of the loss of Nutrition Science Partners Limited (“NSP”), the JV with Nestlé Health Science SA (“Nestlé Health Science”). NSP, which is enrolling patients in the HMPL-004 global Phase III registration trial, was entirely self-funded in 2013, and will be until the Interim Analysis in mid-2014, by the initial cash equity investment in NSP by Nestlé Health Science. All fi gures are reported in US dollar currency unless otherwise stated 4 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report Highlights Drug R&D Division – Step-change developments approaching (Continued) Progressed global development of Volitinib (HMPL-504), a c-Met inhibitor in oncology, in partnership with AstraZeneca AB (publ) (“AstraZeneca”) in Phase I in Australia and China. Phase I dose escalation, initiation of which triggered a $5 million milestone in mid-2013, will be completed by early 2014 and results will be published at the American Society of Clinical Oncology (“ASCO”) meetings in June 2014. Volitinib has demonstrated very encouraging anti-tumour activity in Phase I in certain tumour-types, some of which have no approved therapies on the global market. Phase II studies in papillary renal cell carcinoma (“PRCC”) will start in early 2014 in the United States and global Phase III initiation is scheduled for 2015. Completed exclusive license and collaboration agreement for China with Eli Lilly and Company (“Lilly”) on Fruquintinib (HMPL-013), our highly selective vascular endothelial growth factor receptor (“VEGFR”) inhibitor. Lilly will share development costs and pay HMP up to $86.5 million in upfront payments and development and regulatory milestones and upon commercialisation in China tiered royalties starting in the mid-teens percentage of net sales. Fruquintinib, which received Phase II/ III clearance from the China Food & Drug Administration (“CFDA”) in mid-2013, will start Phase II studies in several tumour types, and a Phase III registration study on one tumour type, in China in 2014. Immunology collaboration with Janssen Pharmaceuticals, Inc. (“Janssen”), the pharmaceutical division of Johnson & Johnson, progressed well in 2013. Janssen nominated a compound, HMPL- 507, discovered by HMP, for further development thereby triggering a $6 million milestone payment. Janssen will be responsible for all development costs and will potentially pay HMP up to an additional $90.5 million in development and regulatory approval milestones, and royalties on worldwide sales upon commercialisation. Beyond the four partnered drug candidates, HMP has effectively progressed three further high potential small molecule oncology drug candidates with stand-out results on Sulfatinib which in 2013 demonstrated very encouraging anti-tumour activity in certain tumour types, some of which have very limited treatment options approved on the global market. In discovery, HMP nominated HMPL-523 in early 2013, a novel Syk inhibitor, for rheumatoid arthritis and intends to start Phase I trials in Australia in early 2014. Consumer Products Division – Refocused Sales on continuing operations up 23% to $12.5 million (2012: $10.2m) driven by progress on the expansion of the range of Hutchison Hain Organic Holdings Limited (“HHO”) products in Asia. Non-recurring $2.0 million in costs associated with the discontinuation of the Sen France and aspects of the China infant formula businesses. Net loss attributable to Chi-Med equity holders on continuing operations of $0.5 million (2012: -$0.9m). Chairman’s Statement 5 Once more, I am delighted to report a year of major progress. With each year, the potential of Chi- Med becomes clearer, the business strengthens its platform for future value creation and it takes big steps forward in building a major, China-based pharmaceutical and health-related products group, with strong potential in global markets. In fact, all the key themes I set out in last year’s announcement have only continued to demonstrate their strength, and Chi-Med’s increasing capabilities. Our Drug R&D Division produced standout performance last year. It initiated the global Phase III registration study on HMPL-004, NATRUL-3 and NATRUL-4, in early 2013 under our joint venture with Nestlé Health Science, NSP. NATRUL-3, an induction study in ulcerative colitis, is progressing well and we intend to present results from the Interim Analysis of the study in mid-2014. Other major achievements occurred on Fruquintinib (HMPL-013), Volitinib (HMPL-504), and the Janssen compound, HMPL-507. On Fruquintinib, in early 2013, we published outstanding Phase I clinical data that was quickly followed by CFDA regulatory clearance to proceed into Phase II/III studies. In parallel, we started a Phase Ib study on a tumour- type that showed great potential in Phase I and ended the year by completing a license and collaboration agreement on Fruquintinib with Lilly which will fund rapid clinical expansion. Our collaboration with AstraZeneca on Volitinib made remarkable progress in 2013, with Phase I close to completion in both Australia and China. Based on the exciting results we have observed, a Phase II study will start in early 2014. Our over three-year collaboration with Janssen also led to the formal drug candidate nomination by Janssen of HMPL-507 in the fi eld of infl ammation. The Drug R&D Division secured $54.8 million in third party cash injections through our partnerships with Nestlé Health Science, Lilly, AstraZeneca and Janssen in 2013. In addition, based on strong pre-clinical and clinical data, our team was able to effectively manoeuvre two of our un-partnered products, Sulfatinib and HMPL-523, into positions that show major potential. Simon To Chairman With each year, the potential of Chi-Med becomes clearer, the business strengthens its platform for future value creation and it takes big steps forward in building a major, China-based pharmaceutical and health-related products group, with strong potential in global markets. 6 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report Chairman’s Statement Revenue (% change 2013 VS. 2012) +106% Net Profi t Attributable to Equity Holders (US$ million) 5.9 Our China Healthcare Division also had an This translates directly into greater consumption of outstanding year, with sales of its own brand pharmaceuticals. Looking forward, this rapid growth products up 14% and net profi t attributable to Chi- is set to continue as China continues to widen and Med equity holders up 20% to an all-time high of deepen its State Medical Insurance Schemes and $18.6 million. In addition, we announced a major catches up with the developed world in terms of per transaction in the China Healthcare Division with capita healthcare spending. There remains a long the establishment of a new 51% Chi-Med owned way to go in this respect as US healthcare spending joint venture with Sinopharm (subject to regulatory per capita was over thirty-one times and France was approval) which will provide us with an exciting new eighteen times that of China in 2011. platform to access commercial synergies across both the Chi-Med and Sinopharm groups and serve major The existing products of our China Healthcare Chinese and international third party pharmaceutical Division are all traditional Chinese medicine (“TCM”), manufacturers. Group Strategy The scale and potential of the economy of China or botanical drugs. This sub-category of healthcare represented approximately 43% of the entire prescription and OTC drug sales in China in 2012. TCM has, over the past ten years, grown faster than and its pharmaceutical industry remain our key synthetic medicine in China, primarily due to its focus. They are driven by dynamics which are set lower cost per dose, good efficacy, safety profiles to continue. On the one hand, the growth of China’s and cultural acceptance. We have major scale in national healthcare plan, together with the growth these operations, manufacturing and selling about of personal incomes and an aging population, 4 billion doses of medicines a year through our fuels demand for pharmaceutical products, both well-established Good Manufacturing Practice prescription and OTC. Our China Healthcare Division (“GMP”) manufacturing base and our sizable, is well positioned to benefit from this increased approximately 2,700-person, sales team which demand. On the other hand, China is increasingly covers all geographical locations and channels in the becoming recognised as an emerging centre of China prescription and OTC drug markets. Our new pharmaceutical drug research and development. joint venture with Sinopharm will add substantially Our Drug R&D Division is recognised as a leading to Chi-Med’s commercial infrastructure in China and innovator, with one of the strongest oncology and we believe that it will be a source of major business immunology pipeline, and continues to benefit opportunity. from its first mover position, the inherently lower operating cost base in China and the massive patient We believe that these macro trends, combined with populations as compared to Western economies. our competitive advantages, normalisation of raw material prices and the realisation of significant We also continue to benefit from our deep value in our property portfolio, will provide an understanding of the China market and the long- increasingly significant source of profit and cash standing benefits of the scale and experience flows for Chi-Med, its subsidiaries and JVs (the of Hutchison Whampoa Limited (“Hutchison “Group”). Whampoa”) in this market, which adds synergies to the increasing economies of scale of our business. Drug R&D Division We have built HMP into one of China’s leading China Healthcare Division Our China Healthcare Division is now a well- end-to-end oncology and immunology drug R&D operations, and we have recorded above some of its e s t a b l i s h e d , s t a b l e a n d d i v e r s i f i e d C h i n a key achievements in 2013. Stability in its purpose p h a r m a c e u t i c a l s o p e r a t i o n w i t h r o b u s t and funding has enabled HMP to build and maintain growth prospects. It competes in the domestic a unique and highly productive discovery team, pharmaceutical market that has grown 20% per which has built a broad and diversified pipeline of year since 2005 behind reforms that have driven new drug candidates which we believe have good government healthcare spending to increase almost potential, both in the fast growth China market and, nine-fold from approximately $14.1 billion in 2005 in a number of cases, on a global level. to approximately $122.7 billion in 2012. Chairman’s Statement 77 Cash fl ows – Solid cash position (US$ million) 36.9 (17.3) 13.2 1.6 62.0 31.2 30.8 5.0 (2.5) 13.1 Cash & Bank balances 1 Jan 2013 Operating activities Investing activities Financing activities 0.5 FX Diff 96.4 49.5 46.9 Cash & Bank balances 31 Dec 2013 Bank Balance of Subsidiaries – IFRS11 Cash flow – IFRS11 Proportional Share of Bank Balance of Joint Ventures (SHPL, HBYS, NSP) Proportional Share of Cash flow of Joint Ventures (SHPL, HBYS, NSP) The drug discovery and development arena in China has made major advances in the past fourteen Consumer Products Division Our Consumer Products Division enables Chi-Med to years since we began our efforts. In the interests capture part of the growing consumer trend towards The adoption of IFRS11 by the Group for the first time establishes the equity accounting principle for the reporting of JVs. This changes the Group’s net assets and the presentation of the Group’s financial performance and position in the consolidated fi nancial statements with the result being that the current liabilities exceeded its current assets by approximately $11.4 million as at 31 December 2013. Included in the current liabilities is the Term Loan which has been reclassified as a current liability from a non-current liability as it falls due in December 2014. Importantly, Chi-Med has received fi nancial support from Hutchison Whampoa in the form of a guarantee which confi rms that Hutchison Whampoa will provide financial support to Chi-Med for its obligations under the Term Loan, and will not demand repayment if Hutchison Whampoa settles the Term Loan on behalf of Chi- Med, for a minimum period of twelve months from the approval date of the 2013 consolidated fi nancial statements of Chi-Med. of the public health, the CFDA, has modernised healthy living and to capitalise on the considerable the drug registration pathway and, particularly in consumer products synergies with the broader Dividend The Chi-Med Board (the “Board”) continues to be of oncology, this is now becoming comparable with the Hutchison Whampoa group. We have reviewed the the view that Chi-Med can create greater shareholder developed world. The biotech ecosystem in China structure of this division and cut the loss-making value by investing in the growth opportunities we has also advanced substantially. This has been driven activities. In future, we will focus on the growth of see and has therefore decided not to recommend a by the major trend by multi-national pharmaceutical our successful partnership with The Hain Celestial dividend for the year ended 31 December 2013. companies to show interest in, and outsource a Group, Inc. (Nasdaq: HAIN) (“Hain Celestial”) and our portion of their discovery work to China. The result access to the broad retail and distribution network of is that world-class drug R&D and innovation is now Hutchison Whampoa. clearly possible in China. The Board The Board continues to exercise good corporate governance and our Independent Non-executive The focus of our Drug R&D Division has been on Cash and Finance We have maintained a solid cash position. Overall at Directors bring a wealth of expertise and experience. They have made, and continue to make, a valuable creating truly innovative, either fi rst-in-class or best- the Chi-Med group-level, we ended 2013 with cash contribution to the evolution of Chi-Med. I very much in-class, drug candidates in the selected therapeutic and cash equivalents of $46.9 million and unutilised appreciate their involvement and I thank them all for areas of oncology and immunology, which have bank loan facilities of $10.3 million. Chi-Med group- their efforts. major China and global potential. Strategically, level bank loans totalled $51.5 million from a HSBC we have adopted a practical approach to funding $30.0 million 3-year revolving loan facility (2013- the considerable costs of our clinical programmes. 2015) and a $26.9 million 3-year term loan from Employees All that Chi-Med has achieved and will achieve is due We partner with multi-national pharmaceutical Scotiabank (Hong Kong) Limited, guaranteed by to the dedication and expertise of its employees and, companies on drugs with global appeal thereby Hutchison Whampoa, which expires in December on behalf of the Board, I thank all of them. Chi-Med’s allowing our partners to fund almost all clinical 2014 (“Term Loan”). Not included in our group- potential is considerable, and we shall continue to trial costs while allowing the Group to retain value level numbers is the cash held in our JVs, Shanghai work hard to realise this. through milestone payments and ultimately the Hutchison Pharmaceuticals Limited (“SHPL”), royalty streams. We will continue to negotiate Hutchison Whampoa Guangzhou Baiyunshan Chinese more collaborations on our broader pipeline as it Medicine Company Limited (“HBYS”), and NSP where progresses, but in the longer term we intend to bring in aggregate $99.0 million in cash was held at the our future un-partnered innovations to the market end of 2013. The JVs carry $0.8 million bank debt in China ourselves, and based on our commercial only. success in the China Healthcare Division, we are confi dent that we will succeed in this endeavour. Simon To Chairman 17 February 2014 8 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report Operations Review Group Results Reporting for the fi rst full year under the new IFRS11 standard, which no longer permits the proportional consolidation of the sales of our two major China Healthcare Division JVs, Chi-Med delivered solid revenue growth, with consolidated Group revenue on continuing operations up 106% to $46.0 million (2012: $22.4m). This was driven primarily by step change growth in the milestone and services income in our Drug R&D Division where revenue increased 327% to $29.5 million (2012: $6.9m). Sales of the continuing operations in our Consumer Products Division grew 23% to $12.5 million (2012: $10.2m) behind regional expansion of the HHO natural and organic product lines. In our nutritional supplements business Hutchison Healthcare Limited (“HHL”) sales fell 25% to $4.0 million (2012: $5.3m) as we continued to tighten working capital and restructure the commercial operation to focus on profi t, which quadrupled during the period. The Group’s full year operating profit was up 65% to $9.6 million (2012: $5.8m), refl ecting the above points and the non-recurring charge of $2.0 million associated with the discontinuation of the Sen France and aspects of our China infant formula project. The group’s net overhead costs increased to $6.2 million (2012: $6.0m) refl ecting an increase of $0.4 million in staff and administration costs but offset in part by reduced costs associated with the employee share option schemes of Chi-Med. Finance costs were $1.5 million (2012: $1.2m) primarily refl ecting the continued borrowing at HHL in the China Healthcare Division, and interest on a partial drawdown of the credit facility of Chi-Med. Profi ts attributable to minority interests were $1.1 million (2012:-$0.1m) as the scale down costs carried by Hain Celestial on the China infant formula project dropped materially compared to 2012. Christian Hogg Chief Executive Offi cer To date, Chi-Med, its partners, and other sources of fi nance have invested approximately $200 million into what is now China’s leading end-to-end oncology and immunology drug R&D operation. China Healthcare Operations Review - China Healthcare 99 2013 Performance by Division US$ million (% change 2013 vs. 2012) China Healthcare Drug R&D Consumer Products Note: (1) Sales of subsidiaries and joint ventures 18.6 (+20%) 29.5 (+327%) (2.4) (-187%) 12.5 (+23%) (0.5) (+45%) Chi-Med’s tax charge was $1.1 million (2012: $1.0m) in our primary own brand prescription and OTC refl ecting a provision for the 5% withholding tax on drug products business to $343.0 million (2012: future dividends resulting from the 2013 profi ts of $300.1m). In 2013, however, we consciously decided our China Healthcare Division JVs. to pull back working capital from our HHL nutritional supplements business as well as shed low profit In total, the Group’s net profi t attributable to Chi-Med lines in HBYS’ Good Supply Practice (“GSP”) OTC drug equity holders was up 63% to $5.9 million compared distribution subsidiary – in aggregate these actions to $3.6 million in 2012 and profit per share grew led to flat sales in these secondary businesses of in line to 11.4 US cents compared to a 7.0 US cents $55.6 million (2012: $55.7m). in 2012. China Healthcare Division In addition to the rapid expansion and evolution of The outcome of strong volume growth on our primary own brand business combined with our focus on profi t in our secondary businesses was a very strong increase the broader pharmaceutical industry in China and our in net profi t attributable to Chi-Med equity holders up key competitive advantages in this sector, we believe 20% to $18.6 million (2012: $15.5m). that our China Healthcare Division will benefi t from the establishment of our new 51% owned strategic Operating Entities and Scope: In 2013, we operated joint venture with Sinopharm in the drug distribution three companies under the China Healthcare and commercialisation arena; the continuing near- Division: (i) a prescription drug company, SHPL, term reduction in key raw material prices; and the which is a 50/50 JV with a wholly-owned subsidiary realisation of signifi cant property assets. In total, we of Shanghai Pharmaceuticals Holding Co., Ltd. believe, these three factors will combine to translate (SHA: 601607); (ii) an OTC drug business, HBYS, into an increasingly material source of profi t and cash which is a 50/50 JV with Guangzhou Baiyunshan for the Group. Pharmaceutical Holdings Co., Ltd. (SHA: 600332); and (iii) a wholly-owned nutritional supplements Financial Performance: Sales of Chi-Med’s subsidiaries company, HHL. We operate two large-scale factories and JVs of the China Healthcare Division grew in Shanghai and Guangzhou, and a sales, marketing, 13% to $394.6 million in 2013 (2012: $350.5m) and distribution operation across about 600 cities driven mainly by the 14% organic sales growth in China. 394.6 (+13%) Sales(1) Net profit/(loss) attributable to Chi-Med equity holders China Healthcare Division Sales(1) (US$ million) 2013 2012 394.6 350.5 2011 271.0 Net Profit Attributable to Equity Holders (US$ million) 2013 2012 2011 18.6 15.5 14.0 10 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report China Healthcare Product Portfolio 2013 Sales (1) US$ million (% change 2013 vs. 2012) Total 394.6 ( +13% ) She Xiang Bao Xin pills Ban Lan Gen granules Fu Fang Dan Shen tablets Note: (1) Sales of subsidiaries and joint ventures She Xiang Bao Xin pills Cardiovascular 123.6 (+21%) Fu Fang Dan Shen tablets Angina 71.9 (+20%) Dan Ning tablets Gallbladder 12.4 (+6%) Zhi Ling Tong capsules Foetal/Infant Development 3.4 (-23%) Ban Lan Gen granules Anti-Viral74.2 (+13%) Kou Yan Qing granules Periodontitis 16.3 (+0%) Nao Xin Qing tablets Cerebrovascular 10.1 (+46%) Others 82.7 (-1%) Operations Review - China Healthcare 1111 Government Healthcare Spending (US$ billions) 19% CAGR (2000-2005) 122.7 92.6 31% CAGR (2005-2012) 72.0 58.7 40.0 25.5 5.9 6.9 7.7 9.4 10.3 14.1 16.3 00 02 04 06 08 10 12 Note: Deutsche Bank, CEIC, Ministry of Health Product (“GDP”) growth in China averaging 10% per year during that period, and the healthcare reforms which have been an important pillar of the Chinese Government’s economic and societal development strategy. Most notably, these healthcare reforms, through the expansion of enrollment in State sponsored medical insurance schemes, have increased medical insurance fund expenditure to approximately $122.7 billion in 2012, a compound average growth rate of 31% since 2005. The growth of these schemes, even though they cover more than just drug expenditure, is directly correlated with drug cost reimbursement for drugs purchased in both the hospital and retail pharmacy channels, and which as a consequence drives sales growth in the pharmaceutical industry. Looking ahead, the room for continued growth of the pharmaceutical industry remains very substantial. T h e C h i n a H e a l t h c a r e D i v i s i o n c u r r e n t l y In December 2013 we announced the formation, Total national healthcare spending in China in 2012 manufactures and sells two household name subject to regulatory approval, of a fourth had increased to 5.4% of GDP compared to 4.6% of brands in the pharmaceutical industry in China, the operating company under the China Healthcare GDP in 2009, but still remains very low compared OTC brand Bai Yun Shan (meaning “White Cloud Division by subscribing to 51% of the shares to the approximately 16% and 11% of GDP in the US Mountain”, a famous scenic area in Guangzhou) and of Sinopharm Holding HuYong Pharmaceutical and Germany respectively. The Ministry of Health’s the Shang Yao brand (literally meaning “Shanghai (Shanghai) Co., Ltd. (“Huyong”), to be renamed healthcare blueprint “Healthy 2020” targets for Pharmaceuticals”). Our products have extensive Hutchison Whampoa Sinopharm Pharmaceuticals healthcare spending as a percentage of GDP to grow representation on the current Medicines Catalogue ( S h a n g h a i ) C o m p a n y L i m i t e d ( “ H u t c h i s o n to 6.5%-7.0% by 2020 which would bring it into line for the National Basic Medical Insurance, Labour Sinopharm”), thereby creating a new Chi-Med with the world mean of 6.4%. Injury Insurance and Childbirth Insurance Systems majority owned JV with Sinopharm. Sinopharm is (“NMC”) as well as the current National Essential China’s largest distributor of pharmaceutical and Medicines List (“Essential Medicines List”) which healthcare products and a leading value added mandates distribution of drugs in China. Our China supply chain service provider. Healthcare Division focuses mainly on products and brands which have leadership market shares in the China Pharmaceutical Market Dynamics: China is Chinese cardiovascular and cold/fl u drug markets. the world’s third largest pharmaceutical market Our product portfolio is well diversified. We own and is widely expected to surpass Japan to become product licenses for over 200 drugs and registered the second largest pharmaceutical market globally health supplements in China, with over 80% of our by 2015 or 2016. There have been two main China Healthcare Division’s sales in 2013 coming drivers behind the compound annual growth rate from nine core products – six of them are OTC of over 20% in the China pharmaceutical industry drugs, two prescription drugs, and one nutritional between 2005 and 2012. The primary drivers have supplement. been economic development, with Gross Domestic 12 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report China Healthcare Medical Insurance Enrollment Per capita Healthcare Spending Million people (% Chinese population) (US$) 22% CAGR (2006-2012) 536 (40%) 473 (35%) 432 (32%) 401 (30%) 317 (24%) 223 (17%) 160 (12%) USA $8,608/capita 31x China $278/capita 06 07 08 09 10 11 12 Note: National Bureau of Statistics Note: Citigroup (2011 data) In 2012, healthcare coverage for the approximately TCM Market Sub-sector: The products sold in the Chi-Med’s competitive advantages: Our China 536 million people (2011: 473m) enrolled in the China Healthcare Division are currently all TCM. TCM Healthcare Division has several key competitive Medical insurance scheme for urban employees represents approximately 46% of the drugs listed advantages namely: 1) two national household and residents was reasonably comprehensive at an in the National Drug Reimbursement Catalogue in name brands (Bai Yun Shan and Shang Yao); 2) estimated average expenditure of about $160 per 2010 and approximately 43% of the $176 billion our involvement in two of the biggest and most capita. The 805 million people (2011: 640m) covered prescription and OTC drug sales in China in 2012 widely distributed TCM therapeutic areas, cold/ by the rural cooperative medical scheme receive only (2011: 43% and $158 billion). TCM remains a flu and cardiovascular; 3) major commercial and an average of about $70 per capita for expenditure stable and growing industry in China and is heavily manufacturing scale; 4) leadership market shares on medical benefi ts. This imbalance between urban supported by the Chinese Government because of in the sub-categories and markets in which we and rural coverage is gradually being addressed by its proven effi cacy and generally lower cost. TCM is compete; and 5) our long-term JVs with three of the the Chinese government through accelerated growth considered a highly efficient form of mainstream top fi ve Chinese pharmaceutical companies. in funding of the rural scheme and migration to the healthcare particularly in lower income areas and urban scheme through increased employment and rural China – this has led to compound annual growth urbanisation in China. in TCM drug sales of 23.1% between 2002 and 2011 as compared to 21.3% for chemical drugs. In addition to these state/employer sponsored healthcare insurance schemes, the private healthcare Our China Healthcare Division TCM business is focused system is growing rapidly in China and household on the therapeutic areas of cardiovascular and cold/ spending on healthcare is signifi cant. In 2012, private flu, the two leading common diseases diagnosed/ hospitals represented 7% of all hospital revenue in treated and two of the top three fastest growing China, along with 14% of the total hospital beds and disease categories in rural markets. We have strong 11% of physicians. A total of approximately 12% of market shares in these two therapeutic areas, household disposable income in China was spent on with She Xiang Bao Xin pill (“SXBXP”) and Fu Fang healthcare in 2011, indicating that healthcare is a Dan Shen (“FFDS”) tablets in cardiovascular and very high priority to Chinese families. Banlangen in cold/fl u. Operations Review - China Healthcare 1313 SHPL – 2013 Sales-by-Province SHPL has continued to make solid progress in expanding beyond its eastern China base where it held leadership market share. Sales Level > US$10.0 million Net Sales US$5.0 - 10.0 million Net Sales US$1.0 - 4.9 million Net Sales < US$1.0 million Net Sales 2013 Sales: US$138.2 million (up +19%) 2012 Sales: US$116.5 million SHPL Main Products by Sales: 10% 2% 88% Cardiovascular (SXBXP) Gallbladder (Dan Ning tablets) Others She Xiang Bao Xin pills (Cardiovascular) Danning Tablet (Gallbladder) 14 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report China Healthcare Shanghai Hutchison Pharmaceuticals Limited Prescription Drugs – SHPL SHPL grew prescription drug sales 19% to $138.2 The cardiovascular drug market is the second largest efforts to patent SXBXP for the long-term and one therapeutic class, after antibiotics, in China with a 20-year patent and three 10-year patents have been million in 2013 (2012: $116.5m), all of which was 13.4% share of the entire pharmaceutical market awarded and fi ve remain under review. from existing products. Since 2005, its compound in 2012 (2011: 13.1%). The market has grown at annual sales growth has averaged 25%. This high 19% compounded annually from 2009 to 2012. The SHPL has continued to make solid progress in level of organic growth has been sustained in recent development of the cardiovascular market is directly expanding beyond its east China base where it held years primarily because of the effective expansion of related to the average age of the population which leadership market share of approximately 39% our commercial network across China and the strong is set to continue to increase in line with the trend among the main TCM cardiovascular prescription position of our main drugs on both the Essential in China of people living longer. In 2011, 12% of drugs in Shanghai in 2012. Geographical expansion Medicines List and the NMC. the total Chinese population was over 65 years old has been helped by the gradual roll-out of the compared to 7% in 2000 and just 4% in 1964. Essential Medicines List. In 2013, SHPL’s sales in its SHPL holds a portfolio of 73 registered drug licenses long established and mature east China markets in China. At the end of 2013, a total of 32 SHPL Sales of SXBXP, a vasodilator used in the treatment of of Shanghai, Jiangsu and Zhejiang provinces grew products (2012: 32) were included in the NMC with heart conditions, grew 21% to $123.6 million (2012: 11% to $62.6 million (2012: $56.2m) while at 17 designated as Type-A and 15 as Type-B and $102.2m) again making it the China Healthcare the same time, its sales outside east China again with 99.7% of all SHPL sales in 2013 capable of Division’s single largest product. SHPL is the only grew more rapidly, up 25% to $75.5 million (2012: being reimbursed under the National Basic Medical manufacturer of SXBXP in China, and the intellectual $60.3m). Sales outside east China represented 55% Insurance, Labour Injury Insurance and Childbirth property of the drug remains well protected. SXBXP of SHPL’s total sales in 2013, compared to only 38% Insurance Systems (“National Insurance Systems”). is included in the Essential Medicines List and ($15.0m) in 2008. This indicates both the continued In addition, a total of 14 SHPL drugs, of which 3 are holds Type-A NMC drug status, which means it is broadening of our national presence and the in active production, were included on the Essential fully reimbursed in all provinces under the NMC. signifi cant further geographical expansion potential. Medicines List with one of these drugs being SXBXP, The “Confidential State Secret Technology” status SHPL also continued to build its second ranked SHPL’s proprietary cardiovascular prescription drug. protection on SXBXP, as certifi ed by China’s Ministry product, Dan Ning tablet despite strong competition of Science and Technology and State Secrecy Bureau, in the gallbladder/infl ammation category with sales has been extended by seven years until late 2016. In growth of 6% to $12.4 million (2012: $11.6m). Dan addition, SHPL has in the past fi ve years redoubled Ning tablet is a unique Type-B NMC drug with patent protection lasting until 2027. Operations Review - China Healthcare 1515 HBYS - 2013 Sales-by-Province HBYS continues to expand across China with particular strength in central and southern China. Geographical expansion potential lies in both eastern and southwest China. Sales Level > US$10.0 million Net Sales US$5.0 - 10.0 million Net Sales US$1.0 - 4.9 million Net Sales < US$1.0 million Net Sales 2013 Sales: US$252.5 million (up +10%) 2012 Sales: US$228.7 million Fu Fang Dan Shen tablets (Angina) HBYS Main Products by Sales: 29% 1% 4% 7% 29% 30% Angina (FFDS) Anti Viral (BLG) Periodontitis (KYQ) Cerebrovasular(NXQ) Inflammation (CXL) Others Ban Lan Gen granules (Anti-Viral) 16 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report China Healthcare HBYS holds a portfolio of 147 registered drug licenses survey, over 80% of responders identified cold/flu in China. By the end of 2013, a total of 69 HBYS as the most common disease diagnosed/treated in products (2012: 62) were included in the China NMC rural areas, and cold/fl u also rated as the third fastest with 34 designated as Type-A and 35 as Type-B growing disease category. We expect this trend to and that 87% of all HBYS sales in 2013 could be lead to substantial growth in the cold/fl u drug market reimbursed under the National Insurance Systems. in China and given HBYS’ leadership market share in In addition, a total of 28 HBYS drugs, of which 9 are the generic Banlangen subcategory, a subcategory in active production, were included on the Essential which represented about 7% of the entire cold/flu As well as its strong portfolio of reimbursed prescription drugs and its trusted Shang Yao brand, SHPL’s main strength remains its powerful, Medicines List. market in China in 2010, we believe the outlook for HBYS growth is positive. regimented, and scalable commercial team. At the end of 2013, SHPL had over 1,600 medical sales representatives and marketing staff (2012: approx. 1,500), managing distribution and sales of SXBXP in over 13,000 hospitals (2012: approx. 10,000) in China. This still only covers some 54% of over 24,000 hospitals in China in 2013, indicating that substantial distribution channel expansion potential exists. As previously reported, SHPL is in the process of upgrading its production facilities, to new Chinese GMP standards, and expanding them over three- fold through a move to a new approximately 78,000 square metre plot of land in Feng Pu district (about 40km from Shanghai city centre) from its existing site in Pu Tuo district (about 13km from Shanghai city centre). This move is on track to complete by the end of 2015. As a measure to reduce risk and smooth the transition process, SHPL has decided to work towards attaining the new Chinese GMP certification on its existing Pu Tuo site, and this should be received in 2014. OTC Drugs – HBYS OTC drug sales in HBYS increased 10% in 2013 to $252.5 million (2012: $228.7m). This was a combination of 13% growth to $200.8 million in sales of HBYS’ own brand OTC products (2012: $178.3m), as raw material prices began to drop and HBYS was able to channel more support into marketing; and a 2% increase to $51.6 million in sales of third party products through HBYS’ GSP distribution subsidiary (2012: $50.5m), as HBYS shed some of the lower margin legacy activities on this business which were acquired in 2010. In 2013, HBYS’ five main products accounted for 70.2% of HBYS sales (2012: 67.9%) as we put greater Sales of Banlangen, HBYS’ market leading generic emphasis on scaling up marketing spend on our own anti-viral, grew 13% in 2013 to $74.2 million (2012: brands as raw material prices normalised and with $65.4m). This was the second year of solid growth re-prioritising and shedding of some of the lower after the challenges caused by sharp price increases margin GSP distribution activities. These products in its single raw material, Banlangen, which had are Banlangen granules, an anti-viral treatment; grown from about RMB5 per kilogram in early FFDS tablets, principally for angina; Kou Yan Qing 2009 to a peak of RMB35 per kilogram in 2010. The granules for periodontitis; Xiao Yan Li Dan tablets for reasons for the raw material price increases were liver/gallbladder; and Nao Xin Qing tablets for heart climatic events, droughts and fl oods, combined with disease and stroke prevention. increased consumption around the 2009 H1N1 flu outbreak. This forced us to materially raise ex-factory The disease categories in which our two main OTC prices to protect margins which led to some volume products compete are cardiovascular (FFDS) and softness in late 2010 and early 2011. This is now fully cold/flu (Banlangen). The cardiovascular category behind us. The price of Banlangen has been stable has been reviewed above in the context of SHPL’s at around RMB8 per kilogram since late 2011, as a SXBXP and the growth potential also applies to FFDS result of its relatively short six-month planting-to- tablets. The second key category in which HBYS harvest cycle which led to sharply increased supply competes, cold/fl u, is also a very relevant market in during 2011. China. According to a recent Citigroup rural hospital Sponsorship of Shanghai Marathon 2013 Operations Review - China Healthcare 1717 Sales of FFDS tablets, HBYS’ OTC treatment for angina, from about RMB50 per kilogram in 2008 to RMB800 grew 20% in 2013 to $71.9 million (2012: $60.2m). per kilogram in mid-2013. The harvest in 2013 was Dramatic increases in the prices of raw materials about 10,000 tons (2012: 6,500 tons) and based on used in FFDS, during 2009 and 2010, led HBYS to actual plantation areas the harvest in 2014, which implement major price increases on FFDS of 24% in starts to come to market in spring, should be no early 2010, a further 24% in 2011 and 4% in 2012. less than 20,000 tons. As predicted, this emerging This led to softness in volume sales. The raw material oversupply has led to the start of the collapse in Sanqi price increases were caused, we believe, more by raw material pricing, which fell over 50% to about speculation triggered by drought-driven supply RMB390 per kilogram in the second half of 2013. We constraints. Several companies in China stockpiled believe that the price of Sanqi will continue to drop Ban Lan Gen granules the raw materials in order to profit by selling to over the coming year. This will materially benefi t the manufacturers at higher prices. According to an growth prospects and profi tability of FFDS and HBYS. article in the National Business Daily, the supply of HBYS remained one of the market leaders in the Sanqi, the key herb in FFDS which takes three years China generic FFDS market throughout this extended to grow, averaged approximately 4,500, 4,900, period of raw material infl ation. and 4,700 tons per year in 2009, 2010 and 2011 respectively. This compares to an estimated demand As previously reported, HBYS has been working to of about 7,000 tons per year during that period. upgrade, to new Chinese GMP standards, and expand Accordingly, the market price of Sanqi increased its production facilities over three-fold through a move away from its existing site in Bai Yun district Fu Fang Dan Shen tablets (about 9km from Guangzhou city centre). Our intention is to split future manufacturing activities Separately, HBYS has acquired an approximately into two functions, extraction (herb processing) and 66,000 square metre plot of land in Zhong Luo Tan formulation (fi nal product/packaging), and conduct district (about 40km from Guangzhou city centre) to these functions at two separate facilities. Extraction build a new formulation factory. Both plots of land, in will be conducted at a new facility in Bozhou city, Bozhou and Zhong Luo Tan were procured at low cost Anhui province. Bozhou is host to the largest herb and secured material local government incentives wholesale market in China due to its proximity to aimed at attracting major tax paying companies like planting sites and central location in China. HBYS HBYS to their areas. In addition to these actions, HBYS acquired, and broke ground on, the approximately successfully attained new Chinese GMP certifi cation 230,000 square metre plot of land for the Bozhou in December 2013 on its existing site in Bai Yun extraction plant in 2013 and is on track to migrate district thereby eliminating any transition risk extraction to this site during 2015. associated with the moves. Kou Yan Qing granules Xiao Yan Li Dan tablets 18 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report China Healthcare Prescription Drug Distribution and Marketing – Hutchison Sinopharm In December 2013, Chi-Med announced the The historical business model of Huyong has been more focused on lower margin logistics Nutritional Supplements – HHL In 2013, the sales of our wholly-owned subsidiary and distribution activities. This will now gradually HHL declined 25% to $4.0 million (2012: $5.3m) establishment of a new JV in China with Sinopharm. change as Hutchison Sinopharm intends to as a result of total focus on profit and continued Sinopharm is, by a very long measure, China’s migrate focus on more value added marketing tightening of working capital – in early 2013 largest distributor of pharmaceutical and healthcare and commercialisation services. Hutchison we moved to a cash upfront policy on HHL. products and a leading value added supply chain Sinopharm will build new product-based detailing Consequently, net profit attributable to Chi-Med service provider in China, with sales of over $20 teams as well as provide a vehicle to tap into equity holders grew 300% to $0.6 million (2012: billion in 2012 and 18% market share leadership in Chi-Med’s existing approximately 2,700-person $0.2m). As a group, Chi-Med has more important the China drug distribution market. pharmaceutical commercial network in China to priorities for its cash and consequently we have sell third party products. It will initially focus on migrated HHL to a less cash intensive, smaller- Chi-Med will invest approximately $9.8 million in big-pharma and multinationals as a customer base scale operation. This could change in future if we cash into Huyong for the subscription of 51% of the and look to become the go-to-market vehicle secure further unique, science-based, nutritional equity in the enlarged share capital of Huyong. This for products that might be mature, niche, or supplement products through partnerships for launch will mean that Huyong will be consolidated as a currently un-detailed by these major organisations. into the China market. In addition, the establishment Chi-Med subsidiary. The Chi-Med investment will be Hutchison Sinopharm will also potentially be a of Hutchison Sinopharm may lead to a migration of largely deployed for expanding future commercial ready-made commercial operation for HMP to bring a portion of the HHL business away from third party activities, particularly in the area of third party drug our un-partnered oncology and immunology drugs commercial partners towards direct control by Chi- sales and marketing. Sinopharm will hold the balance to the market in China upon approval. Med and this too would see HHL’s sales increase. of 49% of the equity in Huyong. Chi-Med will bring the detailing and marketing All HHL’s sales were accounted for by its Zhi Ling Tong Huyong is a GSP certified pharmaceutical and expertise and Sinopharm the distribution, logistics, (“ZLT”) infant and pregnant mother supplements brand. healthcare distribution and marketing company and government relations infrastructure into Pregnancy supplementation is an important market in that was originally established in 1993 and was Hutchison Sinopharm. Hutchison Sinopharm will China in which HHL currently sells three ZLT licensed subsequently acquired by Sinopharm in 2010. have a pan-China scope and we intend to build health supplement products: ZLT DHA capsules, the Upon regulatory approval, which is expected in its commercial system using the same operating omega-3 product for use by pregnant and lactating early 2014, Huyong will be re-named as Hutchison models which have proven effective in SHPL and women to promote brain and retinal development in Whampoa Sinopharm Pharmaceuticals (Shanghai) HBYS. Company Limited. Huyong’s sales in 2012 were over $50 million and profi t before tax was $1.0 million, Huyong had gross assets of $29.9 million at 31 December 2012. babies; ZLT calcium powder for bone growth; and ZLT probiotic powder for toddler immunity. Operations Review - China Healthcare 1919 Zhi Ling Tong booth at Shanghai baby products fair Property Update on SHPL/HBYS Production Expansion HBYS’ existing facilities currently holds two plots Guangzhou Municipal Government’s policy and Separately, we remain in negotiations with multiple the political climate. The land in Plot 1 and Plot property developers on the parameters and timing 2 lies in a specific area of Guangzhou that has of relocation from SHPL’s existing approximately of land, which after planning adjustments, totalled been reclassified as a residential/commercial 58,000 square metre site in Pu Tuo district as well 86,100 square metres. The main HBYS factory is on redevelopment area. Infrastructure is already in as details on the compensation and/or development a 59,400 square metre plot of land (“Plot 1”) and on place, including the Tong He metro station which carried interest that will be payable to SHPL, the the second 26,700 square metre plot of land (“Plot was opened in November 2010 and is only 800 land owner. This should release further substantial 2”) there is a disused printing facility. Our strategy is metres from Plot 2. Precedent auction values for property value. to transact and develop the disused Plot 2 as soon similar plots of land in the immediate vicinity of as possible, followed by the aforementioned phased Plot 1 and 2 would, under current policy, result relocation of the HBYS factory from Plot 1 over the in compensation to HBYS of approximately $237 next fi ve years. million as compared to the current HBYS book value, as at 31 December 2013, of $5.3 million. In 2013, we made major progress in preparing Based on this level of compensation, and after tax Plot 2 for return to the Guangzhou Municipal and minority interests, Chi-Med’s share of Plot 1 Land Bank, though the timing of this return is and 2 auction proceeds would be approximately out of our direct control since it is subject to the $80 million. 20 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report Drug Research & Development China Healthcare Hutchison MediPharma Limited Drug R&D Division Thirteen years ago we established our Drug R&D These breakthrough partnerships demonstrate our commercial milestones. Royalties on net sales will be operation, Hutchison MediPharma Holdings Limited strategy in practice. They show how we can fund at a customary level. (“HMHL”). To date, Chi-Med, its partners, and other our discovery and clinical trial programmes through sources of fi nance have invested approximately $200 upfront and milestone payments and ultimately Based on the clinical trial plans agreed for the million into what is now China’s leading end-to-end substantial commercial milestones and royalty three development-stage collaborations, the oncology and immunology drug R&D operation. We streams. are creating highly innovative therapies for launch in total aggregate global investment in Volitinib, Fruquintinib, and HMPL-004 is estimated at several the fast growth China market and the global market. These partnerships are all global in scope. They cover hundred million US dollars with our partners funding three clinical drug candidates (Volitinib, Fruquintinib, the vast majority of these costs. This business is likely to be Chi-Med’s greatest driver and HMPL-004) and one late-stage preclinical drug of transformational near-term value creation should candidate (HMPL-507, the Janssen inflammation As well as these collaborations, we are making any of our drug candidates successfully complete compound). We retain a major part of the up- rapid progress in our internal drug development clinical development and reach the market. Over the side on these four high potential candidates while programmes. Our other oncology compounds in past three years the quality and potential of HMP’s dramatically reducing the financial risk to HMP. In clinical development include Sulfatinib (HMPL-012) research and development has been well validated aggregate, and subject to clinical success, the four and Epitinib (HMPL-813), which have now shown and recognised by some of the largest and most partnerships have the following financial impact strong clinical response, as well as Theliatinib (HMPL- influential companies in the pharmaceutical and on HMP and NSP (HMP’s 50% held JV with Nestlé 309). Each has progressed rapidly in China and should healthcare industry. Our key partners AstraZeneca Health Science): $72 million in upfront payments, complete their Phase I studies in the first half of and Lilly in oncology, and Nestlé Health Science and milestones, and equity injections had been received 2014. Income from our partnerships should provide Janssen in immunology, have each invested and as at 31 December 2013; up to a further $476 the stable resources needed to fund our internal drug committed to invest in HMP’s clinical development million is scheduled in future development and development programmes thereby allowing us to programmes thereby allowing us to fully realise their regulatory approval milestones; up to $145 million bring several of these drug candidates to market in potential, both in China and the rest of the world. in further option payments and up to $560 million in China ourselves. Operations Review - Drug Research & Development 2121 HMP holds China’s leading oncology & immunology pipeline Risk is now well balanced through 4 deals with major partners (cid:30) (cid:65)(cid:63)(cid:76)(cid:66)(cid:71)(cid:66)(cid:63)(cid:82)(cid:67)(cid:30) (cid:30) (cid:30) (cid:82)(cid:63)(cid:80)(cid:69)(cid:67)(cid:82)(cid:30)(cid:45)(cid:30)(cid:103)(cid:108)(cid:98)(cid:103)(cid:97)(cid:95)(cid:114)(cid:103)(cid:109)(cid:108)(cid:30) (cid:78)(cid:80)(cid:67)(cid:43)(cid:65)(cid:74)(cid:71)(cid:76)(cid:71)(cid:65)(cid:63)(cid:74)(cid:30) (cid:78)(cid:70)(cid:63)(cid:81)(cid:67)(cid:30)(cid:71)(cid:71)(cid:30) (cid:78)(cid:70)(cid:63)(cid:81)(cid:67)(cid:30)(cid:71)(cid:30) (cid:74)(cid:67)(cid:63)(cid:66)(cid:30) (cid:78)(cid:70)(cid:63)(cid:81)(cid:67)(cid:30)(cid:71)(cid:71)(cid:71)(cid:30) (cid:30) (cid:30) (cid:78)(cid:80)(cid:77)(cid:69)(cid:80)(cid:63)(cid:75)(cid:30) (cid:70)(cid:75)(cid:78)(cid:74)(cid:43)(cid:46)(cid:46)(cid:50)(cid:30) 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(cid:30)(cid:30) (cid:30)(cid:30) (cid:30)(cid:30) (cid:30)(cid:30) (cid:30)(cid:30) (cid:30)(cid:30) (cid:30)(cid:30) (cid:30)(cid:30) (cid:30)(cid:30) (cid:30)(cid:30) (cid:30)(cid:30) (cid:30)(cid:30) (cid:30)(cid:30) (cid:30)(cid:30) (cid:30)(cid:30) (cid:30)(cid:30) (cid:30)(cid:30) (cid:30)(cid:30) (cid:30)(cid:30) (cid:77)(cid:108)(cid:97)(cid:109)(cid:106)(cid:109)(cid:101)(cid:119)(cid:30) (cid:71)(cid:108)(cid:100)(cid:106)(cid:95)(cid:107)(cid:107)(cid:95)(cid:114)(cid:103)(cid:109)(cid:108)(cid:30)(cid:36)(cid:30) (cid:71)(cid:107)(cid:107)(cid:115)(cid:108)(cid:109)(cid:106)(cid:109)(cid:101)(cid:119)(cid:30) Note: HCC: Hepatocellular carcinoma or liver cancer; RA: Rheumatoid Arthritis; CRC: Colorectal cancer or colon cancer; NSCLC: Non small cell lung cancer; RCC/PRCC: Renal/ Papillary renal cell carcinoma (kidney cancers); GBM: Glioblastoma or brain cancer; MS: Multiple Sclerosis. Market Dynamics: During the past ten to fifteen strategy directly by receiving a material amount of cash held at the NSP JV level at 31 December 2013 years, the China biotech industry has grown from government grants since 2011. Furthermore, four (31 December 2012: nil) and $4.5 million of Lilly almost nothing to an ecosystem that is catching up of HMP’s drug candidates (Sulfatinib, Fruquintinib, payments which were earned in 2013, but to be to the US and Europe in certain aspects. This biotech Volitinib, and Epitinib) have been classifi ed as a “Key received in very early 2014. ecosystem has made world-class drug R&D and National Programme for Innovative Drug R&D” of the innovation possible in China. For its part, the CFDA Ministry of Science and Technology of China, thereby As our broad clinical pipeline rapidly progresses, continues to make major strides in formalising, qualifying for further grants as well as the highest the financial and organisational requirements on communicating, and expediting the new drug profile and attention in the regulatory approvals HMP are mounting. We have taken two steps in registration process in order to meet the public process in China. health need. the past three years to mitigate the impact of our investments. Firstly, we have licensed/partnered with 2013 Drug R&D Division Financial Performance: major multinationals to bring cash into HMP, shared Total biomedical R&D expenditures in China are the HMP revenues increased 327% to $29.5 million the great majority of clinical expenses with them, and fastest growing for any major market in the world, in 2013 (2012: $6.9m) reflecting income from benefited from their considerable technical know- with a 33% compound annual growth rate from $2.0 collaboration and licensing deals in the form of how. Secondly, we have been expanding research billion in 2007 to $8.4 billion in 2012. This compares upfront payments, milestone payments, and service collaborations in order to allow the unique research to a 1% average compound annual reduction in revenue from Janssen, AstraZeneca, Lilly and NSP. platform of about 200 scientists and staff, which HMP expenditure during the same period in North America Net loss attributable to Chi-Med equity holders was has created in China, to generate cash to help support and Europe, and a compound annual growth in $2.4 million (2012: net profit $2.8m), reflecting a and sustain itself through providing fee-based expenditure of 7% in India and 6% in Asia (excluding considerably higher level of clinical activity at HMP services to our partners. As a result, in total in 2013, China and India). The Chinese Government is heavily and its $8.8 million non-cash share of the $17.5 HMP’s subsidiaries and JVs received aggregate cash investing, primarily through academic and corporate million net loss of the NSP JV. grants, in biomedical R&D with a total of $2.0 billion and equity injections and contractual obligations of $54.8 million in cash (2012: $2.3m). These cash (24%) of biomedical R&D expenditure in China being Importantly, HMP was cash neutral during 2013 even injections and obligations came primarily from government funded. HMP has benefited from this when excluding HMP’s share in the $17.0 million in AstraZeneca, Janssen, Lilly and Nestlé Health Science. 22 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report Drug Research & Development With this cash secured, HMP has moved forward all aspects of its oncology and immunology pipeline during 2013, managing clinical trials on six drug candidates in parallel. HMP has a total of six Phase I/ Ib oncology trials in China and Australia as well as two Phase III infl ammatory bowel disease (“IBD”) trials, NATRUL-3 and NATRUL-4, underway in the United States and Europe. Clinical trial spending during the period by HMP, NSP, and its partners on these six drug candidates totalled approximately $30.1 million (2012: $13.1 m). 2013 Primary Drug R&D Division Transactions and Payments: In October 2013, HMP entered into a licensing, co-development and commercialisation agreement in China with Lilly for Fruquintinib, a selective inhibitor of the Vascular Endothelial Growth Factor (“VEGF”) receptor tyrosine kinase, discovered by HMP, and now in Phase Ib/II testing in China. Hutchison MediPharma Shanghai Under the terms of the agreement, the costs of future specifi c clinical development and approval milestones, accounting treatment) to equity in HMHL, and the development of Fruquintinib in China, to be carried HMP may potentially receive up to an additional Mitsui shareholding in HMHL will remain 12.2%. out by HMP, will be shared between HMP and Lilly. $90.5 million and royalties on worldwide sales upon HMP will potentially receive a series of payments commercialisation of a product by Janssen. of up to $86.5 million, including upfront payments HMP Research and Development Strategy HMP is set up to support and fund research and and development and regulatory approval milestone In December 2011, AstraZeneca and HMP entered development of our drug candidates against targets, payments. In 2013, this income totalled $6.5 million. into a global licensing, co-development and generally proteins or enzymes, associated with the Should Fruquintinib be successfully commercialised commercialisation agreement for Volitinib. In mid- pathogenesis of cancer or infl ammation. We employ in China, HMP would receive tiered royalties starting 2013 HMP gained CFDA clearance on the Volitinib a diversified portfolio approach focusing on three in the mid-teens percentage of net sales. investigational new drug (“IND”) application and main categories: (i) synthetic compounds against started the China Phase I study, triggering a $5 novel targets with global fi rst-in-class potential, which In June 2010, HMP and Janssen agreed to pursue million milestone payment from AstraZeneca. includes Volitinib, HMPL-523, HMPL-453 and HMPL- a global strategic alliance to develop novel small 507 our collaboration compound with Janssen; (ii) molecule therapeutics against a target in the area In early 2013, HMP and Nestlé Health Science synthetic compounds against validated targets with of infl ammation/immunology. We are very proud of received all regulatory approvals to establish our JV, clear differentiation for best-in-class/next generation this collaboration and the over three years of effort NSP. The completion of this transaction meant that therapy in their respective categories, including of our respective teams has yielded a candidate no adjustment event would take place to the 12.2% Fruquintinib, Sulfatinib, Epitinib and Theliatinib; compound, HMPL-507, triggering a $6 million shareholding held by Mitsui & Co., Ltd. (“Mitsui”) in and (iii) botanical drugs against multiple targets, milestone payment from Janssen in 2013. Our team HMHL, the indirect holding company of HMP. Mitsui’s including HMPL-004 and the research currently being will continue to actively collaborate with Janssen original investment in HMHL of $12.5 million was conducted within the NSP JV. to develop the compound. Upon achievement of converted from a long-term liability (its pre-NSP JV Operations Review - Drug Research & Development 2323 HMPL-004-a highly differentiated therapy (cid:51)(cid:43)(cid:63)(cid:81)(cid:63)(cid:113)(cid:30) (cid:70)(cid:75)(cid:78)(cid:74)(cid:43)(cid:46)(cid:46)(cid:50)(cid:30) (cid:64)(cid:103)(cid:109)(cid:106)(cid:109)(cid:101)(cid:103)(cid:97)(cid:113)(cid:30) (cid:75)(cid:99)(cid:97)(cid:102)(cid:95)(cid:108)(cid:103)(cid:113)(cid:107)(cid:30)(cid:109)(cid:100)(cid:30) (cid:63)(cid:97)(cid:114)(cid:103)(cid:109)(cid:108)(cid:30) (cid:80)(cid:109)(cid:115)(cid:114)(cid:99)(cid:30)(cid:109)(cid:100)(cid:30) (cid:63)(cid:98)(cid:107)(cid:103)(cid:108)(cid:103)(cid:113)(cid:114)(cid:112)(cid:95)(cid:114)(cid:103)(cid:109)(cid:108)(cid:30) (cid:76)(cid:109)(cid:108)(cid:43)(cid:113)(cid:99)(cid:106)(cid:99)(cid:97)(cid:114)(cid:103)(cid:116)(cid:99)(cid:30)(cid:192)(cid:30) (cid:107)(cid:115)(cid:106)(cid:114)(cid:103)(cid:110)(cid:106)(cid:99)(cid:30)(cid:114)(cid:95)(cid:112)(cid:101)(cid:99)(cid:114)(cid:113)(cid:57)(cid:30)(cid:65)(cid:77)(cid:86)(cid:42)(cid:30) (cid:74)(cid:77)(cid:42)(cid:30)(cid:78)(cid:78)(cid:63)(cid:80)γ(cid:42)(cid:30)(cid:99)(cid:114)(cid:97)(cid:44) (cid:71)(cid:108)(cid:102)(cid:103)(cid:96)(cid:103)(cid:114)(cid:103)(cid:109)(cid:108)(cid:30)(cid:109)(cid:100)(cid:30)(cid:110)(cid:112)(cid:109)(cid:43) (cid:103)(cid:108)(cid:100)(cid:106)(cid:95)(cid:107)(cid:107)(cid:95)(cid:114)(cid:109)(cid:112)(cid:119)(cid:30) (cid:97)(cid:119)(cid:114)(cid:109)(cid:105)(cid:103)(cid:108)(cid:99)(cid:113)(cid:30) (cid:63)(cid:108)(cid:114)(cid:103)(cid:43)(cid:82)(cid:76)(cid:68)(cid:30) (cid:77)(cid:112)(cid:95)(cid:106)(cid:42)(cid:30)(cid:106)(cid:109)(cid:97)(cid:95)(cid:106)(cid:30) (cid:77)(cid:112)(cid:95)(cid:106)(cid:30) (cid:71)(cid:108)(cid:104)(cid:99)(cid:97)(cid:114)(cid:95)(cid:96)(cid:106)(cid:99)(cid:30) (cid:75)(cid:95)(cid:103)(cid:108)(cid:114)(cid:99)(cid:108)(cid:95)(cid:108)(cid:97)(cid:99)(cid:30) (cid:67)(cid:100)(cid:100)(cid:103)(cid:97)(cid:95)(cid:97)(cid:119)(cid:30) (cid:84)(cid:95)(cid:112)(cid:103)(cid:99)(cid:113)(cid:30) (cid:69)(cid:109)(cid:109)(cid:98)(cid:30)(cid:110)(cid:109)(cid:114)(cid:99)(cid:108)(cid:114)(cid:103)(cid:95)(cid:106)(cid:30) (cid:69)(cid:109)(cid:109)(cid:98)(cid:30) (cid:81)(cid:103)(cid:98)(cid:99)(cid:30)(cid:67)(cid:100)(cid:100)(cid:99)(cid:97)(cid:114)(cid:113)(cid:30) (cid:75)(cid:103)(cid:108)(cid:109)(cid:112)(cid:30) (cid:75)(cid:103)(cid:108)(cid:109)(cid:112)(cid:30) (cid:71)(cid:108)(cid:100)(cid:99)(cid:97)(cid:114)(cid:103)(cid:109)(cid:108)(cid:30)(cid:112)(cid:103)(cid:113)(cid:105)(cid:113)(cid:30)(cid:117)(cid:103)(cid:114)(cid:102)(cid:30) (cid:96)(cid:106)(cid:95)(cid:97)(cid:105)(cid:30)(cid:96)(cid:109)(cid:118)(cid:30)(cid:117)(cid:95)(cid:112)(cid:108)(cid:103)(cid:108)(cid:101)(cid:30) (cid:63)(cid:108)(cid:108)(cid:115)(cid:95)(cid:106)(cid:30)(cid:83)(cid:81)(cid:34)(cid:30) (cid:82)(cid:112)(cid:99)(cid:95)(cid:114)(cid:107)(cid:99)(cid:108)(cid:114)(cid:30)(cid:65)(cid:109)(cid:113)(cid:114)(cid:30) (cid:34)(cid:48)(cid:42)(cid:46)(cid:46)(cid:46)(cid:30)(cid:114)(cid:109)(cid:30)(cid:34)(cid:53)(cid:42)(cid:46)(cid:46)(cid:46)(cid:30) (cid:82)(cid:64)(cid:66)(cid:30) (cid:34)(cid:47)(cid:51)(cid:42)(cid:46)(cid:46)(cid:46)(cid:30)(cid:114)(cid:109)(cid:30)(cid:34)(cid:48)(cid:46)(cid:42)(cid:46)(cid:46)(cid:46)(cid:30) Product Pipeline Progress HMPL-004: This is a proprietary botanical drug for the treatment of IBD, namely ulcerative colitis and Crohn’s disease. Subject to the terms of the NSP JV agreement, and as part of the broader gastrointestinal disease research and development collaboration, HMPL-004 is in fi nal global Phase III registration trials. Unmet needs in IBD: With annual drug sales of about $8 billion across the seven major markets (US, Japan, IBD is a very large therapeutic area. However, there remain clear unmet medical needs in its treatment. These include the need for novel agents which can induce and maintain remission among first-line Mesalamine (5-ASA) non-responding or intolerant patients, and the need for safer agents without the side effects of corticosteroids and immune suppressors. France, Germany, Italy, Spain, and United Kingdom) (cid:65)(cid:106)(cid:103)(cid:108)(cid:103)(cid:97)(cid:95)(cid:106)(cid:30)(cid:80)(cid:99)(cid:113)(cid:110)(cid:109)(cid:108)(cid:113)(cid:99)(cid:30) (cid:50)(cid:46)(cid:43)(cid:52)(cid:46)(cid:35)(cid:30) (cid:124)(cid:53)(cid:46)(cid:35)(cid:30) (cid:38)(cid:78)(cid:102)(cid:95)(cid:113)(cid:99)(cid:30)(cid:71)(cid:71)(cid:30)(cid:98)(cid:95)(cid:114)(cid:95)(cid:39)(cid:30) (cid:124)(cid:53)(cid:46)(cid:35)(cid:30) Pre-clinical and Clinical Performance of HMPL- take approximately 24 months to complete, with an US and Europe. The cost of the HMPL-004 Phase III 004: Extensive preclinical studies indicate that HMPL- Interim Analysis planned for mid-2014. A second programme and all gastrointestinal disease research 004 exhibits its anti-inflammatory effects through Phase III study NATRUL-4, a study designed to and development activities will be funded primarily the inhibition of multiple cytokines (proteins), both evaluate 1,800mg/day of HMPL-004 as a 52-week by Nestlé Health Science through the initial capital systemically and locally, which are involved in maintenance therapy, initiated in July 2013. Subjects investment in NSP and further milestone payments to causing digestive tract inflammation. HMPL-004’s who have completed NATRUL-3 are eligible to enter NSP linked to the success of clinical and commercial effi cacy in induction of clinical response, remission NATRUL-4 directly. activities. and mucosal healing as well as a favourable safety profi le has been established in multiple clinical trials. The total HMPL-004 Phase III clinical programme In the aggregate, the data has demonstrated HMPL- will enroll over 2,700 patients suffering from 004’s high potential to address IBD’s unmet medical ulcerative colitis or Crohn’s disease, primarily in the needs. NSP initiated the NATRUL-3 global Phase III registration trial in April 2013. The primary endpoint of this study is to evaluate 8-week treatments of 1,800mg/day and 2,400mg/day dosages of HMPL- 004 compared with placebo in patients with active mild-to-moderate ulcerative colitis who have inadequate response to their current treatment with Mesalamine (5-ASA). Secondary endpoints of this study include clinical response and mucosal healing. As at the end of 2013, 65 US and 13 European clinical sites were running and active. Screening and enrollment in the NATRUL-3 study is proceeding well and the entire study is expected to Hutchison MediPharma Shanghai 24 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report Drug Research & Development Oncology Portfolio: HMP has a portfolio of five small molecule targeted cancer drugs, three of which are in Phase I clinical trials and two of which are starting Phase II studies on multiple tumour- types. Our strategy over the past nine years has been to discover small molecule drugs which target both validated targets such as Epidermal Growth Factor (“EGFR”) and VEGFR as well as more novel, clinically un-validated targets which have not yet received marketing approval, such as c-Met, Syk, Fibroblast Growth Factor Receptor (“FGFR”) and PI3K. (cid:71)(cid:108)(cid:98)(cid:103)(cid:97)(cid:95)(cid:114)(cid:103)(cid:109)(cid:108) (cid:81)(cid:114)(cid:109)(cid:107)(cid:95)(cid:97)(cid:102) (cid:74)(cid:115)(cid:108)(cid:101) (cid:70)(cid:99)(cid:95)(cid:98)(cid:30)(cid:36)(cid:30)(cid:76)(cid:99)(cid:97)(cid:105) (cid:75)(cid:99)(cid:106)(cid:95)(cid:108)(cid:109)(cid:107)(cid:95) (cid:65)(cid:109)(cid:106)(cid:109)(cid:108) All five of our oncology clinical drug candidates (cid:75)(cid:115)(cid:106)(cid:114)(cid:103)(cid:110)(cid:106)(cid:99)(cid:30)(cid:75)(cid:119)(cid:99)(cid:106)(cid:109)(cid:107)(cid:95) have received IND approval by the CFDA through the Green Channel expedited application process, highlighting their potential and relevance for the China market. In addition, one drug, Volitinib, has also been undergoing Phase I trials in Australia. Together, (cid:77)(cid:116)(cid:95)(cid:112)(cid:103)(cid:95)(cid:108) (cid:73)(cid:103)(cid:98)(cid:108)(cid:99)(cid:119)(cid:30)(cid:38)(cid:78)(cid:80)(cid:65)(cid:65)(cid:39) (cid:73)(cid:103)(cid:98)(cid:108)(cid:99)(cid:119)(cid:30)(cid:38)(cid:77)(cid:114)(cid:102)(cid:99)(cid:112)(cid:113)(cid:39) (cid:67)(cid:113)(cid:109)(cid:110)(cid:102)(cid:95)(cid:101)(cid:115)(cid:113) these oncology clinical drug candidates cover a (cid:82)(cid:109)(cid:114)(cid:95)(cid:106) broad spectrum of most prevalent solid tumours and hematologic malignancies with important unmet c-Met is an important target (cid:97)(cid:43)(cid:75)(cid:99)(cid:114) (cid:76)(cid:99)(cid:117)(cid:30)(cid:65)(cid:95)(cid:113)(cid:99)(cid:113)(cid:30)(cid:38)(cid:48)(cid:46)(cid:46)(cid:54)(cid:39) (cid:63)(cid:107)(cid:110)(cid:106)(cid:103)(cid:100)(cid:103)(cid:43) (cid:97)(cid:95)(cid:114)(cid:103)(cid:109)(cid:108) (cid:75)(cid:115)(cid:114)(cid:95)(cid:114)(cid:103)(cid:109)(cid:108) (cid:77)(cid:116)(cid:99)(cid:112)(cid:43) (cid:67)(cid:118)(cid:110)(cid:112)(cid:99)(cid:113)(cid:113)(cid:103)(cid:109)(cid:108) (cid:69)(cid:106)(cid:109)(cid:96)(cid:95)(cid:106) (cid:65)(cid:102)(cid:103)(cid:108)(cid:95) (cid:47)(cid:35) (cid:54)(cid:35) (cid:48)(cid:53)(cid:35) (cid:50)(cid:35) (cid:47)(cid:46)(cid:46)(cid:35) (cid:47)(cid:49)(cid:35) (cid:47)(cid:46)(cid:35) (cid:50)(cid:35) (cid:47)(cid:47)(cid:35) (cid:47)(cid:46)(cid:35) (cid:50)(cid:35) (cid:50)(cid:35) (cid:50)(cid:47)(cid:35) (cid:52)(cid:53)(cid:35) (cid:50)(cid:52)(cid:35) (cid:52)(cid:51)(cid:35) (cid:49)(cid:49)(cid:35) (cid:53)(cid:55)(cid:35) (cid:55)(cid:48)(cid:35) (cid:55)(cid:54)(cid:55)(cid:42)(cid:51)(cid:55)(cid:54) (cid:50)(cid:52)(cid:50)(cid:42)(cid:50)(cid:49)(cid:55) (cid:47)(cid:42)(cid:52)(cid:46)(cid:54)(cid:42)(cid:54)(cid:48)(cid:49) (cid:51)(cid:48)(cid:48)(cid:42)(cid:46)(cid:51)(cid:46) (cid:52)(cid:51)(cid:49)(cid:42)(cid:47)(cid:55)(cid:55) (cid:47)(cid:55)(cid:53)(cid:42)(cid:50)(cid:46)(cid:48) (cid:53)(cid:52)(cid:42)(cid:49)(cid:53)(cid:46) (cid:49)(cid:42)(cid:54)(cid:48)(cid:51) (cid:47)(cid:42)(cid:48)(cid:49)(cid:49)(cid:42)(cid:53)(cid:47)(cid:47) (cid:48)(cid:48)(cid:47)(cid:42)(cid:49)(cid:47)(cid:49) (cid:47)(cid:46)(cid:48)(cid:42)(cid:53)(cid:52)(cid:48) (cid:48)(cid:48)(cid:51)(cid:42)(cid:50)(cid:54)(cid:50) (cid:49)(cid:46)(cid:42)(cid:47)(cid:51)(cid:46) (cid:48)(cid:53)(cid:47)(cid:42)(cid:49)(cid:50)(cid:54) (cid:50)(cid:54)(cid:48)(cid:42)(cid:48)(cid:49)(cid:55) (cid:51)(cid:42)(cid:53)(cid:55)(cid:50)(cid:42)(cid:53)(cid:47)(cid:52) (cid:51)(cid:42)(cid:55)(cid:46)(cid:55) (cid:48)(cid:54)(cid:42)(cid:53)(cid:49)(cid:55) (cid:49)(cid:42)(cid:52)(cid:47)(cid:48) (cid:49)(cid:48)(cid:42)(cid:51)(cid:46)(cid:54) (cid:48)(cid:51)(cid:55)(cid:42)(cid:48)(cid:49)(cid:51) (cid:47)(cid:42)(cid:52)(cid:47)(cid:54)(cid:42)(cid:46)(cid:46)(cid:46) medical needs representing significant market In December 2011, HMP signed a global licensing types, in particular in relation to PRCC, a form of renal potential. deal with AstraZeneca on Volitinib and then followed cell carcinoma (kidney cancer) for which there is no up with the start of Phase I study in Australia current approved therapy on the global market. PRCC We believe that HMP currently owns one of the in February 2012. This Phase I clinical study is represents about 10-15% of all new cases of renal cell deepest, fastest moving and most relevant small designed to find the maximum tolerated dose and carcinoma. Aberrant activation of the c-Met signalling molecule targeted cancer drug pipelines in China recommended Phase II dose. This study has to- pathway has been well documented in PRCC and today, and that given the rapid growth of this date enrolled and treated 30 patients in seven dose effective inhibition of c-Met has been considered segment, as well as the overall attractiveness of both cohorts with the drug administered either once a potential treatment pathway for PRCC. Based on the China and global oncology market, we are well daily or twice daily, the majority of patients being Phase I activity, we believe that Volitinib is a highly positioned to increase shareholder value rapidly in Caucasian. the near term. potent c-Met inhibitor and as such has great potential for several tumour-types which exhibit c-Met Volitinib: Volitinib (HMPL-504) is a potent and CFDA in China enabling HMP to initiate a Phase I publication of the results from the Phase I studies highly selective c-Met inhibitor for the treatment of study of Volitinib in Asian patients in June 2013. Ten is planned to be released at the annual meeting of cancer, which has been demonstrated to inhibit the patients have so far been enrolled in this study. ASCO in June 2014. In April 2013 an IND application was cleared by the amplifi cation, mutation, or over-expression. Formal growth of tumours in a series of pre-clinical disease models, especially for those tumours with aberrant It is anticipated that Phase I dose escalation studies Since PRCC has no approved therapy on the global c-Met signalling such as gene amplifi cation or c-Met in Australia and China will complete by the end market, HMP and AstraZeneca intend to start a global over expression. In addition, these biomarkers of the first half of 2014. To date, Volitinib has Phase II PRCC study in early 2014 followed by Phase provide the potential to explore patient selection demonstrated good safety and tolerability and III global registration study in 2015. Furthermore, in strategies in later stage clinical trials. favourable pharmacokinetic properties in late stage addition to the PRCC plans, Phase II proof-of-concept cancer patients. More importantly, it has shown studies on several other tumour-types with c-Met encouraging anti-tumour activity in several tumour- amplifi cation, mutation, or over-expression are being considered and should start in 2014. Operations Review - Drug Research & Development 2525 Fruquintinib Phase I tumor volume shrinkage: (cid:48) (cid:52) (cid:35) (cid:47) (cid:52) (cid:35) (cid:40) (cid:40) (cid:47) (cid:53) (cid:35) (cid:54) (cid:35) (cid:54) (cid:35) (cid:52) (cid:35) (cid:40) (cid:40) VEGF/VEGFR Inhibitors: At an advanced stage, tumours secrete large amounts of VEGF, a protein, to stimulate formation of excessive vasculature (angiogenesis) around the tumour in order to provide greater blood fl ow, oxygen, and nutrients to fuel the rapid growth of the tumour. VEGF receptor inhibitors stop the growth of the vasculature around the tumour and thereby starve the tumour of the nutrients it needs to grow rapidly. Several fi rst generation VEGF/VEGFR inhibitors have been approved globally since 2005 and 2006, including both small molecule receptor inhibitor (cid:50)(cid:46)(cid:35) (cid:48)(cid:46)(cid:35) (cid:46)(cid:35) (cid:43)(cid:48)(cid:46)(cid:35) (cid:43)(cid:50)(cid:46)(cid:35) (cid:43)(cid:52)(cid:46)(cid:35) (cid:43)(cid:54)(cid:46)(cid:35) (cid:39) (cid:66) (cid:74) (cid:81) (cid:38) (cid:30) (cid:99) (cid:108) (cid:103) (cid:106) (cid:30) (cid:99) (cid:113) (cid:95) (cid:96) (cid:107) (cid:109) (cid:112) (cid:100) (cid:30) (cid:39) (cid:35) (cid:46) (cid:46) (cid:47) (cid:38) (cid:99) (cid:101) (cid:108) (cid:95) (cid:102) (cid:65) (cid:47) (cid:48) (cid:49) (cid:50) (cid:51) (cid:52) (cid:53) (cid:54) (cid:55) (cid:47)(cid:46) (cid:47)(cid:47) (cid:47)(cid:48) (cid:47)(cid:49) (cid:47)(cid:50) (cid:47)(cid:51) (cid:47)(cid:52) (cid:47)(cid:53) (cid:47)(cid:54) (cid:47)(cid:55) (cid:48)(cid:46) (cid:48)(cid:47) (cid:48)(cid:48) (cid:48)(cid:49) (cid:48)(cid:50) (cid:48)(cid:51) (cid:48)(cid:52) (cid:48)(cid:53) (cid:48)(cid:54) (cid:48)(cid:55) (cid:49)(cid:46) (cid:49)(cid:47) (cid:49)(cid:48) (cid:49)(cid:49) (cid:49)(cid:50) (cid:43) (cid:47) (cid:35) (cid:43) (cid:49) (cid:35) (cid:43) (cid:50) (cid:35) (cid:40) (cid:40) (cid:44) (cid:43) (cid:51) (cid:48) (cid:35) (cid:43) (cid:53) (cid:35) (cid:43) (cid:47) (cid:48) (cid:35) (cid:43) (cid:47) (cid:51) (cid:35) (cid:43) (cid:47) (cid:51) (cid:35) (cid:43) (cid:47) (cid:51) (cid:35) (cid:40) (cid:40) (cid:43) (cid:47) (cid:53) (cid:35) (cid:43) (cid:47) (cid:54) (cid:35) (cid:43) (cid:47) (cid:55) (cid:35) (cid:43) (cid:48) (cid:47) (cid:35) (cid:43) (cid:48) (cid:47) (cid:35) (cid:43) (cid:49) (cid:47) (cid:35) (cid:43) (cid:49) (cid:48) (cid:35) (cid:43) (cid:49) (cid:49) (cid:35) (cid:43) (cid:49) (cid:50) (cid:35) (cid:43) (cid:49) (cid:50) (cid:35) (cid:43) (cid:49) (cid:51) (cid:35) (cid:43) (cid:49) (cid:54) (cid:35) (cid:43) (cid:50) (cid:46) (cid:35) (cid:43) (cid:50) (cid:49) (cid:35) (cid:43) (cid:50) (cid:53) (cid:35) (cid:43) (cid:51) (cid:55) (cid:35) (cid:40) (cid:40) (cid:40) (cid:43) (cid:51) (cid:55) (cid:35) (cid:43) (cid:52) (cid:55) (cid:35) (cid:43) (cid:47) (cid:46) (cid:46) (cid:35) drugs such as Nexavar™ (Bayer) and Sutent™ (Pfi zer) (cid:43)(cid:47)(cid:46)(cid:46)(cid:35) with 2012 sales of approximately $1.0 billion and $1.2 billion respectively; and monoclonal antibodies such as Avastin™ (Roche) with 2012 sales (cid:40)(cid:40)(cid:56)(cid:30)(cid:109)(cid:116)(cid:99)(cid:112)(cid:95)(cid:106)(cid:106)(cid:30)(cid:78)(cid:66)(cid:30)(cid:38)(cid:108)(cid:109)(cid:108)(cid:43)(cid:114)(cid:95)(cid:112)(cid:101)(cid:99)(cid:114)(cid:30)(cid:106)(cid:99)(cid:113)(cid:103)(cid:109)(cid:108)(cid:42)(cid:30)(cid:108)(cid:99)(cid:117)(cid:30)(cid:106)(cid:99)(cid:113)(cid:103)(cid:109)(cid:108)(cid:30)(cid:95)(cid:110)(cid:110)(cid:99)(cid:95)(cid:112)(cid:99)(cid:98)(cid:39) (cid:40)(cid:40)(cid:40)(cid:56)(cid:30)(cid:109)(cid:116)(cid:99)(cid:112)(cid:95)(cid:106)(cid:106)(cid:30)(cid:78)(cid:66)(cid:30)(cid:38)(cid:78)(cid:80)(cid:30)(cid:109)(cid:108)(cid:30)(cid:66)(cid:50)(cid:55)(cid:30)(cid:95)(cid:113)(cid:113)(cid:99)(cid:113)(cid:113)(cid:107)(cid:99)(cid:108)(cid:114)(cid:30)(cid:117)(cid:95)(cid:113)(cid:30)(cid:108)(cid:109)(cid:114)(cid:30)(cid:97)(cid:109)(cid:108)(cid:100)(cid:103)(cid:112)(cid:107)(cid:99)(cid:98)(cid:30)(cid:50)(cid:117)(cid:105)(cid:113)(cid:30)(cid:106)(cid:95)(cid:114)(cid:99)(cid:112)(cid:39) of approximately $6.1 billion. The success of these per day cohort overall response rate was over 46%. will be shared between HMP and Lilly. The current drugs validated VEGFR inhibition as a new class of In separate Phase I studies, overall response rates for development plan for Fruquintinib now includes one therapy for the treatment of cancer. Sutent™ and Nexavar™ were approximately 18% and new Phase Ib study and two new Phase II studies to Fruquintinib: Fruquintinib (HMPL-013) is a 2%, respectively. initiate throughout 2014, beginning in the second quarter, however in the case of the tumour-type novel small molecule compound to treat cancer A fi rst-in-human Phase I clinical trial started in early being studied in the ongoing Phase Ib, HMP will very that selectively inhibits VEGF receptors, namely 2011 and the clinical programme has enrolled and likely move directly into a Phase III registration study VEGFR1, VEGFR2, and VEGFR3 which makes it highly treated 40 patients. Fruquintinib has demonstrated in the second half of 2014. potent at low dosages. Fruquintinib’s high kinase excellent pharmacokinetic properties and was well selectivity (and therefore tolerability), particularly tolerated at doses up to 4mg once daily as well as A critical step towards registration of Fruquintinib is when compared to fi rst generation VEGFR inhibitors 5mg once daily in a three-weeks-on, one-week- the establishment of manufacturing capability which on the market, leads to high drug exposure at the off, regimen. A Phase Ib study was initiated and needs to be in place ahead of initiation of the first maximum tolerated dose, higher sustained target has treated 58 patients as of the end of 2013 in a Fruquintinib Phase III study in China. To this end, inhibition to maximise strong clinical effi cacy, and a tumour-type that responded well to Fruquintinib in during 2013, HMP began construction of a China better safety profi le. Fruquintinib has shown highly Phase I. The Phase Ib study is expected to fully report GMP quality formulation facility for Fruquintinib potent inhibitory effects on multiple human tumour by the end of the third quarter 2014, with detailed in Suzhou, Jiangsu province. We believe that this xenografts, including some refractory tumours such information expected to be released at the ASCO facility will be ready to produce Fruquintinib by mid- as pancreatic cancer and melanoma. annual meeting in June 2014. 2014 to support the fi rst Phase III registration study. Furthermore, the Suzhou facility will be capable of Very good preliminary clinical activity has been HMP submitted a Phase II/III clinical trial application being expanded to support China production of HMP’s observed in multiple tumour types, including partial to the CFDA in late 2012 and received clearance other oncology candidates as and when necessary. response (greater than 30% reduction in tumour for the Phase II/III study in mid-2013. In October size) in breast, colorectal, gastric and non-small 2013 HMP entered into a co-development and We believe that if the Fruquintinib clinical efficacy cell lung cancer (“NSCLC”) patients. This shows an commercialisation agreement in China with Lilly and safety that we have seen in the Phase I study excellent correlation of the pre-clinical and clinical for Fruquintinib, granting the drug more financial is carried through to Phase III, Fruquintinib has the data with respect to Fruquintinib anti-tumour activity resources to be developed across multiple tumour potential to become a major targeted therapy on and drug exposure. Across all dose cohorts, overall types in China. The costs of future development both the China and global markets over the coming response rate was 38%, and in the 4mg single dose of Fruquintinib in China, to be carried out by HMP, years with substantial global sales potential. 26 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report Drug Research & Development Hutchison MediPharma (Suzhou) Limited (“HMP Suzhou”) – Fruquintinib formulation factory Sulfatinib: Sulfatinib (HMPL-012) is a novel small in China and potentially globally. HMP expects to molecule that selectively inhibits the tyrosine kinase complete the dose escalation by mid-2014 and activity associated with VEGF and FGFR. Pre-clinical report results shortly thereafter. data shows that Sulfatinib has demonstrated a narrow kinase inhibition profile affecting mainly EGFR Inhibitors: EGFR is a protein that is a VEGFR and FGFR and consequently has an attractive cell-surface receptor for Epidermal Growth anti-tumour profile, and is a potent suppressor Factor. Activation of EGFR can lead to a series of angiogenesis, an established approach in anti- of downstream signalling activities that activate cancer treatment. It targets major cancer types tumour cell proliferation, migration, invasion, and such as hepatocellular carcinoma (liver cancer), the suppression of cell death. Tumour cell division HMP Suzhou – QA/QC labs neuroendocrine tumours, colorectal cancer and can happen uncontrollably when EGFR-activating breast cancer. The fi rst-in-human Phase I clinical trial mutations occur. Treatment strategies for certain is underway in China and has enrolled and treated cancers relate to inhibiting EGFRs with small molecule 57 patients with the drug given once or twice daily. tyrosine kinase inhibitors. Once the tyrosine kinase The Phase I dose escalation is still ongoing. To is disabled, it cannot activate the EGFR pathway and date, Sulfatinib has demonstrated good safety and cancer cell growth is suppressed. tolerability, favourable pharmacokinetic properties, and encouraging preliminary anti-tumour activity in Since 2003, several EGFR inhibitors have been multiple tumour types, including liver cancer. Most approved globally and in China and are used for encouragingly, in Phase I, Sulfatinib has exhibited the treatment of NSCLC, particularly for patients anti-tumour activity in some tumour types for which with EGFR-activating mutations, who make up there are limited treatment options approved on approximately 10-30% of NSCLC patients. The the global market. This we believe could potentially approved EGFR inhibitors include both small lead to accelerated approvals/breakthrough status molecule drugs such as Tarceva™ (Roche) and Iressa™ HMP Suzhou – Workshop Operations Review - Drug Research & Development 2727 (AstraZeneca) with 2012 sales of approximately $1.4 billion and $0.6 billion respectively and monoclonal antibodies such as Erbitux™ (indicated for head and neck cancer and colorectal cancer) (Bristol-Myers Squibb and Merck KGaA) with 2012 sales of approximately $1.8 billion. The success of these drugs has validated EGFR inhibition as a new class of cancer therapy. However, there remain several areas of unmet medical needs that represent signifi cant market opportunities, including: (1) brain metastasis and/or primary brain tumours with EGFR activating mutations; (2) tumours with wild-type EGFR activation through gene amplifi cation or over- expression; and (3) T790M EGFR mutation that is resistant to current EGFR inhibitors. Sulfatinib Phase I tumour shrinkage: (cid:85)(cid:85)(cid:95)(cid:95)(cid:114)(cid:114)(cid:99)(cid:99)(cid:112)(cid:112)(cid:100)(cid:100)(cid:95)(cid:95)(cid:106)(cid:106)(cid:106)(cid:106)(cid:30)(cid:30)(cid:78)(cid:78)(cid:106)(cid:106)(cid:109)(cid:109)(cid:114)(cid:114)(cid:56)(cid:56)(cid:30)(cid:30)(cid:30)(cid:30)(cid:64)(cid:99)(cid:113)(cid:114)(cid:30)(cid:112)(cid:99)(cid:113)(cid:110)(cid:109)(cid:108)(cid:113)(cid:99)(cid:30)(cid:109)(cid:100)(cid:30)(cid:99)(cid:116)(cid:95)(cid:106)(cid:115)(cid:95)(cid:96)(cid:106)(cid:99)(cid:30)(cid:110)(cid:95)(cid:114)(cid:103)(cid:99)(cid:108)(cid:114)(cid:113)(cid:30)(cid:38)(cid:108)(cid:59)(cid:47)(cid:49)(cid:39) (cid:30) (cid:30) (cid:39) (cid:66) (cid:74) (cid:81) (cid:38) (cid:30) (cid:99) (cid:108) (cid:103) (cid:106) (cid:30) (cid:99) (cid:113) (cid:95) (cid:64) (cid:107) (cid:109) (cid:112) (cid:100) (cid:30) (cid:39) (cid:35) (cid:38) (cid:30) (cid:99) (cid:101) (cid:108) (cid:95) (cid:102) (cid:65) (cid:48)(cid:46)(cid:35) (cid:47)(cid:46)(cid:35) (cid:46)(cid:35) (cid:43)(cid:47)(cid:46)(cid:35) (cid:43)(cid:48)(cid:46)(cid:35) (cid:43)(cid:49)(cid:46)(cid:35) (cid:43)(cid:50)(cid:46)(cid:35) (cid:43)(cid:51)(cid:46)(cid:35) HMP has two EGFR inhibitors which potentially In pre-clinical studies, Epitinib demonstrated HMP is now working, within the Phase I trial could address two of these areas, Epitinib, which excellent brain penetration, superior to that of framework, towards establishing activity in NSCLC entered Phase I trials in late 2011, and Theliatinib, current globally marketed EGFR inhibitors, and good patients with tumours metastasised to the brain which entered Phase I trials in late 2012. At efficacy in orthotopic brain tumour models and carrying EGFR-activating mutations. If efficacy the end of Phase I we will judge the functional reached drug concentrations in the brain tissue that among patients with primary brain tumours or differentiation/superiority of these two molecules are expected to result in robust effi cacy when given tumours metastasised to the brain carrying EGFR- both against each other and current marketed orally at doses well below toxic levels. The Phase I activating mutations is established, Epitinib could EGFR therapies and decide upon a strategy going clinical trial started in China in mid-2011 and by the become a breakthrough development candidate forward. end of 2013 the trial has enrolled and treated 28 for HMP, making it potentially a next-generation Epitinib: Epitinib (HMPL-813) is a highly potent tolerated with excellent pharmacokinetic properties attractive China prospects and major global sales inhibitor of the EGFR tyrosine kinase involved in up to 240mg per day and has now demonstrated the potential. We expect this Phase I study will complete tumour growth, invasion and migration designed anti-tumour activity expected from EGFR inhibitors in the second half of 2014. patients with drug given once daily. Epitinib was well differentiated alternative to Iressa™ and Tarceva™ with to maximise penetration of the drug into the and partial response among patients with NSCLC with brain. Epitinib has good kinase selectivity and EGFR-activating mutation. demonstrated a broad spectrum of anti-tumour activity via oral dosing in multiple xenografts in preclinical studies. Importantly, in addition to NSCLC, EGFR-activating mutations are also found in 30- 40% of glioblastoma patients, the most aggressive malignant primary brain tumour in humans. The currently available EGFR inhibitors lack satisfactory clinical efficacy against primary brain tumours or tumours metastasised to the brain, largely due to insuffi cient drug penetration into the brain through the blood brain barrier. Brain metastasis occurs in 8-10% of cancer patients and is a signifi cant cause of cancer-related morbidity and mortality worldwide. Primary tumours of the lung are the most common cause of brain metastasis, as it has been estimated that 50% of patients with lung cancer will ultimately develop brain metastasis. Hutchison MediPharma Shanghai – Laboratory 28 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report Drug Research & Development Theliatinib: Theliatinib (HMPL-309) is a novel B cells, one of major cellular components of the which will start a Phase I study to evaluate its safety small molecule EGFR inhibitor with strong binding immune system, play pivotal roles in autoimmune and pharmacokinetic profi le in humans. affi nity to the wild-type EGFR protein. In pre-clinical diseases such as RA and lupus. Targeted B-cell testing, it was found to have potent anti-EGFR activity receptor therapy Rituximab (sold as Rituxan™ and We believe, due to its high selectivity on Syk and low against the growth of not only the tumours with MabThera™ by Roche), has been approved for the inhibition of other kinases and good pharmacokinetic EGFR-activating mutations, but also those without treatment of RA and non-Hodgkin’s lymphoma. Syk, properties, HMPL-523 has the potential to be the fi rst (the majority, also known as wild-type EGFR). Other a key enzyme downstream of the B cell receptor, small molecule Syk inhibitor to exhibit both effi cacy than NSCLC tumours, most other tumour types have regulates many cellular events of B cells. The fi rst oral in B-cell activation inhibition as well as a good safety no EGFR-activating mutations. The current EGFR Syk inhibitor in clinical development, Fostamatinib, profi le in humans. If this can be established in Phase I, inhibitor products have limited response for these had demonstrated clinical effi cacy in late-stage RA we believe that HMPL-523 will become an attractive cancers and therefore are limited to only NSCLC trials, however its dose and hence its efficacy was candidate for global partnership and development. patients with the EGFR-activating mutations. The limited by its side effects. In addition, GS-9973 (in Phase I clinical trial started in China in late-2012 and, development by Gilead Sciences) is undergoing HMPL-453: In the second half of 2013, HMP’s amongst the 14 patients that have been enrolled a Phase II clinical trial for chronic lymphocytic discovery programme against the novel FGFR target and treated, Theliatinib was well tolerated with good leukaemia with promising Phase II interim results. in oncology started fi nal regulatory toxicity testing. pharmacokinetic properties up to 60mg per day, dose escalation is ongoing. If the pre-clinical fi ndings In preclinical in vitro and animal studies, HMPL- HMPL-507: In addition to our internal discovery of wild-type EGFR inhibition are confi rmed in humans 523 demonstrated superior potency and kinase activities, our three and a half year collaboration with in Phase I clinical studies, Theliatinib would become selectivity to Fostamatinib (which should improve its Janssen in inflammation has been very successful a highly attractive next-generation EGFR inhibitor. toxicity profi le), a reversal of the progression of joint and has yielded a confi rmed candidate compound, The fi nal Phase I study results are anticipated to be infl ammation and bone erosion, and a reduction in HMPL-507, against a novel inflammation target, available in late 2014. the release of multiple pro-infl ammatory cytokines. triggering a $6 million milestone payment from Discovery programmes: Our fully integrated Good Laboratory Practice safety evaluation with a continue into 2014, with our respective teams discovery teams in oncology and immunology favourable safety margin. It is anticipated that the working extremely well in partnership. It has completed all IND-enabling studies and Janssen. This important strategic collaboration will made substantial progress in 2013. We staff and IND will be submitted in early 2014 in Australia, after resource our discovery team with the objective of producing one or two new internally discovered drug candidates per year. HMPL-523: HMPL-523 is a novel, highly selective and potent small molecule inhibitor targeting Syk, an essential enzyme involved in B cell receptor signalling pathway and a novel target for investigational therapies in immunology and oncology. HMPL-523 is being developed as an oral formulation for the treatment of infl ammatory diseases such as rheumatoid arthritis (“RA”) and lupus, as well as B cell receptor driven malignancies. HMPL-523 Effi cacy – Arthritis Model (cid:48)(cid:50) (cid:47)(cid:55) (cid:47)(cid:50) (cid:55) (cid:50) (cid:43)(cid:47) (cid:30)(cid:110)(cid:70)(cid:48)(cid:44)(cid:47) (cid:70)(cid:65)(cid:106) (cid:47) (cid:49) (cid:47)(cid:46) (cid:49)(cid:46) (cid:47)(cid:46)(cid:30)(cid:75)(cid:78)(cid:73)(cid:89)(cid:48)(cid:91)(cid:42) (cid:79)(cid:77)(cid:66)(cid:30)(cid:71)(cid:78) (cid:47)(cid:46)(cid:30)(cid:75)(cid:78)(cid:73)(cid:89)(cid:48)(cid:91)(cid:42) (cid:64)(cid:71)(cid:66)(cid:42)(cid:30)(cid:78)(cid:77) (cid:76)(cid:95)(cid:146)(cid:116)(cid:99) (cid:84)(cid:99)(cid:102)(cid:103)(cid:97)(cid:106)(cid:99) (cid:70)(cid:75)(cid:78)(cid:74)(cid:43)(cid:51)(cid:48)(cid:49)(cid:30)(cid:38)(cid:75)(cid:78)(cid:73)(cid:89)(cid:48)(cid:91)(cid:42)(cid:30)(cid:79)(cid:66)(cid:42)(cid:30)(cid:78)(cid:77)(cid:39) (cid:67)(cid:108)(cid:96)(cid:112)(cid:99)(cid:106) (cid:80)(cid:50)(cid:46)(cid:52) (cid:30) (cid:91) (cid:47) (cid:89) (cid:30) (cid:113) (cid:99) (cid:112) (cid:109) (cid:97) (cid:113) (cid:30) (cid:106) (cid:119) (cid:101) (cid:109) (cid:109) (cid:102) (cid:114) (cid:95) (cid:110) (cid:109) (cid:114) (cid:113) (cid:103) (cid:70) (cid:99) (cid:106) (cid:105) (cid:108) (cid:63) (cid:30) (cid:30) (cid:30) (cid:114) (cid:95) (cid:80) (cid:30) (cid:100) (cid:109) (cid:107) (cid:115) (cid:81) (cid:30) Note: 1 Aggregate of scores for Bone resorption; Structure (cartilage damage); Cartilage cells Inflammatory cell infiltration in periarticular tissue; and Synovial inflammation & hyperplasia; 2 MPK = milligrams per kilogram of body weight; QD = one dose per day; BID = two doses per day; QOD = one dose every other day; PO = by mouth (i.e. orally); IP = by Intraperitoneal injection; Naïve = model score without induced arthritis; Notes: Fostamatinib is a prodrug of the SYK inhibitor R406. Consumer Products Operations Review - Consumer Products 2929 Consumer Products Division Our Consumer Products Division is an extension of our China Healthcare operation which enables Chi- Med to capture part of the growing consumer trend towards healthy living and to capitalise on the considerable consumer products synergies with the broader Hutchison Whampoa group. We aim to build a profi table scale business systematically over time behind a portfolio of relevant and unique health- related consumer products. Overall, the Consumer Products Division’s sales on continuing operations grew 23% in 2013 to $12.5 million (2012: $10.2m). This was driven by solid 2012 – Global Market Share – Health & Wellness F&B (cid:77)(cid:112)(cid:101)(cid:95)(cid:108)(cid:103)(cid:97)(cid:30) (cid:50)(cid:35)(cid:42)(cid:30)(cid:34)(cid:48)(cid:55)(cid:96)(cid:30) (cid:64)(cid:99)(cid:114)(cid:114)(cid:99)(cid:112)(cid:30)(cid:100)(cid:109)(cid:112)(cid:30)(cid:87)(cid:109)(cid:115) (cid:48)(cid:50)(cid:35)(cid:42)(cid:30)(cid:34)(cid:47)(cid:54)(cid:47)(cid:96) (cid:76)(cid:95)(cid:114)(cid:115)(cid:112)(cid:95)(cid:106)(cid:106)(cid:119)(cid:30) (cid:70)(cid:99)(cid:95)(cid:106)(cid:114)(cid:102)(cid:119)(cid:30) (cid:49)(cid:55)(cid:35)(cid:42)(cid:30)(cid:34)(cid:48)(cid:54)(cid:53)(cid:96)(cid:30) (cid:68)(cid:109)(cid:109)(cid:98)(cid:30)(cid:71)(cid:108)(cid:114)(cid:109)(cid:106)(cid:99)(cid:112)(cid:95)(cid:108)(cid:97)(cid:99)(cid:30) (cid:47)(cid:35)(cid:42)(cid:30)(cid:34)(cid:54)(cid:96)(cid:30) (cid:68)(cid:109)(cid:112)(cid:114)(cid:103)(cid:100)(cid:103)(cid:99)(cid:98)(cid:45)(cid:30) (cid:68)(cid:115)(cid:108)(cid:97)(cid:114)(cid:103)(cid:109)(cid:108)(cid:95)(cid:106)(cid:30) (cid:49)(cid:48)(cid:35)(cid:42)(cid:30)(cid:34)(cid:48)(cid:50)(cid:48)(cid:96)(cid:30) Note: Euromonitor – Global product share, 2012 Market Value (US$ billion). growth in the HHO business. We discontinued the of primarily healthy living focused products in 48 packaged food business to $6.7 million, a 31% Sen France operation and aspects of the China food, beverage, baby, and beauty care categories. increase in sales of organic personal care products infant formula businesses and, in-so-doing, took The top seven brands we market include Sen® and to $2.3 million, and a 51% increase in organic baby a non-recurring charge of $2.0 million, of which Avalon Organics® natural/organic beauty care; foods to $1.1 million. $1.4 million was attributable to Chi-Med equity Earth’s Best® organic baby food; Imagine® organic holders and $0.6 million to Hain Celestial. Net soups; Terra® natural snacks; Walnut Acres Organic® While our geographical focus is Hong Kong and loss attributable to Chi-Med equity holders for the sauces; and Health Valley® organic cereals and mainland China, which grew 15% to $6.4 million in continuing operations of the Consumer Products snacks. The Consumer Products Division now employs 2013 and represented 63% of HHO’s business, we Division narrowed to $0.5 million (2012: $0.9m). approximately 45 staff in both the commercial and have also expanded distribution of our brands into product supply areas primarily in Hong Kong and nine territories in Asia. Particularly good progress The Consumer Products Division has three operating mainland China. entities: an organic and natural products business, was made during 2013 in Singapore and Taiwan, where sales grew 91% to $1.7 million. HHO, which is a JV with Hain Celestial; a wholly- owned proprietary botanical based beauty care Hutchison Hain Organic HHO has made most progress in the distribution Organic and natural consumer products remain a business operated under the Sen® brand; and a of the broad range of several hundred imported niche category in Asia, however we believe that this wholly-owned consumer products distribution Hain Celestial organic and natural products. Having will evolve quickly over the coming years and HHO business, Hutchison Consumer Products Limited. commenced in 2010, this continued well in 2013 is well positioned to benefit from this. In order to Through its operating entities, the Consumer to $10.2 million (2012: $8.3 million). This was profi tability on the HHO business we will look to begin Products Division distributes and markets 31 brands driven by 16% growth in HHO’s organic and natural production of some key items in China during 2014. with sales on continuing operations growing 23% step-up expansion, reduce complexity, and improve Hutchison Hain Organic products on sale in Hong Kong Hutchison Hain Organic products 30 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report Operations Review Current Trading and Outlook for the Group We believe that 2014 will be a very good year for Chi- this high potential programme. We believe that these activities will further prove the efficacy and Med across all three divisions. safety of our pipeline and lead to a rapid increase in their market value as well as triggering milestone Sales and profi t in our China Healthcare Division have payments from existing partners and/or further started the year well ahead of 2013 levels as a result licensing and collaboration activity. of effective commercial execution and a continued normalisation of certain raw material prices which The Consumer Products Division’s continuing we expect to continue through the year. We are also operations have started the year well and we expect continuing to work towards creating considerable to focus on HHO and make a profi t in this Division in value through our plans to relocate and expand our 2014. China manufacturing capabilities. We expect a break-out year in 2014 on our Drug making continued great strides forward on all Chi- R&D Division as we publish clinical data on Volitinib, Med’s businesses. We look forward to 2014 with the expectation of Fruquintinib, and Sulfatinib, in each case outlining next stage clinical plans. We expect by year end to have up to six Phase II studies and possibly two Phase III studies ongoing on these three candidates. On HMPL-004 we will complete our Interim Analysis on NATRUL-3, our Phase III induction study, and publish the status. We expect also to start Phase I trials on HMPL-523, our Syk inhibitor for inflammation, in Christian Hogg Chief Executive Offi cer Australia and, in so doing, to attract attention to 17 February 2014 Biographical Details Of Directors 31 1 Simon TO Executive Director and Chairman 2 Christian HOGG Executive Director and Chief Executive Offi cer 3 Johnny CHENG Executive Director and Chief Financial Offi cer Mr To, aged 62, has been a Director since 2000 and an Executive Director and Chairman since 2006. He is also Chairman of the Remuneration Committee and a member of the Technical Committee of the Company. He is managing director of Hutchison Whampoa (China) Limited (“Hutchison China”) and has been with Hutchison China for over thirty years, building its business from a small trading company to a billion dollar investment group. He has negotiated major transactions with multinationals such as Procter & Gamble (“P&G”), Lockheed, Pirelli, Beiersdorf, United Airlines and British Airways. Mr To’s career in China spans more than thirty years and he is well known to many of the top Government leaders in China. Mr To is the original founder of Hutchison Whampoa Limited’s (“Hutchison Whampoa”) TCM business and has been instrumental in the acquisitions made to date. He received a First Class Honours Bachelor’s Degree in Mechanical Engineering from Imperial College, London and an MBA from Stanford University’s Graduate School of Business. Mr Hogg, aged 48, has been an Executive Director and Chief Executive Offi cer since 2006. He is also a member of the Technical Committee of the Company. He joined Hutchison China in 2000 and has since led all aspects of the creation, implementation and management of the Company’s strategy, business and listing. This includes the creation of the Company’s start-up businesses and the acquisition and operational integration of assets that led to the formation of the Company’s China joint ventures. Prior to joining Hutchison China, Mr Hogg spent ten years with P&G starting in the US in Finance and then Brand Management in the Laundry and Cleaning Products Division. Mr Hogg then moved to China to manage P&G’s detergent business followed by a move to Brussels to run P&G’s global bleach business. Mr Hogg received a Bachelor’s degree in Civil Engineering from the University of Edinburgh and an MBA from the University of Tennessee. Mr Cheng, aged 47, has been an Executive Director since 2011 and Chief Financial Offi cer of the Company since 2008. He is also a director of Hutchison MediPharma (Hong Kong) Limited, Sen Medicine Company Limited, Hutchison MediPharma Limited and Hutchison MediPharma (Suzhou) Limited. He was a director of Hutchison Healthcare Limited during 2009. Prior to joining the Company, Mr Cheng was Vice President, Finance of Bristol Myers Squibb in China and was a director of Sino-American Shanghai Squibb Pharmaceuticals Ltd. and Bristol-Myers Squibb (China) Investment Co. Ltd. in Shanghai between late 2006 and 2008. Mr Cheng started his career as an auditor with Price Waterhouse in Australia and then KPMG in Beijing before spending eight years with Nestle China where he was in charge of a number of fi nance and control functions in various operations. Mr Cheng received a Bachelor of Economics, Accounting Major from the University of Adelaide and is a member of the Institute of Chartered Accountants in Australia. 3 7 4 5 1 2 9 6 8 32 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report Biographical Details Of Directors 4 Shigeru ENDO Non-executive Director Mr Endo, aged 79, has been a Non-executive Director since 2008. He is chief executive offi cer and a director of Hutchison Whampoa Japan K.K. He worked for over 40 years with Mitsui & Co., Ltd (“Mitsui”), where he became senior executive managing director and a member of the main board of Mitsui. Mr Endo received a Bachelor of Arts degree in Economics from Keio University. During his career, Mr Endo, a Japanese citizen and fluent English and Mandarin speaker, has managed large-scale business operations in Japan, China and the United States. 5 Christian SALBAING Non-executive Director Mr Salbaing, aged 64, has been a Non-executive Director since 2006. He is deputy chairman of Hutchison Whampoa (Europe) Limited, the European headquarters company of Hutchison Whampoa. He is also deputy chairman of Hutchison Whampoa Luxembourg Holdings S.à r.l., the principal holding company for the businesses of Hutchison Whampoa in Europe. He represents Hutchison Whampoa across its European businesses, in particular with key strategic partners of the Group, the European Commission and member governments and in relation to regulatory and public affairs matters. He is a member of the ITU Telecom Board, the GSMA Limited Board and the Asia Task Force set up by the UK Government in 2010. Mr Salbaing received an LL.L. degree in Civil Law from the University of Montreal in 1970 and a Juris Doctor degree from the University of San Francisco in 1974. He is a member of the Bars of Quebec, California (inactive status since 2006) and Paris. 6 Edith SHIH Non-executive Director and Company Secretary Ms Shih, aged 62, has been a Non-executive Director and Company Secretary since 2006 and company secretary of Group companies since 2000. She is also head group general counsel and company secretary of Hutchison Whampoa, an executive director and alternate director of Hutchison Harbour Ring Limited, a company listed on The Stock Exchange of Hong Kong Limited, a director of Hutchison International Limited, as well as director and company secretary of numerous companies in the Hutchison Whampoa group. Ms Shih has been employed by Hutchison Whampoa since 1991 and oversees all legal, regulatory, compliance and corporate secretarial affairs of the Hutchison Whampoa group. She is President of The Hong Kong Institute of Chartered Secretaries and a member and convenor of a Financial Reporting Review Panel of the Financial Reporting Council. Ms Shih received a Bachelor of Science degree in Education and a Master of Arts degree from the University of the Philippines and a Master of Arts degree and a Master of Education degree from Columbia University, New York. Ms Shih is a qualifi ed solicitor in England and Wales, Hong Kong and Victoria, Australia and a Fellow of both The Institute of Chartered Secretaries and Administrators and The Hong Kong Institute of Chartered Secretaries. 7 Michael HOWELL Independent Non-executive Director Mr Howell, aged 66, has been an Independent Non- executive Director since 2006. He is also Chairman of the Audit Committee and a member of the Remuneration Committee of the Company. From 2002 to 2006, Mr Howell was chief executive of Transport Initiatives Edinburgh Ltd., a public-sector company responsible for major transportation projects in Scotland, including a new tram system for Edinburgh. From 1998 to 2002, he was executive chairman of FPT Group Limited, a global distribution company. Mr Howell’s prior career was in manufacturing, and transportation services where, after beginning his career in the UK motor industry, he went on to hold senior positions at Cummins Engine and General Electric in the USA and Europe, and Railtrack Group plc in the UK. Mr Howell holds directorships in other private and public companies in the UK and USA. Mr Howell attended Trinity College, Cambridge receiving his Master’s degree in Engineering/Economics from Cambridge University (UK), followed by MBAs from INSEAD (France) and Harvard University (USA). 8 Christopher HUANG Independent Non-executive Director Professor Huang, aged 62, has been an Independent Non-executive Director since 2006. He is also Chairman of the Technical Committee and a member of the Audit Committee of the Company. He is currently Professor of Cell Physiology, and Fellow and Director of Studies in Medicine at Murray Edwards College, University of Cambridge, UK. Professor Huang has spent over twenty years in academia and research in the fi eld of cellular and systems physiology. He has authored over 300 publications in the form of monographs, books, papers and articles whilst pursuing research collaborations with major pharmaceutical companies and holding editorships of Biological Reviews, the Journal of Physiology and Europace. Professor Huang completed his Bachelor’s degrees in Physiological Sciences (B.A.) and Clinical Medicine (B.M., B.Ch.) at The Queen’s College, Oxford, and his postgraduate (Ph.D.) degree at the University of Cambridge. He has also been awarded higher medical (D.M.) and scientifi c (D.Sc.) degrees by both Oxford and Cambridge. He is also a Fellow of the Society of Biology (FSB), and is currently President of the Cambridge Philosophical Society. 9 Christopher NASH Independent Non-executive Director Mr Nash, aged 55, has been an Independent Non- executive Director since 2006 and was appointed as Senior Independent Director in September 2006. He is also a member of the Audit Committee and the Remuneration Committee of the Company. He is a non-executive director of NTR plc, GKN Evo eDrive Systems Ltd, Gasrec Limited and a Director of Current OpenGrid Limited. Mr Nash’s career has spanned over thirty years during which he was senior vice president and group head of strategy and corporate finance at Global Crossing Ltd., where he also served on the management board and several divisional boards. In the mid-1990s he was group head of corporate fi nance at Cable & Wireless Plc., and before that a director of North West Water International Ltd. Earlier in his career Mr Nash worked for S.G. Warburg and Co. Ltd. and also spent some time in the venture capital sector. During his career, Mr Nash has spent signifi cant periods of time in Asia. Mr Nash received a Bachelor’s degree in Civil Engineering from Imperial College, London and an MBA from Manchester Business School. Report Of The Directors 3333 The Directors have pleasure in submitting to shareholders their report and statement of audited accounts for the year ended 31 December 2013. PRINCIPAL ACTIVITIES The principal activity of the Company is that of a holding company of a healthcare group whose main country of operation is China. It is focused on researching, developing, manufacturing and selling pharmaceuticals and health oriented consumer products. BUSINESS REVIEW A detailed review of the performance, business activities and future development of the Company and its subsidiaries (the “Group”) is set out in the Chairman’s Statement and the Operations Review. RESULTS The Consolidated Income Statement is set out on page 48 and shows the Group’s results for the year ended 31 December 2013. DIVIDENDS No interim dividend for the year ended 31 December 2013 was declared and the Directors do not recommend the payment of a fi nal dividend for the year ended 31 December 2013. RESERVES Movements in the reserves of the Group during the year are set out in the Consolidated Statement of Changes in Equity on pages 52 to 53. NON-CURRENT ASSETS Particulars of the movements of non-current assets of the Group are set out in notes 14 to 18 to the accounts. SHARE CAPITAL Details of the share capital of the Company are set out in note 22 to the accounts. DIRECTORS The Directors of the Company as at 31 December 2013 were: Executive Directors: Simon To Christian Hogg Johnny Cheng 34 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report Report Of The Directors Non-executive Directors: Shigeru Endo Christian Salbaing Edith Shih Independent Non-executive Directors: Michael Howell Christopher Huang Christopher Nash Mr Johnny Cheng, Professor Christopher Huang and Mr Christopher Nash will retire by rotation at the forthcoming annual general meeting under the provisions of Article 91(1) of the Articles of Association of the Company and, being eligible, will offer themselves for re-election. The Directors’ biographical details are set out on pages 31 to 32. DIRECTORS’ INTERESTS IN SHARES As at 31 December 2013, the interests in the shares of the Company held by the Directors and their families were as follows: Name of Directors Christian Hogg Johnny Cheng Michael Howell Christopher Nash Edith Shih Christopher Huang Number of ordinary shares held 320,000 192,108 153,600 26,506 20,000 2,475 SHARE OPTION SCHEMES AND DIRECTORS’ RIGHTS TO ACQUIRE SHARES (i) Share option scheme of the Company On 4 June 2005, the Company adopted a share option scheme (the “Share Option Scheme”), the rules of which were subsequently amended by the Board of Directors of the Company on 21 March 2007. Pursuant to the Share Option Scheme, the Board of Directors of the Company may, at its discretion, offer any employees and directors (including Executive and Non-executive Directors but excluding Independent Non-executive Directors) of the Company, holding companies of the Company and any of their subsidiaries or affi liates, and subsidiaries or affi liates of the Company options to subscribe for shares of the Company. Report Of The Directors 3535 The following share options were outstanding under the Share Option Scheme during the year ended 31 December 2013: Effective date of Number of share Granted Exercised Expired/lapsed/ Number of share Name or category grant of share options held at during during cancelled options held at Exercise period of Exercise price of of participants options 1 January 2013 2013 2013 during 2013 31 December 2013 share options share options 19.5.2006 (1) 25.8.2008 (3) 19.5.2006 (1) 11.9.2006 (2) 18.5.2007 (4) 28.6.2010 (3) 1.12.2010 (3) 24.6.2011 (3) 20.12.2013(3) 768,182 64,038 76,818 26,808 43,857 102,628 227,600 150,000 – – – – – – – – N/A 896,386 – – – – (3,000) – – – – – – – – – – 768,182 19.5.2006 to 3.6.2015 64,038 25.8.2008 to 24.8.2018 76,818 26,808 40,857 19.5.2006 to 3.6.2015 11.9.2006 to 18.5.2016 18.5.2007 to 17.5.2017 102,628 28.6.2010 to 27.6.2020 (50,000) 177,600 1.12.2010 to 30.11.2020 – – 150,000 24.6.2011 to 23.6.2021 896,386 20.12.2013 to 19.12.2023 1,459,931 896,386 (3,000) (50,000) 2,303,317 £ 1.090 1.260 1.090 1.715 1.535 3.195 4.967 4.405 6.100 Directors Christian Hogg Johnny Cheng Employees in aggregate Total: Notes: (1) The share options were granted on 4 June 2005, conditionally upon the Company’s admission which took place on 19 May 2006. The share options granted are exercisable subject to, amongst other relevant vesting criteria, the vesting schedule of 50% on 19 May 2007 and 25% on each of 19 May 2008 and 19 May 2009. (2) The share options granted are exercisable subject to, amongst other relevant vesting criteria, the vesting schedule of one-third on each of 19 May 2007, 19 May 2008 and 19 May 2009. (3) The share options granted are exercisable subject to, amongst other relevant vesting criteria, the vesting schedule of 25% on each of the fi rst, second, third and fourth anniversaries of the date of grant of share options. (4) The share options granted are exercisable subject to, amongst other relevant vesting criteria, the vesting schedule of one-third on each of the first, second and third anniversaries of the date of grant of share options. (ii) Share option scheme for existing shares of Hutchison MediPharma Holdings Limited (“HMHL”) On 6 August 2008, HMHL, a subsidiary of the Company, adopted a share option scheme (the “HMHL Share Option Scheme”), the rules of which were subsequently amended by the Board of Directors of HMHL on 15 April 2011, as the sole share-based incentive programme for employees or directors of HMHL and any of its holding companies, subsidiaries and affi liates (each an “Eligible Employee”). Each Eligible Employee is eligible to participate in the HMHL Share Option Scheme and options may be granted to him or her to acquire existing shares in HMHL subject to the rules of the HMHL Share Option Scheme. 36 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report Report Of The Directors The following share options were outstanding under the HMHL Share Option Scheme during the year ended 31 December 2013: Effective date of Number of share Granted Exercised Expired/lapsed/ Number of share Category of participants grant of share options held at during during cancelled options held at Exercise period of Exercise price of options 1 January 2013 2013 2013 during 2013 31 December 2013 share options share options 6.8.2008 (1) 5.10.2009 (1) 3.5.2010 (1) 2.8.2010 (1) 22.11.2010 (1) 18.4.2011 (1) 17.10.2012 (1) 1,243,000 234,000 360,000 206,000 240,000 562,385 299,120 3,144,505 – – – – – – – – – – – – – – – – (1,186,000) (184,000) (60,000) (181,000) (240,000) (455,965) (299,120) 57,000 50,000 300,000 25,000 6.8.2008 to 5.8.2014 5.10.2009 to 4.10.2015 3.5.2010 to 2.5.2016 2.8.2010 to 1.8.2016 – 22.11.2010 to 21.11.2016 106,420 18.4.2011 to 17.4.2017 – 17.10.2012 to 16.10.2018 (2,606,085)(2) 538,420 US$ 1.28 1.52 2.12 2.24 2.36 2.36 2.73 Employees in aggregate Total: Notes: (1) The share options granted are exercisable subject to, amongst other relevant vesting criteria, the vesting schedule of 25% on each of the fi rst, second, third and fourth anniversaries of the date of grant of share options. (2) Out of 2,606,085 share options, (i) 2,485,189 were cancelled with the consent of the relevant Eligible Employees in exchange for new share options of the Company vesting over a period of four years and/or cash consideration payable over a period of four years and (ii) 120,896 were cancelled following cessation of employment of the relevant Eligible Employees. SIGNIFICANT SHAREHOLDINGS As at 12 February 2014, according to the records of the Company, the following holders held interests in 3% or more of the issued share capital of the Company: Names Hutchison Healthcare Holdings Limited (1) (“HHHL”) Computershare Company Nominees Limited (2) (“CCNL”) Depositary Interest held under CCNL: Chase Nominees Limited Slater Investments Limited (3) FIL Limited (3) Notes: Number of ordinary Approximate % of issued shares held share capital 36,666,667 15,295,025 70.44% 29.38% 2,768,865 5.32% 3,170,000 2,640,514 6.09% 5.07% (1) HHHL is a private company registered in the British Virgin Islands and carries on business as a holding company. HHHL is an indirect wholly-owned subsidiary of Hutchison Whampoa Limited which is registered in Hong Kong. (2) (3) CCNL is a company registered in Scotland, United Kingdom under company number SC167175 and is acting as the custodian of the depository interests register. Major interests in shares of the Company notifi ed to the Company under the Vote Holder and Issuer Notifi cation Rules of the Disclosure Rules and Transparency Rules. Report Of The Directors 3737 AUDITOR The accounts have been audited by PricewaterhouseCoopers who will retire and, being eligible, will offer themselves for re-appointment. ANNUAL GENERAL MEETING The annual general meeting (“AGM”) of the Company will be held on Thursday, 8 May 2014 at 10:00 am at 4th Floor, Hutchison House, 5 Hester Road, Battersea, London SW11 4AN. Details of the resolutions proposed are set out in the Notice of the AGM. By Order of the Board Edith Shih Director and Company Secretary 17 February 2014 38 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report Corporate Governance Report The Company strives to attain and maintain high standards of corporate governance best suited to the needs and interests of the Company and its subsidiaries (the “Group”) as it believes that effective corporate governance practices are fundamental to safeguarding shareholder interests and enhancing shareholder value. Accordingly, the Company has adopted corporate governance principles that emphasise a quality board of Directors (the “Board”), effective internal controls, stringent disclosure practices, transparency and accountability. It is, in addition, committed to continuously improving these practices and inculcating an ethical corporate culture. The Company has applied the principles of the UK Corporate Governance Code (the “Code”) notwithstanding that the Company’s shares are admitted to trade on AIM, and is therefore not required to comply with the Code. Set out below are the corporate governance practices adopted by the Company. THE BOARD The Board is responsible for directing the strategic objectives of the Company and overseeing the management of the business. Directors are charged with the task of promoting the success of the Company and making decisions in the best interest of the Company. The Board is satisfi ed that it meets the Code’s requirement for effective operation. The Board, led by the Chairman, Mr Simon To, determines and monitors the Group’s long term objectives and commercial strategies, annual operating and capital expenditure budgets and business plans, evaluates the performance of the Company, and supervises the management of the Company (“Management”). Management is responsible for the day-to-day operations of the Group under the leadership of the Chief Executive Offi cer. As at 31 December 2013, the Board comprised nine Directors, including the Chairman, Chief Executive Offi cer, Chief Financial Offi cer, three Non-executive Directors and three Independent Non-executive Directors (one of whom is Senior Independent Director). Biographical details of the Directors are set out in the “Biographical Details of Directors” section on pages 31 to 32 and on the Company’s website (www.chi-med.com). For a Director to be considered independent, the Board must be satisfi ed that the Director does not have any direct or indirect material relationship with the Group. In determining the independence of Directors, the Board follows the requirements of the Code. The role of the Chairman is separate from that of the Chief Executive Offi cer. Such division of responsibilities reinforces the independence and accountability of these executives. The Chairman is responsible for the effective conduct of the Board, ensuring that it as a whole plays an effective role in the development and determination of the Group’s strategy and overall commercial objectives and acts as the guardian of the Board’s decision-making processes. He is responsible for setting the agenda for each Board meeting, taking into account, where appropriate, matters proposed by Directors. He also ensures that the Board receives accurate, timely and clear information on the Group’s performance, the issues, challenges and opportunities facing the Group and matters reserved to it for decision. With the support of the Executive Directors and the Company Secretary, the Chairman seeks to ensure that the Board complies with approved procedures, including the schedule of Reserved Matters to the Board for its decision and the Terms of Reference of all Board Committees. The Board, under the leadership of the Chairman, has adopted good corporate governance practices and procedures and taken appropriate steps to provide effective communication with shareholders, as outlined later in the report. Corporate Governance Report 3939 The Chief Executive Offi cer, Mr Christian Hogg, is responsible for managing the businesses of the Group, formulating and developing the Group’s strategy and overall commercial objectives in close consultation with the Chairman and the Board. With the executive management team of each core business division, the Chief Executive Offi cer implements the decisions of the Board and its Committees. He maintains an ongoing dialogue with the Chairman to keep him fully informed of all major business development and issues. He is also responsible for ensuring that the development needs of senior management reporting to him are identifi ed and met as well as leading the communication programme with shareholders. The Board meets regularly. Between scheduled meetings, senior management of the Group provides information to Directors on a regular basis with respect to the activities and development of the Group. Throughout the year, Directors participate in the deliberation and approval of routine and operational matters of the Company by way of written resolutions with supporting explanatory materials, supplemented by additional verbal and/or written information from the Company Secretary or other executives as and when required. Whenever warranted, additional Board meetings are held. In addition, Directors have full access to information on the Group and independent professional advice at all times whenever deemed necessary by the Directors and they are at liberty to propose appropriate matters for inclusion in Board agendas. With respect to regular meetings of the Board, Directors receive written notice of the meetings generally about a month in advance and an agenda with supporting Board papers no less than three days prior to the meeting. With respect to other meetings, Directors are given as much notice as is reasonable and practicable in the circumstances. Except for those circumstances permitted by the Articles of Association of the Company, a Director who has a material interest in any contract, transaction, arrangement or any other kind of proposal put forward to the Board for consideration abstains from voting on the relevant resolution and such Director is not counted for quorum determination purposes. The Company held four Board meetings in 2013 with 100% attendance of its members. Position Name of Directors Attended/Eligible to attend Chairman Executive Directors: Non-executive Directors: Independent Non-executive Directors: Simon To Christian Hogg (Chief Executive Officer) Johnny Cheng (Chief Financial Officer) Shigeru Endo Christian Salbaing Edith Shih Michael Howell Christopher Huang Christopher Nash 4/4 4/4 4/4 4/4 4/4 4/4 4/4 4/4 4/4 In addition to Board meetings, the Chairman held two meetings with Non-executive Directors without the presence of the Executive Directors, with full attendance, to review the performance of the Executive Directors. The Senior Independent Director, Mr Christopher Nash, also held a meeting with all Non-executive Directors without the presence of the Chairman, with full attendance, for the appraisal of the Chairman’s performance. In addition, evaluation of the performance of the Board and its Committees together with the Chairman of each Committee was conducted by questionnaires. The objective of such evaluation is to ensure that the Board, its Committees and the Chairman of each Committee continued to act effectively in fulfi lling the duties and responsibilities expected of them. 40 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report Corporate Governance Report All Non-executive Directors are engaged on service contracts which are automatically renewed for successive 12 month periods unless terminated by written notice given by either party. The Chairman of the Board is of the view that the performance of each of the Non-executive Directors continues to be effective and they all demonstrate commitment to their role as a Non-executive Director. All Directors are subject to re-election by shareholders at annual general meetings and at least once every three years on a rotation basis in accordance with the Articles of Association of the Company. A retiring Director is eligible for re-election and re-election of retiring Directors at general meetings is dealt with by separate individual resolutions. Save as mentioned herein, there are no existing or proposed service contracts between any of the Directors and the Company which cannot be terminated by the Company within 12 months and without payment of compensation. Where vacancies arise at the Board, candidates are proposed and put forward to the Board for consideration and approval, with the objective of appointing to the Board individuals with expertise in the businesses of the Group and leadership qualities to complement the capabilities of the existing Directors thereby enabling the Company to retain as well as improve its competitive position. Upon appointment to the Board, Directors receive a package of orientation materials on the Group and are provided with a comprehensive induction to the Group’s businesses by senior executives. Continuing education and relevant reading materials are provided to Directors regularly to help ensure that they are apprised of the latest changes in the commercial, legal and regulatory environment in which the Group conducts its businesses. BOARD COMMITTEES The Company has established three permanent board committees: an Audit Committee, a Remuneration Committee and a Technical Committee, details of which are described later in this report. Other board committees are established by the Board as and when warranted to take charge of specifi c duties. COMPANY SECRETARY The Company Secretary, Ms Edith Shih, is accountable to the Board for ensuring that Board procedures are followed and Board activities are effi ciently and effectively conducted. These objectives are achieved through adherence to proper Board processes and the timely preparation and dissemination to Directors comprehensive Board agendas and papers. The Company Secretary is responsible for ensuring that the Board is fully apprised of the relevant legislative, regulatory and corporate governance developments of relevance to the Group and that it takes these into consideration when making decisions for the Group. From time to time, she organises seminars on specifi c topics of importance and interest and disseminates relevant reference materials to Directors for their information. The Company Secretary is also directly responsible for the Group’s compliance with all obligations of the AIM Rules for Companies (“AIM Rules”), including the preparation, publication and despatch of annual reports and interim reports within the time limits laid down in the AIM Rules, the timely dissemination to shareholders and the market of announcements and information relating to the Group and assisting in the notifi cation of Directors’ dealings in securities of the Group. Furthermore, the Company Secretary advises the Directors on their obligations for disclosure of interests and dealings in the Company’s securities, related party transactions and price-sensitive information and ensures that the standards and disclosures requirements of the AIM Rules are complied with and, where required, reported in the annual report of the Company. In relation to related party transactions, detailed analyses are performed on all potential related party transactions to ensure full compliance and for Directors’ consideration. ACCOUNTABILITY AND AUDIT Financial Reporting The responsibility of Directors in relation to the fi nancial statements is set out below. It should be read in conjunction with, but distinguished from, the Independent Auditor’s Report on page 47 which acknowledges the reporting responsibility of the Group’s Auditor. Annual Report and Accounts The Directors acknowledge their responsibility for the preparation of the annual report and fi nancial statements of the Company, ensuring that the annual report and fi nancial statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s performance, business model and strategy in accordance with the Code, Cayman Islands Companies Law and the applicable accounting standards. Corporate Governance Report 4141 Accounting Policies The Directors consider that in preparing the financial statements, the Group has applied appropriate accounting policies that are consistently adopted and made judgements and estimates that are reasonable and prudent in accordance with the applicable accounting standards. Accounting Records The Directors are responsible for ensuring that the Group keeps accounting records which disclose the fi nancial position of the Group upon which fi nancial statements of the Group could be prepared in accordance with the Group’s accounting policies. Safeguarding Assets The Directors are responsible for taking all reasonable and necessary steps to safeguard the assets of the Group and to prevent and detect fraud and other irregularities within the Group. Going Concern The Directors, having made appropriate enquiries, are of the view that the Group has adequate resources to continue in operational existence for the foreseeable future and that, for this reason, it is appropriate to adopt the going concern basis in preparing the fi nancial statements. Audit Committee Under the Terms of Reference of the Audit Committee, the Audit Committee is required to review the Group’s interim and fi nal results and interim and annual fi nancial statements, oversee the relationship between the Company and its external auditor, monitor and review the effectiveness of the Company’s internal audit function in the context of the Company’s overall risk management systems giving due consideration to laws and regulations and the provisions of the Code. The Committee is authorised to obtain, at the Company’s expense, external legal or other professional advice on any matters within its Terms of Reference. In addition, the Audit Committee assists the Board in meeting its responsibility for maintaining an effective system of internal control. It reviews the process by which the Group evaluates its control environment and risk assessment process, and the way in which business and control risks are managed. It receives and considers the presentations of Management in relation to the review on the effectiveness of the Group’s internal control systems and the adequacy of resources, qualifi cations and experience of staff in the Group’s accounting and fi nancial reporting function, and their training programmes and budget. In addition, the Audit Committee reviews with the internal auditor of the Group’s holding company the work plan for its audits for the Group together with its resource requirements and considers the report of the internal auditor of the Group’s holding company to the Audit Committee on the effectiveness of internal controls in the Group business operations. Further, it also receives the report from the Company Secretary on the Group’s material litigation proceedings and compliance status on regulatory requirements. These reviews and reports are taken into consideration by the Audit Committee when it makes its recommendation to the Board for approval of the consolidated fi nancial statements for the year. The Terms of Reference for the Audit Committee and the Complaints Procedures adopted by the Board are published on the Company’s website. The Audit Committee comprises three Independent Non-executive Directors who possess the relevant business and fi nancial management experience and skills to understand fi nancial statements and contribute to the fi nancial governance, internal controls and risk management of the Company. It is chaired by Mr Michael Howell with Professor Christopher Huang and Mr Nash as members. None of the Committee Members is related to the Company’s external auditor. The Audit Committee held four meetings in 2013 with 100% attendance of its members. Name of Members Michael Howell (Chairman) Christopher Huang Christopher Nash Attended/Eligible to attend 4/4 4/4 4/4 42 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report Corporate Governance Report The Audit Committee meets with the Chief Financial Offi cer and other senior management of the Company from time to time for the purposes of reviewing the interim and fi nal results and the interim report and annual report and other fi nancial, internal control and risk management matters of the Company. It considers and discusses the reports and presentations of Management and the Group’s internal and external auditors, with a view to ensuring that the Group’s consolidated fi nancial statements are prepared in accordance with International Financial Reporting Standards. It also meets with the Group’s principal external auditor, PricewaterhouseCoopers (“PwC”), to consider the reports of PwC on the scope, strategy, progress and outcome of its independent review of the interim fi nancial report and its annual audit of the consolidated fi nancial statements. In addition, the Audit Committee holds regular private meetings with the external auditor, the Chief Financial Offi cer and the internal auditor of the Group’s holding company separately without the presence of Management. EXTERNAL AUDITOR The Audit Committee reviews and monitors the external auditor’s independence, objectivity and effectiveness of the audit process. It receives each year the letter from the external auditor confi rming its independence and objectivity and holds meetings with representatives of the external auditor to consider the scope of its audit, approve its fees, and the scope and appropriateness of non-audit services, if any, to be provided by it. The Audit Committee also makes recommendations to the Board on the appointment and retention of the external auditor. The Group’s policy regarding the engagement of PwC for the various services listed below is as follows: • Audit services – include audit services provided in connection with the audit of the consolidated fi nancial statements. All such services are to be provided by external auditor. • Audit related services – include services that would normally be provided by an external auditor but not generally included in the audit fees, for example, audits of the Group’s pension plans, due diligence and accounting advice related to mergers and acquisitions, internal control reviews of systems and/or processes, and issuance of special audit reports for tax or other purposes. The external auditor is to be invited to undertake those services that it must, or is best placed, to undertake in its capacity as auditor. • Taxation related services – include all tax compliance and tax planning services, except for those services which are provided in connection with the audit. The Group uses the services of the external auditor where it is best suited. All other signifi cant taxation related work is undertaken by other parties as appropriate. • Other services – include, for example, audit or review of third parties to assess compliance with contracts, risk management diagnostics and assessments, and non- fi nancial systems consultations. The external auditor is also permitted to assist Management and the internal auditor of the Group’s holding company with internal investigations and fact-fi nding into alleged improprieties. These services are subject to specifi c approval by the Audit Committee. • General consulting services – the external auditor is not eligible to provide services involving general consulting work. For the year ended 31 December 2013, all the fees paid to PwC were for audit and non-audit services. INTERNAL CONTROL, LEGAL AND REGULATORY CONTROL AND GROUP RISK MANAGEMENT The Board has overall responsibility for the Group’s system of internal control and assessment and management of risks. In meeting its responsibility, the Board seeks to increase risk awareness across the Group’s business operations and has put in place policies and procedures, including parameters of delegated authority, which provide a framework for the identifi cation and management of risks. It also reviews and monitors the effectiveness of the systems of internal control to ensure that the policies and procedures in place are adequate. Reporting and review activities include review by the Executive Directors and the Board and approval of detailed operational and fi nancial reports, budgets and plans provided by management of the business operations, review by the Board of actual results against budget, review by the Audit Committee of the ongoing work of the internal audit and risk management functions of the Group’s holding company, as well as regular business reviews by the Executive Directors and the executive management team of each core business division. Whilst these procedures are designed to identify and manage risks that could adversely impact the achievement of the Group’s business objectives, they do not provide absolute assurance against material mis-statement, errors, losses or fraud. Corporate Governance Report 4343 Internal Control Environment and Systems Executive Directors are appointed to the boards of all material operating subsidiaries and associates for monitoring those companies, including attendance at board meetings, review and approval of business strategies, budgets and plans, and setting of key business performance targets. The executive management team of each core business division is accountable for the conduct and performance of each business in the division within the agreed strategies and similarly management of each business is accountable for its conduct and performance. The Group’s internal control procedures include a comprehensive system for reporting information to the executive management team of each core business division and the Executive Directors. Business plans and budgets are prepared annually by management of individual businesses and subject to review and approval by both the executive management team and the Executive Directors as part of the Group’s fi ve-year corporate planning cycle. Reforecasts for the current year are prepared on a quarterly basis and reviewed for variances to the budget and for approval. When setting budgets and reforecasts, Management identifi es, evaluates and reports on the likelihood and potential fi nancial impact of signifi cant business risks. The Executive Directors review monthly management reports on the fi nancial results and key operating statistics of each business and discuss with the executive management team and senior management of business operations to review these reports, business performance against budgets, forecasts, signifi cant business risk sensitivities and strategies. In addition, fi nancial controllers of the executive management team of each core business division discuss with the representatives of the Finance Department to review monthly performance against budget and forecast, and to address accounting and fi nance related matters. The Finance Department has established guidelines and procedures for the approval and control of expenditures. Operating expenditures are subject to overall budget control and are controlled within each business with approval levels set by reference to the level of responsibility of each executive and offi cer. Capital expenditures are subject to overall control within the annual budget review and approval process, and more specifi c control and approval prior to commitment by the Finance Department or Executive Directors are required for unbudgeted expenditures and material expenditures within the approved budget. Quarterly reports of actual versus budgeted and approved expenditures are also reviewed. The General Manager of the internal audit function of the Group’s holding company, reporting directly to the Audit Committee, provides independent assurance as to the existence and effectiveness of the risk management activities and controls in the Group’s business operations in various countries. Using risk assessment methodology and taking into account the dynamics of the Group’s activities, internal audit derives its yearly audit plan which is reviewed by the Audit Committee, and reassessed during the year as needed to ensure that adequate resources are deployed and the plan’s objectives are met. Internal audit function of the Group’s holding company is responsible for assessing the Group’s internal control systems, formulating an impartial opinion on the system, and reporting its fi ndings to the Audit Committee, the Chief Executive Offi cer, the Chief Financial Offi cer and the senior management concerned as well as following up on all reports to ensure that all issues have been satisfactorily resolved. In addition, a regular dialogue is maintained with the external auditor so that both are aware of the signifi cant factors which may affect their respective scope of work. Depending on the nature of business and risk exposure of individual business units, the scope of work performed by the internal audit function includes fi nancial and operations reviews, recurring and surprise audits, fraud investigations and productivity effi ciency reviews. Reports from the external auditor on internal controls and relevant fi nancial reporting matters are presented to the General Manager of the internal audit function of the Group’s holding company and, as appropriate, to the Chief Financial Offi cer. These reports are reviewed and appropriate actions are taken. The Board, through the Audit Committee, has conducted a review of the effectiveness of the Group’s internal control systems for the year ended 31 December 2013 covering all material fi nancial, operational and compliance controls and risk management functions, and is satisfi ed that such systems are effective and adequate. In addition, it has reviewed and is satisfi ed with the adequacy of resources, qualifi cations and experience of the staff of the Group’s accounting and fi nancial reporting function, and their training programmes and budget. 44 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report Corporate Governance Report Legal and Regulatory Control The Group Legal Department has the responsibility of safeguarding the legal interests of the Group. The team is responsible for monitoring the day-to-day legal affairs of the Group, including preparing, reviewing and approving all legal and corporate secretarial documentation of Group companies, working in conjunction with fi nance, tax, treasury, corporate secretarial and business unit personnel on the review and co-ordination process, and advising Management of legal and commercial issues of concern. In addition, the Group Legal Department is also responsible for overseeing regulatory (business and AIM) compliance matters of all Group companies. It analyses and monitors the regulatory framework within which the Group operates, including reviewing applicable laws and regulations and preparing and submitting response or fi lings to relevant regulatory and/or government authorities and consultations, as the case may be. It also determines and approves the engagement of external legal advisors, ensuring the requisite professional standards are adhered to as well as most cost effective services are rendered. Further, the Group Legal Department organises and holds continuing education seminars/conferences on legal and regulatory matters of relevance to the Group for Directors, business executives and the Group legal team. Group Risk Management The Chief Executive Offi cer and the Group Risk Management Department of the Group’s holding company have the responsibility of developing and implementing risk mitigation strategies including the deployment of insurance to transfer the fi nancial impact of risks. The Group Risk Management Department of the Group’s holding company, working with the business operations worldwide, is responsible for arranging appropriate insurance coverage and organising Group-wide risk reporting. Directors and Offi cers Liability Insurance is also in place to protect Directors and offi cers of the Group against their potential legal liabilities. Workplace Safety The Group is committed to providing a healthy and safe workplace for all its employees and complying with all applicable health and safety laws and regulations. Health and safety considerations are incorporated into the design, operations and maintenance of the Group’s premises. Employees are provided with appropriate job skills and safety training and are educated with regard to their responsibilities for achieving the health and safety objectives of the Group. The Group also communicates with its employees on occupational health and safety issues. REMUNERATION OF DIRECTORS AND SENIOR MANAGEMENT Remuneration Committee The responsibilities of the Remuneration Committee are to assist the Board in achieving its objective of attracting, retaining and motivating employees of the highest calibre and experience needed to shape and execute strategy across the Group’s substantial, diverse and international business operations. It assists the Group in the administration of a fair and transparent procedure for setting remuneration policies including assessing the performance of Executive Directors and senior executives of the Group and determining their remuneration packages. The Terms of Reference for the Remuneration Committee adopted by the Board are published on the Company’s website. The Remuneration Committee comprises three members, chaired by the Chairman Mr To with Mr Michael Howell and Mr Nash, both Independent Non-executive Directors, as members who possess experience in human resources and personnel emoluments. Mr To has experience in the traditional Chinese medicine industry as well as expertise in human resources and personnel in China. The Remuneration Committee meets towards the end of each year to determine the remuneration package of Executive Directors and senior management of the Group and during the year to consider share options grant and other remuneration related matters. Remuneration matters are also considered and approved by way of written resolutions and additional meetings where warranted. The Remuneration Committee held one meeting in 2013 with 100% attendance of its members to review background information on market data (including economic indicators, statistics and the Remuneration Bulletin) and headcount and staff costs. During the year, the Remuneration Committee also reviewed and approved the proposed 2014 directors’ fees, year end bonus and 2014 remuneration package of Executive Directors and senior executives of the Company and made recommendation to the Board on the directors’ fees for Non-executive Directors. Executive Directors do not participate in the determination on their own remuneration. Corporate Governance Report 4545 Remuneration Policy The remuneration of Mr Christian Hogg and Mr Cheng, the Executive Directors, and senior executives is determined with reference to their expertise and experience in the industry, the performance and profi tability of the Group as well as remuneration benchmarks from other local and international companies and prevailing market conditions. Senior management also participates in bonus arrangements which are determined in accordance with the performance of the Group and the individual’s performance. The Chairman, Mr To, does not receive performance related remuneration from the Company and is remunerated through his service agreement. All Non- executive Directors have entered into service agreements with the Company and are remunerated with fi xed fees as determined by the Board. Directors’ emoluments comprise payments to Directors from the Company and its subsidiaries. The emoluments of each of the Directors exclude amounts received from the subsidiaries of the Company and paid to a subsidiary or an intermediate holding company of the Company. The amounts paid to each Director for 2013 are as below: Taxable benefi ts Pension contributions Share option benefi ts Total US$ US$ Name of Directors Executive Directors: Simon To Christian Hogg Johnny Cheng Non-executive Directors: Shigeru Endo Christian Salbaing Edith Shih Independent Non-executive Directors: Michael Howell Christopher Huang Christopher Nash Salary and fees US$ 20,128(1) (4) 337,974(2) (4) 262,016(2) 20,128(3) 20,128(1) 20,128(3) (4) 53,138 53,138 53,138 Bonus US$ – 602,564 203,846 – – – – – – US$ – 14,423 – – – – – – – US$ – 22,846 20,266 – – – – – – Aggregate emoluments 839,916 806,410 14,423 43,112 – –(5) –(5) 20,128 977,807 486,128 – – – – – – – 20,128 20,128 20,128 53,138 53,138 53,138 1,703,861 Notes: (1) (2) (3) (4) Such Director’s fees were paid to Hutchison Whampoa (China) Limited. Emoluments paid include Director’s fees of US$20,128. Such Director’s fees were paid to Hutchison Whampoa Limited. Director’s fees received from the subsidiaries of the Company during the period he/she served as director that were paid to a subsidiary or an intermediate holding company of the Company are not included in the amounts above. (5) The fair value of share options granted to the Executive Director had been fully recognised as expenses in the past few years and no such expenses were recognised in 2013. TECHNICAL COMMITTEE The Technical Committee comprises three members, chaired by Professor Huang with Mr To and Mr Christian Hogg, both Executive Directors, as members. The Technical Committee members consider from time to time matters relating to the technical aspects of the business and in research and development. It also invites such executives as it thinks fi t to attend meetings as and when required. 46 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report Corporate Governance Report The Terms of Reference for the Technical Committee adopted by the Board are published on the Company’s website. The Technical Committee held one meeting in 2013 with 100% attendance of its members. CODE OF ETHICS The Group places utmost importance on employees’ ethical, personal and professional standards. Every employee is provided with the Group’s Code of Ethics booklet, and all employees are expected to achieve the highest standards set out in the Code of Ethics including avoiding confl ict of interest, discrimination or harassment and bribery etc. Employees are required to report any non-compliance with the Code of Ethics to Management. INVESTOR RELATIONS AND SHAREHOLDERS’ RIGHTS The Group actively promotes investor relations and communication with the investment community throughout the year. Through its Chairman and Chief Executive Offi cer, the Group responds to requests for information and queries from the investment community including shareholders, analysts and the media through regular briefi ng meetings, announcements, conference calls and presentations. The other Directors, including Non-executive Directors, develop an understanding of the views of the major shareholders about the Company by periodic meetings on the subject with the Chairman and the Chief Executive Offi cer. The Board is committed to providing clear and full information on the Group to shareholders through the publication of notices, announcements, interim and annual reports. An updated version of the Memorandum and Articles of Association of the Company is published on the Company’s website. Moreover, additional information on the Group is also available to shareholders through the Investor Relations page on the Company’s website. Shareholders are encouraged to attend all general meetings of the Company, such as the annual general meeting for which at least 20 working days’ notice is given and at which the Chairman and Directors are available to answer questions on the Group’s businesses. All shareholders have statutory rights to call for extraordinary general meetings and put forward agenda items for consideration by shareholders by sending the Company Secretary a written request for such general meetings together with the proposed agenda items. Regularly updated fi nancial, business and other information on the Group is made available on the Company’s website for shareholders. The latest shareholders’ meeting of the Company was the 2013 Annual General Meeting which was held on 10 May 2013 at 4th Floor, Hutchison House, 5 Hester Road, Battersea, London attended by PwC and all the Directors including the Chairmen of the Board, the Audit Committee, the Remuneration Committee and the Technical Committee with 100% attendance. Directors are requested and encouraged to attend shareholders’ meetings albeit presence overseas for the Group businesses or unforeseen circumstances might prevent Directors from so doing. The Group values feedback from shareholders on its efforts to promote transparency and foster investor relationship. Comments and suggestions to the Board or the Company are welcome and can be addressed to the Company Secretary by mail/e-mail or to the Company by e-mail at info@chi-med.com. By Order of the Board Edith Shih Director and Company Secretary 17 February 2014 Independent Auditor’s Report 4747 TO THE SHAREHOLDERS OF HUTCHISON CHINA MEDITECH LIMITED (incorporated in the Cayman Islands with limited liability) We have audited the consolidated accounts of Hutchison China MediTech Limited (the “Company”) and its subsidiaries (together, the “Group”) set out on pages 48 to 111, which comprise the consolidated statement of fi nancial position as at 31 December 2013, and the consolidated income statement, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash fl ows for the year then ended, and a summary of signifi cant accounting policies and other explanatory information. Directors’ responsibility for the consolidated accounts The directors of the Company are responsible for the preparation and fair presentation of consolidated accounts in accordance with International Financial Reporting Standards, and for such internal control as the directors determine is necessary to enable the preparation of consolidated accounts that are free from material misstatement, whether due to fraud or error. Auditor’s responsibility Our responsibility is to express an opinion on these consolidated accounts based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated accounts are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated accounts. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the consolidated accounts, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of consolidated accounts in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the consolidated accounts. We believe that the audit evidence we have obtained is suffi cient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated accounts present fairly, in all material respects, the fi nancial position of the Group as at 31 December 2013, and of the Group’s fi nancial performance and cash fl ows for the year then ended in accordance with International Financial Reporting Standards. Other matters This report, including the opinion, has been prepared for and only for you, as a body, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. PricewaterhouseCoopers Certified Public Accountants Hong Kong, 17 February 2014 48 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report Consolidated Income Statement For the year ended 31 December 2013 Continuing operations Revenue Cost of sales Gross profi t Selling expenses Administrative expenses Other net operating income Gain on disposal of a business Share of profi ts less losses after tax of joint ventures Operating profi t Finance costs Profi t before taxation Taxation charge Profi t for the year from continuing operations Discontinued operations Loss for the year from discontinued operations Profi t for the year Attributable to: Equity holders of the Company – Continuing operations – Discontinued operations Non-controlling interests Earnings per share for profi t from continuing operations attributable to equity holders of the Company for the year (US$ per share) — basic — diluted Earnings per share for profi t from continuing and discontinued operations attributable to equity holders of the Company for the year (US$ per share) — basic — diluted Note 5 6 (a) 6 (b) 17 7 8 9 10 23 11(a) 11(b) 11(a) 11(b) 2013 US$’000 2012 US$’000 (Restated) 45,970 (22,208) 23,762 (3,452) (21,295) 1,603 – 10,937 11,555 (1,485) 10,070 (1,050) 9,020 (1,978) 7,042 7,323 (1,408) 5,915 1,127 7,042 0.1407 0.1385 0.1136 0.1119 22,367 (12,754) 9,613 (5,694) (21,376) 1,871 11,476 17,147 13,037 (1,160) 11,877 (1,116) 10,761 (7,221) 3,540 9,472 (5,834) 3,638 (98) 3,540 0.1824 0.1799 0.0701 0.0691 Consolidated Statement Of Comprehensive Income For the year ended 31 December 2013 4949 Profi t for the year Other comprehensive income that has been or may be reclassifi ed subsequently to profi t or loss: Exchange translation differences Total comprehensive income for the year (net of tax) Attributable to: Equity holders of the Company — Continuing operations — Discontinued operations Non-controlling interests 2013 US$’000 2012 US$’000 (Restated) 7,042 3,540 3,342 10,384 10,360 (1,503) 8,857 1,527 10,384 662 4,202 10,616 (6,248) 4,368 (166) 4,202 50 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report Consolidated Statement Of Financial Position As at 31 December 2013 ASSETS Non-current assets Property, plant and equipment Leasehold land Goodwill Other intangible assets Investment in joint ventures Deferred tax assets Current assets Inventories Trade receivables Other receivables and prepayments Amount due from related parties Cash and cash equivalents Total assets EQUITY Capital and reserves attributable to the Company’s equity holders Share capital Reserves Non-controlling interests Total equity Note 31 December 2013 US$’000 31 December 2012 US$’000 (Restated) 1 January 2012 US$’000 (Restated) 14 15 16 17 18 19 20 30 21 22 23 5,028 1,508 407 – 111,405 285 3,344 1,498 407 – 109,552 280 4,550 1,523 407 14,166 66,690 390 118,633 115,081 87,726 1,420 13,410 3,356 1,985 46,863 1,590 9,508 1,583 1,194 30,767 4,327 12,168 2,221 5,676 42,525 67,034 44,642 66,917 185,667 159,723 154,643 52,051 36,819 88,870 15,966 52,048 18,530 70,578 11,620 51,743 13,042 64,785 11,324 104,836 82,198 76,109 Consolidated Statement Of Financial Position 5151 Note 31 December 2013 US$’000 31 December 2012 US$’000 (Restated) 1 January 2012 US$’000 (Restated) 24 25 30 26 18 27 26 4,163 15,389 7,374 51,508 – 3,183 15,229 6,303 10,892 – 4,941 11,912 5,345 29,731 158 78,434 35,607 52,087 – 2,397 – – – 2,528 12,467 26,923 4,551 1,758 20,138 – 2,397 41,918 26,447 80,831 77,525 78,534 (11,400) 9,035 14,830 107,233 124,116 102,556 185,667 159,723 154,643 LIABILITIES Current liabilities Trade payables Other payables, accruals & advance receipts Amounts due to related parties Bank borrowings Current tax liabilities Non-current liabilities Deferred income Deferred tax liabilities Convertible preference shares Bank borrowing Total liabilities Net current (liabilities)/assets Total assets less current liabilities Total equity and liabilities Simon To Director Christian Hogg Director 52 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report Consolidated Statement Of Changes In Equity For the year ended 31 December 2013 Attributable to equity holders of the Company Share capital US$’000 Share-based Share compensation reserve US$’000 premium US$’000 Exchange reserve US$’000 General reserves US$’000 Accumulated losses US$’000 Total US$’000 Non– controlling interests US$’000 Total equity US$’000 As at 1 January 2012, as previously reported Prior year adjustments in respect of 51,743 92,955 4,748 8,650 496 (93,807) 64,785 12,545 77,330 changes in accounting policy (note 2) – – – – – – – (1,221) (1,221) As at 1 January 2012, as restated 51,743 92,955 4,748 8,650 496 (93,807) 64,785 11,324 76,109 Profi t/(loss) for the year Other comprehensive income/(loss) that has been or may be reclassifi ed subsequently to profi t or loss, as restated: Exchange translation differences arising from: — subsidiaries — joint ventures Total comprehensive income/(loss) for the year (net of tax), as restated Issue of shares (Note 22(a)) Share-based compensation expenses Transfer between reserves Loan from a non-controlling shareholder of a subsidiary (Note 30(b)) Dividend paid to a non-controlling shareholder of a subsidiary (Note 30(a)) – – – – – 305 – – – – – – – – – 714 – – – – – – – – – (390) 796 (180) – – – – 3,638 3,638 (98) 3,540 224 506 730 730 – – – – – – – – – – – – – – – – – 224 506 730 – (68) (68) 224 438 662 3,638 4,368 (166) 4,202 – – 180 – – 629 796 – – – – – – 629 796 – 1,000 1,000 (538) (538) As at 31 December 2012, as restated 52,048 93,669 4,974 9,380 496 (89,989) 70,578 11,620 82,198 Consolidated Statement Of Changes In Equity 5353 Attributable to equity holders of the Company Share capital US$’000 Share-based Share compensation reserve US$’000 premium US$’000 Exchange reserve US$’000 General reserves US$’000 Accumulated losses US$’000 Total US$’000 Non– controlling interests US$’000 Total equity US$’000 As at 1 January 2013, as previously reported Prior year adjustments in respect of 52,048 93,669 4,974 9,380 496 (89,989) 70,578 13,070 83,648 changes in accounting policy (Note 2) – – – – – – – (1,450) (1,450) As at 1 January 2013, as restated 52,048 93,669 4,974 9,380 496 (89,989) 70,578 11,620 82,198 Profi t for the year Other comprehensive income that has been or may be reclassifi ed subsequently to profi t or loss: Exchange translation differences arising from: — subsidiaries — joint ventures Total comprehensive income for the year (net of tax) Issue of shares (Note 22(a)) Share-based compensation expenses Transfer between reserves Dilution of interest in a subsidiary (Note 27) Dividend paid to a non-controlling shareholder of a subsidiary (Note 30(a)) – – – – – 3 – – – – – – – – – 6 – – – – – – – – – (2) 332 (168) (120) – – – 5,915 5,915 1,127 7,042 662 2,280 2,942 2,942 – – – (243) – – – – – – – – – – – – – 662 2,280 2,942 62 338 400 724 2,618 3,342 5,915 8,857 1,527 10,384 – – 168 9,459 – 7 332 – 9,096 – 25 – 3,371 7 357 – 12,467 – (577) (577) As at 31 December 2013 52,051 93,675 5,016 12,079 496 (74,447) 88,870 15,966 104,836 54 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report Consolidated Statement Of Cash Flows For the year ended 31 December 2013 Cash fl ows from operating activities Net cash used in operations Interest received Finance costs paid Income tax paid Dividend received from joint ventures Net cash generated from/(used in) operating activities Cash fl ows from investing activities Purchase of property, plant and equipment Payments for development costs Proceeds from disposal of property, plant and equipment Net cash used in investing activities Cash fl ows from fi nancing activities Decrease in amount due from a non-controlling shareholder of a subsidiary Dividend paid to a non-controlling shareholder of a subsidiary Loan from a non-controlling shareholder of a subsidiary New long-term bank loans New short-term bank loans Repayment of short-term bank loans Net proceeds from issuance of ordinary shares Buy back of convertible preference shares Net cash generated from fi nancing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at 1 January Exchange differences Cash and cash equivalents at 31 December Analysis of cash and cash equivalents – Cash and bank balances Note 28 27 2013 US$’000 2012 US$’000 (Restated) (4,065) 451 (1,485) (1,181) 11,308 5,028 (2,500) – – (2,500) – (577) – – 14,261 (568) 7 – 13,123 15,651 30,767 445 46,863 (18,123) 388 (1,160) (393) 7,837 (11,451) (430) (4,169) 11 (4,588) 1,516 (538) 1,000 26,923 – (18,839) 629 (6,519) 4,172 (11,867) 42,525 109 30,767 21 46,863 30,767 Notes To The Accounts 5555 1 GENERAL INFORMATION Hutchison China MediTech Limited (the “Company”) and its subsidiaries (together the “Group”) is principally engaged in researching, developing, manufacturing and selling pharmaceuticals and health oriented consumer products. The Group and its joint ventures have manufacturing plants in Shanghai and Guangzhou in the People’s Republic of China (the “PRC”) and sell mainly in the PRC and Hong Kong. During the year, the Group had discontinued parts of its consumer products operation in the PRC and France as detailed in Note 10. The Company was incorporated in the Cayman Islands on 18 December 2000 as an exempted company with limited liability under the Companies Law (2000 Revision), Chapter 22 of the Cayman Islands. The address of its registered offi ce is P.O. Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands. The Company’s ordinary shares were admitted to trading on AIM regulated by the London Stock Exchange. These consolidated accounts are presented in thousands of United States dollars (“US$’000”), unless otherwise stated, and were approved for issue by the Board of Directors on 17 February 2014. 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of preparation The consolidated accounts of the Company have been prepared in accordance with International Financial Reporting Standards (“IFRS”). These consolidated accounts have been prepared under the historical cost convention. As at 31 December 2013, the current liabilities of the Group exceeded its current assets by approximately US$11,400,000. Included in the current liabilities is a term loan of US$26,923,000 which is due for repayment in December 2014 (the “term loan”) and is guaranteed by Hutchison Whampoa Limited (“HWL”), the ultimate holding company of the Group. HWL has confi rmed that it will provide continuous fi nancial support to the Group for its obligations under the term loan, and will not demand for repayment should HWL be required to repay the term loan on the Group’s behalf, for a minimum period of twelve months from the date of this report (the “fi nancial support”). The future funding requirements of the Group are expected to be met through cash fl ows generated from operating activities, the continuous draw down of the existing revolving credit facility and the planned refi nancing of the term loan. Based on the Group’s history of its ability to obtain external fi nancing together with the fi nancial support from HWL, its operating performance and its expected future working capital requirements, the management is of the view that there are suffi cient fi nancial resources available to the Group to meet its liabilities as and when they fall due. Accordingly, these consolidated accounts have been prepared on a going concern basis. Changes in accounting policies and disclosures During the year, the Group has adopted all of the new and revised standards, amendments and interpretations issued by the International Accounting Standards Board that are relevant to the Group’s operations and mandatory for annual periods beginning 1 January 2013. The adoption of these new and revised standards, amendments and interpretations did not have any material effects on the Group’s results of operations or fi nancial position, except for IAS 1 (Amendments), IFRS 11 and IFRS 12 as described below. (A) The amendments to IAS 1 “Presentation of Financial Statements” introduce a grouping of items presented in other comprehensive income items that could be reclassifi ed to profi t or loss at a future point in time now have to be presented separately from items that will never be reclassifi ed. The adoption of these amendments affected presentation only and had no impact on the Group’s results of operations or fi nancial position. (B) IFRS 11 “Joint Arrangements” was issued in May 2011 which required a party to a joint arrangement to determine the type of joint arrangement it is involved by assessing the contractual rights and obligations arising from the arrangement rather than the legal structure. 56 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report Notes To The Accounts 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Changes in accounting policies and disclosures (Continued) In accordance with IFRS 11, joint arrangements are classifi ed into two types: (i) Joint operation is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement. A joint operator shall recognise in relation to its interest in a joint operation i) its assets, including its share of any assets held jointly; ii) its liabilities, including its share of any liabilities incurred jointly; iii) its revenue from the sale of its share of the output arising from the joint operation; iv) its share of the revenue from the sale of the output by the joint operation; and v) its expenses, including its share of any expenses incurred jointly; and (ii) Joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. A joint venturer shall recognise its interest in a joint venture as an investment and shall account for that investment using the equity method in accordance with IAS 28 Investments in Associates and Joint Ventures unless the entity is exempted from applying the equity method as specifi ed in that standard. Under the current rights and obligations of operations in the Group’s joint ventures (“JVs”), Group management has assessed the existing arrangement and determined the Group’s JVs as joint venture arrangements. In previous years, the Group’s share of each of the assets, liabilities, income and expenses of the JVs were combined line by line with the Group’s similar line items in the consolidated accounts in accordance with the proportionate consolidation method. In the consolidated accounts for the year ended 31 December 2013, the Group adopted the equity method to account for its investments in JVs in accordance with IFRS 11. Under the equity method, interests in JVs are initially recognised in the consolidated statement of fi nancial position at cost and adjusted thereafter to recognise the Group’s share of the profi t or loss and other comprehensive income of the JVs. The change in accounting policy has been applied for the earliest comparative period presented and the effect of the change in accounting policy mentioned above on the results of the Group for the years ended 31 December 2013 and 2012 and the fi nancial position of the Group as at 31 December 2013, 31 December 2012 and 1 January 2012 are summarised in the following pages. Notes To The Accounts 5757 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Estimated impact of change in accounting policy on the consolidated income statement and statement of comprehensive income Statement of comprehensive income Revenue Cost of sales Gross profi t Selling expenses Administrative expenses Other net operating income Share of profi ts less losses after tax of joint ventures Operating profi t Finance costs Profi t before taxation Taxation charge Profi t for the year from continuing operations Discontinued operations Loss for the year from discontinued operations Profi t for the year Other comprehensive income Exchange translation differences Total comprehensive income There are no impacts on the basic and diluted earnings per share as the profi t for the year remain unchanged. For the year ended 31 December 2013 Change in accounting policy US$’000 (195,977) 100,400 (95,577) 57,070 24,978 (1,231) 10,937 (3,823) 21 (3,802) 3,802 – – – – – 58 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report Notes To The Accounts 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Estimated impact of change in accounting policy on the consolidated statement of fi nancial position ASSETS Non-current assets Property, plant and equipment Leasehold land Goodwill Other intangible assets Investment in an associated company Investment in joint ventures Deferred tax assets Current assets Inventories Trade receivables Other receivables and prepayments Amount due from related parties Cash and cash equivalents Total assets EQUITY Capital and reserves attributable to the Company’s equity holders Share capital Reserves Non-controlling interests Total equity LIABILITIES Current liabilities Trade payables Other payables, accruals and advance receipts Amounts due to related parties Bank borrowings Current tax liabilities Non-current liabilities Deferred income Deferred tax liabilities Convertible preference shares Bank borrowing Total liabilities Net current assets Total assets less current liabilities Total equity and liabilities As at 31 December 2013 Change in accounting policy US$’000 (24,440) (16,405) (8,059) (15,144) (36) 111,405 (1,756) 45,565 (31,162) (32,168) (6,526) 1,896 (49,578) (117,538) (71,973) – – (1,700) (1,700) (20,797) (43,585) – (1,378) (410) (66,170) (3,861) (242) – – (4,103) (70,273) (51,368) (5,803) (71,973) Notes To The Accounts 5959 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Impact of change in accounting policy on the consolidated income statement and statement of comprehensive income Statement of comprehensive income Revenue Cost of sales Gross profi t Selling expenses Administrative expenses Other net operating income Gain on disposal of a business Share of profi ts less losses after tax of joint ventures Operating profi t Finance costs Profi t before taxation Taxation charge Profi t for the year from continuing operations Discontinued operations Loss for the year from discontinued operations Profi t for the year Other comprehensive income Exchange translation differences Total comprehensive income For the year ended 31 December 2012 US$’000 (Note) Change in accounting policy US$’000 For the year ended 31 December 2012 US$’000 (Restated) 195,531 (98,135) (173,164) 85,381 97,396 (60,595) (34,747) 2,602 11,476 – 16,132 (1,209) 14,923 (4,162) 10,761 (7,221) 3,540 662 4,202 (87,783) 54,901 13,371 (731) – 17,147 (3,095) 49 (3,046) 3,046 – – – – – 22,367 (12,754) 9,613 (5,694) (21,376) 1,871 11,476 17,147 13,037 (1,160) 11,877 (1,116) 10,761 (7,221) 3,540 662 4,202 There are no impacts on the basic and diluted earnings per share as the profi t for the year remain unchanged. Note: The above consolidated income statement for the year ended 31 December 2012 have been restated for the results of Group’s discontinued operations as explained in note 10. 60 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report Notes To The Accounts 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Impact of change in accounting policy on the consolidated statement of fi nancial position Change in accounting policy US$’000 As at 31 December 2012 US$’000 (Previously reported) As at 31 December 2012 US$’000 (Restated) As at 1 January 2012 US$’000 (Previously reported) Change in accounting policy US$’000 As at 1 January 2012 US$’000 (Restated) 22,848 10,440 8,311 15,585 32 – 1,639 (19,504) (8,942) (7,904) (15,585) (32) 109,552 (1,359) 3,344 1,498 407 – – 109,552 280 23,277 6,175 8,248 14,858 31 – 1,550 (18,727) (4,652) (7,841) (692) (31) 66,690 (1,160) 4,550 1,523 407 14,166 – 66,690 390 58,855 56,226 115,081 54,139 33,587 87,726 25,318 44,343 3,940 15,000 62,009 (23,728) (34,835) (2,357) (13,806) (31,242) 1,590 9,508 1,583 1,194 30,767 28,720 51,573 5,063 1,516 53,763 (24,393) (39,405) (2,842) 4,160 (11,238) 4,327 12,168 2,221 5,676 42,525 150,610 (105,968) 44,642 140,635 (73,718) 66,917 ASSETS Non-current assets Property, plant and equipment Leasehold land Goodwill Other intangible assets Investment in an associated company Investment in joint ventures Deferred tax assets Current assets Inventories Trade receivables Other receivables and prepayments Amount due from related parties Cash and cash equivalents Total assets 209,465 (49,742) 159,723 194,774 (40,131) 154,643 Notes To The Accounts 6161 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Impact of change in accounting policy on the consolidated statement of fi nancial position (Continued) Change in accounting policy US$’000 As at 31 December 2012 US$’000 (Previously reported) As at 31 December 2012 US$’000 (Restated) As at 1 January 2012 US$’000 (Previously reported) Change in accounting policy US$’000 As at 1 January 2012 US$’000 (Restated) 52,048 18,530 70,578 13,070 – – – (1,450) 52,048 18,530 70,578 11,620 51,743 13,042 64,785 12,545 – – – (1,221) 51,743 13,042 64,785 11,324 83,648 (1,450) 82,198 77,330 (1,221) 76,109 18,897 43,715 6,303 11,202 951 (15,714) (28,486) – (310) (951) 3,183 15,229 6,303 10,892 – 16,451 35,568 5,345 30,038 1,074 (11,510) (23,656) – (307) (916) 4,941 11,912 5,345 29,731 158 81,068 (45,461) 35,607 88,476 (36,389) 52,087 2,692 2,667 12,467 26,923 (2,692) (139) – – – 2,528 12,467 26,923 6,919 1,911 20,138 – (2,368) (153) – – 4,551 1,758 20,138 – 44,749 (2,831) 41,918 28,968 (2,521) 26,447 125,817 (48,292) 77,525 117,444 (38,910) 78,534 69,542 (60,507) 9,035 52,159 (37,329) 14,830 128,397 (4,281) 124,116 106,298 (3,742) 102,556 EQUITY Capital and reserves attributable to the Company’s equity holders Share capital Reserves Non-controlling interests Total equity LIABILITIES Current liabilities Trade payables Other payables, accruals and advance receipts Amounts due to related parties Bank borrowings Current tax liabilities Non-current liabilities Deferred income Deferred tax liabilities Convertible preference shares Bank borrowing Total liabilities Net current assets Total asset less current liabilities Total equity and liabilities 209,465 (49,742) 159,723 194,774 (40,131) 154,643 62 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report Notes To The Accounts 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (C) IFRS 12 “Disclosure of Interests in Other Entities” brings together into a single standard that all the disclosure requirements relevant to an entity’s interests in subsidiaries, joint arrangements, associates and unconsolidated structured entities. The disclosure requirements in IFRS 12 are generally more extensive than those previously required by the respective standards. The Group’s additional disclosures of interests in joint ventures and subsidiaries with material non-controlling interests have been made in Note 17 and Note 23 to the consolidated fi nancial statements accordingly. (a) Basis of consolidation The consolidated accounts of the Group include the accounts of the Company and all its direct and indirect subsidiaries made up to 31 December and also incorporate the Group’s interests in joint ventures on the basis set out in Notes 2(d) below. The accounting policies of subsidiaries and joint ventures have been changed where necessary to ensure consistency with the policies adopted by the Group. All signifi cant intercompany transactions and balances within the Group are eliminated on consolidation. Non-controlling interests represent the interests of outside shareholders in the operating results and net assets of subsidiaries and subsidiaries of joint ventures. (b) Subsidiaries Subsidiaries are all entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable return from its involvement with the entity and has the ability to affect those returns through its power over the entity. The consolidated accounts of the Group include the accounts of the Company and all its direct and indirect subsidiaries made up to 31 December and also incorporate the Group’s interests in joint ventures on the basis set out in Notes 2(d) below. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. When the Group ceases to have control or signifi cant infl uence, any retained interest in the entity is remeasured to its fair value at the date when the control is lost, with the change in carrying amount recognised in income statement. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, joint venture or fi nancial asset. In addition, any amounts previously recognised as other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognised in other comprehensive income are reclassifi ed to income statement. (c) Transactions with non-controlling interests Transactions with non-controlling interests that do not result in a loss of control are accounted for as transactions with equity owners of the Group. For purchases from non-controlling interests, the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity. Notes To The Accounts 6363 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (d) Joint arrangements Investment in joint arrangements are classifi ed as either joint operations or joint ventures depending on the contractual rights and obligations of each investors. The Group has assessed the nature of its joint arrangements and determined them to be joint ventures. Joint ventures are accounted for using the equity method. Under the equity method of accounting, interests in joint ventures are initially recognised at cost and adjusted thereafter to recognise the Group’s share of the post-acquisition profi ts or losses and movements in other comprehensive income. The Group determines at each reporting date whether there is any objective evidence that the investment in the joint ventures is impaired. If this is the case, the Group calculates the amount of impairment as the difference between the recoverable amount of the joint ventures and its carrying value and recognises the amount adjacent to ‘share of profi ts less losses after tax of joint ventures’ in the income statement. The Group’s investment in joint ventures includes goodwill identifi ed on acquisition, net of any accumulated impairment loss. (e) Foreign currency translation Items included in the accounts of each of the Group’s companies are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”). The functional currency of the Company and most of its principal subsidiaries and joint ventures is Renminbi (“RMB”) whereas the consolidated accounts are presented in United States dollars (“US dollars”), which is the Company’s presentation currency, as the Company holds investments in various countries and US dollars is considered as a common currency. Transactions in foreign currencies are converted at the rates of exchange ruling at the transaction dates. Monetary assets and liabilities denominated in foreign currencies are translated at the rates of exchange ruling at end of the reporting period. Exchange differences are included in the determination of income statement. The accounts of the Company, overseas subsidiaries and joint ventures are translated into the Company’s presentation currency using the year end rates of exchange for the statement of fi nancial position items and the average rates of exchange for the year for the income statement items. Exchange differences are recognised directly in the consolidated statement of comprehensive income. On consolidation, exchange differences arising from the translation of the net investments in foreign operations are recognised directly in the consolidated statement of comprehensive income. When a foreign operation is disposed of, exchange differences that were recorded in equity are recognised in the consolidated income statement as part of the gain or loss on disposal. Exchange differences arising from translation of inter-company loan balances among the Group’s companies and joint ventures are taken to the exchange reserve when such loans form part of the Group’s net investment in a foreign entity. When such loans are repaid, the related exchange gains or losses are transferred out of the exchange reserve and are recognised in the consolidated income statement. 64 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report Notes To The Accounts 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (f) Property, plant and equipment Property, plant and equipment other than construction in progress are stated at historical cost less accumulated depreciation and any accumulated impairment losses. Historical cost includes the purchase price of the asset and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefi ts associated with the item will fl ow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the income statement during the fi nancial period in which they are incurred. Depreciation is calculated using the straight-line method to allocate their costs less accumulated impairment losses over their estimated useful lives. The principal annual rates are as follows: Buildings Leasehold improvements Plant and equipment Furniture and fi xtures, other equipment and motor vehicles 20-30 years Over the unexpired period of the lease or 3-5 years, whichever is shorter 10 years 4-5 years The assets’ useful lives are reviewed, and adjusted if appropriate, at end of each reporting period. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (Note 2(l)). Gains and losses on disposals are determined by comparing net sales proceeds with the carrying amount of the relevant assets and are recognised in income statement. (g) Construction in progress Construction in progress represents plant and machinery pending installation and is stated at cost less accumulated impairment losses (if any). Cost includes the costs of plant and machinery. No provision for depreciation is made on construction-in-progress until such time as the relevant assets are completed and ready for intended use. When the assets concerned are brought into use, the costs are transferred to property, plant and equipment and depreciated in accordance with the policy as stated in Note 2(f). (h) Leasehold land Leasehold land is stated at cost less accumulated amortisation and accumulated impairment losses (if any). Cost mainly represents consideration paid for the rights to use the land on which various plants and buildings are situated for a period of 50 years from the date the respective right was granted. Amortisation of leasehold land is calculated on a straight-line basis over the period of the land use rights. Notes To The Accounts 6565 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (i) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifi able assets of the acquired subsidiary at the date of acquisition. Goodwill on acquisition of a foreign operation is treated as an asset of the foreign operation. Goodwill arising on acquisition is retained at the carrying amount as a separate asset, and subject to impairment test annually and when there are indications that the carrying value may not be recoverable. If the cost of acquisition is less than the fair value of the Group’s share of the net identifi able assets of the acquired subsidiary, the difference is recognised directly in the consolidated income statement. The profi t or loss on disposal of a subsidiary or joint venture is calculated by reference to the net assets at the date of disposal including the attributable amount of goodwill but does not include any attributable goodwill previously eliminated against reserves. (j) Trademarks, patents and others Trademarks, patents and others have defi nite useful lives and are carried at historical cost less accumulated amortisation and accumulated impairment losses. Amortisation is calculated using the straight-line method to allocate the costs of trademarks, patents and others over their estimated useful lives of four to ten years. (k) Research and development Research expenditure is recognised as an expense as incurred. Costs incurred on development projects (relating to the design and testing of new or improved products) are recognised as intangible assets when it is probable that the project will generate future economic benefi ts by considering its commercial and technological feasibility, and costs can be measured reliably. Other development expenditures are recognised as an expense as incurred. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period. Development costs with a fi nite useful life that have been capitalised (if any) are amortised on a straight-line basis over the period of expected benefi t not exceeding fi ve years. The capitalised development costs are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets exceeds its recoverable amount. Where the research phase and the development phase of an internal project cannot be clearly distinguished, all expenditure incurred on the project is charged to the income statement. (l) Impairment of assets Assets that have an indefinite useful life such as goodwill or intangible assets not ready to use are not subject to amortisation and are tested for impairment annually. Assets are reviewed for impairment to determine whether there is any indication that the carrying value of these assets may not be recoverable and have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. Such impairment loss is recognised in the income statement. 66 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report Notes To The Accounts 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (m) Inventories Inventories are stated at the lower of cost and net realisable value. Cost is determined using the weighted average cost method. The cost of fi nished goods and work in progress comprises raw materials, direct labor, other direct costs and related production overheads (based on normal operating capacity). Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses. (n) Trade and other receivables Trade and other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. A provision for impairment of trade and other receivables is established when there is objective evidence that the asset is impaired. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash fl ows, discounted at the effective interest rate. The amount of the provision is recognised in the income statement. (o) Cash and cash equivalents Cash and cash equivalents comprise cash on hand and demand deposits. (p) Borrowings Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method. (q) Financial liabilities and equity instruments Financial liabilities and equity instruments issued by the Group are classifi ed according to the substance of the contractual arrangements entered into and the defi nitions of a fi nancial liability and an equity instrument. Financial liabilities (including trade and other payables) are initially measured at fair value, and are subsequently measured at amortised cost, using the effective interest method. An equity instrument is any contract that does not meet the defi nition of fi nancial liability and evidences a residual interest in the assets of the Group after deducting all of its liabilities. Ordinary shares are classifi ed as equity. Incremental costs, net of tax, directly attributable to the issue of new shares are shown in equity as a deduction from the proceeds. (r) Convertible preference shares A subsidiary of the Group has issued convertible preference shares that are convertible to ordinary shares of the subsidiary, the number of which varies subject to conditions, as set out in the relevant agreements, that are ultimately linked to the value of the unquoted ordinary shares of the subsidiary that issued the instruments. The convertible preference shares have no maturity date, no obligation to pay dividends nor to be redeemed for cash but can be required to be settled by the delivery of the unquoted ordinary shares of the subsidiary concerned. The contractual obligation to issue a variable number of ordinary shares means that the instruments do not meet the defi nition of an equity instrument and consequently the convertible preference shares are fi nancial liabilities that are recognised initially at fair value being the transaction price. As the variability in the range of reasonable fair value estimates of the unquoted ordinary shares of the subsidiary is signifi cant and the probabilities of the various estimates cannot be reasonably assessed, it is not possible to measure the fair value of the ordinary shares of the subsidiary reliably, and hence for the fair value of the convertible preference shares that are linked to that value. Consequently, these instruments are measured at cost. If a reliable fair value becomes available for the convertible preference shares they will be measured at fair value and the difference between their carrying amount and fair value at that time, and subsequently, will be recognised in the income statement. The convertible preference shares are classifi ed as equity when the condition set out in the relevant agreements are satisfi ed and be settled by a fi xed number of preference shares. Notes To The Accounts 6767 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (s) Deferred income tax Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated accounts. Deferred income tax assets are recognised to the extent that it is probable that future taxable profi t will be available against which the temporary differences can be utilised. (t) Employee benefi ts (i) Pension plans The Group operates various defi ned contribution plans. The Group’s contributions to the defi ned contribution plans are charged to the income statement in the year incurred. Pension costs are charged against the income statement within employee benefi t expenses. The pension plans are generally funded by the relevant group companies and by payments from employees of the contributory plans. (ii) Share-based payments The Group operates certain equity-settled share-based compensation plans. The fair value of the employee services received in exchange for the grant of the options is recognised as an expense. The total amount to be expensed is determined by reference to the fair value of the options granted: i) including any market performance conditions; ii) excluding the impact of any service and non-market performance vesting conditions (for example, profi tability and sales growth targets); and iii) including the impact of any non-vesting conditions. Non-market vesting conditions are included in assumptions about the number of options that are expected to vest. The total expense is recognised over the vesting period, which is the period over which all of the specifi ed vesting conditions are to be satisfi ed. At end of each reporting period, the Group revises its estimates of the number of options that are expected to vest based on non-market vesting conditions. It recognises the impact of the revision of original estimates, if any, in the income statement, with a corresponding adjustment to equity. The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium when the options are exercised. When the share options are forfeited after the vesting date or are still not exercised at the expiry date, the amount previously recognised in the share-based compensation reserve will be transferred to retained profi ts. (u) Provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events; it is probable that an outfl ow of resources will be required to settle the obligation; and the amount has been reliably estimated. Provisions are not recognised for future operating losses. (v) Operating leases Leases in which a signifi cant portion of the risks and rewards of ownership are retained by the lessor are classifi ed as operating leases. Payments made under operating leases are charged to the income statement on a straight-line basis over the period of the leases. (w) Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. All other borrowing costs are recognised in the income statement in the period in which they are incurred. 68 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report Notes To The Accounts 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (x) Government incentives Incentives from government are recognised at their fair values where there is a reasonable assurance that the incentives will be received and all attached conditions will be complied with. Government incentives relating to costs are deferred and recognised in the income statement over the period necessary to match them with the costs that they are intended to compensate. (y) Revenue and income recognition Revenue comprises the fair value of the consideration received and receivable for the sales of goods and services in the ordinary course of the Group’s activities. Revenue is shown net of value-added tax, returns, volume rebates and discounts after eliminated sales within the Group. Revenue and income are recognised as follows: (i) Sales of goods – wholesales Sales of goods are recognised when a group entity has delivered products to the customer, the customer has accepted the products and collectability of the related receivables is reasonably assured. (ii) Sales of goods – retail Sales of goods are recognised at the point of sales less an estimate for sales return based on past experience where goods are sold with a right to return. Retail sales are usually in cash or by credit card. The recorded revenue is the gross amount of sales, including credit card fees payable for the transaction. Such fees are included in selling expenses. (iii) Other service income Other service income is recognised when services are rendered. (iv) Income from research and development projects Income from the provision of pharmaceutical research and development service is recognised when services are rendered. The Group receives payment from third parties under the licensing, co-development and commercialisation agreement. Considerations for development services are initially reported as deferred income and are recognised as revenue over the period of each development phase by using the percentage-of-completion method, based on the percentage of costs to date compared to the total estimated development costs for each development phase, contractual milestone or performance. (v) Interest income Interest income is recognised on a time-proportion basis using the effective interest method. (z) Discontinued operations A discontinued operation is a component of the Group’s business, the operations and cash fl ows of which can be clearly distinguished from the rest of the Group and which represents a separate major line of business or geographic area of operations, or is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations, or is a subsidiary acquired exclusively with a view to resale. When an operation is classifi ed as discontinued, a single amount is presented in the income statement, which comprises the post-tax profi t or loss of the discontinued operation. Notes To The Accounts 6969 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) At the date of authorisation of these consolidated accounts, the following standards, amendments and interpretations were in issue but not yet effective and have not been early adopted by the Group: IAS 19 (Amendments) (2) IAS 32 (Amendments) (1) IAS 36 (Amendments) (1) IAS 39 (Amendments) (1) IFRS 10, IFRS12 and IAS 27 (Amendments) (1) IFRS 9 (4) IFRS 14 (3) IFRIC-21 (1) Annual improvements 2010-2012 cycle (2) Annual improvements 2011-2013 cycle (2) Defi ned Benefi t Plans: Employee Contributions Offsetting Financial Assets and Financial Liabilities Recoverable Amount Disclosures for Non-Financial Assets Novation of Derivatives and Continuation of Hedge Accounting Investment Entities Financial Instruments Regulatory Deferral Accounts Levies Improvements to IFRS Improvements to IFRS (1) (2) (3) (4) Effective for the Group for annual periods beginning on or after 1 January 2014. Effective for the Group for annual periods beginning on or after 1 January 2015. Effective for the Group for annual periods beginning on or after 1 January 2016. Effective for the Group for annual periods beginning on or after 1 January 2015. The effective date was subsequently removed and the revised effective date is to be determined. The adoption of standards, amendments and interpretations listed above in future periods is not expected to have any material effect on the Group’s result of operations and fi nancial position. 3 FINANCIAL RISK MANAGEMENT (a) Financial risk factors The Group’s activities expose it to a variety of fi nancial risks, including foreign exchange risk, credit risk, cash fl ow interest rate risk and liquidity risk. The Group does not use any derivative fi nancial instruments for speculative purpose. (i) Foreign exchange risk The Group mainly operates in the PRC with most of the transactions settled in RMB. The Group also has retail and trading operations in various jurisdictions. The Group’s assets and liabilities, and transactions arising from its operations that are exposed to foreign exchange risk are primarily with respect to the US dollars. Management has a policy to require group companies to manage their foreign exchange risk against functional currency. It mainly includes managing the exposures arising from sales and purchases made by the relevant group companies in currencies other than their own functional currencies. The Group also manages its foreign exchange risk by performing regular reviews of the Group’s net foreign exchange exposures. The Group has not used any hedging arrangement to hedge its exposure during the year as foreign currency risk is considered relatively insignifi cant. As the assets and liabilities of each company within the Group are mainly denominated in the respective company’s functional currency, management considers that the Group’s volatility against changes in exchange rates of foreign currencies would not be signifi cant. Accordingly, no sensitivity analysis is presented for foreign exchange risk. 70 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report Notes To The Accounts 3 FINANCIAL RISK MANAGEMENT (Continued) (a) Financial risk factors (Continued) (ii) Credit risk The carrying amounts of cash at bank, short-term bank deposits, trade receivables, other receivables and amount due from related parties included in the consolidated statement of fi nancial position represent the Group’s maximum exposure to credit risk of the counterparty in relation to its fi nancial assets. Substantially all of the Group’s cash at banks are deposited in major fi nancial institutions, which management believes are of high credit quality. The Group has a policy to limit the amount of credit exposure to any fi nancial institution. The Group has no signifi cant concentrations of credit risk. The Group has policies in place to ensure that wholesales of products are made to customers with an appropriate credit history and the Group performs periodic credit evaluations of its customers. Normally the Group does not require collaterals from trade debtors. Management makes periodic assessment on the recoverability of trade receivables, other receivables and amount due from related parties. The Group’s historical experience in collection of receivables falls within the recorded allowances. It is considered that adequate provision for uncollectible receivables has been made. (iii) Cash flow interest rate risk The Group has no signifi cant interest-bearing assets except for bank deposits and cash at bank, details of which have been disclosed in Notes 21.The Group’s exposure to changes in interest rates is mainly attributable to its bank borrowings, which bear interest at fl oating interest rates and expose the Group to cash fl ow interest rate risk. Details of the Group’s bank borrowings are disclosed in Note 26. The Group has not used any interest rate swaps to hedge its exposure to interest rate risk as it is considered not cost effi cient. The Group has performed sensitivity analysis for the effects on the Group’s profi t after taxation for the year as a result of changes in interest expense on fl oating rate borrowings. The sensitivity to interest rate used is based on the market forecasts available at the end of the reporting period and under the economic environments in which the Group operates, with other variables held constant. According to the analysis, the impact on the profi t/loss after taxation of a 100 basis-point shift would be a maximum increase/decrease of US$509,000 and US$316,000 for the years ended 31 December 2013 and 2012 respectively. Notes To The Accounts 7171 3 FINANCIAL RISK MANAGEMENT (Continued) (a) Financial risk factors (Continued) (iv) Liquidity risk Prudent liquidity management implies maintaining suffi cient cash and cash equivalents and the availability of funding when necessary. The Group’s policy is to regularly monitor current and expected liquidity requirements to ensure that it maintains suffi cient cash balances and adequate credit facilities to meet its liquidity requirements in the short and long term. The Group’s primary cash requirements have been used for additions of and upgrades on property, plant and equipment, investment in intangible assets, settlement of bank loans, settlement of payables and payment for operating expenses. The Group mainly fi nances its working capital requirements through a combination of internal resources and bank borrowings. As at 31 December 2012 and 2013, the Group’s current fi nancial liabilities were due for settlement contractually within twelve months. The Group’s non-current fi nancial liabilities were disclosed in Notes 26 and 27. Interest element in connection with bank loans payable in the next twelve months calculated in accordance with the contractual undiscounted cash fl ows amounted to US$535,000 (2012 as restated: US$448,000). As at 31 December 2013, the current liabilities of the Group exceeded its current assets by approximately US$11,400,000. Included in the current liabilities is a term loan of US$26,923,000 which is due for repayment in December 2014 (the “term loan”) and is guaranteed by HWL, the ultimate holding company of the Group. HWL has confi rmed it will provide continuous fi nancial support to the Group for its obligations under the term loan, and will not demand for repayment should HWL be required to repay the term loan on the Group’s behalf, for a minimum period of twelve months from the date of this report. (b) Capital risk management The Group’s objectives when managing capital are to safeguard the Group’s ability to provide returns for shareholders and benefi ts for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. The Group regularly reviews and manages its capital structure to ensure optimal capital structure to maintain a balance between higher shareholders’ return that might be possible with higher levels of borrowings and advantages and security afforded by a sound capital position, and makes adjustments to the capital structure in light of changes in economic conditions. The Group monitors capital on the basis of the gearing ratio. This ratio is calculated as total bank borrowings divided by total equity attributable to the Company’s equity holders as shown on the consolidated statement of fi nancial position. Currently, it is the Group’s strategy to maintain a reasonable gearing ratio. The gearing ratios as at 31 December 2013 and 2012 were as follows: Total bank borrowings (Note 26) Total equity attributable to the Company’s equity holders Gearing ratio 2013 US$’000 51,508 88,870 58.0% 2012 US$’000 (Restated) 37,815 70,578 53.6% The increase in the gearing ratio was primarily resulted from the drawdown of new short-term bank loans during 2013. 72 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report Notes To The Accounts 3 FINANCIAL RISK MANAGEMENT (Continued) (c) Fair value estimation The Group does not have any fi nancial assets or liabilities which are carried at fair value. The carrying amounts of the Group’s current fi nancial assets, including cash and bank balances, trade receivables, other receivables, amount due from related parties, and current fi nancial liabilities, including trade payables, other payables and accruals, bank borrowings, and balances with related parties, approximate their fair values due to their short-term maturities. The carrying amounts of the Group’s fi nancial instruments carried at cost or amortised cost are not materially different from their fair values. The face values less any estimated credit adjustments for fi nancial assets and liabilities with a maturity of less than one year are assumed to approximate their fair values. The fair value of fi nancial liabilities for disclosure purposes is estimated by discounting the future contractual cash fl ows at the current market interest rate that is available to the Group for similar fi nancial instruments. 4 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS Note 2 includes a summary of the signifi cant accounting policies used in the preparation of the accounts. The preparation of accounts often requires the use of judgements to select specifi c accounting methods and policies from several acceptable alternatives. Furthermore, signifi cant estimates and assumptions concerning the future may be required in selecting and applying those methods and policies in the accounts. The Group bases its estimates and judgements on historical experience and various other assumptions that it believes are reasonable under the circumstances. Actual results may differ from these estimates and judgements under different assumptions or conditions. The following is a review of the more signifi cant assumptions and estimates, as well as the accounting policies and methods used in the preparation of the accounts. (a) Revenue recognition The Group accounts for licensing, co-development and commercialisation agreement in respect of the research and development project using the percentage-of-completion method, recognising revenue when they are received or receivable, non-refundable and in substance consideration for achievement of specifi c defi ned goals. The identifi cation of specifi c defi ned goals requires signifi cant judgment and considerations include extent of effort involved in rendering each milestone and fair value of each distinct service. The percentage-of-completion method places considerable importance on accurate estimates of the extent of progress towards completion for each milestone, and the signifi cant estimates include total estimated development costs, remaining costs to completion, corresponding risks and other judgements for each milestone. (b) Useful lives of property, plant and equipment The Group has made substantial investments in property, plant and equipment. Changes in technology or changes in the intended use of these assets may cause the estimated period of use or value of these assets to change. Notes To The Accounts 7373 4 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (Continued) (c) Impairment of assets The Group tests annually whether goodwill (note 16) and intangible assets not ready to use as included under the Group’s JVs, has suffered any impairment. Other assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset exceeds its recoverable amount in accordance with the accounting policy stated in Note 2(l). The recoverable amount of an asset or a cash-generating unit is determined based on the higher of the asset’s or the cash-generating unit’s fair value less costs to sell and value-in-use. The value-in-use calculation requires the entity to estimate the future cash fl ows expected to arise from the asset and a suitable discount rate in order to calculate present value, and the growth rate assumptions in the cash fl ow projections which has been prepared on the basis of management’s assumptions and estimates. (d) Impairment of receivables The Group makes provision for impairment of receivables based on an assessment of the recoverability of the receivables. This assessment is based on the credit history of the relevant counterparty and the current market condition. Provisions are made where events or changes in circumstances indicate that the receivables may not be collectible. The identifi cation of impairment in receivables requires the use of judgement and estimates. Where the expectation is different from the original estimate, such difference will impact the carrying amount of receivables and impairment is recognised in the period in which such estimate has been changed. (e) Research and development costs Research expenditure is recognised as an expense as incurred. Where the research phase and the development phase of an internal project cannot be clearly distinguished, all expenditure incurred on the project is charged to the income statement. In determining whether the development costs can be capitalised, management assesses the probability that the project will generate future economic benefi ts by considering its commercial and technical feasibility. This assessment could change when there are subsequent technological advancement and innovations. (f) Deferred income tax The Group has signifi cant tax losses carried forward and has not recognised the deferred income tax assets on these losses. Deferred income tax assets in respect of tax losses are recognised to the extent that it is probable that future taxable profi t will be available against which the temporary differences can be utilised. No deferred income tax assets are recognised when it is uncertain whether there are suffi cient future taxable profi ts available before such tax losses expire. Where the fi nal outcome of these uncertainties are different from the estimation, such differences will impact the carrying amount of deferred tax assets in the period in which such determination is made. (g) Disposal of business In 2012, the Group contributed certain of its assets and business processes including (i) the global development and commercial rights of a novel, oral therapy for Infl ammatory Bowel Disease for a drug candidate previously recognised by the Group as intangible assets and (ii) the exclusive rights to its extensive botanical library and well-established botanical research and development platform in the fi eld of gastrointestinal (“GI”) disease previously developed by the Group ((i) & (ii) collectively referred as the “Business”), into a joint venture that would be jointly owned by a subsidiary of the Group and an unrelated third party as disclosed in Note 6 (b). In accordance with IFRS 3 “Business Combinations”, management had exercised signifi cant judgement in determining whether this contribution constitutes a transfer of a business. The Business comprises an integrated set of activities including inputs in the form of a botanical library and a team of scientists engaged in the fi eld of GI area, and critical processes in the form of well-established botanical research and development platform that are used to generate outputs in the form of novel medicines and nutritional products. Although the related team of scientists was not transferred as a result of this transaction, management believes that it did not involve the use of specifi ed knowledge that is unique to an individual scientist or team and this team of scientists can be easily replicated by a market participant to run the business. Accordingly, management considered the transaction met the requirements under IFRS 3 to be classifi ed and accounted for as the disposal of a business. 74 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report Notes To The Accounts 5 REVENUE AND SEGMENT INFORMATION The Group is principally engaged in researching, developing, manufacturing and selling pharmaceuticals and health oriented consumer products. Revenues recognised for the year are as follows: Continuing operations: Sales of goods Income from research and development projects (note) Discontinued operations: Sales of goods Service income Note: 2013 US$’000 16,470 29,500 45,970 (40) – 2012 US$’000 (Restated) 15,452 6,915 22,367 38 166 45,930 22,571 Income from research and development projects include upfront income and milestone income of US$22.2 million (2012: US$4.6 million) from three global licensing, co-development and commercialisation agreements (Note 25) and income from the provision of research and development services of US$7.3 million (2012: US$2.3 million). The chief executive offi cer (the chief operating decision maker) has reviewed the Group’s internal reporting in order to assess performance and allocate resources, and has determined that the Group has three reportable operating segments as follows: • China healthcare: comprises the development, manufacture, distribution and sale of over-the-counter products, prescription products and health supplements products. • Drug research and development (“Drug R&D”): relates mainly to drug discoveries and other pharmaceutical research and development activities, and the provision of research and development services. • Consumer products: relates to sales of health oriented consumer products. China healthcare and Drug R&D segments are primarily located in the PRC and the locations for consumer products segment are further segregated into the PRC and Hong Kong. The operating segments are strategic business units that offer different products and services. They are managed separately because each business requires different technological advancement and marketing approach. The performance of the reportable segments are assessed based on a measure of earnings or losses before interest income, fi nance costs and tax expenses (“EBIT/(LBIT)”). The group had discontinued parts of its consumer products operations in the PRC and France for the year ended 31 December 2013 and consumer products operations in the United Kingdom (the “UK”) for the year ended 31 December 2012. Details of the discontinued operations are included in note 10. Notes To The Accounts 7575 5 REVENUE AND SEGMENT INFORMATION (Continued) The segment information for the reportable segments for the year is as follows: Continuing operations As at and for the year ended 31 December 2013 China healthcare PRC US$’000 Drug R&D PRC US$’000 Consumer products Reportable segment PRC US$’000 Hong Kong US$’000 Total US$’000 Unallocated US$’000 Total US$’000 Revenue from external customers 3,985 29,500 923 11,562 45,970 – 45,970 EBIT/(LBIT) Interest income Share of profi ts less losses after tax of joint ventures 806 6,495 9 31 (80) 12 19,702 (8,765) – 2 – (486) 6,735 (6,568) 54 397 167 451 10,937 – 10,937 Operating profi t/(loss) 20,517 (2,239) (68) (484) 17,726 (6,171) 11,555 Finance costs 186 – Additions to non-current assets (other than fi nancial instrument and deferred tax assets) Depreciation/amortisation 5 16 2,461 889 – – 3 – 186 1,299 1,485 2 15 2,468 923 32 40 2,500 963 Total assets 97,271 50,272 1,768 8,312 157,623 27,113 184,736 76 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report Notes To The Accounts 5 REVENUE AND SEGMENT INFORMATION (Continued) Discontinued operations China healthcare PRC Drug R&D PRC As at and for the year ended 31 December 2013 Consumer products Reportable segment PRC UK France Hong Kong Total Unallocated Total US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 Revenue from external customers LBIT Operating loss Additions to non-current assets (other than fi nancial instrument and deferred tax assets) Depreciation/amortisation Total assets – – – – – – – – – – – – 1 (1,141) (1,141) – – – – – – – – (41) (837) (837) – – 283 648 – – – – – – (40) (1,978) (1,978) – – 931 – – – – – – (40) (1,978) (1,978) – – 931 Notes To The Accounts 7777 5 REVENUE AND SEGMENT INFORMATION (Continued) The segment information for the reportable segments for the year is as follows: Continuing operations As at and for the year ended 31 December 2012 (Restated) China healthcare PRC US$’000 R&D Drug PRC US$’000 Consumer products Reportable segment PRC US$’000 France US$’000 Hong Kong US$’000 total Unallocated US$’000 US$’000 Total US$’000 Revenue from external customers 5,277 6,915 787 EBIT/(LBIT) 432 2,624 (400) Interest income 8 153 Share of profi ts less losses after tax of joint ventures 17,132 15 3 – Operating profi t/(loss) 17,572 2,792 (397) Finance costs 171 – Additions to non-current assets (other than fi nancial instrument and deferred tax assets) Depreciation/amortisation – 30 4,518 1,392 – 4 1 Total assets 87,933 45,608 2,137 – – – – – – – – – 9,388 22,367 – 22,367 (901) 1,755 (6,253) (4,498) 1 – 165 223 388 17,147 – 17,147 (900) 19,067 (6,030) 13,037 – 171 989 1,160 6 18 4,528 114 4,642 1,441 25 1,466 7,631 143,309 14,483 157,792 78 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report Notes To The Accounts 5 REVENUE AND SEGMENT INFORMATION (Continued) Discontinued operations China healthcare PRC US$’000 Drug R&D PRC US$’000 As at and for the year ended 31 December 2012 (Restated) Consumer products Reportable segment PRC US$’000 UK US$’000 France US$’000 Hong Kong US$’000 total Unallocated US$’000 US$’000 Total US$’000 Revenue from external customers LBIT Operating loss Additions to non-current assets (other than fi nancial instrument and deferred tax assets) Depreciation/amortisation Total assets – – – – – – – – – – – – (783) 344 643 (3,273) (3,201) (747) (3,273) (3,201) (747) – – – – 35 1 1 363 1,568 – – – – – – 204 (7,221) (7,221) 1 36 1,931 – – – – – – 204 (7,221) (7,221) 1 36 1,931 Revenue from external customers is after elimination of inter-segment sales. The amount eliminated attributable to consumer products segment from UK to France is US$Nil (2012: US$414,000) and from Hong Kong to the PRC is US$628,000 (2012: US$485,000). Sales between segments are carried out at mutually agreed terms. Unallocated expenses mainly represent corporate expenses which include corporate employee benefi t expenses and the relevant share-based compensation expenses. Unallocated assets mainly comprise cash at banks and deferred tax assets. A reconciliation of EBIT for reportable segments to profi t before taxation and discontinued operation is provided as follows: EBIT for reportable segments Unallocated expenses Interest income Share of profi ts less losses after tax of joint ventures Finance costs Profi t before taxation 2013 US$’000 6,735 (6,568) 451 10,937 (1,485) 10,070 2012 US$’000 (Restated) 1,755 (6,253) 388 17,147 (1,160) 11,877 As at 31 December 2013, the total non-current assets, other than investment in joint ventures and deferred tax assets, located in the PRC, France and Hong Kong were US$6,823,000 (2012 restated: US$5,104,000), US$Nil (2012: US$1,000) and US$120,000 (2012: US$144,000) respectively. Notes To The Accounts 7979 2013 US$’000 2012 US$’000 (Restated) 451 1,217 4 (69) – 1,603 388 308 35 (12) 1,152 1,871 6 (a) OTHER NET OPERATING INCOME Continuing operations: Interest income Net foreign exchange gains Other operating income Other operating expenses Profi t on buy back of convertible preference shares (Note 27) 6 (b) GAIN ON DISPOSAL OF A BUSINESS On 27 November 2012, Hutchison MediPharma (Hong Kong) Limited (a subsidiary of the Group) and Nestlé Health Science S.A. (“Nestlé”), a fully-owned subsidiary of Nestlé S.A., a company specialised in the development of science-based personalised nutritional solutions, entered into a joint venture agreement in which Nestlé agreed to contribute cash and the Group agreed to contribute the Business as defi ned in Note 4(g) into Nutrition Science Partners Limited (the “JV”). The JV would be jointly owned with each of the Group and Nestlé having a 50% equity interest. As at 31 December 2012, the Group had contributed the Business (the drug candidate with cumulative capitalised costs amounted to US$18,524,000) into the JV, and management considered the Group had effectively lost control over the Business since 27 November 2012 notwithstanding the legal formation of the JV was subject to regulatory approvals as at 31 December 2012 (all the regulatory approvals regarding the formation of JV have been subsequently satisfi ed in 2013). Accordingly, the Group had recorded a gain on disposal of the business, being the difference between the contribution to be received from the JV partner and the carrying values of net assets contributed into the JV for the year ended 31 December 2012. 7 OPERATING PROFIT Operating profi t is stated after charging the following: Continuing operations: Auditor’s remuneration Amortisation of leasehold land Cost of inventories recognised as expense Depreciation of property, plant and equipment Write-off of inventories (note) Provision for inventories (note) Provision for receivables Loss on disposal of property, plant and equipment Operating lease rentals in respect of land and buildings Research and development expense Employee benefi t expenses (Note 13) 2013 US$’000 408 38 16,823 925 41 88 42 17 672 4,475 16,517 2012 US$’000 (Restated) 376 36 9,072 1,430 22 – – 78 556 5,894 14,675 Note: Provision for inventories and write-off of inventories amounted to US$88,000 (2012 restated: US$ Nil) and US$41,000 (2012 restated: US$22,000) respectively mainly related to obsolete or damaged inventories. 80 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report Notes To The Accounts 8 FINANCE COSTS Continuing operations: Interest expense on bank loans Guarantee fee on bank loan (Note 30) Interest expense on amount due to immediate holding company (Note 30) 9 TAXATION CHARGE Continuing operations: Current tax – PRC Deferred income tax (Note 18) Taxation charge 2013 US$’000 2012 US$’000 (Restated) 922 471 92 689 471 – 1,485 1,160 2013 US$’000 2012 US$’000 (Restated) 1,186 (136) 1,050 236 880 1,116 (a) The Group has no estimated assessable profi t in Hong Kong for the year (2012: Nil). (b) Hutchison MediPharma Limited, a subsidiary of the Group, has been granted Technology Advancement Service Entity status and is subject to a preferential income tax rate of 15% up to 2014 and is renewable subject to approval by the relevant tax authorities. Hutchison Healthcare Limited (“HHL”), a subsidiary of the Group, is entitled to a two-year exemption from income taxes followed by a 50% reduction in income taxes for the ensuing three years. These tax benefi ts were expired in 2012 and thereafter HHL is subject to a tax rate of 25%. Notes To The Accounts 8181 9 TAXATION CHARGE (Continued) (c) The taxation charge on the Group’s profi t before taxation differs from the theoretical amount that would arise using the Group’s weighted average tax rate as follows: Continuing operations: Profi t before taxation Tax calculated at the domestic tax rates of respective companies Effect of JVs’ result reported net of tax Tax losses for which no deferred tax asset was recognised Utilisation of previously unrecognised tax losses Withholding tax on unremitted earnings Others Taxation charge 2013 US$’000 2012 US$’000 (Restated) 10,070 11,877 5,115 (4,453) 817 (1,677) 1,029 219 1,050 1,750 (5,044) 3,774 – 1,005 (369) 1,116 The weighted average tax rate calculated at the domestic tax rates of respective companies for the year was 50.8% (2012 restated: 14.7%). The fl uctuation in the weighted average applicable tax rate arose because of the changes in the relative profi tability of the Group’s operations in different tax jurisdictions. The effective tax rate for the year was 10.4% (2012 restated: 9.4%). 82 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report Notes To The Accounts 10 RESULTS AND CASH FLOWS OF DISCONTINUED OPERATIONS In June 2012, the Group discontinued its consumer products operation in the UK, which represented a geographical area of the Group’s business. In June 2013, the Group discontinued its consumer products operation in France which represented a geographical area of the Group’s business, and a major business line in the PRC consumer products operation, as their performances were below expectation in light of increased competitive activities in the UK, France and the PRC consumer product market. The results and cash fl ows of the discontinued operations are set out below. The 2012 comparative fi gures in the consolidated income statement have also been reclassifi ed to conform to the current year presentation. Revenue and income (Note 1) Expenses (Note 2) Loss before taxation from discontinued operations Taxation charge Loss for the year from discontinued operations Cash fl ow from discontinued operations Net cash used in operating activities Net cash generated from investing activities Net cash generated from fi nancing activities Net (decrease)/increase in cash and cash equivalents Note 1 Revenue and income include: Sales of goods Service income Other income Note 2 Expenses include: Cost of inventories recognised as expense Depreciation of property, plant and equipment Employee benefi t expenses Loss on disposal of property, plant and equipment Operating lease rentals in respect of land and building Write-off of inventories Provision for inventories Provision for receivables Selling expenses 2013 US$’000 2012 US$’000 (Restated) (31) (1,947) (1,978) – (1,978) (1,239) – – (1,239) (40) – 9 (31) 7 – 239 1 198 96 – – 840 896 (8,117) (7,221) – (7,221) (893) 4 1,026 137 38 166 692 896 1,349 36 1,728 106 712 1,446 927 72 1,202 Notes To The Accounts 8383 11 EARNINGS/(LOSSES) PER SHARE (a) Basic earnings/(losses) per share Basic earnings/(losses) per share is calculated by dividing the profi t/(loss) attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the year. Weighted average number of outstanding ordinary shares in issue 52,050,988 51,918,898 2013 2012 (Restated) Profi t/(loss) for the year attributable to equity holders of the Company – Continuing operations (US$’000) – Discontinued operations (US$’000) Earnings/(losses) per share attributable to equity holders of the Company – Continuing operations (US$ per share) – Discontinued operations (US$ per share) 7,323 (1,408) 5,915 0.1407 (0.0271) 9,472 (5,834) 3,638 0.1824 (0.1123) 0.1136 0.0701 (b) Diluted earnings/(losses) per share Diluted earnings/(losses) per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of the share options that have been granted under the Company’s share option scheme to refl ect the dilutive potential ordinary shares of the Company. A calculation is prepared to determine the number of shares that could have been acquired at fair value (determines as the average market share price of the Company’s shares over the period) based on the monetary value of the subscription rights attached to outstanding share options. The number of shares calculated as above is compared with the number of shares that would have been issued assuming the exercise of share options. Weighted average number of outstanding ordinary shares in issue Adjustment for share options Profi t/(loss) for the year attributable to equity holders of the Company – Continuing operations (US$’000) – Discontinued operations (US$’000) Diluted earnings per share for profi t from continuing operations attributable to equity holders of the Company (US$ per share) 2013 2012 (Restated) 52,050,988 827,438 51,918,898 731,464 52,878,426 52,650,362 7,323 (1,408) 5,915 9,472 (5,834) 3,638 0.1385 0.1799 Diluted earnings per share for profi t from continuing and discontinued operations attributable to equity holders of the Company (US$ per share) 0.1119 0.0691 84 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report Notes To The Accounts 11 EARNINGS/(LOSSES) PER SHARE (Continued) (b) Diluted earnings/(losses) per share (Continued) Diluted loss per share from discontinued operations for the years ended 31 December 2013 and 2012 were the same as the basic loss per share from discontinued operations since the share options had anti-dilutive effect. 12 DIRECTORS’ EMOLUMENTS Fees Basic salaries, housing allowances, other allowances and benefi ts in kind Contributions to pension schemes Share-based compensation expenses 13 EMPLOYEE BENEFIT EXPENSES (INCLUDING DIRECTORS’ EMOLUMENTS) Wages, salaries and bonuses Pension costs – defi ned contribution plans Staff welfare Share-based compensation expenses Approximately US$5,256,000 (2012: US$ 2,418,000) is included in cost of sales. 2013 US$’000 280 1,381 43 – 1,704 2013 US$’000 12,953 1,793 1,414 357 16,517 2012 US$’000 276 1,301 41 10 1,628 2012 US$’000 (Restated) 10,818 1,547 1,558 752 14,675 Notes To The Accounts 8585 14 PROPERTY, PLANT AND EQUIPMENT Furniture and fi xtures, other equipment and motor Construction Leasehold improve– Plant and ments equipment US$’000 US$’000 vehicles US$’000 in progress US$’000 Total US$’000 Buildings situated in the PRC US$’000 Cost As at 1 January 2013, as previously reported Prior year adjustments in respect of change in accounting policy 22,955 4,218 13,061 14,415 860 55,509 (20,483) (1,751) (12,983) (5,356) (860) (41,433) As at 1 January 2013, as restated 2,472 2,467 Exchange differences Additions Disposals 79 – – 79 55 (18) As at 31 December 2013 2,551 2,583 78 3 4 – 85 9,059 299 1,211 (148) – 18 1,230 – 14,076 478 2,500 (166) 10,421 1,248 16,888 Accumulated depreciation and impairment As at 1 January 2013, as previously reported Prior year adjustments in respect of change in accounting policy As at 1 January 2013, as restated Exchange differences Charge for the year Disposals As at 31 December 2013 Net book value As at 31 December 2013 9,916 3,778 8,141 10,826 (9,291) (1,476) (8,081) (3,081) 625 21 115 – 761 2,302 73 19 (17) 2,377 1,790 206 60 2 13 – 75 10 7,745 255 778 (131) 8,647 – – – – – – – 32,661 (21,929) 10,732 351 925 (148) 11,860 1,774 1,248 5,028 86 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report Notes To The Accounts 14 PROPERTY, PLANT AND EQUIPMENT (Continued) Furniture and fi xtures, other equipment Plant and equipment US$’000 and motor Construction vehicles US$’000 in progress US$’000 Total US$’000 Buildings situated in Leasehold the PRC improvements US$’000 US$’000 Cost As at 1 January 2012, as previously reported Prior year adjustments in respect of change in accounting policy 21,479 5,293 12,014 14,229 1,967 54,982 (19,027) (1,313) (11,931) (4,399) (1,936) (38,606) As at 1 January 2012, as restated Exchange differences Additions Disposals 2,452 20 – – 3,980 34 50 (1,597) As at 31 December 2012 2,472 2,467 83 1 – (6) 78 9,830 81 377 (1,229) 9,059 Accumulated depreciation and impairment As at 1 January 2012, as previously reported Prior year adjustments in respect of change in accounting policy As at 1 January 2012, as restated Exchange differences Charge for the year Disposals As at 31 December 2012 Net book value 8,774 5,032 7,619 10,280 (8,266) (1,343) (7,583) (2,687) 508 5 112 – 625 3,689 33 121 (1,541) 2,302 36 1 23 – 60 18 7,593 72 1,210 (1,130) 7,745 1,314 As at 31 December 2012 1,847 165 31 – 3 (34) – – – – – – – – – 16,376 136 430 (2,866) 14,076 31,705 (19,879) 11,826 111 1,466 (2,671) 10,732 3,344 Notes To The Accounts 8787 2013 US$’000 2012 US$’000 (Restated) 1,706 55 1,761 208 7 38 253 1,692 14 1,706 169 3 36 208 1,508 1,498 2013 US$’000 2012 US$’000 (Restated) 407 407 15 LEASEHOLD LAND The Group’s interests in leasehold land represent prepaid operating lease payments and are located in the PRC. Cost As at 1 January Exchange differences As at 31 December Accumulated amortisation As at 1 January Exchange differences Amortisation charge As at 31 December Net book value As at 31 December 16 GOODWILL Cost As at 1 January and 31 December Goodwill is allocated to HHL, a subsidiary of the Group. For the purposes of impairment reviews, the recoverable amount of goodwill is determined based on value-in-use calculations. The value-in-use calculations use cash fl ow projections based on fi nancial budgets approved by management covering a fi ve-year period. Projections in excess of fi ve years are used to take into account increasing market share and growth momentum. There are a number of assumptions and estimates involved for the preparation of cash fl ow projections for the period covered by the approved budget. Key assumptions include the expected growth in revenues and gross margin, and pre-tax discount rate of 11% (2012: 11%), to refl ect the risks involved. Management prepared the fi nancial budgets taking into account actual and prior year performance and market development expectations. Cash fl ows beyond that fi ve-year period have been extrapolated using steady growth rate of 5%. Judgment is required to determine key assumptions adopted in the cash fl ow projections and changes to key assumptions can signifi cantly affect these cash fl ow projections. 88 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report Notes To The Accounts 17 INVESTMENT IN JOINT VENTURES Unlisted shares Share of undistributed post acquisition reserves Particulars regarding the principal joint ventures are set below: 31 December 2013 US$’000 31 December 2012 US$’000 (Restated) 61,883 49,522 50,479 59,073 111,405 109,552 Name Hutchison Whampoa Guangzhou Baiyunshan Chinese Medicine Company Limited (“HBYS”) Shanghai Hutchison Pharmaceuticals Limited (“SHPL”) Principal place of business Equity interest attributable to the Group Nature of relationship Measurement method The PRC 40% (note(i)) Manufacture and distribution Equity of Traditional Chinese Medicine (“TCM”) products The PRC 50% Manufacture and distribution Equity of TCM products Nutrition Science Partners Hong Kong 43.88% (note(ii)) Provide research and Equity Limited (“NSP”) development of pharmaceutical products All of the above joint ventures are private companies and there is no quoted market price available for its shares. Notes: (i) There is 20% non-controlling interest in the intermediate holding company which holds 50% equity interest in HBYS. (ii) There is 12.24% non-controlling interest in the intermediate holding company which holds 50% equity interest in NSP. Notes To The Accounts 8989 17 INVESTMENT IN JOINT VENTURES (Continued) Summarised fi nancial information for joint ventures Set out below are the summarised financial information for the joint ventures which are included under the China Healthcare operating segment (“China Healthcare JVs”) and Drug R&D operating segment (“Drug R&D JV”) and accounted for using the equity method. (i) Summarised statements of fi nancial position China Healthcare JVs HBYS As at 31 December 2013 US$’000 2012 US$’000 SHPL As at 31 December 2013 US$’000 2012 US$’000 R&D JV NSP As at 31 December 2013 US$’000 2012 US$’000 Cash and cash equivalents Other current assets (excluding cash and cash equivalents) 51,587 38,121 30,331 24,196 17,031 – 94,110 85,740 44,828 35,925 30 30,000 Total current assets 145,697 123,861 75,159 60,121 17,061 30,000 Non-current assets 59,446 39,848 35,646 30,203 30,000 30,000 Current fi nancial liabilities (excluding trade and other payables) Other current liabilities (including trade and other payables) – (620) (820) – – (91,760) (63,472) (38,484) (29,113) (4,604) Total current liabilities (91,760) (64,092) (39,304) (29,113) (4,604) Non-current liabilities (3,180) (3,809) (5,025) (1,853) – – – – – Net assets 110,203 95,808 66,476 59,358 42,457 60,000 90 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report Notes To The Accounts 17 INVESTMENT IN JOINT VENTURES (Continued) (ii) Summarised statements of comprehensive income China Healthcare JVs HBYS For the year ended 31 December SHPL For the year ended 31 December R&D JV NSP For the year ended 31 December 2013 US$’000 2012 US$’000 2013 US$’000 2012 US$’000 2013 US$’000 2012 US$’000 Revenue Depreciation and amortisation Interest income Finance cost Profi t/(loss) before taxation Taxation charge Post-tax profi t/(loss) Other comprehensive income 252,465 (3,598) 1,103 (44) 20,386 (3,408) 16,978 3,879 228,728 (2,671) 227 (41) 19,420 (2,823) 16,597 898 138,160 (2,612) 197 – 26,620 (4,196) 22,424 848 116,544 (2,411) 151 (58) 20,931 (3,267) 17,664 434 – – – – (17,543) – (17,543) – Total comprehensive income 20,857 17,495 23,272 18,098 (17,543) Dividends declared 6,462 6,256 16,154 3,110 – – – – – – – – – – – Note: The post-tax profi t and total comprehensive income for the year ended 31 December 2013 for other individual immaterial joint venture is approximately US$15,000 (2012: US$32,000) and US$24,000 (2012: US$35,000) respectively. Notes To The Accounts 9191 17 INVESTMENT IN JOINT VENTURES (Continued) (iii) Reconciliation of summarised fi nancial information Reconciliation of the summarised fi nancial information presented to the carrying amount of investment in the joint ventures China Healthcare JVs HBYS As at 31 December 2013 US$’000 2012 US$’000 SHPL As at 31 December 2013 US$’000 2012 US$’000 R&D JVs NSP As at 31 December 2013 US$’000 2012 US$’000 Opening net assets at 1 January Additions Profi t/(loss) for the year Dividend declared Other comprehensive income 95,808 – 16,978 (6,462) 3,879 84,569 – 16,597 (6,256) 898 59,358 – 22,424 (16,154) 848 44,370 – 17,664 (3,110) 434 60,000 – (17,543) – – – 60,000 – – – Closing net assets at 31 December 110,203 95,808 66,476 59,358 42,457 60,000 Interest in joint ventures @50% 55,102 47,904 33,238 29,679 21,229 30,000 Goodwill Non-controlling interests – (1,700) – (1,450) 3,282 – 3,180 – – – – – Carrying value Note: 53,402 46,454 36,520 32,859 21,229 30,000 The carrying value for other individual immaterial joint venture as at 31 December 2013 is approximately US$254,000 (2012:US$239,000). The joint ventures had the following operating lease commitments and capital commitments at 31 December 2013. Operating lease commitments Capital commitments 31 December 2013 US$’000 31 December 2012 US$’000 1,329 8,379 750 278 92 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report Notes To The Accounts 18 DEFERRED INCOME TAX Deferred tax assets Deferred tax liabilities Net deferred tax liabilities The movements in net deferred income tax liabilities are as follows: At 1 January Credited/(charged) to the consolidated income statement – withholding tax on unremitted earnings – expiry of deferred tax asset At 31 December 31 December 2013 US$’000 285 (2,397) (2,112) 2013 US$’000 31 December 2012 US$’000 (Restated) 280 (2,528) (2,248) 2012 US$’000 (Restated) (2,248) (1,368) 136 – (769) (111) (2,112) (2,248) The deferred tax assets and liabilities are offset when there is a legally enforceable right to set off and when the deferred income taxes related to the same fi scal authority. The Group’s deferred tax assets are mainly related to depreciation allowances and tax losses, and deferred tax liabilities are mainly related to unremitted earnings from joint ventures. The potential deferred tax assets in respect of tax losses which have not been recognised in the consolidated accounts amounted to approximately US$22,384,000 as at 31 December 2013 (2012: US$24,124,000). These unrecognised tax losses can be carried forward against future taxable income and will expire in the following years: No expiry date 2013 2014 2015 2016 2017 2018 As at 31 December 2013 US$’000 68,206 – – 9,323 686 16,470 1,272 95,957 2012 US$’000 64,385 10,590 8,437 10,829 350 10,281 – 104,872 19 INVENTORIES Raw materials Finished goods 20 TRADE RECEIVABLES Trade receivables from third parties Trade receivables from related parties (Note 30) Notes To The Accounts 9393 31 December 2013 US$’000 483 937 1,420 31 December 2013 US$’000 10,424 2,986 13,410 31 December 2012 US$’000 (Restated) 488 1,102 1,590 31 December 2012 US$’000 (Restated) 6,757 2,751 9,508 Substantially all the trade receivables are denominated in RMB and HK$ and are due within one year from the end of the reporting period. The carrying value of trade receivables approximates their fair values. Movements on the provision for trade receivables are as follows: At 1 January Provision Exchange difference At 31 December The impaired and provided receivables of US$1,670,000 (2012 restated: US$1,554,000) are aged over 6 months. 2013 US$’000 1,554 42 74 1,670 2012 US$’000 (Restated) 1,470 72 12 1,554 94 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report Notes To The Accounts 20 TRADE RECEIVABLES (Continued) As at 31 December 2013, trade receivables of approximately US$3,703,000 (2012 restated: US$4,797,000) were past due but not impaired. These related to a number of independent customers for whom there is no recent history of default. The ageing analysis of these receivables is as follows: Up to 3 months 4 to 6 months 6 to 12 months 2013 US$’000 1,136 959 1,608 3,703 2012 US$’000 (Restated) 846 916 3,035 4,797 The credit quality of trade receivables neither past due nor impaired has been assessed by reference to historical information about the counterparty default rates. The existing counterparties do not have defaults in the past. 21 CASH AND CASH EQUIVALENTS Cash at bank and in hand Short-term bank deposits (note (a)) Denominated in: US dollars RMB (note (b)) UK Pound Sterling HK$ Euro Notes: 31 December 2013 US$’000 31 December 2012 US$’000 (Restated) 20,946 25,917 46,863 2013 US$’000 12,203 32,139 212 1,651 658 46,863 13,948 16,819 30,767 2012 US$’000 4,163 22,678 311 2,231 1,384 30,767 (a) The weighted average effective interest rate on short-term bank deposits, with maturity ranging from 7 to 90 days, was 2.1% (2012: 2.7%) per annum. Cash at bank earns interest at fl oating rates based on daily bank deposit rates. (b) Certain cash and bank balances denominated in RMB were deposited with banks in the PRC. The conversion of these RMB denominated balances into foreign currencies is subject to the rules and regulations of foreign exchange control promulgated by the PRC government. Notes To The Accounts 9595 22 SHARE CAPITAL (a) Authorised and issued share capital Authorised: As at 1 January 2012, 31 December 2012, 1 January 2013 and 31 December 2013 75,000,000 75,000 Number of shares of US$1 each Nominal amount US$’000 Issued and fully paid: As at 1 January 2012 Issue of shares under share option scheme (note) As at 31 December 2012 As at 1 January 2013 Issue of shares under share option scheme (note) Number of Shares US$’000 51,743,153 51,743 305,295 52,048,448 52,048,448 3,000 305 52,048 52,048 3 As at 31 December 2013 52,051,448 52,051 Note: Issue date 9 January 2012 14 June 4 September 4 September 26 February 2012 2012 2012 2013 Number of ordinary shares of US$1 each allotted and issued by the Company Issue price Aggregate cash consideration (US$’000) 51,212 £1.090 86 192,108 £1.260 377 53,650 £1.715 145 8,325 £1.535 21 3,000 £1.535 7 Weighted average share price at the exercise date £3.68 £3.98 £3.83 £3.83 £4.40 All the above new shares rank pari passu in all respects with the then existing shares. 96 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report Notes To The Accounts 22 SHARE CAPITAL (Continued) (b) Share option schemes (i) Share option scheme of the Company On 4 June 2005, the Company adopted a share option scheme (the “HCML Share Option Scheme”), the rules of which were subsequently amended by the Board of Directors of the Company on 21 March 2007. Pursuant to the HCML Share Option Scheme, the Board of Directors of the Company may, at its discretion, offer any employees and directors (including executive and non-executive directors but excluding independent non- executive directors) of the Company, holding companies of the Company and any of their subsidiaries or affi liates, and subsidiaries or affi liates of the Company options to subscribe for shares of the Company. As of 31 December 2013, options representing approximately 4.4% of the issued share capital of the Company were granted to directors of the Company and certain employees of the Group and its joint ventures under the HCML Share Option Scheme which are exercisable within a period of ten years from the offer date subject to the vesting schedules of the respective share options. The following share options were outstanding under the HCML Share Option Scheme as at 31 December 2013: Effective date of grant of share options Name or category of participants Directors Exercise period of share options Exercise price of Number of shares share options subject to the options Christian Hogg 19 May 2006 (note (i)) On Admission to 3 June 2015 £1.090 Johnny Cheng 25 August 2008 (note (iii)) From 25 August 2008 £1.260 to 24 August 2018 Employees in aggregate 19 May 2006 (note (i)) On Admission to 3 June 2015 £1.090 11 September 2006 (note (ii)) From 11 September 2006 £1.715 to 18 May 2016 768,182 64,038 76,818 26,808 18 May 2007 (note (iv)) From 18 May 2007 £1.535 40,857 to 17 May 2017 28 June 2010 (note (iii)) From 28 June 2010 £3.195 102,628 to 27 June 2020 1 December 2010 (note (iii)) From 1 December 2010 £4.967 177,600 to 30 November 2020 24 June 2011 (note (iii)) From 24 June 2011 £4.405 150,000 to 23 June 2021 20 December 2013 (note (iii)) From 20 December 2013 £6.100 896,386 to 19 December 2023 2,303,317 Notes To The Accounts 9797 22 SHARE CAPITAL (Continued) (b) Share option schemes (Continued) (i) Share option scheme of the Company (Continued) Movements in the number of share options outstanding and their related weighted average exercise prices are as follows: 2013 2012 Weighted average exercise price in £ per share 2.22 6.10 1.54 4.97 3.67 Number of options 1,459,931 896,386 (3,000) (50,000) 2,303,317 Weighted average exercise price in £ per share 2.06 – 1.32 – 2.22 Number of options 1,765,226 – (305,295) – 1,459,931 As at 1 January Granted Exercised Lapsed As at 31 December The Company has no legal or constructive obligation to repurchase or settle the share options in cash. Save as mentioned above, no other share options under the HCML Share Option Scheme were cancelled or exercised or lapsed during the year ended 31 December 2013. Notes: (i) The share options were granted on 4 June 2005, conditionally upon the Company’s Admission which took place on 19 May 2006. The share options granted and exercisable subject to, amongst other relevant vesting criteria, the vesting schedules of 50% on 19 May 2007 and 25% on each of 19 May 2008 and 19 May 2009. (ii) The share options granted are exercisable subject to, amongst other relevant vesting criteria, the vesting schedule of one-third on each of 19 May 2007, 19 May 2008 and 19 May 2009. (iii) The share options granted are exercisable subject to, amongst other relevant vesting criteria, the vesting schedule of 25% on each of the fi rst, second, third and fourth anniversaries of the date of grant of share options. (iv) The share options granted are exercisable subject to, amongst other relevant vesting criteria, the vesting schedule of one-third on each of the fi rst, second and third anniversaries of the date of grant of share options. (v) As at 31 December 2013, the fair value of share options in connection with the 2,303,317 share options outstanding as at the same date remain unvested was amounting to £882,000 (equivalent to US$1,444,000). The amount is to be recognised as expense of the Group over the remaining vesting periods of the relevant share options as mentioned in the note (iii) above. The amount recognised as expenses for the year ended 31 December 2013 amounted to US$206,000 (2012: US$416,000). 98 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report Notes To The Accounts 22 SHARE CAPITAL (Continued) (b) Share option schemes (Continued) (i) Share option scheme of the Company (Continued) The fair value of options granted under the HCML Share Option Scheme determined using the Binomial Model is as follows: Effective date of grant of share options 19 May 11 September 2006 2006 18 May 2007 25 August 28 June 1 December 24 June 20 December 2008 2010 2010 2011 2013 Value of each share option £1.546 £0.553 £0.533 £0.569 £1.361 £1.995 £1.841 £3.154 Signifi cant inputs into the valuation model: Exercise price Share price at effective grant date Expected volatility (notes (i) to (v)) Risk-free interest rate Expected life of options Expected dividend yield Notes: £1.090 £2.5050 38.8% 4.540% £1.715 £1.7325 38.8% 4.766% £1.535 £1.5400 40.0% 5.098% £1.260 £1.2600 35.0% 4.700% £3.195 £3.1500 49.9% 3.340% £4.967 £4.6000 48.43% 3.360% £4.405 £4.3250 46.6% 3.130% £6.100 £6.100 36.00% 3.160% 1.2 to 3.9 years 3.4 to 5.3 years 3.9 to 5.7 years 7.1 to 8.0 years 6.25 years 6.25 years 6.25 years 6.25 years 0% 0% 0% 0% 0% 0% 0% 0% (i) For share options granted on or before 18 May 2007, the volatility of the underlying stock during the life of the options is estimated based on the historical volatility of the comparable companies for the past one to two years as of the valuation date, since there were no or only a relatively short period of trading record of the Company’s shares at the respective grant dates. (ii) For share options granted on 25 August 2008, the volatility of the underlying stock during the life of the options is estimated with reference to the volatility of the Company two years prior to the issuance of share options. (iii) For share options granted on 28 June 2010 and 1 December 2010, the volatility of the underlying stock during the life of the options is estimated with reference to the volatility of the Company four years prior to the issuance of share options. (iv) For share options granted on 24 June 2011, the volatility of the underlying stock during the life of the options is estimated with reference to the volatility of the Company fi ve years prior to the issuance of share options. (v) For share options granted on 20 December 2013, the volatility of the underlying stock during the life of the options is estimated with reference to the volatility of the Company seven years prior to the issuance of share options. Notes To The Accounts 9999 22 SHARE CAPITAL (Continued) (b) Share option schemes (Continued) (ii) Share option scheme of a subsidiary On 6 August 2008, Hutchison MediPharma Holdings Limited (“HMHL”), a subsidiary of the Company, adopted a share option scheme (the “HMHL Share Option Scheme”), the rules of which were subsequently amended by the Board of Directors of HMHL on 15 April 2011, pursuant to which any employee or director of HMHL and any of its holding company, subsidiaries and affi liates is eligible to participate in the HMHL Share Option Scheme subject to the discretion of the board of directors of HMHL. As of 31 December 2013, options representing approximately 1.8% of HMHL’s total issued ordinary shares were granted to certain employees of Hutchison MediPharma Limited, a subsidiary of HMHL under the HMHL Share Option Scheme which are exercisable within a period of six years from the offer date subject to the vesting schedules of 25% on each of the fi rst, second, third and fourth anniversaries of the date of grant of share options. The following share options were outstanding under the HMHL Share Option Scheme as at 31 December 2013: Category of participants Employees in aggregate Effective date of grant of share options Exercise period of Exercise Price Number of shares share options of share options subject to the options 6 August 2008 (note (i)) From 6 August 2008 US$1.28 57,000 to 5 August 2014 5 October 2009 (note (i)) From 5 October 2009 US$1.52 50,000 3 May 2010 (note (i)) to 4 October 2015 From 3 May 2010 to 2 May 2016 US$2.12 300,000 2 August 2010 (note (i)) From 2 August 2010 US$2.24 25,000 to 1 August 2016 18 April 2011 (note (i)) From 18 April 2011 US$2.36 106,420 to 17 April 2017 538,420 100 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report Notes To The Accounts 22 SHARE CAPITAL (Continued) (b) Share option schemes (Continued) (ii) Share option scheme of a subsidiary (Continued) Movements in the number of share options outstanding and their related weighted average exercise prices are as follows: 2013 2012 Weighted average exercise price in US$ per share 1.87 – 1.80 2.03 Weighted average exercise price in US$ per share 1.73 2.73 1.61 1.87 Number of options 3,144,505 – (2,606,085) 538,420 Number of options 4,050,607 299,120 (1,205,222) 3,144,505 As at 1 January Granted Lapsed/Cancelled (note (ii)) As at 31 December Notes: (i) The share options granted are exercisable subject to, amongst other relevant vesting criteria, the vesting schedule of 25% on each of the fi rst, second, third and fourth anniversaries of the date of grant of share options. (ii) Out of 2,606,085 share options, (i) 2,485,189 were cancelled with the consent of the relevant eligible employees in exchange for new share options of the Company vesting over a period of four years and/or cash consideration payable over a period of four years and (ii) 120,896 were cancelled following cessation of employment of the relevant eligible employees. (iii) As at 31 December 2013, the fair value of share options in connection with the 538,420 share options outstanding as at the same date remain unvested was amounting to US$79,000. The amount is to be recognised as expense of the Group over the remaining vesting periods of the relevant share options as mentioned in the note (i) above. The amount recognised as expenses for the year ended 31 December 2013 amounted to US$151,000 (2012: US$336,000) and of which no such expenses (2012: US$44,000) has been capitalised as intangible assets during the year. Notes To The Accounts 101101 22 SHARE CAPITAL (Continued) (b) Share option schemes (Continued) (ii) Share option scheme of a subsidiary (Continued) The fair value of options granted under the HMHL Share Option Scheme determined using the Binomial Model is as follows: Effective date of grant of share options 6 August 2008 5 October 2009 3 May 2010 2 August 2010 18 April 2011 Value of each share option US$0.034 US$0.027 US$0.361 US$0.258 US$0.923 Signifi cant inputs into the valuation model: Exercise price Share price at effective grant date Expected volatility (note) Risk-free interest rate Expected life of options Expected dividend yield Note: US$1.280 US$0.270 53% 3.293% 4.6 to 5.8 years 0% US$1.520 US$0.261 53% 2.564% 6 years 0% US$2.120 US$1.098 54% 2.772% 6 years 0% US$2.240 US$1.030 49% 2.007% 6 years 0% US$2.360 US$2.048 55% 2.439% 6 years 0% The volatility of the underlying stock during the life of the options is estimated based on the historical volatility of the comparable companies for the past one to seven years as of the valuation date. 102 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report Notes To The Accounts 23 NON-CONTROLLING INTERESTS The total non-controlling interests as at 31 December 2013 is approximately US$15,966,000 (2012: US$11,620,000) of which US$10,587,000 (2012: US$9,260,000) is attributable to Hutchison BYS (Guangzhou) Holding Limited (“HGHL”) and its subsidiaries (together the “HGHL Group”), US$3,626,000 (2012: nil) is attributable to HMHL and its subsidiaries (“HMHL Group”) and US$1,753,000 (2012: US$2,360,000) is attributable to Hutchison Hain Organic Holdings Limited (“HHOH”) and its subsidiaries (together the “HHOH Group”). Set out below are the particulars and summarised fi nancial information for each subsidiary that has non-controlling interests that are material to the Group. Name HGHL HMHL (note (i)) HHOH (note (ii)) Notes: Principle place of business Equity interest attributable to the non-controlling interests British Virgin Islands Cayman Islands British Virgin Islands 20% 12.24% 50% (i) The Group has 4 voting rights out of total of 5 voting rights. (ii) The portion of equity interest is in proportion to the portion of voting rights. The Group has one additional casting vote in the event of deadlock. Summarised consolidated statements of fi nancial position HGHL Group As at 31 December 2013 US$’000 2012 US$’000 172 53,335 (1,060) (3,265) 8 46,387 (879) (2,980) HMHL Group As at 31 December 2013 US$’000 21,215 28,104 (19,928) – 2012 US$’000 14,468 35,122 (18,640) (12,466) HHOH Group As at 31 December 2013 US$’000 2012 US$’000 8,230 45 (4,734) (9,600) 7,944 64 (3,300) (9,600) Current assets Non-current assets Current liabilities Non-current liabilities Net assets/(liabilities) 49,182 42,536 29,391 18,484 (6,059) (4,892) Notes To The Accounts 103103 23 NON-CONTROLLING INTERESTS (Continued) Summarised consolidated statements of comprehensive income HGHL Group For the year ended 31 December 2013 US$’000 2012 US$’000 HMHL Group For the year ended 31 December 2013 US$’000 2012 US$’000 HHOH Group For the year ended 31 December 2013 US$’000 2012 US$’000 Revenue – – 29,500 6,915 10,157 8,290 Profi t/(loss) before taxation Taxation charge Post-tax profi t/(loss) (Note) Other comprehensive income/(loss) 8,286 (446) 7,840 1,352 8,076 (503) 7,573 288 (2,238) (21) (2,259) 295 2,791 – 2,791 150 (1,215) – (1,215) 48 (3,977) – (3,977) (398) Total comprehensive income/(loss) 9,192 7,861 (1,964) 2,941 (1,167) (4,375) Dividends paid to non-controlling interests 577 538 – – – – Note: For the year ended 31 December 2013, the post-tax loss of HHOH Group included approximately US$1,141,000 (2012: US$3,277,000) being attributable to discontinued operations. Summarised consolidated statements of cash fl ows HGHL Group HMHL Group HHOH Group 31 December 2013 31 December 2013 31 December 2013 Net cash generated from/(used in) operating activities Net cash used in investing activities Net cash generated from fi nancing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Exchange gains on cash and cash equivalents Cash and cash equivalents at end of year The information above is the amount before inter-company eliminations. Transactions with non-controlling interests are set out in Note 30. US$’000 US$’000 163 – – 163 8 – 171 2,903 (2,457) 3,982 4,428 8,227 314 12,969 US$’000 (136) – – (136) 4,609 52 4,525 104 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report Notes To The Accounts 24 TRADE PAYABLES Trade payables due to third parties Trade payable due to a related party (Note 30) 31 December 2013 US$’000 1,811 2,352 4,163 31 December 2012 US$’000 (Restated) 1,508 1,675 3,183 Substantially all the trade payables due to third parties are denominated in US dollar and HK$ and due within one year from the end of the reporting period. Trade payable due to a related party is denominated in US dollars and due within one year from the end of the reporting period. The carrying value of trade payables approximates their fair values due to their short-term maturities. 25 OTHER PAYABLES, ACCRUALS AND ADVANCE RECEIPTS Other payables and accruals Accrued operating expenses Accrued salaries Other payables Advance receipts Payments in advance from customers Deferred government incentives Deferred upfront income (note) Note: 31 December 2013 US$’000 31 December 2012 US$’000 (Restated) 5,327 3,047 3,895 12,269 248 2,872 – 3,120 2,893 1,263 4,728 8,884 11 1,783 4,551 6,345 15,389 15,229 In 2011, the Group entered into a global licensing, co-development and commercialisation agreement in respect of its research and development project with a third party for which an initial cash payment of US$20 million (“Upfront Income”) was received by the Group. The Group will receive further milestones income contingent upon the successful achievement of clinical development and future commercialisation of the products. Upfront Income of US$4.6 million (2012: US$4.6 million) was recognised during the year. Notes To The Accounts 105105 31 December 2013 US$’000 31 December 2012 US$’000 (Restated) – 51,508 51,508 1.67% 26,923 10,892 37,815 1.87% 26 BANK BORROWINGS Bank borrowings Non-current (note (i)) Current (note (i) and (ii)) Total borrowings Weighted average effective interest rate Notes: (i) The long-term bank loan of US$26,923,000 is unsecured, interest bearing, denominated in HK$ and will mature in December 2014. It is included in current bank borrowing as at 31 December 2013 and is guaranteed by Hutchison Whampoa Limited. The carrying amount of the bank loan approximates its fair values. (ii) All short-term bank loans are unsecured and interest bearing and the carrying amount of these bank loans approximates their fair values. (a) As at 31 December 2013, the Group’s borrowings were repayable as follow: Within 1 year Between 2 and 5 years 2013 US$’000 51,508 – 51,508 2012 US$’000 (Restated) 10,892 26,923 37,815 106 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report Notes To The Accounts 26 BANK BORROWINGS (Continued) (b) The carrying amounts of the group’s borrowings are denominated in the following currencies: HK$ RMB 27 CONVERTIBLE PREFERENCE SHARES 2013 US$’000 48,718 2,790 51,508 2012 US$’000 (Restated) 37,179 636 37,815 In 2010, HMHL issued an aggregate number of 7,390,029 convertible preference shares at US$2.725 per share each to two independent third parties (“preference shares holders”) for a total cash consideration of approximately US$20.1 million. These convertible preference shares shall be convertible into a variable number of ordinary shares of HMHL subject to, amongst other terms and conditions as set out in the relevant agreements, an adjustment event that the occurrence or non-occurrence has not yet been determined at the inception date. Consequently, the convertible preference shares were classifi ed as fi nancial liabilities as at the reporting date. In October 2012, the Company had purchased 2,815,249 convertible preference shares amounted to US$7.67 million from one of the convertible preference shares holders for a consideration of approximately US$6.52 million. As a result, a gain of approximately US$1.15 million (Note 6(a)) was recognised in the consolidated income statement for the year ended 31 December 2012. In March 2013, as a result of the satisfaction of aforementioned conditions, the remaining 4,574,780 convertible preference shares amounting to US$12.47 million was reclassifi ed as equity of HMHL. The Group’s interest in HMHL has been diluted from 100% to 87.76%, and the difference between the Group’s proportionate share of the carrying amount of the net assets of HMHL diluted and the consideration received has been credited to equity. 28 NOTE TO THE CONSOLIDATED STATEMENT OF CASH FLOWS Reconciliation of profi t for the year to net cash used in operations: Profi t for the year Adjustments for: Taxation charge Share-based compensation expenses Amortisation of leasehold land Write-off of inventories Provision for inventories Provision for receivables Depreciation on property, plant and equipment Loss on disposal of property, plant and equipment Gain on disposal of a business Profi t on buy back of convertible preference shares Interest income Share of profi ts less losses after tax of joint ventures Finance costs Exchange differences Notes To The Accounts 107107 2013 US$’000 2012 US$’000 (Restated) 7,042 3,540 1,050 357 38 137 88 42 925 18 – – (451) (10,937) 1,485 493 1,116 752 36 1,468 927 72 1,466 184 (11,476) (1,152) (388) (17,147) 1,160 (27) Operating profi t/(loss) before working capital changes 287 (19,469) Changes in working capital: – (increase)/decrease in inventories – (increase)/decrease in trade receivables – (increase)/decrease in other receivables and prepayments – increase in amount due from a fellow subsidiary – increase in amount due from joint ventures – increase in amount due from the ultimate holding company – increase/(decrease) in trade payables – increase in other payables, accruals and advance receipts – decrease in deferred income – increase in amount due to immediate holding company – decrease in amount due to a fellow subsidiary Net cash used in operations Attributable to: – Continuing operations – Discontinued operations (55) (3,944) (1,773) (89) (614) (88) 980 160 – 1,157 (86) 342 2,588 638 – (188) – (1,758) 3,317 (4,551) 958 – (4,065) (18,123) (2,826) (1,239) (4,065) (17,230) (893) (18,123) 108 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report Notes To The Accounts 29 COMMITMENTS (a) Capital Commitment The Group had the following capital commitments as at 31 December 2013: Property, plant and equipment Contracted but not provided for (b) Operating lease commitments 2013 US$’000 2012 US$’000 (Restated) 459 – The Group leases various factories, offi ces and retail stores under non-cancellable operating lease agreements. As at 31 December 2013, the future aggregate minimum lease payments in respect of land and buildings under non-cancellable operating leases were as follows: Not later than one year Later than one year and not later than fi ve years Later than fi ve years 2013 US$’000 748 1,654 486 2,888 2012 US$’000 (Restated) 523 1,067 623 2,213 Notes To The Accounts 109109 30 SIGNIFICANT RELATED PARTY TRANSACTIONS Save as disclosed above, the Group has the following signifi cant transactions during the year with related parties which were carried out in the normal course of business at terms determined and agreed by the relevant parties: (a) Transactions with related parties: Sales of goods to – Fellow subsidiaries Provision of research and development services to – A joint venture Purchase of goods from – A non-controlling shareholder of a subsidiary Royalty fee paid to – A non-controlling shareholder of a subsidiary Rendering of marketing services from – Fellow subsidiaries Management service fee to – An intermediate holding company Interest paid to – An immediate holding company Guarantee fee on bank loan to – The ultimate holding company Dividend paid to – A non-controlling shareholder of a subsidiary 2013 US$’000 2012 US$’000 (Restated) 7,803 6,967 3,612 – 6,304 4,802 – 569 914 92 471 577 4 591 914 – 471 538 No transactions have been entered into with the directors of the Company (being the key management personnel) during the years ended 31 December 2012 and 2013 other than the emoluments paid to them (being the key management personnel compensation) as disclosed in Note 12. Details of guarantee provided by the ultimate holding company for bank borrowing are disclosed in Note 26. 110 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report Notes To The Accounts 30 SIGNIFICANT RELATED PARTY TRANSACTIONS (Continued) (b) Balances with related parties included in: Trade receivables from related parties: – Fellow subsidiaries (Note 20) (note (i)) Trade payable due to a related party: – A non-controlling shareholder of a subsidiary (Note 24) (note (i)) Amounts due from related parties: – The ultimate holding company (note (i)) – A fellow subsidiary (note(i)) – Joint ventures (note (i)) Amounts due to related parties: – Immediate holding company (note (iii)) – A fellow subsidiary (note (i)) 2013 US$’000 2012 US$’000 (Restated) 2,986 2,751 2,352 1,675 88 89 1,808 1,985 7,374 – 7,374 – – 1,194 1,194 6,217 86 6,303 Non-controlling shareholders: – Loans from non-controlling shareholders of subsidiaries (note (ii)) 5,379 5,379 Notes: (i) Other balances with related parties are unsecured, interest-free and repayable on demand. The carrying values of balances with related parties approximate their fair values due to their short-term maturities. (ii) Loans from non-controlling shareholders of subsidiaries are unsecured, interest-free and are recorded in non-controlling interests. (iii) Amount due to immediate holding company as at 31 December 2013 is unsecured, interest-bearing (2012: interest-free) and repayable on demand. The carrying values of balances with related parties approximate their fair values due to their short-term maturities. 31 HOLDING COMPANIES The immediate holding company is Hutchison Healthcare Holdings Limited, a company incorporated in the British Virgin Islands. The Company’s directors regard Hutchison Whampoa Limited, a company incorporated and listed in Hong Kong, as the ultimate holding company and also ultimate controlling party of the Company. 32 APPROVAL OF ACCOUNTS The consolidated accounts set out on pages 48 to 111 were approved by the Board of Directors on 17 February 2014. Notes To The Accounts 111111 33 PARTICULARS OF PRINCIPAL SUBSIDIARIES AND JOINT VENTURES AT 31 DECEMBER 2013 Place of establishment and operation Nominal value of issued ordinary share capital/ registered capital Type of legal entity Equity interest attributable to the Group As at 31 December 2013 2012 Principal activities Name Subsidiaries Hutchison Healthcare The PRC RMB207,460,000 100% 100% Limited liability Manufacture and Limited company distribution of healthcare products Hutchison MediPharma The PRC US$37,500,000 87.76% 100% Limited liability Research and Limited company development of pharmaceutical products Hutchison Hain Organic Hong Kong HK$1,000,000 50% 50% Limited liability Wholesale and (Hong Kong) Limited (“HHOL”) (note) company trading of healthcare and consumer products Hutchison Consumer Hong Kong HK$1 100% 100% Limited liability Wholesale and Products Limited company trading of healthcare and consumer products Hutchison Hain Organic The PRC US$3,000,000 50% 50% Limited liability Wholesale and (Guangzhou) Limited (“HHOGZL”) (note) Joint ventures company trading of healthcare and consumer products Shanghai Hutchison The PRC RMB229,000,000 50% 50% Limited liability Manufacture and Pharmaceuticals Limited company distribution of TCM products Nutrition Science Partners Hong Kong HK$20,000 43.88% 50% Limited liability Research and development Limited company of pharmaceutical products Hutchison Whampoa The PRC RMB200,000,000 40% 40% Limited liability Manufacture and Guangzhou Baiyunshan Chinese Medicine Company Limited Note: company distribution of TCM products HHOL and HHOGZL are regarded as subsidiaries of the Group as the Group has the control over their fi nancial and operating policies of HHOL and HHOGZL. 112 HUTCHISON CHINA MEDITECH LIMITED 2013 Annual Report Information For Shareholders Depositary Computershare Investor Services PLC The Pavilions Bridgwater Road Bristol BS99 6ZY United Kingdom Telephone: Facsimile: +44 (0)906 999 0000 +44 (0)870 703 6114 Shareholders Contact Please direct enquiries to: 22nd Floor, Hutchison House 10 Harcourt Road Hong Kong Attn: Ms Edith Shih Non-executive Director & Company Secretary +852 2128 1778 ediths@hwl.com.hk Fascsmile: E-mail: Investor Information Corporate press releases, fi nancial reports and other investor information on the Company are available online at the Company’s website. Investor Relations Contact Please direct enquiries to: E-mail: Telephone: Facsimile: ir@chi-med.com +852 2121 8200 +852 2121 8281 Website Address www.chi-med.com Listing The Company’s ordinary shares are listed on AIM regulated by the London Stock Exchange 7 May 2014 to 8 May 2014 8 May 2014 July 2014 Code HCM Financial Calendar Closure of Register of Members Annual General Meeting Interim Results Announcement Registered Offi ce P.O. Box 309, Ugland House Grand Cayman, KY1-1104 Cayman Islands Telephone: Facsimile: +1 345 949 8066 +1 345 949 8080 Principal Place of Business 22nd Floor, Hutchison House 10 Harcourt Road Hong Kong Telephone: Facsimile: +852 2128 1188 +852 2128 1778 Principal Executive Offi ce 21st Floor, Hutchison House 10 Harcourt Road Hong Kong Telephone: Facsimile: +852 2121 8200 +852 2121 8281 Share Registrar Computershare Investor Services (Jersey) Limited Queensway House Hilgrove Street, St. Helier Jersey, Channel Islands JE1 1ES Telephone: Facsimile: +44 (0)870 707 4040 +44 (0)870 873 5851 Past Performance and Forward Looking Statements The performance and the results of operations of the Group contained within this Annual Report are historical in nature, and past performance is no guarantee of the future results of the Group. Any forward-looking statements and opinions contained within this Annual Report are based on current plans, estimates and projections, and therefore involve risks and uncertainties. Actual results may differ materially from expectations discussed in such forward-looking statements and opinions. The Group, the Directors, employees and agents of the Group assume (a) no obligation to correct or update the forward-looking statements or opinions contained in this Annual Report; and (b) no liability in the event that any of the forward-looking statements or opinions do not materialise or turn out to be incorrect.