(Incorporated in the Cayman Islands with limited liability) （於開曼群島註冊成立的有限公司） 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 35 37 42 51 52 53 54 56 58 59 Information For Shareholders 114 * This Annual Report is in English and Chinese. In case of any inconsistency, the English version shall prevail. 2 HUTCHISON CHINA MEDITECH LIMITED 2014 Annual Report Our Business Our two main divisions are rapidly converging towards our medium-term objective. Drug R&D Division the leading innovator in oncology & immunology in China China Healthcare Division a powerful commercial platform in China A large-scale China-based pharmaceutical company a leader in China oncology 3 3 Highlights Consolidated Group Results Revenue up 100% to $91.8 million (2013: $46.0m). Net profit attributable to Chi-Med equity holder of $5.4 million (2013: $5.9m) as Chi-Med continues to balance a dramatic increase in clinical trial activity on seven new drug candidates with rapidly increasing profit in the China Healthcare Division. Cash positive overall during 2014 with Group level cash and bank balances of $51.1 million (31 December 2013: $46.9m). In addition, cash and bank balances held at the joint venture (“JV”) level of $77.0 million (31 December 2013: $99.0m) which is being used to fund construction of two new large-scale factories. Drug R&D Division – Innovation platform with potential to yield multiple new drug approvals Revenue $24.8 million (2013: $29.5m) resulting mainly from milestone and service income from partners AstraZeneca AB (Publ) (“AstraZeneca”), Eli Lilly and Company (“Lilly”), Janssen Pharmaceuticals, Inc., the pharmaceutical division of Johnson & Johnson (“Janssen”), and Nestlé Health Science SA (“Nestlé Health Science”). Net loss attributable to Chi-Med equity holders of $9.7 million (2013: -$2.4m) due primarily to the rapid expansion of clinical trial activity on the seven clinical-stage drug candidates of Hutchison MediPharma Limited (“HMP”). A total of 16 clinical trials are underway, compared to 7 twelve months ago, with total clinical trial spending in 2014 of $44.8 million (2013: $30.1m). AZD6094 began eight Phase Ib/II studies in 2014 and early 2015 all in stratified c-Met aberrant patient populations in possible Breakthrough Therapy indications. AZD6094 has already achieved partial response in several indications, thereby increasing its chances of becoming the global first-in- class c-Met inhibitor. Fruquintinib completed Phase Ib colorectal cancer study, with highly encouraging efficacy and safety profile. Also in colorectal cancer in China we completed enrolment in a Phase II study, which we now judge is highly probable to meet required success criteria, and began a Phase III registration study in late 2014. Gastric and lung cancer Phase Ib/II studies also began in 2014 with rapid progress. Sulfatinib completed Phase I study with a 32% objective response rate (“ORR”) among neuroendocrine tumour (“NET”) patients; by far the highest ever ORR observed globally to-date in NET patients on a tolerable therapy. Consequently, a Phase Ib NET study started in late 2014 and a Phase II/III clinical trial application in China has been submitted. Sulfatinib will be the first un-partnered targeted therapy that Chi-Med will develop in the United States (“US”) and as such an Investigational New Drug (“IND”) application has recently been submitted in the US. A short pharmacokinetics bridging study in non-Asian patients on sulfatinib will start in early 2015 followed by a Phase II study in NET patients by mid-year. HMPL-523, our novel, potential first-in-class, Syk inhibitor for inflammation and oncology, began Phase I trial in Australia in mid-2014 and will complete in 2015. Phase I success will make HMPL- 523 a candidate for licensing – several potential global partners await this critical data. All fi gures are reported in US dollars unless otherwise stated. 4 HUTCHISON CHINA MEDITECH LIMITED 2014 Annual Report Highlights Drug R&D Division – Innovation platform with potential to yield multiple new drug approvals (Continued) Interim analysis on HMPL-004 NATRUL-3 Phase III study showed, despite a solid safety profile, no overall efficacy benefit was observed, so the study was terminated. Subsequent sub-group analysis shows a strong trend to efficacy in remission in the high-dose 2,400mg/day treatment arm among 5-ASA refractory patients. Nestlé Health Science and Chi-Med are currently reviewing data. Decision on next steps to be made in 2015. On-track and on budget to start fruquintinib production at new Suzhou factory in mid-2015, a requirement for Phase III registration studies. This facility could also produce AZD6094 and sulfatinib in due course. Advanced both differentiated epidermal growth factor receptor (“EGFR”) compounds in clinical trials, epitinib into Phase Ib and theliatinib into late Phase I. Progressed two late stage preclinical candidates, a PI3Kδ inhibitor (HMPL-689) and a selective fibroblast growth factor receptor (“FGFR”) inhibitor (HMPL-453), into regulatory toxicity study. Both compounds expected to start Phase I human trials in late 2015 or early 2016. China Healthcare Division – Record revenue and profit performance Sales in the China Healthcare Division’s subsidiaries and JVs were up 29% to $509.4 million (2013: $394.6m). Third party drug distribution and commercialisation businesses were up 93% to $99.9 million due to the commencement of operations of Hutchison Whampoa Sinopharm Pharmaceuticals (Shanghai) Company Limited (“Hutchison Sinopharm”). Growth in own, non-third party, business was up 19% to $409.5 million with cardiovascular and secondary over-the-counter (“OTC”) drug products performing well. New revenue streams also emerged in 2014 from deeper operational integration and synergy with Guangzhou Baiyunshan Pharmaceutical Holdings Co., Ltd. (“Guangzhou Pharmaceutical”). Net profit attributable to Chi-Med equity holders was up 21% to $22.6 million (2013: $18.6m) resulting from normalisation of certain raw material costs as well as volume scale efficiencies. Established a wholly-owned Good Supply Practice (“GSP”) distribution company under Shanghai Hutchison Pharmaceuticals Limited (“SHPL”) and then completed an exclusive marketing deal for SHPL to take over six Shanghai Pharmaceuticals Holding Co., Ltd. (“Shanghai Pharmaceuticals”) drug products in China. Hutchison Sinopharm signed exclusive deals to commercialise Merck Serono’s Concor® (beta-blocker) in several provinces in China; and AstraZeneca’s Seroquel® (bi-polar disorder/schizophrenia) in all China. On-track and on budget to complete new factories for both SHPL and Hutchison Whampoa Guangzhou Baiyunshan Chinese Medicine Company Limited (“HBYS”) during 2015 which will increase production capacity by three-fold and allow for release of significant value from the property of our existing sites, which are close to the city centres of Shanghai and Guangzhou. Consumer Products Division – Focused on profitable activities Sales up 6% to $13.2 million (2013: $12.5m) driven by progress on the expansion of the range of Hutchison Hain Organic Holdings Limited (“HHO”) products in Asia. Net profit attributable to Chi-Med equity holders of $1.3 million (2013: net loss of $1.9m). HHO won an arbitration award of $2.5 million against Swiss supplier of infant formula, $1.0 million of which is attributable to Chi-Med equity holders. To re-launch Earth’s Best® organic formula in China in mid-2015 using The Hain Celestial Group, Inc.’s (NASDAQ: HAIN) (“Hain Celestial”) reliable US-based supplier. Chairman’s Statement 5 Each year Chi-Med takes on greater challenges in the field of innovation and commercial execution and succeeds in the vast majority of its endeavours through hard work and commitment. This was certainly the case in 2014, a year in which we generated record revenues and profi t in China and made tremendous strides across all our Divisions. Group Strategy Our over-riding objective is to create a large-scale, fully integrated and highly profi table pharmaceutical company based in China providing innovations and products to the China and the global markets. We believe that this is an objective we are now on-track to achieve during the next fi ve years. For many years we have been clear that this means focusing on two, now rapidly converging, priorities: (1) sustained and un-interrupted investment in drug innovation through the Drug R&D Division; and (2) establishment of deep commercial know-how and pharmaceutical sales and marketing infrastructure in China through our China Healthcare Division. Our early decision to collaborate with powerful industry partners to help accelerate and improve execution in our selected areas of strategic focus has proven very successful. In our Drug R&D Division, AstraZeneca, Janssen, Lilly and Nestlé Health Science have brought not just considerable fi nancial resource to our collaborations, but also invaluable technical expertise and organisational resources. In the China Healthcare Division, our three Division partners – Shanghai Pharmaceuticals, Guangzhou Pharmaceutical, and Sinopharm Group Co. Ltd. (“Sinopharm”) – are among the largest local pharmaceutical companies in China. These partnerships have given us industry recognition and a portfolio of brands and products upon which our commercial and manufacturing network are built. In our Consumer Products Division, the partnership with Hain Celestial has brought us a massive range of relevant and unique health-related consumer products. Simon To Chairman Each year Chi-Med takes on greater challenges in the fi eld of innovation and commercial execution and succeeds in the vast majority of its endeavours through hard work and commitment. 6 HUTCHISON CHINA MEDITECH LIMITED 2014 Annual Report Chairman’s Statement Revenue (% change 2014 vs. 2013) +100% Net Profi t Attributable to Equity Holders (US$ million) 5.4 We have also adopted a common sense approach The approval and market launch of these innovations to financing to provide continuity and stability is beginning to become a near term reality. Subject throughout the past 15 years. to success in our current trials, we can expect New Drug Application (“NDA”) submissions for AZD6094 We set out to build a profi table and cash generative and fruquintinib to the US and China Food and Drug China Healthcare Division that could help fund our Administration (“FDA”) respectively to begin as early long-term investments in HMP’s innovation and, in as 2016. this, we have succeeded. Equally important as our exciting clinical drug We have also shared risks on some of our clinical candidates to our long-term success is the strength drug candidates and since 2010 have received about of our drug discovery platform. Our team of about $138.2 million, including $32.8 million in 2014, 250 full time scientists and staff is focused on in external cash from our global partners. These discovering the next innovations that HMP will bring partners have also enabled us to progress with them to the clinic over the coming years. The discovery a portfolio of clinical trials costing an estimated $44.8 effort is very active and we continue to expect it to million in 2014. yield one to two high potential new candidates each And, from time to time, we have accessed low- year. cost borrowing, sometimes with guarantees The market for targeted therapies has grown from Hutchison Whampoa Limited (“Hutchison dramatically worldwide over the past decade Whampoa”), to bridge between clinical milestones reaching $41.8 billion, or 46% of the total market for and external collaboration payments. cancer therapies. China represents a highly attractive opportunity in the area of targeted therapies with We will continue to apply this practical approach to enormous unmet medical need driven by the almost fi nancing until material milestone, royalty or operating 3.5 million new cancer patients per year. We believe profi t streams emerge from our approved HMP drugs. our position as the leading innovator in oncology in We will look at alternative forms of fi nance which might China could lift Chi-Med to become a market leader assist in the achievement of our objectives. in this fi eld over the next decade. Drug R&D Division We have built our Drug R&D Division, HMP, China Healthcare Division Our China Healthcare Division is now a well- into China’s leading end-to-end oncology and 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 immunology drug R&D operation. Stability in its pharmaceuticals operation with increasingly exciting purpose and funding has enabled HMP to build and growth prospects. maintain a unique and highly productive discovery team, which has built a broad and diversified It competes in the domestic China pharmaceutical pipeline of new drug candidates. market, which recorded a compound annual growth rate of approximately 20% from 2005 Our strong belief is that the way to achieve long- to 2013 behind reforms that have increased term success in the pharmaceutical industry is focus Central Government healthcare spending ten- on addressing unmet medical and patient needs fold from approximately $14.1 billion in 2005 to through breakthrough innovation. The focus of our approximately $147.2 billion in 2013. Looking Drug R&D Division for over a decade has been on forward, this rapid growth is set to continue as creating truly innovative, first-in-class or best-in- China continues to widen and deepen its State class, drug candidates in the selected therapeutic Medical Insurance Schemes and catches up with the areas of oncology and immunology which have developed world, which spends 20 to 30 times more major China and global potential. We are currently in terms of per capita healthcare spending. progressing a portfolio of six small molecule targeted therapies in 16 clinical studies in China and The own-brand products in our China Healthcare around the world, and in addition, one botanical Division have major operational scale. They drug candidate. Chairman’s Statement 77 manufacture and sell about 4.2 billion doses of medicines a year through our well-established Good Consumer Products Division Our Consumer Products Division enables Chi-Med to these new factories are designed to increase production capacity in both JVs by approximately Manufacturing Practice (“GMP”) manufacturing base. capture part of the growing consumer trend towards three-fold. This will also allow us to release This has enabled us, over the past decade, to build a healthy living and to capitalise on the considerable substantial value from compensation resulting from world-class commercial organisation of nearly 3,000 synergies with the broader Hutchison Whampoa vacating our existing sites as well as benefi t from a people covering over 600 cities and towns, detailing group in consumer products. We are focused on reduction in contract manufacturing on our OTC drug drugs to over 80,000 physicians in about 13,500 accelerating the future growth of our partnership business. hospitals, in both the China prescription and the OTC with Hain Celestial and our access to the over 11,400 drug markets. retail store and distribution network of Hutchison Whampoa. Last year, our Consumer Products Division Dividend The Chi-Med Board (the “Board”) continues to We expect our existing own-brand products to achieved net profitability and in 2015, we will re- believe we can create greater shareholder value by continue to grow sales and profit in line with the enter the Chinese infant formula market, a market investing in the growth opportunities we see and broader pharmaceutical market in China. which we continue to believe represents a great has therefore decided not to recommend a dividend opportunity. for the year ended 31 December 2014. In addition, over the past two years, we have restructured our China Healthcare Division to add a new and very exciting source of incremental revenue Cash and Finance We continue to maintain a solid cash position. At The Board The Board continues to exercise good corporate and profi t. By establishing both Hutchison Sinopharm Chi-Med group-level, we ended 2014 with cash and governance and our Independent Non-executive and our new entity, Shanghai Shangyao Hutchison bank balances of $51.1 million (2013: $46.9m) and Directors bring a wealth of expertise and experience. Whampoa GSP Company Limited (“SHPL GSP”), in unutilised bank loan facilities of $8.5 million (2013: They have made, and continue to make, a valuable 2014, we have now unlocked Chi-Med’s commercial $10.3m). Chi-Med group-level bank loans totalled contribution to the evolution of Chi-Med. I very much infrastructure in China. For the first time, we can $53.2 million from: (1) a $26.3 million 3-year appreciate their involvement and I thank them all for commercialise third party products, the margins on revolving loan facility from HSBC (2013-2015); and their efforts. which can be almost as attractive as manufacturing. (2) a $26.9 million 4-year term loan from Scotiabank Our commercial capability is well recognised in Whampoa, and expiring in June 2018. Consequently, (Hong Kong) Limited, guaranteed by Hutchison Our People All that Chi-Med has achieved and will achieve is due the pharmaceutical industry in China and it is the group-level net cash position at end 2014 was to the dedication and expertise of its employees and, attractive to third parties as evidenced by our -$2.1 million (end 2013: -$4.6m). on behalf of the Board, I thank all of them. Chi-Med’s recent commercial deals with Merck Serono on potential is considerable, and we shall continue to Concor®, AstraZeneca on Seroquel®, and Shanghai Not included in our group-level numbers is the cash work hard to realise this. Pharmaceuticals on six new, mainly prescription, held in our JVs – SHPL, HBYS, and Nutrition Science drug products. Partners Limited (“NSP”), our JV with Nestlé Health Science. In aggregate, these held $77.0 million in We believe that these macro trends in the China cash and bank balances (2013: $99.0m) at the end pharmaceutical industry, combined with our of 2014. The JVs carry $22.6 million bank debt (2013: competitive advantages and the realisation of $0.8m). The aggregate $43.8 million use of cash at significant value in our property portfolio, will the JV-level during 2014 was driven in large part Simon To Chairman provide an increasingly significant source of profit by the new factory construction projects at SHPL and cash fl ows. and HBYS, which are in full swing. Upon completion, 25 February 2015 8 HUTCHISON CHINA MEDITECH LIMITED 2014 Annual Report Operations Review Group Results In 2014, Chi-Med delivered high revenue growth, with consolidated Group revenue up 100% to $91.8 million (2013: $46.0m). This growth was driven primarily by the establishment of the new Hutchison Sinopharm business which recorded $50.2 million in sales (2013: nil). Group revenues are reported under IFRS11 which do not include the sales of our two major 50/50 China JVs which achieved $455.5 million in sales in 2014 (2013: $390.6m). The Group’s full year operating profit was $10.2 million (2013: $9.6m) as a result of improved operating profitability in the China Healthcare (up 21% to $24.8m) and Consumer Products Divisions (up 209% to $2.8m), but offset by increased clinical trial expenditures in the Drug R&D Division. The Group’s corporate operating loss increased to $6.4 million (2013: $6.2m) as a result of our continuing efforts to control group-level costs tightly. Finance costs were fl at at $1.5 million (2013: $1.5m) primarily refl ecting the continued minor borrowing at Hutchison Healthcare Limited (“HHL”) in the China Healthcare Division, and interest on a partial drawdown of Chi-Med’s credit facility. Profits attributable to minority interests were $1.9 million (2013: $1.1m) as growth in minority interest profits on the Hain Celestial and HBYS businesses more than offset the share of losses in the Drug R&D Division assigned to Mitsui & Co., Ltd. (“Mitsui”). Chi-Med’s tax charge was $1.4 million (2013: $1.1m) due to a provision for the 5% withholding tax on future dividends resulting from the 2014 profi ts of our China Healthcare Division businesses as well as a tax on the profi ts of the Consumer Products Division. In total, the Group’s net profi t attributable to Chi-Med equity holders was $5.4 million compared to $5.9 million in 2013 with profi t per share of 10.2 US cents compared to a profit of 11.4 US cents per share in 2013. Christian Hogg Chief Executive Offi cer In 2014, $44.8 million was invested in clinical studies on our seven novel drug candidates. Operations Review 99 l y g o o c n O l y g o o n u m m I i d o t a m u e h R = A R l ; s i s o r e l c S e p i t l u M = S M ; n o i s s e r p x e r e v o = E / O ; e v i t i s o p d e t s e t = e v + a / n a / n a / n a / n a / n T BB T B T B T B T B T B T B T B T B T B a n h C i - - i ) s e d u t s 2 ( s r e m o c l l a e n i l d r 3 l d o h n o - - S U - - n o i t c u d n i k w 8 r e c n a c l a t c e r o o C l e s a e s i d s n h o r C ' a n h C i - - l e x a t i l c a p / w o b m o c e n i l d n 2 r e c n a c c i r t s a G a n h C i - - c i r t s a g , g n u l , c i t a e r c n a P s r u o m u t e n i r c o d n e o r u e N R F G F / R F G E V a n h C i - - s r e m o c l l a e n i l d r 3 r e c n a c g n u l l l e c l l a m s - n o N 3 / 2 / 1 F G E V l d o h n o - - U E / S U - - e c n a n e t n a m k w 2 5 i l d o h n o - - U E / S U - - n o i t c u d n i k w 8 ) . d o M - d l i M ( s i t i l o c e v i t a r e c l U ) . d o M - d l i M ( s i t i l o c e v i t a r e c l U α F N T - i t n A 4 0 0 - L P M H l l a b o G - - 1 9 2 9 D Z A / w . o b m o c e v + m R F G E r e c n a c g n u l l l e c l l a m s - n o N a n h C i i - - b n i t i f e g / w . o b m o c e v + m R F G E r e c n a c g n u l l l e c l l a m s - n o N a n h C i - - y p a r e h t o n o m E / O t e M - c + t w R F G E r e c n a c g n u l l l e c l l a m s - n o N U E / a d a n a C / S U - - e n i l t s 1 a m o n i c r a c l l e c l a n e r y r a l l i p a P a n h C i s r u o m u t d i l o s , l a e g a h p o s e O a n h C i - - l e x a t e c o d / w . o b m o c e v + t e M - c a n h C i - - l e x a t e c o d / w . o b m o c E / O t e M - c a n h C i - - y p a r e h t o n o m e v + t e M - c a n h C i - - y p a r e h t o n o m E / O t e M - c a i l a r t s u A a i l a r t s u A s r e c n a c l l a c i g o o t a m e H r e c n a c c i r t s a G r e c n a c c i r t s a G r e c n a c c i r t s a G r e c n a c c i r t s a G s u p u l , S M , A R a n h C i - - . s t e m n a r b / i w e v + m R F G E r e c n a c g n u l l l e c l l a m s - n o N i a m e a k u e l , a m o h p m y L s r e c n a c l l a c i g o o t a m e H l a b o G l l a b o G l s r u o m u t d i l o S n o i t a m m a l f n I + m R F G E T W R F G E i b n i t n u q u r F i i b n i t a f l u S i b n i t i p E i b n i t a i l e h T t e M - c i / b n i t i l o v a s ( 4 9 0 6 D Z A i ) b n i t i l o v k y S δ K 3 P I R F G F l e v o N 3 2 5 - L P M H 9 8 6 - L P M H 3 5 4 - L P M H n o i t a r o b a l l o C ; e p y t d l i w r o t p e c e r r o t c a f h t w o r g l a m r e d p e = t i w R F G E ; t n a t u m r o t p e c e r r o t c a f h t w o r g l i a m r e d p e = m R F G E ; s i s a t s a t e m n a r b = i . s t e m n a r b i ; h t i w n o i t a n b m o c n i i = o b m o c : s e t o N . s i t i r h t r A s n o i t a c i d n i ) ” T B “ ( y p a r e h T h g u o r h t k a e r B e l b i s s o p 0 1 – s e t a d d n a c i l a c i n i l c 7 I I I e s a h P I I e s a h P b I h P I e s a h P n i l c e r P s l i a t e D y d u t S l / n o i t a u p o P t e g r a T n o i t a c i d n I r e n t r a P t e g r a T m a r g o r P 10 HUTCHISON CHINA MEDITECH LIMITED 2014 Annual Report Drug Research & Development Drug R&D Division We established our drug R&D operation, HMP, 14 in 16 different clinical studies in oncology and represented approximately 46% ($41.8 billion) of the immunology indications, 13 of which are Phase Ib/ total oncology drug market up from 11% a decade years ago and, together with finance provided by II proof-of-concept (“PoC”) studies with 10 being in ago. our partners and other sources, we have to-date potential Breakthrough Therapy indications. invested approximately $255 million in its activities. The first targeted therapy for HER2 positive breast In HMP, we have what is now China’s leading end-to- This innovative new drug pipeline, in our view, has cancer, trastuzumab (Roche), was approved by the end oncology and immunology drug R&D operation the potential over the mid-term to make Chi-Med into US FDA in 1998 and over the next 12 years from focused on creating highly innovative therapies for a large-scale pharmaceutical company and a leader 1999 to 2010, a further 12 more targeted therapies launch in the fast growth China market and the global in oncology in China. market. were approved. The pace of approvals of these targeted therapies has since increased, in line with We assembled the HMP team over time comprising Market Dynamics in Oncology: The annual global number of new cancer cases industry research and development investment, with 13 further approvals in the three years from 2011 a group of the best and brightest drug research reached 14.1 million with 8.2 million deaths recorded to 2013. Approximately half of the current global and development personnel in China who have in 2012. The rapid expansion of the global oncology targeted therapy market is vascular endothelial been given a stable and supportive environment to drug market which totalled $91 billion in 2013 growth factor receptor (“VEGF”/”VEGFR”) and EGFR create their innovations over a prolonged period of has been driven in large part by the expansion of inhibitors with bevacizumab (Roche), a humanised time. The result is a pipeline of seven clinical-stage the targeted therapy market, including both small anti-VEGF monoclonal antibody, being the largest drug candidates currently being tested in parallel molecule and biologic treatments. In 2013, these individual drug with sales of $7.1 billion in 2014. Operations Review - Drug Research & Development 1111 drugs, range in price from $ 2 , 7 3 0 p e r m o n t h f o r gefitinib (AstraZeneca) an EGFR inhibitor for non-small cell lung cancer (“NSCLC”) to $16,580 per month for rituximab a targeted antibody therapy for Non-Hodgkin’s lymphoma. Given that almost all targeted therapies are global drugs, they are to a great extent restricted to global pricing policy thereby pricing themselves beyond the reach of the broad patient population in China. Beyond targeted therapies, the vast majority of cancer patients in China are limited t o t r a d i t i o n a l g e n e r i c c h e m o t h e r a p y a g e n t s , Despite the increase in approved targeted therapies dramatically underdeveloped at just 8% of the manufactured by many Chinese pharmaceutical most of the kinome, the spectrum of over 500 global market. Furthermore, targeted therapies companies and available at generally accessible human protein kinases involved in cell signalling and represent only 23% ($1.7 billion) of the China market, cost. These agents fall into a few key categories function, has yet to be drugged. Interestingly, 16 equivalent to just 4% of the global targeted therapy such as anti-metabolites (pemextred, capecitabine, of the 23 approved small molecule tyrosine kinase market. inhibitors (“TKIs”) fall into just 3 of the over 19 kinase gemcitabine, etc.) which represent 20% of the oncology market; plant alkaloids (paclitaxel, classes (VEGFR, EGFR and Abl) classifi ed as validated Despite being far less developed in China than docetaxel etc.) also 20% of the market; DNA- targets, leaving a very broad range of novel targets, globally, targeted therapies are still the largest damaging agents (oxaplatin, temozolomide, such as c-Met, PI3K, Syk, FGFR, to be explored. single sub-segment of the oncology drug market in nedaplatin etc.) at 11% of the market; and finally Furthermore, even in cases in which TKI products China. The cost of targeted therapies has been the hormones (letrozole, bicalutamide, anastrozole etc.) exist against validated targets, there remains major major limitation on growth. The 10 main approved making up 6% of the market. opportunity to improve efficacy and tolerability targeted therapies in China, all proprietary global through enhanced kinase selectivity (reduction of off target toxicity), dose selection, and gain approval in either new additional indications or in combinations with other agents in approved indications. China represents a major unmet medical need in the fi eld of oncology and consequently one of the greatest opportunities for growth and development. China alone recorded 3.5 million new cases of cancer and 2.5 million cancer deaths during 2012, representing 24.8% and 30.5% of all new cases and deaths globally, both disproportionately high as compared to the 19.7% of the world’s population that China represents. Despite this major patient need, the overall Chinese oncology market, which was estimated at $7.4 billion in 2013, remains 12 HUTCHISON CHINA MEDITECH LIMITED 2014 Annual Report Drug Research & Development HMP Research and Development Strategy: HMP is set up to support and fund research and expedite clinical development of new, potential In aggregate, we had received $77 million in “breakthrough” drugs or treatments that show upfront payments, milestones, equity injections, and dramatic responses in early-phase studies. Using shareholder loans received as at 31 December 2014. development of our drug candidates against targets, this regulatory pathway, once a promising new And subject to clinical success, HMP and NSP (our generally tyrosine kinases (proteins or enzymes), drug candidate is designated as a Breakthrough 50% held JV with Nestlé Health Science) will receive: associated with the pathogenesis of cancer or Therapy, the US FDA and the sponsor company would up to a further $471 million is scheduled in future inflammation. We employ a diversified, risk- collaborate to determine the best path forward to development and regulatory approval milestones; up balanced, portfolio approach focusing on three main abbreviate the traditional three-phase approach to $145 million in further option payments and up to categories: (1) synthetic compounds against novel to drug development. The main criteria for a new $560 million in commercial milestones. Beyond this, targets with global first-in-class potential, which drug candidate to qualify for Breakthrough Therapy royalties on net sales will be at a customary level. includes AZD6094 (c-Met), HMPL-523 (Syk), HMPL- designation are: (1) a rare disease indication which 453 (FGFR), and our collaboration compound with is life threatening and currently untreatable or has Based on the clinical trial plans agreed for the Janssen in inflammation; (2) synthetic compounds limited treatment options; (2) clear understanding three development-stage collaborations, the against validated targets with clear differentiation to of the molecular pathways of the disease thereby total aggregate global investment in AZD6094, potentially be a best-in-class/next generation therapy allowing for effective patient selection/stratifi cation; fruquintinib and HMPL-004 is estimated at well over in their respective categories, including fruquintinib/ and (3) unprecedented efficacy, the substantial $500 million with our partners funding the vast sulfatinib (VEGFR), epitinib/theliatinib (EGFR) and treatment effect in large enough patient pool in early majority of these costs. HMPL-689 (PI3Kδ); and (3) botanical drugs against multiple targets, including HMPL-004 (TNFα, IL1-β, etc.) and the research currently being conducted within the NSP JV. clinical development. The impact of Breakthrough Therapy designation can be transformational in terms of time to launch 2014 Drug R&D Division Financial Performance: HMP revenues were $24.8 million in 2014 (2013: for a new drug candidate that is either highly $29.5m) reflecting income from collaboration and For all our drug candidates, we conduct all pre- effective against a novel target (first-in-class); or licensing deals in the form of milestone payments, clinical work in China, leveraging both our deep highly differentiated and superior against a validated and service revenue from Janssen, AstraZeneca, Lilly talent pool and effi cient cost structure. Our strategy target (best-in-class). The US FDA is showing strong and NSP. Net loss attributable to Chi-Med equity is to rapidly move them through early clinical commitment to implement the ABTPA as evidenced holders was $9.7 million (2013: -$2.4m), refl ecting development in China to completion of Phase Ib/ by the increasing amount of novel drug candidates the considerably broadened range of clinical activities II PoC. The large patient population in China makes that have been granted Breakthrough Therapy at HMP. Clinical trial spending during the period it feasible to explore multiple indications in parallel designation and subsequently approved, with three by HMP, NSP and its partners on our seven drug thereby significantly improving the probability of in 2013 and ten in 2014. candidates totalled approximately $44.8 million success. Once positive PoC has been demonstrated, (2013: $30.1m). we can move into registration studies in these proven All clinical candidates of HMP have been designed indications at speed in China. to be either fi rst-in-class or best-in-class, and several of them are showing high potential to meet the If our candidates are only able to establish non- Breakthrough Therapy qualifi cation criteria. HMP is 2014 Primary Drug R&D Division Transactions and Payments: In May 2014, under the terms of the December inferiority versus existing approved global products, currently conducting Phase Ib/II PoC studies primarily 2011 AZD6094 collaboration and license agreement, our fallback is to bring them to market in China at on AZD6094, epitinib and sulfatinib in 10 different AstraZeneca paid HMP a $5.0 million milestone pricing that will be accessible to the broad patient potential Breakthrough Therapy indications. payment linked to the start of global Phase II clinical population. If however, the drug candidate exhibits study in the secondary indication, papillary renal cell global potential, resulting from superior PoC data, we In order to allow HMP to progress such a broad carcinoma (“PRCC”). Also in May 2014, Mitsui made will move it into global trials either by ourselves or in portfolio of clinical drug candidates, at speed and an equity injection of $3.1 million, their pro rata partnership in order to maximise value, particularly across multiple indications, we have partnered with share of a total equity injection by Chi-Med of $21.9 in indications that have Breakthrough Therapy leading global pharmaceutical companies. These million. Mitsui retains a 12.2% share in Hutchison potential. partnerships cover three clinical drug candidates MediPharma Holdings Limited (“HMHL”), the In 2012 the US Congress passed the Food and Drug late-stage preclinical drug candidate (the Janssen 2014, Nestlé Health Science injected a $5.0 million Administration Safety and Innovation Act, which infl ammation compound). We retain a signifi cant part shareholder’s loan into NSP, matching a shareholder’s incorporated the Advancing Breakthrough Therapies of the upside on these four high potential candidates loan of the same amount made by HMHL to NSP JV. (AZD6094, fruquintinib and HMPL-004) and one holding company of the Drug R&D Division. In June for Patients Act (“ABTPA”). ABTPA is intended to while dramatically reducing the fi nancial risk to HMP. Operations Review - Drug Research & Development 1313 Throughout 2014, HMP provided full-time equivalent lung, stomach, colorectal, kidney (PRCC), oesophageal (“FTE”) services to several of its partners, Janssen and brain cancer. C-Met+ however, outside of PRCC, (multiple research projects); NSP (botanical research occurs in between 1% to 20% of patients – a small, in gastrointestinal disease); Lilly (management albeit important segment of the patient populations of the Fruquintinib China clinical and regulatory of these tumour types. In PRCC the occurrence of and manufacturing programmes); AstraZeneca c-Met+ is between 40% and 75%. During the past (management of the AZD6094 China clinical and three years, AZD6094 has achieved partial response regulatory programme). In aggregate total FTE (tumour measurement reduction of >30%) in income from these partners was $14.3 million in patients with c-Met+ in PRCC, lung, colorectal and 2014 (2013: $7.3m). Product Pipeline Progress: Oncology Portfolio: HMP has a portfolio of five gastric cancers thereby proving its high potential to become a global fi rst-in-class and best-in-class c-Met inhibitor. Our view on overall market potential for AZD6094 in only c-Met+ lung, kidney (PRCC) and clinical-stage small molecule targeted cancer drugs gastric cancer patients is estimated at $2.3 billion in which are currently in a total of 15 studies: Phase I annual non-risk adjusted peak sales. (1 study), Phase Ib (10 studies), Phase II (3 studies) and Phase III (1 study) clinical studies on multiple C-Met over expression (“c-Met O/E”) occurs in a (cid:63)(cid:88)(cid:66)(cid:52)(cid:46)(cid:55)(cid:50)(cid:30)(cid:192)(cid:30)(cid:78)(cid:80)(cid:65)(cid:65) (cid:49)(cid:54)(cid:35) (cid:53)(cid:51)(cid:35) (cid:77)(cid:96)(cid:104)(cid:99)(cid:97)(cid:114)(cid:103)(cid:116)(cid:99)(cid:30)(cid:80)(cid:99)(cid:113)(cid:110)(cid:109)(cid:108)(cid:113)(cid:99)(cid:30)(cid:80)(cid:95)(cid:114)(cid:99)(cid:56)(cid:30) (cid:66)(cid:103)(cid:113)(cid:99)(cid:95)(cid:113)(cid:99)(cid:30)(cid:65)(cid:109)(cid:108)(cid:114)(cid:112)(cid:109)(cid:106)(cid:30)(cid:80)(cid:95)(cid:114)(cid:99)(cid:56)(cid:30) (cid:65)(cid:102)(cid:112)(cid:109)(cid:107)(cid:109)(cid:113)(cid:109)(cid:107)(cid:99)(cid:53)(cid:30)(cid:101)(cid:95)(cid:103)(cid:108) (cid:68)(cid:109)(cid:97)(cid:95)(cid:106)(cid:30)(cid:75)(cid:99)(cid:114)(cid:30)(cid:69)(cid:99)(cid:108)(cid:99)(cid:30)(cid:101)(cid:95)(cid:103)(cid:108) (cid:76)(cid:109)(cid:30)(cid:97)(cid:102)(cid:95)(cid:108)(cid:101)(cid:99)(cid:113)(cid:30)(cid:38)(cid:65)(cid:102)(cid:53)(cid:45)(cid:68)(cid:75)(cid:39) (cid:39) (cid:35) (cid:38) (cid:30) (cid:99) (cid:108) (cid:103) (cid:106) (cid:99) (cid:113) (cid:95) (cid:96) (cid:30) (cid:44) (cid:113) (cid:116) (cid:30) (cid:113) (cid:99) (cid:101) (cid:108) (cid:95) (cid:102) (cid:97) (cid:30) (cid:99) (cid:101) (cid:95) (cid:114) (cid:108) (cid:99) (cid:97) (cid:112) (cid:99) (cid:110) (cid:30) (cid:114) (cid:113) (cid:99) (cid:64) (cid:52)(cid:46)(cid:35) (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:43)(cid:47)(cid:46)(cid:46)(cid:35) tumour-types. All fi ve of our oncology clinical drug broader patient population between 40% and achieved partial response (tumour measurement candidates have received IND approval by the China 92% in the aforementioned tumour types, thereby reduction of >30%), one of which has been on drug FDA through the Green Channel expedited application representing a larger market opportunity if AZD6094 for >24 months and has tumour measurement process, highlighting their potential and relevance for can inhibit tumour growth in c-Met O/E patients. No reduction of >85%. A further three of these eight PRCC the China market. c-Met TKIs have shown clinical benefi t in this c-Met patients achieved stable disease. This aggregate ORR O/E patient population, however, we believe due of 38% is very encouraging for PRCC which currently Together, these oncology clinical drug candidates to its very high selectivity, good safety profi le, and has no effective treatments on the global market. cover a broad spectrum of most prevalent solid ability to dose-up to very high levels (600mg BID) Furthermore, since the data for these eight patients is tumours with important unmet medical needs and suppress c-Met activation through complete not mature the ORR could continue to improve with representing significant market potential. Our next target inhibition for 24 hours a day that AZD6094 time. Prior to AZD6094, the highest ORR reported for wave of oncology drug candidates continues this has a good, albeit challenging, chance of providing a PRCC specifi c Phase II study (of 74 PRCC patients) solid tumour focus with HMPL-453 (FGFR), but now clinical benefi t to c-Met O/E patients. was 13.5% by foretinib (GlaxoSmithKline) in 2012. also extends into hematologic malignancies with HMPL-523 (Syk) and HMPL-689 (PI3Kδ). As a result, HMP, in collaboration with AstraZeneca, If in the global Phase II study on PRCC we are able AZD6094 (HMPL-504/volitinib/savolitinib): in c-Met+ and c-Met O/E patient populations. will look to pursue US FDA Breakthrough Therapy is progressing AZD6094 in a total of eight indications to deliver an ORR in-line with that seen to-date, we AZD6094 is a novel targeted therapy and inhibitor of the c-Met receptor tyrosine kinase for the treatment Clinical study 1 – PRCC: PRCC of cancer. The c-Met, also known as hepatocyte represents approximately 10- growth factor receptor (HGFR), signalling pathway 15% of the 270,000 new renal has specifi c roles particularly in normal mammalian cell carcinoma (kidney cancer) growth and development; however, this pathway patients worldwide annually. Chi- has been shown to function abnormally in a range Med announced in May 2014 of different cancers. AZD6094 was designed by HMP that HMP and AstraZeneca had to minimise potential for renal toxicity, the primary commenced a global Phase II issue that held back the first generation of c-Met study in PRCC in the US, Canada inhibitors from gaining approval. and Europe. The basis for the Phase II study in PRCC was the There are two main types of abnormal c-Met strong correlation in the Australian Phase I study designation which could lead to a submission for function: gene amplification; and c-Met over between c-Met+ status and response to AZD6094 approval in 2016. We believe that an approval as expression. Generally, c-Met gene amplification published in May 2014 at the American Society of a first-in-class treatment for PRCC could yield non- (“c-Met+”) has been proven to be highly correlated Clinical Oncology (“ASCO”) annual meeting. Until now, risk adjusted peak sales, in PRCC alone, of over $500 with tumour growth in many indications including out of a total of eight PRCC patients, who have been million. Interim results from this Phase II study in treated with various doses of AZD6094, three have PRCC are expected to be reported during 2015. 14 HUTCHISON CHINA MEDITECH LIMITED 2014 Annual Report Drug Research & Development Clinical studies 2 and 3 – EGFR activating mutation (“EGFRm+”) TKI resistant NSCLC c-Met+ patients. There are about 1.4 million new NSCLC patients worldwide (cid:63)(cid:88)(cid:66)(cid:52)(cid:46)(cid:55)(cid:50)(cid:30)(cid:66)(cid:99)(cid:116)(cid:99)(cid:106)(cid:109)(cid:110)(cid:107)(cid:99)(cid:108)(cid:114)(cid:30)(cid:78)(cid:106)(cid:95)(cid:108) annually of which, while varying greatly by ethnicity, (cid:65)(cid:70)(cid:71)(cid:76)(cid:63) (cid:48)(cid:46)(cid:47)(cid:49) (cid:48)(cid:46)(cid:47)(cid:50) (cid:48)(cid:46)(cid:47)(cid:51) up to approximately 30% have EGFRm+. NSCLC patients with EGFRm+ are treated effectively with TKIs such as gefi tinib and erlotinib (Roche) with total 2014 sales of approximately $2 billion. Unfortunately, most patients build resistance to TKIs and tumour growth restarts via resistance pathways. The main resistance pathways include T790M mutation (“T790M+”) accounting for approximately 45-50% of patients and c-Met+ about 15-20% of patients. This is particularly important given that both gefi tinib and erlotinib will come off patent in 2017/2018. This will likely lead to cheaper and more accessible TKI treatments of EGFRm+ NSCLC which in turn will lead to an eventual increase in the prevalence resistance due to both T790M+ and c-Met+. (cid:78)(cid:102)(cid:95)(cid:113)(cid:99)(cid:30)(cid:71) (cid:76)(cid:81)(cid:65)(cid:74)(cid:65)(cid:30)(cid:38)(cid:97)(cid:109)(cid:107)(cid:96)(cid:109)(cid:30)(cid:117)(cid:45)(cid:30)(cid:101)(cid:99)(cid:100)(cid:103)(cid:114)(cid:103)(cid:108)(cid:103)(cid:96)(cid:39) (cid:76)(cid:81)(cid:65)(cid:74)(cid:65)(cid:30)(cid:38)(cid:97)(cid:43)(cid:75)(cid:99)(cid:114)(cid:30)(cid:77)(cid:45)(cid:67)(cid:30)(cid:67)(cid:69)(cid:68)(cid:82)(cid:30)(cid:117)(cid:114)(cid:39) (cid:69)(cid:95)(cid:113)(cid:114)(cid:112)(cid:103)(cid:97)(cid:30)(cid:65)(cid:95)(cid:108)(cid:97)(cid:99)(cid:112)(cid:30)(cid:38)(cid:97)(cid:43)(cid:75)(cid:99)(cid:114)(cid:41)(cid:39) (cid:69)(cid:95)(cid:113)(cid:114)(cid:112)(cid:103)(cid:97)(cid:30)(cid:65)(cid:95)(cid:108)(cid:97)(cid:99)(cid:112)(cid:30)(cid:38)(cid:97)(cid:43)(cid:75)(cid:99)(cid:114)(cid:30)(cid:77)(cid:45)(cid:67)(cid:39) (cid:69)(cid:95)(cid:113)(cid:114)(cid:112)(cid:103)(cid:97)(cid:30)(cid:65)(cid:95)(cid:108)(cid:97)(cid:99)(cid:112)(cid:30)(cid:38)(cid:97)(cid:43)(cid:75)(cid:99)(cid:114)(cid:41)(cid:30)(cid:117)(cid:45)(cid:30)(cid:98)(cid:109)(cid:97)(cid:99)(cid:114)(cid:95)(cid:118)(cid:99)(cid:106)(cid:39) (cid:69)(cid:95)(cid:113)(cid:114)(cid:112)(cid:103)(cid:97)(cid:30)(cid:65)(cid:95)(cid:108)(cid:97)(cid:99)(cid:112)(cid:30)(cid:38)(cid:97)(cid:43)(cid:75)(cid:99)(cid:114)(cid:30)(cid:77)(cid:45)(cid:67)(cid:30)(cid:117)(cid:45)(cid:30)(cid:98)(cid:109)(cid:97)(cid:99)(cid:114)(cid:95)(cid:118)(cid:99)(cid:106)(cid:39) (cid:69)(cid:74)(cid:77)(cid:64)(cid:63)(cid:74) (cid:78)(cid:102)(cid:95)(cid:113)(cid:99)(cid:30)(cid:71) (cid:76)(cid:81)(cid:65)(cid:74)(cid:65)(cid:30)(cid:36)(cid:45)(cid:109)(cid:112)(cid:30)(cid:69)(cid:95)(cid:113)(cid:114)(cid:112)(cid:103)(cid:97) (cid:78)(cid:95)(cid:110)(cid:103)(cid:106)(cid:106)(cid:95)(cid:112)(cid:119)(cid:30)(cid:80)(cid:99)(cid:108)(cid:95)(cid:106)(cid:30)(cid:65)(cid:99)(cid:106)(cid:106)(cid:30)(cid:65)(cid:95)(cid:112)(cid:97)(cid:103)(cid:108)(cid:109)(cid:107)(cid:95) (cid:76)(cid:81)(cid:65)(cid:74)(cid:65)(cid:30)(cid:38)(cid:67)(cid:69)(cid:68)(cid:80)(cid:107)(cid:41)(cid:30)(cid:82)(cid:73)(cid:71)(cid:30)(cid:112)(cid:99)(cid:113)(cid:103)(cid:113)(cid:114)(cid:95)(cid:108)(cid:114)(cid:42)(cid:30)(cid:97)(cid:43)(cid:75)(cid:99)(cid:114)(cid:41) (cid:97)(cid:109)(cid:107)(cid:96)(cid:109)(cid:30)(cid:117)(cid:45)(cid:30)(cid:63)(cid:88)(cid:66)(cid:55)(cid:48)(cid:55)(cid:47)(cid:39) (cid:78)(cid:102)(cid:95)(cid:113)(cid:99)(cid:30)(cid:71)(cid:71)(cid:45)(cid:71)(cid:71)(cid:71) (cid:65)(cid:106)(cid:99)(cid:95)(cid:112)(cid:95)(cid:108)(cid:97)(cid:99)(cid:30)(cid:38)(cid:65)(cid:102)(cid:103)(cid:108)(cid:95)(cid:39) (cid:78)(cid:102)(cid:95)(cid:113)(cid:99)(cid:30)(cid:71)(cid:96) (cid:78)(cid:102)(cid:95)(cid:113)(cid:99)(cid:30)(cid:71)(cid:96) (cid:78)(cid:102)(cid:95)(cid:113)(cid:99)(cid:30)(cid:71)(cid:71)(cid:45)(cid:71)(cid:71)(cid:71) (cid:78)(cid:102)(cid:95)(cid:113)(cid:99)(cid:30)(cid:71)(cid:71)(cid:45)(cid:71)(cid:71)(cid:71) (cid:78)(cid:102)(cid:95)(cid:113)(cid:99)(cid:30)(cid:71)(cid:96) (cid:78)(cid:102)(cid:95)(cid:113)(cid:99)(cid:30)(cid:71)(cid:96) (cid:78)(cid:102)(cid:95)(cid:113)(cid:99)(cid:30)(cid:71)(cid:96) (cid:78)(cid:102)(cid:95)(cid:113)(cid:99)(cid:30)(cid:71)(cid:96) (cid:78)(cid:102)(cid:95)(cid:113)(cid:99)(cid:30)(cid:71)(cid:71)(cid:45)(cid:71)(cid:71)(cid:71) (cid:78)(cid:102)(cid:95)(cid:113)(cid:99)(cid:30)(cid:71)(cid:71)(cid:45)(cid:71)(cid:71)(cid:71) (cid:78)(cid:102)(cid:95)(cid:113)(cid:99)(cid:30)(cid:71)(cid:71)(cid:45)(cid:71)(cid:71)(cid:71) (cid:78)(cid:102)(cid:95)(cid:113)(cid:99)(cid:30)(cid:71)(cid:71)(cid:45)(cid:71)(cid:71)(cid:71) (cid:78)(cid:102)(cid:95)(cid:113)(cid:99)(cid:30)(cid:71)(cid:71) (cid:78)(cid:102)(cid:95)(cid:113)(cid:99)(cid:30)(cid:71)(cid:96) (cid:78)(cid:102)(cid:95)(cid:113)(cid:99)(cid:30)(cid:71)(cid:71)(cid:45)(cid:71)(cid:71)(cid:71) (cid:78)(cid:102)(cid:95)(cid:113)(cid:99)(cid:30)(cid:71)(cid:71)(cid:71) (cid:78)(cid:102)(cid:95)(cid:113)(cid:99)(cid:30)(cid:71)(cid:71)(cid:45)(cid:71)(cid:71)(cid:71) (cid:81)(cid:115)(cid:96)(cid:107)(cid:103)(cid:114) (cid:78)(cid:109)(cid:113)(cid:113)(cid:103)(cid:96)(cid:106)(cid:99) (cid:74)(cid:95)(cid:115)(cid:108)(cid:97)(cid:102)(cid:99)(cid:113) In 2014, AstraZeneca received US FDA Breakthrough Clinical study 4 – EGFR wild-type c-Met O/E NSCLC Due to Chinese regulatory requirements, it was Therapy designation on AZD9291, its drug candidate patients. Of the 1.4 million new NSCLC patients necessary to name HMPL-504 relatively early in the for T790M+ EGFRm+ TKI resistant patients. In this worldwide annually, approximately 67% exhibit development process in 2011. The name HMP chose patient population AZD9291 recorded an ORR of c-Met O/E. 64% in a large-scale Phase I study and the non-risk was volitinib a phonetic match to the mandarin translation of “504”. When HMP began proceedings adjusted peak year sales potential for this indication Clinical studies 5 and 6 – c-Met+ and c-Met to register the volitinib name outside China, under is estimated at $3 billion. In the additional 15-20% of O/E gastric cancer patients. Of the approximately the World Health Organisation’s (“WHO”) International EGFRm+ TKI resistant patients who progress because 1.0 million new gastric (stomach) cancer patients Nonproprietary Name (“INN”) system, it was made of c-Met+, a clinical study of an AZD9291 plus worldwide annually, approximately 10% are c-Met+ clear by the WHO that volitinib was too close to an AZD6094 combination treatment is now underway and approximately 40% are c-Met O/E. Furthermore, existing registered name and as such the fi nal name in Japan, South Korea, Taiwan and the US. The idea China has the largest gastric cancer population in the that we have settled on for global INN registration is is that shutting down the two main resistance world accounting for approximately half of global savolitinib. pathways, representing 60-70% of all EGFRm+ TKI new patients annually. resistant patients, would severely limit the avenues VEGF/VEGFR Inhibitors: At an advanced stage, for tumour growth. We believe that this novel Clinical studies 7 and 8 – c-Met+ and c-Met O/E tumours secrete large amounts of VEGF, a protein, combination, of two well-tolerated therapies, has gastric cancer patients in combination with docetaxel. to stimulate formation of excessive vasculature potential to deliver the ORR levels needed to qualify As a result of its good safety profi le we believe there (angiogenesis) around the tumour, in order to for US FDA Breakthrough Therapy designation for this is potential to combine AZD6094 with chemotherapy provide greater blood flow, oxygen, and nutrients c-Met+ patient population. in gastric cancer and thereby introduce AZD6094 to patients earlier in the treatment process. The third clinical study of AZD6094 in combination with gefitinib in EGFRm+/c-Met+/T790M negative Beyond these eight clinical programmes, we are lung cancer patients will start enrolment in early conducting multiple investigator-led exploratory 2015. It is reasonable to estimate, based on a studies in further tumour types in which c-Met proportional reference to the T790M+ market size, has been shown to function abnormally. that the EGFRm+ TKI resistant NSCLC c-Met+ patient population could have incremental non-risk adjusted peak year sales potential of approximately $1 billion. Operations Review - Drug Research & Development 1515 (cid:68)(cid:112)(cid:115)(cid:111)(cid:115)(cid:103)(cid:108)(cid:114)(cid:103)(cid:108)(cid:103)(cid:96) (cid:66)(cid:99)(cid:113)(cid:103)(cid:101)(cid:108)(cid:99)(cid:98)(cid:30)(cid:114)(cid:109)(cid:30)(cid:109)(cid:108)(cid:106)(cid:119)(cid:30)(cid:103)(cid:108)(cid:102)(cid:103)(cid:96)(cid:103)(cid:114)(cid:30)(cid:84)(cid:67)(cid:69)(cid:68)(cid:80)(cid:30)(cid:47)(cid:42)(cid:30)(cid:48)(cid:42)(cid:30)(cid:49) (cid:71)(cid:108)(cid:102)(cid:103)(cid:96)(cid:103)(cid:114)(cid:103)(cid:109)(cid:108) (cid:95)(cid:114)(cid:30)(cid:47)(cid:175)(cid:75) (cid:60)(cid:55)(cid:46)(cid:35) (cid:53)(cid:46)(cid:124)(cid:55)(cid:46)(cid:35) (cid:50)(cid:46)(cid:124)(cid:53)(cid:46)(cid:35) (cid:58)(cid:50)(cid:46)(cid:35) Screening at 1μM against 253 Kinases to fuel the rapid growth of the tumour. VEGFR inhibitors stop the growth of the vasculature around the tumour and thereby s t a r v e t h e t u m o u r o f t h e nutrients/oxygen it needs to grow rapidly. Several first generation VEGF/ VEGFR inhibitors have been approved globally since 2005 and 2006, including both small molecule TKI drugs such as sorafenib (Bayer) and sunitinib (Pfizer) with 2014 sales of approximately $1.0 billion and $1.2 billion respectively; and monoclonal antibodies such as bevacizumab (Roche) with 2014 sales of approximately $7.1 billion. The success of these drugs validated VEGFR inhibition as a new class of therapy for the treatment of cancer. Fruquintinib: Fruquintinib (HMPL-013) is a novel main indications all of which represent major unmet comparing in the same study to a placebo-arm small molecule compound to treat cancer that medical needs in China and, in our view, aggregate (n = 68) ORR of 0.0%, DCR of 7.4%, and 9 month OS of selectively inhibits VEGFR. Fruquintinib as a result non-risk adjusted peak year sales potential of over approximately 24%. The safety profi le of fruquintinib of better kinase selectivity is highly differentiated $300 million in China alone. versus other small molecule VEGFR inhibitors, which in the Phase Ib also compared favourably to the regorafenib Asia Phase III study with for example can be prone to excessive off-target toxicities. Indication 1 – Third-line colorectal cancer. liver function abnormalities (hepatotoxicity) for Fruquintinib only inhibits VEGFR 1, 2 and 3 resulting The incidence of colorectal cancer in China is fruquintinib of 11.9% versus 48.5% for regorafenib. in few off-target toxicities and thereby allowing approximately 0.4 million patients per year and it to dose up to much improved target coverage, the third-line setting, that being patients who A Phase II double blind placebo controlled study of both in terms of extent and duration. Furthermore, have failed two previous lines of treatment such fruquintinib versus placebo, randomised using a 2:1 fruquintinib has no drug accumulation problems as chemotherapy, represents a patient population ratio, among 71 third-line colorectal cancer patients and a low risk of drug/drug interaction problems with few if any remaining treatment options. In May completed enrolment, in just over four months, in which is favourable for combination therapies (e.g. 2014, HMP published encouraging China Phase Ib August 2014 and results will be reported imminently fruquintinib in combination with chemotherapy) clinical results in third-line colorectal cancer at the in early 2015. During the last quarter of 2014, and allowing for use earlier in a patients treatment ASCO annual meeting. The fruquintinib Phase Ib study in the ordinary course of safety tracking, the general regime and thereby increasing market potential reported in the 5mg 3-week on/1-week off arm (n outcome of this study became increasingly clear, to a by providing clinical benefit to a larger patient = 42) ORR of 10.3%, Disease Control Rate (“DCR”) of high degree of probability. population. 82.1%, and 9-month Overall Survival (“OS”) of 62%. For reference, in a recently published Asian Phase Fruquintinib is a highly potent drug candidate with In October 2013, HMP entered into a license and III third-line colorectal cancer study regorafenib a unique safety profile linked to its therapeutic collaboration agreement on fruquintinib with (Bayer) administered at 160mg 3-week on/1-week effect of inhibiting VEGFR. As has been previously Lilly. Since then HMP, in partnership with Lilly, has off regimen (n = 136) reported ORR of 4.4%, DCR reported in the context of the Phase Ib study, quickly expanded clinical development in three of 51.5%, and 9-month OS of approximately 46% normal and manageable (mostly low grade) 16 HUTCHISON CHINA MEDITECH LIMITED 2014 Annual Report Drug Research & Development (cid:68)(cid:112)(cid:115)(cid:111)(cid:115)(cid:103)(cid:108)(cid:114)(cid:103)(cid:108)(cid:103)(cid:96) (cid:63)(cid:106)(cid:106)(cid:109)(cid:117)(cid:113)(cid:30)(cid:100)(cid:109)(cid:112)(cid:30)(cid:100)(cid:115)(cid:106)(cid:106)(cid:30)(cid:36)(cid:30)(cid:113)(cid:115)(cid:113)(cid:114)(cid:95)(cid:103)(cid:108)(cid:99)(cid:98)(cid:30)(cid:114)(cid:95)(cid:112)(cid:101)(cid:99)(cid:114)(cid:30)(cid:103)(cid:108)(cid:102)(cid:103)(cid:96)(cid:103)(cid:114)(cid:103)(cid:109)(cid:108) (cid:66)(cid:95)(cid:119)(cid:59)(cid:48)(cid:54)(cid:42)(cid:30)(cid:48)(cid:107)(cid:101)(cid:43)(cid:111)(cid:98) (cid:66)(cid:95)(cid:119)(cid:59)(cid:47)(cid:50)(cid:42)(cid:30)(cid:48)(cid:107)(cid:101)(cid:43)(cid:111)(cid:98) (cid:66)(cid:95)(cid:119)(cid:59)(cid:47)(cid:50)(cid:42)(cid:30)(cid:50)(cid:107)(cid:101)(cid:43)(cid:111)(cid:98) (cid:66)(cid:95)(cid:119)(cid:59)(cid:47)(cid:50)(cid:42)(cid:30)(cid:51)(cid:107)(cid:101)(cid:43)(cid:111)(cid:98) (cid:66)(cid:95)(cid:119)(cid:59)(cid:47)(cid:50)(cid:42)(cid:30)(cid:52)(cid:107)(cid:101)(cid:43)(cid:111)(cid:98) by HMP during 2014, to be paid by Lilly upon achievement of the PoC Criteria. Based on the major unmet medical need in China combined with extensive pre-clinical data, the extensive Phase Ib data on fruquintinib reported above, the high degree of probability of a positive outcome in the Phase II study and consultation with the Chinese regulatory authorities, we decided to start our third-line colorectal cancer Phase III registration study in December 2014 ahead of completion of the Phase II study. This should allow us to complete enrolment of the 420 patient Phase (cid:39) (cid:74) (cid:107) (cid:45) (cid:101) (cid:108) (cid:38) (cid:30) (cid:44) (cid:97) (cid:108) (cid:109) (cid:65) (cid:30) (cid:95) (cid:107) (cid:113) (cid:95) (cid:78) (cid:106) (cid:52)(cid:46)(cid:46) (cid:51)(cid:46)(cid:46) (cid:50)(cid:46)(cid:46) (cid:49)(cid:46)(cid:46) (cid:48)(cid:46)(cid:46) (cid:47)(cid:46)(cid:46) (cid:46) (cid:46) (cid:67)(cid:65)(cid:54)(cid:46)(cid:30)(cid:38)(cid:60)(cid:54)(cid:46)(cid:35)(cid:30)(cid:110)(cid:84)(cid:67)(cid:69)(cid:68)(cid:80)(cid:30)(cid:103)(cid:108)(cid:102)(cid:103)(cid:96)(cid:103)(cid:114)(cid:103)(cid:109)(cid:108)(cid:39) III registration study by early 2016. (cid:49) (cid:52) (cid:55) (cid:47)(cid:48) (cid:47)(cid:51) (cid:47)(cid:54) (cid:48)(cid:47) (cid:48)(cid:50) (cid:67)(cid:65)(cid:51)(cid:46)(cid:30)(cid:38)(cid:60)(cid:51)(cid:46)(cid:35)(cid:30)(cid:110)(cid:84)(cid:67)(cid:69)(cid:68)(cid:80)(cid:30)(cid:103)(cid:108)(cid:102)(cid:103)(cid:96)(cid:103)(cid:114)(cid:103)(cid:109)(cid:108)(cid:39) (cid:82)(cid:103)(cid:107)(cid:99)(cid:30)(cid:38)(cid:102)(cid:39) target related adverse events such as hand-foot- fruquintinib, we judge it highly probable that the syndrome, dysphonia and hypertension uniquely economic benefi ts will fl ow to HMP. This remains occur in third-line colorectal cancer patients treated subject to the final confirmations by with fruquintinib. Furthermore, the prognosis for Lilly as per such agreement. third-line colorectal cancer patients is so poor that a positive treatment outcome is likely attributable, Accordingly, under International again with a high degree of probability, to the drug Accounting Standard 18 (IAS18) being tested. r e l a t i n g t o m e a s u r e m e n t a n d recognition of revenue arising from In the context of the very specific PoC success rendering of services, the group has, in criteria (“PoC Criteria”) linked to predetermined 2014, recognised $9.8 million service payment obligations from Lilly, laid out in the revenue, the majority of which relates exclusive license and collaboration agreement on to the reimbursement of costs incurred Colorectal Cancer Phase Ib Study[1] Regimen Objective Response Rate Disease Control Rate ≥16-wk Progression Free Survival ≥9-mo Overall Survival Fruquintinib Phase Ib (China) 3rd Line colorectal cancer 5mg 3/1 wk (N = 42) 10.3% 82.1% Regorafenib (Bayer’s Stivarga®) Phase III (Asia) 3rd Line colorectal cancer 160mg 3/1 wk (N = 136) Placebo (N = 68) 4.4% 0% 51.5% 7.4% 66.7% ~38% ~3% 62% ~46% ~24% [1] Objective Response Rate (“ORR”) = % of patients with >30% tumour diameter shrinkage; Disease Control Rate (“DCR”) = % of patients with <20% tumour diameter growth; Progression Free Survival (“PFS”) = % of patients with <20% tumour diameter growth at 16 weeks; Overall Survival (“OS”) = % of patients alive at 9 months. Operations Review - Drug Research & Development 1717 (cid:68)(cid:112)(cid:115)(cid:111)(cid:115)(cid:103)(cid:108)(cid:114)(cid:103)(cid:108)(cid:103)(cid:96)(cid:30)(cid:66)(cid:99)(cid:116)(cid:99)(cid:106)(cid:109)(cid:110)(cid:107)(cid:99)(cid:108)(cid:114)(cid:30)(cid:78)(cid:106)(cid:95)(cid:108) (cid:65)(cid:70)(cid:71)(cid:76)(cid:63) (cid:65)(cid:109)(cid:106)(cid:109)(cid:112)(cid:99)(cid:97)(cid:114)(cid:95)(cid:106)(cid:30)(cid:97)(cid:95)(cid:108)(cid:97)(cid:99)(cid:112) (cid:38)(cid:49)(cid:112)(cid:98)(cid:30)(cid:106)(cid:103)(cid:108)(cid:99)(cid:39) (cid:76)(cid:109)(cid:108)(cid:43)(cid:113)(cid:107)(cid:95)(cid:106)(cid:106)(cid:30)(cid:97)(cid:99)(cid:106)(cid:106)(cid:30)(cid:106)(cid:115)(cid:108)(cid:101)(cid:30)(cid:97)(cid:95)(cid:108)(cid:97)(cid:99)(cid:112) (cid:38)(cid:49)(cid:112)(cid:98)(cid:30)(cid:106)(cid:103)(cid:108)(cid:99)(cid:39) (cid:69)(cid:95)(cid:113)(cid:114)(cid:112)(cid:103)(cid:97)(cid:30)(cid:97)(cid:95)(cid:108)(cid:97)(cid:99)(cid:112) (cid:38)(cid:48)(cid:108)(cid:98)(cid:30)(cid:106)(cid:103)(cid:108)(cid:99)(cid:30)(cid:97)(cid:109)(cid:107)(cid:96)(cid:103)(cid:108)(cid:95)(cid:114)(cid:103)(cid:109)(cid:108) (cid:117)(cid:45)(cid:30)(cid:110)(cid:95)(cid:97)(cid:106)(cid:103)(cid:114)(cid:95)(cid:118)(cid:99)(cid:106)(cid:39) (cid:69)(cid:74)(cid:77)(cid:64)(cid:63)(cid:74) (cid:81)(cid:109)(cid:106)(cid:103)(cid:98)(cid:30)(cid:82)(cid:115)(cid:107)(cid:109)(cid:115)(cid:112)(cid:113)(cid:30)(cid:38)(cid:82)(cid:64)(cid:66)(cid:39) (cid:48)(cid:46)(cid:47)(cid:49) (cid:48)(cid:46)(cid:47)(cid:50) (cid:48)(cid:46)(cid:47)(cid:51) (cid:78)(cid:102)(cid:95)(cid:113)(cid:99)(cid:30)(cid:71)(cid:96) (cid:81)(cid:115)(cid:96)(cid:107)(cid:103)(cid:114) (cid:78)(cid:109)(cid:113)(cid:113)(cid:103)(cid:96)(cid:106)(cid:99) (cid:74)(cid:95)(cid:115)(cid:108)(cid:97)(cid:102) (cid:78)(cid:102)(cid:95)(cid:113)(cid:99)(cid:30)(cid:71)(cid:71) (cid:78)(cid:102)(cid:95)(cid:113)(cid:99)(cid:30)(cid:71)(cid:71) (cid:78)(cid:102)(cid:95)(cid:113)(cid:99)(cid:30)(cid:71)(cid:71)(cid:71) (cid:78)(cid:102)(cid:95)(cid:113)(cid:99)(cid:30)(cid:71)(cid:71)(cid:71) (cid:78)(cid:102)(cid:44)(cid:30)(cid:106)(cid:96)(cid:30)(cid:66)(cid:68) (cid:78)(cid:102)(cid:95)(cid:113)(cid:99)(cid:30)(cid:71)(cid:71) (cid:78)(cid:102)(cid:95)(cid:113)(cid:99)(cid:30)(cid:71)(cid:71)(cid:71) (cid:78)(cid:109)(cid:114)(cid:99)(cid:108)(cid:114)(cid:103)(cid:95)(cid:106)(cid:30)(cid:101)(cid:106)(cid:109)(cid:96)(cid:95)(cid:106)(cid:30)(cid:113)(cid:114)(cid:115)(cid:98)(cid:103)(cid:99)(cid:113) commercial supply upon approval. As a result, HMP is in the final stages of establishing a GMP manufacturing facility for fruquintinib in Suzhou, Jiangsu province. We believe that fruquintinib has the potential to become the global best-in-class small molecule VEGFR inhibitor and address major unmet medical needs in China and beyond. Sulfatinib: Sulfatinib (HMPL-012) is a novel small molecule that selectively inhibits the tyrosine kinase activity associated with VEGFR and FGFR. Pre-clinical data shows that sulfatinib has demonstrated a narrow kinase inhibition profi le affecting mainly VEGFR and FGFR and consequently has an attractive anti-tumour profi le, and is a potent suppressor of angiogenesis. Indication 2 – Third-line NSCLC. The incidence a Phase Ib dose fi nding study of an already proven of NSCLC cancer in China is approximately 0.8 effi cacious dose level of fruquintinib in combination HMP started Phase I study on sulfatinib in 2010 and million patients per year and, as with colorectal with paclitaxel, we have completed one cohort identifi ed issues in the pharmacokinetic properties of cancer in the third-line setting, represents a patient successfully and continue dose escalation. We hope the drug, primarily high variability in drug absorption population with few if any remaining treatment to finalise the combination dose regime during both inter-patient and intra-patient. In 2012, HMP options. In May 2014, we began enrolment in a the first half of 2015 and start a Phase II study of made formulation adjustments to sulfatinib to Phase II double blind placebo controlled study of fruquintinib in second-line gastric cancer in China improve absorption and reduce variability and fruquintinib versus placebo, randomised using a 2:1 during the second half of 2015. ratio, among 90 third-line NSCLC patients. NSCLC has restarted dose escalation in the Phase I study in early 2013. The Phase I results on the new sulfatinib proven challenging for VEGFR inhibitors, other than Under the terms of the license and collaboration formulation have been highly encouraging and were bevacizumab, throughout the past decade; however, agreement for fruquintinib with Lilly, HMP is published in May 2014 at the ASCO annual meeting. recent successes with ramcirumab (Lilly) and responsible for the manufacture of fruquintinib Sulfatinib was proven safe and well tolerated with an lenvantinib (Eisai) in clinical studies outside China, in China. Furthermore, it is a requirement in China improved pharmacokinetic profi le, including higher combined with the four out of six NSCLC patients that that Phase III registration studies use drug product drug exposure and lower variability, than the initial achieved partial response in the fruquintinib Phase manufactured in the facility that will support first formulation. Ia study, give us confi dence that the high selectivity, potency and target coverage of fruquintinib may be sufficient to provide clinical benefit in this difficult patient population. We expect to complete enrolment in the Phase II study imminently and report results during 2015. Indication 3 – Second-line gastric cancer. The incidence of gastric cancer in China is approximately 0.5 million patients per year and the potential approval in the second-line setting, in combination with paclitaxel, will represent the largest market opportunity for fruquintinib among the three current indications. For perspective, in gastric cancer the second-line patient population would be approximately five-fold larger than the third-line patient population. In November 2014, we began 18 HUTCHISON CHINA MEDITECH LIMITED 2014 Annual Report Drug Research & Development Sulfatinib: unprecedented efficacy in NET patients sunitinib/ Placebo everolimus/ Placebo octreotide/ Placebo sulfatinib lanreotide/ Placebo Gastrointestinal (Antigen Ki67<10%) NET Approval Mid-gut Pancreatic Pancreatic median PFS (months) 15.6 / 5.9 11.0 / 4.6 11.4 / 5.5 NR / 18.0 Hazard Ratio p-value Objective Response Rate Disease Control Rate 0.33 0.000017 2% / 2% 0.35 <0.001 5% / 2% 0.42 <0.001 9% / 0% 67% / 37% 73% / 51% 63% / 60% 0.47 <0.001 NR NR All NET efficacy No Progression yet in 17 evaluable patients (median time on drug 7.5 mo.) 32% 100% Outstanding clinical efficacy has been seen with than 5% subset of total NET, and have ORR of <10% Sulfatinib, in contrast, recorded a 32% ORR, meaning sulfatinib in patients with NET. NET is a rare cancer and DCR approximately 70%. Octreotide (Novartis), it reduced tumour size by more than 30% in 7 out of of the hormone system, normally slow growth, a chemotherapy agent for all NET patients, has ORR the 22 NET patients treated, and 100% DCR meaning affecting the gastrointestinal tract, pancreas, lung and of 6% and DCR around 35-45%. Lanreotide (Ipsen), a the balance 10 out of 17 evaluable patients saw no several other organs. There are 12,000-15,000 new somatastatin analogue, was approved in December increase in tumour size. NET patients annually in the US and high prevalence 2014 by the US FDA for patients in a narrow subset of about 110,000. of early-stage gastrointestinal NET (Ki67 <10%) and In late 2014, we began enroling patients in a Phase pancreatic NET. While showing important progression Ib study of NET patients in China at the Phase II dose The early preliminary clinical efficacy of sulfatinib free survival and overall survival benefi t, lanreotide, of 300mg once daily, we intend to enrol a total of compares very favourably to existing drugs approved similar to all other approved NET treatments, showed approximately 30 further NET patients, of all types in the NET arena. Sunitinib and everolimus (Novartis) very low or possibly 0% ORR meaning that while (lung, gastrointestinal and pancreatic), and complete are both approved only in pancreatic NET, a less tumours were stabilised, they did not shrink. the study in 2016. In parallel, in January 2015 HMP (cid:81)(cid:115)(cid:106)(cid:100)(cid:95)(cid:114)(cid:103)(cid:108)(cid:103)(cid:96)(cid:56)(cid:30)(cid:47)(cid:46)(cid:46)(cid:35)(cid:30)(cid:66)(cid:103)(cid:113)(cid:99)(cid:95)(cid:113)(cid:99)(cid:30)(cid:65)(cid:109)(cid:108)(cid:114)(cid:112)(cid:109)(cid:106)(cid:30)(cid:80)(cid:95)(cid:114)(cid:99) (cid:64)(cid:99)(cid:113)(cid:114)(cid:30)(cid:114)(cid:115)(cid:107)(cid:109)(cid:115)(cid:112)(cid:30)(cid:112)(cid:99)(cid:113)(cid:110)(cid:109)(cid:108)(cid:113)(cid:99)(cid:30)(cid:103)(cid:108)(cid:30)(cid:47)(cid:53)(cid:30)(cid:99)(cid:116)(cid:95)(cid:106)(cid:115)(cid:95)(cid:96)(cid:106)(cid:99)(cid:30)(cid:76)(cid:67)(cid:82)(cid:30)(cid:110)(cid:95)(cid:114)(cid:103)(cid:99)(cid:108)(cid:114)(cid:113) (cid:82)(cid:112)(cid:99)(cid:95)(cid:114)(cid:107)(cid:99)(cid:108)(cid:114)(cid:30)(cid:109)(cid:108)(cid:101)(cid:109)(cid:103)(cid:108)(cid:101) (cid:66)(cid:103)(cid:113)(cid:97)(cid:109)(cid:108)(cid:114)(cid:103)(cid:108)(cid:115)(cid:99)(cid:98)(cid:30)(cid:114)(cid:112)(cid:99)(cid:95)(cid:114)(cid:107)(cid:99)(cid:108)(cid:114) (cid:43)(cid:50)(cid:35) (cid:43)(cid:52)(cid:35) (cid:43)(cid:54)(cid:35) (cid:43)(cid:47)(cid:52)(cid:35) (cid:43)(cid:47)(cid:53)(cid:35) (cid:43)(cid:47)(cid:54)(cid:35) (cid:43)(cid:48)(cid:46)(cid:35) (cid:43)(cid:48)(cid:46)(cid:35) (cid:43)(cid:48)(cid:49)(cid:35) (cid:43)(cid:48)(cid:55)(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) submitted a Phase II/III clinical trial application to the China FDA which we hope will be cleared during 2015 thereby allowing us, subject to continued strong efficacy and safety data from the Phase Ib study, to progress sulfatinib into final registration studies in NET in China. Furthermore, recently HMP submitted an IND application to the US FDA on sulfatinib and it is our intention to commence development in NET patients in the US early in 2015. We will start immediately with a short Phase Ib study to confirm pharmacokinetic profile among non- Asian patients, followed by a Phase II study in all NET (cid:43)(cid:50)(cid:47)(cid:35) (cid:43)(cid:50)(cid:48)(cid:35) patients in mid-2015. (cid:43)(cid:51)(cid:54)(cid:35) (cid:43)(cid:53)(cid:49)(cid:35) (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:99) (cid:101) (cid:108) (cid:95) (cid:102) (cid:65) (cid:30) (cid:35) (cid:48)(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) (cid:43)(cid:52)(cid:46)(cid:35) (cid:43)(cid:53)(cid:46)(cid:35) (cid:43)(cid:54)(cid:46)(cid:35) Operations Review - Drug Research & Development 1919 We believe that sulfatinib has the potential to revolutionise the treatment of NET and continued high levels of ORR/DCR among NET patients could also raise the possibility of considering application for US FDA Breakthrough Therapy designation. EGFR Inhibitors: EGFR is a receptor tyrosine kinase for Epidermal Growth Factor. Activation of EGFR can lead to a series of downstream signalling activities In EGFR+ (gene amplification of wild-type EGFR) patients, there are no targeted therapies approved despite high levels of EGFR+ occurring in many of the above EGFR O/E tumour types. At HMP we set out over 10 years ago to create targeted therapies in the EGFR arena that would go beyond the already approved EGFRm+ NSCLC patient population to address certain areas of unmet that activate tumour cell proliferation, migration, Unlike c-Met, where targeted therapies are yet to be medical needs that represent significant market invasion, and the suppression of cell death. Tumour approved in the c-Met O/E patient population, there opportunities, including: (1) brain metastasis and/ cell division can happen uncontrollably when the is a successful example of clinical efficacy among or primary brain tumours with EGFRm+ (activating pathway is abnormally activated through EGFRm+ EGFR O/E patients, in tumour types such as colorectal mutations); and (2) tumours with wild-type EGFR (EGFR activating mutations), gene amplification or cancer and head and neck cancer which have 53% activation through gene amplification (EGFR+) or protein over expression. EGFR small molecule TKIs, and 66% to 90% EGFR O/E respectively. The most over-expression (EGFR O/E). HMP has two EGFR such as gefi tinib and erlotinib, bind to the intracellular successful targeted therapy in this EGFR O/E patient inhibitors which potentially could address these kinase domain and inhibit the activation of the kinase population is the monoclonal antibody cetuximab areas, epitinib, which entered Phase I trials in late leading to the blockade of pathway signalling. (indicated for head and neck cancer and colorectal 2011, and theliatinib, which entered Phase I trials in In a similar fashion as described above for abnormal 2014 sales of approximately $1.8 billion. Importantly cancer) (Bristol-Myers Squibb and Merck Serono) with late 2012. c-Met function, EGFR behaves abnormally in three main ways: gene amplification of wild-type EGFR (“EGFR+”); over expression of wild-type EGFR (“EGFR O/E”); and EGFRm+. EGFRm+ has been identified in 10-30% of NSCLC patients. EGFR TKIs have demonstrated significant clinical effi cacy against EGFRm+. Since 2003, several EGFR TKIs have been approved globally and in China and are used for the treatment of NSCLC patients with EGFRm+ including gefi tinib and erlotinib with 2014 sales of approximately $0.6 billion and $1.4 billion respectively. Outside of NSCLC, EGFRm+ occurs rarely other than in glioblastoma, primary brain tumours, in which 27% to 54% of patients have EGFRm+. Unfortunately, current EGFRm+ targeted therapies such as gefi tinib and erlotinib are unable to penetrate the blood brain barrier in sufficient concentrations to provide clinical benefi t to glioblastoma patients. Therefore, there are no effective targeted therapies however, there remain many tumour types with Epitinib: Epitinib (HMPL-813) is a highly potent for EGFRm+ NSCLC with brain metastasis or EGFRm+ high levels of EGFR O/E in which targeted therapies EGFR inhibitor. Pre-clinical studies and orthotopic glioblastoma. have not yet been approved such as NSCLC (62%), brain tumour models have shown that epitinib oesophageal (30-90%), gastric (44-52%), pancreatic demonstrated excellent brain penetration and (20-48%), glioblastoma (54-66%), ovarian (9-62%) effi cacy, superior to that of current globally marketed and breast (basal) (68%) cancer. However, no small EGFRm+ inhibitors such as gefitinib and erlotinib. molecule EGFR TKIs have been approved for EGFR O/E The first-in-human Phase I clinical trial started in cancers. late 2011 and epitinib has been well tolerated and 20 HUTCHISON CHINA MEDITECH LIMITED 2014 Annual Report Drug Research & Development demonstrated the anti-tumour activity expected from EGFRm+ inhibitors, i.e. partial response among patients EGFRm+ NSCLC patients. We have now completed dose escalation and have established 160mg once daily as the recommended Phase II dose (“RPTD”) which is well tolerated with a relatively low incidence of expected adverse events. No dose limiting toxicity was seen in any dose level. HMP has now commenced screening on a Phase Ib study, towards establishing activity in NSCLC patients with tumours metastasised to the brain carrying EGFRm+. In China, 10% of lung cancer patients have brain metastasis at initial diagnosis and 80% after two further years. If epitinib is able to provide clinical benefit to NSCLC patients with brain metastasis in the Phase Ib study, we will address a major unmet medical need. Results of the Phase Ib study will be expected late in 2015. (cid:64)(cid:43)(cid:97)(cid:99)(cid:106)(cid:106)(cid:30)(cid:113)(cid:103)(cid:101)(cid:108)(cid:95)(cid:106)(cid:106)(cid:103)(cid:108)(cid:101)(cid:30)(cid:110)(cid:95)(cid:114)(cid:102)(cid:117)(cid:95)(cid:119)(cid:30)(cid:192)(cid:30)(cid:107)(cid:95)(cid:104)(cid:109)(cid:112)(cid:30)(cid:110)(cid:109)(cid:114)(cid:99)(cid:108)(cid:114)(cid:103)(cid:95)(cid:106) (cid:63)(cid:108)(cid:114)(cid:103)(cid:101)(cid:99)(cid:108) (cid:64)(cid:65)(cid:80) (cid:65)(cid:66)(cid:53)(cid:55) (cid:63) (cid:64) (cid:78) (cid:78) (cid:74)(cid:87)(cid:76) (cid:81) (cid:87) (cid:73) (cid:78) (cid:78) (cid:81) (cid:87) (cid:73) (cid:78) (cid:74)(cid:87)(cid:76) (cid:78) T (cid:99)(cid:118)(cid:114)(cid:112)(cid:95)(cid:97)(cid:99)(cid:106)(cid:106)(cid:115)(cid:106)(cid:95)(cid:112) (cid:103)(cid:108)(cid:114)(cid:112)(cid:95)(cid:97)(cid:99)(cid:106)(cid:106)(cid:115)(cid:106)(cid:95)(cid:112) (cid:63)(cid:73)(cid:82) (cid:78) (cid:107)(cid:82)(cid:77)(cid:80) (cid:78)(cid:71)(cid:78)(cid:48) (cid:78)(cid:71)(cid:78)(cid:49) (cid:78)(cid:47)(cid:49)(cid:73)(cid:68) (cid:78) (cid:64)(cid:82)(cid:73) (cid:78) T T (cid:78) (cid:78)(cid:74)(cid:65)(cid:71)(cid:48) (cid:69)(cid:81)(cid:43)(cid:55)(cid:55)(cid:53)(cid:49) (cid:69)(cid:81)(cid:43)(cid:47)(cid:47)(cid:46)(cid:47) (cid:103)(cid:96)(cid:112)(cid:115)(cid:114)(cid:103)(cid:108)(cid:103)(cid:96) (cid:78)(cid:73)(cid:65)(cid:66) (cid:70)(cid:75)(cid:78)(cid:74)(cid:43)(cid:51)(cid:48)(cid:49) (cid:70)(cid:75)(cid:78)(cid:74)(cid:43)(cid:52)(cid:54)(cid:55) (cid:70)(cid:75)(cid:78)(cid:74)(cid:43)(cid:46)(cid:53)(cid:55) (cid:71)(cid:73)(cid:73) (cid:76)(cid:68)(cid:43)(cid:75)(cid:64) (cid:78)(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:97)(cid:119)(cid:114)(cid:109)(cid:105)(cid:103)(cid:108)(cid:99)(cid:113) dose and no drug accumulation. We intend to pharmaceutical companies have been working on Theliatinib: Theliatinib (HMPL-309) is a novel small continue to escalate to 120mg per day dose and once oral small-molecule Syk inhibitors for many years, molecule EGFR inhibitor with the highest binding we reach RPTD we will initiate Phase Ib studies on the because of the major unmet medical need and affi nity to the wild-type EGFR protein as compared main tumour types with high prevalence of wild-type potential in diseases such as rheumatoid arthritis to existing EGFR targeted therapies. Gefitinib and EGFR+ and EGFR O/E such as oesophageal, head and (a market expected to reach $38.5 billion in 2017), erlotinib reach insufficient drug concentrations neck, and NSCLC. to suppress wild-type EGFR effectively whereas but without breakthrough clinical success. Oral small molecule therapies are attractive because they are theliatinib has shown in Phase I to be able to Immunology Portfolio: HMP has two clinical stage more convenient to use than intravenous monoclonal achieve drug concentrations at the 60mg per day drug candidates in the fi eld of immunology: HMPL- antibody immune-modulators like infliximab dose that are effective at inhibiting wild-type EGFR 523, a small molecule Syk inhibitor being developed (Janssen) and adalimumab (AbbVie). Furthermore, almost completely for 24 hours a day. Furthermore, in autoimmune diseases such as rheumatoid arthritis oral small molecules are generally cleared more monoclonal antibodies, such as cetuximab, which and lupus, in addition to its potential applications quickly from the body as compared to the weeks while approved for certain EGFR O/E tumour types in B-cell malignancies in oncology; and HMPL-004 or months for antibodies, so as a consequence, it is are less effective for EGFR+ (gene amplifi ed) patients. a botanical drug being developed in inflammatory easier to manage serious side effects by stopping the Small molecule targeted therapies such as theliatinib, bowel disease (“IBD”). medication. which work in the intra-cellular domain, are more likely to provide clinical benefi t EGFR+ tumour types. HMPL-523: HMPL-523 is a novel, highly selective Most recently, in 2013 fostamatinib (AstraZeneca/ and potent small molecule inhibitor targeting the Rigel), an oral small molecule pro-drug of the Syk Dose escalation in the Phase I study has now gone spleen tyrosine kinase, or Syk, a key component inhibitor R406, failed to meet its primary endpoints further and completed a 90mg per day cohort which in B-cell receptor signalling. As one of the major in a global Phase III study in rheumatoid arthritis. was found to be safe and well tolerated with no dose cellular components of the immune system, Most companies with experience in the fi eld attribute limiting toxicity and also with good pharmacokinetic B-cells play pivotal roles in autoimmune diseases clinical failure of Syk compounds to-date to safety properties of linear drug exposure with increased as well as B-cell malignancies in oncology. Global concerns. While it is well accepted, from both preclinical and clinical data, that effective inhibition Operations Review - Drug Research & Development 2121 HMPL-523: First-in-class Syk inhibitor in immunology Compound/ Company invitroActivity IC50 (nM)* Selectivity invivoActivity Min Efficacious Dose Phase of Development R788, R406 Rigel/AZ • Enzyme: 54 nM • Cell: 54 nM Syk, FLT-3, KDR, Src, Lyn, JAK • rCIA: 10 mg/kg BID • mSLE: 10 mg/kg BID • CLL: 80 mg/kg/day Phase III for RA complete: 100 mg BID; & 150 mg QD Phase II: ITP GS-9973 Gilead • Enzyme: 55 nM* Selective for Syk Phase I: oncology (NHL, CLL) HMPL-523 HMP • Enzyme: 25 nM • Cell: 51 nM • HWB: 250 nM Selective for Syk rCIA (QD) • EDmin = 0.7-1 mg/kg • ED50 = 1.4-2 mg/kg Phase I Immunology, oncology of Syk will lead to the desired temporary down- HMP has worked in discovery for over fi ve years on be suppressed effectively with reduced off-target regulation of the immune system and ameliorate HMPL-523 and we believe that it is likely the most toxicity. In June 2014, HMP began a Phase I clinical inflammation, it has never been achieved by a selective Syk inhibitor currently in development trial in Australia to study dose escalation, safety, compound with an acceptable safety profi le. This is with a good chance of being fi rst-in-class globally. tolerability and pharmacokinetics for single and made particularly challenging in rheumatoid arthritis, Selectivity is critical in this case as, unlike failed multiple doses of HMPL-523 in healthy volunteers. which is a chronic disease requiring treatment over Syk inhibitors in the past, there is no material off- This Phase I study has completed nine single dose long periods of time in otherwise healthy individuals, target kinase inhibition with HMPL-523 expected escalation cohorts, passing through the predicted so safety thresholds are extremely high. at the efficacious dose levels. This means Syk can efficacious dose level in humans (6 milligrams per (cid:48)(cid:50) (cid:48)(cid:50) (cid:47)(cid:55) (cid:47)(cid:55) (cid:47)(cid:50) (cid:47)(cid:50) (cid:55) (cid:55) (cid:50) (cid:50) (cid:43)(cid:47) (cid:43)(cid:47) (cid:70)(cid:75)(cid:78)(cid:74)(cid:43)(cid:51)(cid:48)(cid:49)(cid:30)(cid:192)(cid:30)(cid:102)(cid:103)(cid:101)(cid:102)(cid:106)(cid:119)(cid:30)(cid:110)(cid:109)(cid:114)(cid:99)(cid:108)(cid:114) Cohort 8 (single dose) successful at ~6MPK i.e. now past predicted efficacious human dose kilogram of body weight), with no toxicity observed. We will continue to explore higher single doses and multiple doses of HMPL-523 and will likely complete Phase I by mid-2015. (cid:110)(cid:70)(cid:48)(cid:44)(cid:47) (cid:70)(cid:65)(cid:71) (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:42) (cid:64)(cid:71)(cid:66)(cid:42)(cid:30)(cid:78)(cid:77) (cid:47)(cid:46) (cid:75)(cid:78)(cid:73)(cid:42) (cid:79)(cid:77)(cid:66)(cid:30)(cid:71)(cid:78) (cid:44)(cid:44) (cid:76)(cid:95)(cid:103)(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: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:91) (cid:47) (cid:89) (cid:30) (cid:106) (cid:113) (cid:99) (cid:112) (cid:109) (cid:97) (cid:113) (cid:30) (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:114) (cid:95) (cid:80) (cid:30) (cid:100) (cid:109) (cid:107) (cid:115) (cid:81) (cid:30) (cid:30) [1] Aggregate of scores for Bone resorption; Structure (cartilage damage); Cartilage cells Inflammatory cell infiltration in periarticular tissue; and Synovial inflammation & hyperplasia; 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; Enbrel (Amgen/Pfizer) monoclonal antibody anti- TNF for Rheumatoid Arthritis (“RA”) – 2013 RA global sales $4.6 billion. 22 HUTCHISON CHINA MEDITECH LIMITED 2014 Annual Report Drug Research & Development (cid:70)(cid:75)(cid:78)(cid:74)(cid:43)(cid:46)(cid:46)(cid:50) (cid:81)(cid:114)(cid:112)(cid:109)(cid:108)(cid:101)(cid:30)(cid:78)(cid:102)(cid:95)(cid:113)(cid:99)(cid:30)(cid:71)(cid:71)(cid:96)(cid:30)(cid:98)(cid:95)(cid:114)(cid:95)(cid:30)(cid:103)(cid:108)(cid:30)(cid:83)(cid:65)(cid:30) (cid:38)(cid:97)(cid:109)(cid:43)(cid:114)(cid:112)(cid:99)(cid:95)(cid:114)(cid:30)(cid:117)(cid:45)(cid:51)(cid:43)(cid:63)(cid:81)(cid:63)(cid:39)(cid:89)(cid:47)(cid:91)(cid:89)(cid:48)(cid:91) (cid:80)(cid:99)(cid:107)(cid:103)(cid:113)(cid:113)(cid:103)(cid:109)(cid:108) (cid:80)(cid:99)(cid:113)(cid:110)(cid:109)(cid:108)(cid:113)(cid:99) (cid:110)(cid:43)(cid:116)(cid:95)(cid:106)(cid:115)(cid:99)(cid:59) (cid:46)(cid:44)(cid:46)(cid:46)(cid:46)(cid:49) (cid:53)(cid:47)(cid:44)(cid:46)(cid:35) (cid:49)(cid:48)(cid:44)(cid:46)(cid:35) (cid:49)(cid:51)(cid:44)(cid:46)(cid:35) (cid:47)(cid:54)(cid:44)(cid:46)(cid:35) (cid:47)(cid:53)(cid:44)(cid:46)(cid:35) (cid:110)(cid:43)(cid:116)(cid:95)(cid:106)(cid:115)(cid:99)(cid:59) (cid:46)(cid:44)(cid:46)(cid:47)(cid:49) (cid:49)(cid:55)(cid:44)(cid:46)(cid:35) (cid:48)(cid:44)(cid:49)(cid:86) (cid:78)(cid:106)(cid:95)(cid:97)(cid:99)(cid:96)(cid:109) (cid:96)(cid:115)(cid:114)(cid:30)(cid:113)(cid:115)(cid:112)(cid:110)(cid:112)(cid:103)(cid:113)(cid:99)(cid:98)(cid:30)(cid:96)(cid:119)(cid:30)(cid:109)(cid:116)(cid:99)(cid:112)(cid:95)(cid:106)(cid:106)(cid:30) (cid:76)(cid:63)(cid:82)(cid:80)(cid:83)(cid:74)(cid:43)(cid:49)(cid:30)(cid:71)(cid:63)(cid:89)(cid:49)(cid:91)(cid:30)(cid:112)(cid:99)(cid:113)(cid:115)(cid:106)(cid:114) (cid:80)(cid:99)(cid:107)(cid:103)(cid:113)(cid:113)(cid:103)(cid:109)(cid:108) (cid:80)(cid:99)(cid:113)(cid:110)(cid:109)(cid:108)(cid:113)(cid:99) (cid:49)(cid:48)(cid:44)(cid:53)(cid:35) (cid:47)(cid:51)(cid:44)(cid:50)(cid:35) (cid:47)(cid:53)(cid:44)(cid:49)(cid:35) (cid:110)(cid:43)(cid:116)(cid:95)(cid:106)(cid:115)(cid:99)(cid:59) (cid:46)(cid:44)(cid:51)(cid:52)(cid:46)(cid:50) (cid:110)(cid:43)(cid:116)(cid:95)(cid:106)(cid:115)(cid:99)(cid:59) (cid:46)(cid:44)(cid:53)(cid:49)(cid:52)(cid:50) (cid:50)(cid:46)(cid:44)(cid:51)(cid:35) (cid:48)(cid:50)(cid:44)(cid:52)(cid:35) (cid:47)(cid:51)(cid:44)(cid:54)(cid:35) (cid:51)(cid:46)(cid:35) (cid:50)(cid:46)(cid:35) (cid:49)(cid:46)(cid:35) (cid:48)(cid:46)(cid:35) (cid:47)(cid:46)(cid:35) (cid:46)(cid:35) (cid:78)(cid:106)(cid:95)(cid:97)(cid:99)(cid:96)(cid:109)(cid:30)(cid:41)(cid:30)(cid:51)(cid:43)(cid:63)(cid:81)(cid:63)(cid:30)(cid:38)(cid:76)(cid:59)(cid:51)(cid:48)(cid:39) (cid:47)(cid:42)(cid:54)(cid:46)(cid:46)(cid:107)(cid:101)(cid:45)(cid:98)(cid:95)(cid:119)(cid:30)(cid:41)(cid:30)(cid:51)(cid:43)(cid:63)(cid:81)(cid:63)(cid:30)(cid:38)(cid:76)(cid:59)(cid:51)(cid:47)(cid:39) (cid:78)(cid:106)(cid:95)(cid:97)(cid:99)(cid:96)(cid:109)(cid:30)(cid:41)(cid:30)(cid:51)(cid:43)(cid:63)(cid:81)(cid:63)(cid:30)(cid:38)(cid:76)(cid:59)(cid:51)(cid:48)(cid:39) (cid:48)(cid:42)(cid:50)(cid:46)(cid:46)(cid:107)(cid:101)(cid:45)(cid:98)(cid:95)(cid:119)(cid:30)(cid:41)(cid:30)(cid:51)(cid:43)(cid:63)(cid:81)(cid:63)(cid:30)(cid:38)(cid:76)(cid:59)(cid:51)(cid:53)(cid:39) (cid:54)(cid:46)(cid:35) (cid:53)(cid:46)(cid:35) (cid:52)(cid:46)(cid:35) (cid:51)(cid:46)(cid:35) (cid:50)(cid:46)(cid:35) (cid:49)(cid:46)(cid:35) (cid:48)(cid:46)(cid:35) (cid:47)(cid:46)(cid:35) (cid:46)(cid:35) [1] UC = Ulcerative colitis; [2] 1,800mg/day HMPL-004 plus Mesalamine (5-ASA) versus Mesalamine (5-ASA) alone (Placebo-arm); [3] IA = Phase III Interim Analysis conducted at ~1/3rd patient enrolment. HMPL-004: This is a proprietary botanical drug causing digestive tract inflammation. HMPL-004’s of effi cacy and safety on approximately one-third of for the treatment of IBD, namely ulcerative colitis effi cacy, when combined with 5-ASAs, in induction the 420 planned patients in NATRUL-3. The result of and Crohn’s disease. Subject to the terms of the of clinical response, remission and mucosal healing the interim analysis was that while no safety issues NSP JV agreement, and as part of the broader as well as a favourable safety profile has been or concerns were observed, HMPL-004 showed gastrointestinal disease research and development established in multiple clinical trials including a no overall material effect over the placebo-arm collaboration, HMPL-004 has been in global Phase III successful global Phase IIb study in mild-to-moderate patients and consequently the NATRUL-3 study was registration trials during 2014. ulcerative colitis patients. In the aggregate, the data terminated and the data un-blinded. has demonstrated HMPL-004’s high potential to Unmet needs in IBD: With annual drug sales of address certain unmet medical needs in IBD. Subsequent post-hoc analysis of the un-blinded approximately $8 billion across the seven major markets (US, Japan, France, Germany, Italy, Spain and the United Kingdom) 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) refractory, non-responding or intolerant patients, and the need for safer agents without the side effects of corticosteroids and immune suppressants. NATRUL-3 data showed clear inconsistency with the Phase IIb study in efficacy among patients who had been on 5-ASAs for less than one year prior to NATRUL-3 (49% of the patients). In these patients we observed a high remission rate among the placebo-arm patients and a very low remission rate among HMPL-004 2,400mg-arm patients. After further analysis of the un-blinded NATRUL-3 data we hypothesise the following: On the placebo- arm patients on 5-ASAs for less than one year: The Pre-clinical and Clinical Performance of HMPL-004: Phase III registration trial in mild-to-moderate 5-ASAs, was likely due to a delayed/slow response Extensive preclinical studies indicate that HMPL- ulcerative colitis patients on HMPL-004, in to prolonged 5-ASA treatment and improved 004 exhibits its anti-inflammatory effects through combination treatment with 5-ASAs, and conducted compliance during the course of NATRUL-3’s 8-week In April 2013, NSP initiated the NATRUL-3 global high remission rate, given the short-term usage of the inhibition of multiple cytokines (proteins), both an interim analysis in mid-August 2014. The interim induction period. systemically and locally, which are involved in analysis was intended to assess both futility, in terms Operations Review - Drug Research & Development 2323 (cid:96)(cid:115)(cid:114)(cid:30)(cid:70)(cid:75)(cid:78)(cid:74)(cid:43)(cid:46)(cid:46)(cid:50)(cid:30)(cid:117)(cid:109)(cid:112)(cid:105)(cid:113)(cid:30)(cid:117)(cid:99)(cid:106)(cid:106)(cid:30)(cid:103)(cid:108)(cid:30) (cid:51)(cid:43)(cid:63)(cid:81)(cid:63)(cid:30)(cid:100)(cid:95)(cid:103)(cid:106)(cid:115)(cid:112)(cid:99)(cid:30)(cid:110)(cid:95)(cid:114)(cid:103)(cid:99)(cid:108)(cid:114)(cid:113) (cid:80)(cid:99)(cid:107)(cid:103)(cid:113)(cid:113)(cid:103)(cid:109)(cid:108) (cid:80)(cid:99)(cid:113)(cid:110)(cid:109)(cid:108)(cid:113)(cid:99) (cid:110)(cid:43)(cid:116)(cid:95)(cid:106)(cid:115)(cid:99)(cid:59) (cid:46)(cid:44)(cid:46)(cid:48)(cid:54)(cid:52) (cid:48)(cid:51)(cid:44)(cid:46)(cid:35) (cid:47)(cid:50)(cid:44)(cid:49)(cid:35) (cid:47)(cid:46)(cid:44)(cid:53)(cid:35) (cid:110)(cid:43)(cid:116)(cid:95)(cid:106)(cid:115)(cid:99)(cid:59) (cid:46)(cid:44)(cid:46)(cid:55)(cid:48)(cid:52) (cid:51)(cid:49)(cid:44)(cid:52)(cid:35) (cid:48)(cid:51)(cid:44)(cid:46)(cid:35) (cid:48)(cid:54)(cid:44)(cid:52)(cid:35) (cid:48)(cid:44)(cid:53)(cid:86) (cid:78)(cid:106)(cid:95)(cid:97)(cid:99)(cid:96)(cid:109) (cid:78)(cid:106)(cid:95)(cid:97)(cid:99)(cid:96)(cid:109)(cid:30)(cid:41)(cid:30)(cid:51)(cid:43)(cid:63)(cid:81)(cid:63)(cid:30)(cid:60)(cid:30)(cid:47)(cid:119)(cid:112)(cid:44)(cid:30)(cid:38)(cid:76)(cid:59)(cid:48)(cid:54)(cid:39) (cid:48)(cid:42)(cid:50)(cid:46)(cid:46)(cid:107)(cid:101)(cid:45)(cid:98)(cid:95)(cid:119)(cid:30)(cid:41)(cid:30)(cid:51)(cid:43)(cid:63)(cid:81)(cid:63)(cid:30)(cid:60)(cid:30)(cid:47)(cid:119)(cid:112)(cid:44)(cid:30)(cid:38)(cid:76)(cid:59)(cid:48)(cid:54)(cid:39) (cid:52)(cid:46)(cid:35) (cid:51)(cid:46)(cid:35) (cid:50)(cid:46)(cid:35) (cid:49)(cid:46)(cid:35) (cid:48)(cid:46)(cid:35) (cid:47)(cid:46)(cid:35) (cid:46)(cid:35) (cid:52)(cid:46)(cid:35) (cid:51)(cid:46)(cid:35) (cid:50)(cid:46)(cid:35) (cid:49)(cid:46)(cid:35) (cid:48)(cid:46)(cid:35) (cid:47)(cid:46)(cid:35) (cid:46)(cid:35) (cid:110)(cid:95)(cid:112)(cid:114)(cid:103)(cid:97)(cid:115)(cid:106)(cid:95)(cid:112)(cid:106)(cid:119)(cid:30)(cid:103)(cid:100)(cid:30)(cid:98)(cid:103)(cid:100)(cid:100)(cid:103)(cid:97)(cid:115)(cid:106)(cid:114)(cid:30)(cid:114)(cid:109)(cid:30) (cid:114)(cid:112)(cid:99)(cid:95)(cid:114)(cid:30)(cid:110)(cid:95)(cid:114)(cid:103)(cid:99)(cid:108)(cid:114)(cid:113)(cid:30)(cid:113)(cid:114)(cid:112)(cid:95)(cid:114)(cid:103)(cid:100)(cid:103)(cid:99)(cid:98) (cid:80)(cid:99)(cid:107)(cid:103)(cid:113)(cid:113)(cid:103)(cid:109)(cid:108) (cid:80)(cid:99)(cid:113)(cid:110)(cid:109)(cid:108)(cid:113)(cid:99) (cid:110)(cid:43)(cid:116)(cid:95)(cid:106)(cid:115)(cid:99)(cid:59) (cid:46)(cid:44)(cid:46)(cid:48)(cid:51)(cid:55) (cid:48)(cid:48)(cid:44)(cid:48)(cid:35) (cid:47)(cid:47)(cid:44)(cid:47)(cid:35) (cid:47)(cid:47)(cid:44)(cid:47)(cid:35) (cid:110)(cid:43)(cid:116)(cid:95)(cid:106)(cid:115)(cid:99)(cid:59) (cid:46)(cid:44)(cid:46)(cid:52)(cid:51)(cid:50) (cid:51)(cid:48)(cid:44)(cid:46)(cid:35) (cid:48)(cid:46)(cid:44)(cid:46)(cid:35) (cid:49)(cid:48)(cid:44)(cid:46)(cid:35) (cid:48)(cid:44)(cid:55)(cid:86) (cid:78)(cid:106)(cid:95)(cid:97)(cid:99)(cid:96)(cid:109) (cid:78)(cid:106)(cid:95)(cid:97)(cid:99)(cid:96)(cid:109)(cid:30)(cid:41)(cid:30)(cid:51)(cid:43)(cid:63)(cid:81)(cid:63)(cid:30)(cid:60)(cid:30)(cid:47)(cid:119)(cid:112)(cid:44)(cid:30)(cid:38)(cid:76)(cid:59)(cid:48)(cid:53)(cid:39) (cid:48)(cid:42)(cid:50)(cid:46)(cid:46)(cid:107)(cid:101)(cid:45)(cid:98)(cid:95)(cid:119)(cid:30)(cid:41)(cid:30)(cid:51)(cid:43)(cid:63)(cid:81)(cid:63)(cid:30)(cid:60)(cid:30)(cid:47)(cid:119)(cid:112)(cid:44)(cid:30)(cid:38)(cid:76)(cid:59)(cid:48)(cid:51)(cid:39) On the HMPL-004 2,400mg-arm patients on 5-ASAs a function of timing of the planned interim analysis HMP and our partner in NSP, Nestlé Health Science, for less than one year, it was observed that there was which took place after only one-third of subjects had continue to review and discuss both the above an abnormally high incidence of “difficult to treat” completed the induction phase of the study. hypotheses as well as conduct further technical patients. Analysis of both Phase IIb and NATRUL-3 analysis in the area of formulation and biomarkers as data across all treatment arms showed that patients In the post-hoc analysis of the NATRUL-3 sub- we work towards agreeing next steps for HMPL-004 never reached clinical remission for ulcerative colitis group of 2,400mg-arm patients on 5-ASAs for more during 2015. during the 8-week treatment period, if such patients than one year, a sub-group that can be described at the date of enrolment actively suffered from as 5-ASA refractory/failure patients, we observed Discovery programmes: Our fully integrated certain concurrent medical conditions. positive outcome. NATRUL-3 effi cacy results for the discovery teams in oncology and immunology 2,400mg-arm patients in this sub-group were in- made substantial progress in 2014. We staff and Unfortunately, the 2,400mg-arm patients on 5-ASAs line with the Phase IIb and clinical remission rates, resource our discovery team with the objective of for less than one year were heavily skewed towards the primary endpoint for NATRUL-3, showed a clear producing one or two new internally discovered drug those “diffi cult to treat” patients with 31% of 2,400mg- trend to efficacy as compared to the placebo-arm. candidates per year. Aside from the current discovery arm patients on 5-ASAs for less than one year being Furthermore, when “diffi cult to treat” patients were projects listed below, all of which are less than “diffi cult to treat” patients as compared to only 13% of excluded, the trend to effi cacy was even stronger for 12 months from Phase I, HMP has active research placebo-arm patients on 5-ASAs for less than one year. HMPL-004. The unbalanced patient population may have been programmes against three further novel targets that we are in the process of designing small molecule compounds to selectively target. 24 HUTCHISON CHINA MEDITECH LIMITED 2014 Annual Report Drug Research & Development HMPL-689: The targeting of PI3Kδ (delta) for B-cell malignancies is gaining an increasingly high profi le HMPL-689 more potent and more selective than idelalisib & duvelisib with idelalisib (Gilead) gaining fast track approval IC50 (μM) HMPL-689 idelalisib duvelisib in mid-2014 in multiple haematological cancer indications. Duvelisib (Infinity/AbbVie), another high profile PI3Kδ inhibitor, is also in Phase III in various haematological cancer indications. There is also increasing evidence that PI3Kδ inhibitors are effective in the ibrutinib-resistant mutant population, Enzyme PI3Kδ 0.0008 (n = 3) 0.002 0.001 PI3Kγ (fold vs. PI3Kδ) (142X) 0.114 (142X) (52X) 0.104 (52X) (2X) 0.002 (2X) PI3Kα (fold vs. PI3Kδ) (>1,250X) >1 (>1,250X) (433X) 0.866 (433X) (143X) 0.143 (143X) PI3Kβ (fold vs. PI3Kδ) (109X) 0.087 (109X) (147X) 0.293 (147X) (8X) 0.008 (8X) ibrutinib being an important BTK inhibitor for several to pursue global development on fastest possible is a highly relevant target in the field of B-cell types of B-cell malignancies. timing. To this end, HMPL-689 started IND-enabling malignancies such as lymphoma. To this end, once We have designed HMPL-689 with superior success, we expect to commence Phase I clinical trials dose for rheumatoid arthritis in Phase I, we intend regulatory toxicity testing in late 2014 and, subject to HMPL-523 has reached its expected efficacious PI3K isoform selectivity, in particular to spare in late 2015. PI3Kγ(gamma) to minimise the serious infection observed with duvelisib due to its strong immune suppression. HMPL-689 potency, particularly at the whole blood level allows for reduced daily doses to minimise compound related toxicity such as the high level of liver toxicity observed with the idelalisib 150mg twice-daily dose regime. HMPL- 689’s pharmacokinetic properties have been found to be favourable with expected good oral absorption, moderate tissue distribution and low clearance, to continue dose escalation into oncology patients. Furthermore, HMP has additional Syk compounds with different tissue distribution/plasma distribution profi les to HMPL-523, such as HMPL-079, that we also intend to investigate in the oncology arena. Janssen Collaboration: In addition to our internal discovery activities, our five year collaboration with Janssen in inflammation has been successful and has yielded several compounds against a highly novel inflammation target. This important suitable for once daily dosing. It is also expected that HMPL-453: HMP’s discovery programme against the strategic collaboration will continue in 2015, with HMPL-689 will have low risk of drug accumulation novel FGFR target in oncology started fi nal regulatory our respective teams working extremely well in and drug/drug interaction due to Cytochrome P450 toxicity testing in 2014 and IND fi ling is expected in partnership towards the objective of commencing (CYP) inhibition/induction. late 2015. clinical development. Given the above, we believe that HMPL-689 has the S y k O n c o l o g y : H M P h a s t o - d a t e fo c u s e d potential to be a best-in-class PI3Kδ agent, superior development of HMP-523 on immunology, to both idelalisib and duvelisib, and HMP intends specifically rheumatoid arthritis. However, Syk China Healthcare 2525 China Healthcare Division Financial performance: Sales of Chi-Med’s subsidiaries Guangzhou Pharmaceutical (SEHK: 0874); (iii) a GSP mandates distribution of drugs in China. Our product pharmaceutical marketing and commercialisation portfolio is well diversified. We own product and JVs of the China Healthcare Division grew 29% company, Hutchison Sinopharm, which is a 51% licenses for over 200 drugs and registered health to $509.4 million in 2014 (2013: $394.6m) driven owned subsidiary of Chi-Med with Sinopharm (SEHK: supplements in China, with over 65% of our China by solid performance in our own, non-third party, 1099) holding the remaining 49%; and (iv) a wholly- Healthcare Division’s sales in 2014 coming from business which grew 19% to $409.5 million (2013: owned nutritional supplements company, HHL. We nine core products – six of them are OTC drugs, two $343.0m) as well as a step-change in the scale of operate two large-scale factories in Shanghai and prescription drugs, and one nutritional supplement. our third party pharmaceutical distribution and Guangzhou, and a national sales, marketing, and commercialisation business which grew 93% to $99.9 distribution operation across about 600 cities and China pharmaceutical market dynamics: China is the million (2013: $51.6m) behind the establishment towns in China. of Hutchison Sinopharm. The outcome of this sales world’s third largest pharmaceutical market and is widely expected to surpass Japan to become the progress, combined with a gradual reduction in prices The China Healthcare Division currently manufactures second largest pharmaceutical market globally in of certain key raw materials through the year, led to and sells two household name brands in the 2015 or 2016. The compound annual growth rate a strong increase in net profi t attributable to Chi-Med pharmaceutical industry in China, the OTC brand of approximately 20% in the China pharmaceutical equity holders which was up 21% to $22.6 million Bai Yun Shan (meaning “White Cloud Mountain”, industry between 2005 and 2013 has been driven (2013: $18.6m). a famous scenic area in Guangzhou) and the in large part by healthcare reforms and increased Shang Yao brand (literally meaning “Shanghai Chinese Government spending on healthcare. This Operating entities and scope: In 2014, we operated Pharmaceuticals”). Our products have extensive spending rose to approximately $147.2 billion four companies under the China Healthcare Division: representation on the current Medicines Catalogue in 2013 from $14.1 billion in 2005, a compound (i) a prescription drug company, SHPL, which is for the National Basic Medical Insurance, Labour average growth rate of 34%. a 50/50 JV with a wholly-owned subsidiary of Injury Insurance and Childbirth Insurance Systems Shanghai Pharmaceuticals (SEHK: 2607); (ii) an (“NMC”) as well as the current National Essential OTC drug business, HBYS, which is a 50/50 JV with Medicines List (“Essential Medicines List”) which (cid:78)(cid:99)(cid:112)(cid:30)(cid:65)(cid:95)(cid:110)(cid:103)(cid:114)(cid:95)(cid:30)(cid:70)(cid:99)(cid:95)(cid:106)(cid:114)(cid:102)(cid:97)(cid:95)(cid:112)(cid:99)(cid:30)(cid:81)(cid:110)(cid:99)(cid:108)(cid:98)(cid:103)(cid:108)(cid:101) (cid:65)(cid:102)(cid:103)(cid:108)(cid:95)(cid:30)(cid:69)(cid:109)(cid:116)(cid:99)(cid:112)(cid:108)(cid:107)(cid:99)(cid:108)(cid:114)(cid:30)(cid:70)(cid:99)(cid:95)(cid:106)(cid:114)(cid:102)(cid:97)(cid:95)(cid:112)(cid:99)(cid:30)(cid:81)(cid:110)(cid:99)(cid:108)(cid:98)(cid:103)(cid:108)(cid:101) (cid:83)(cid:81)(cid:63) (cid:34)(cid:54)(cid:42)(cid:50)(cid:52)(cid:53)(cid:45)(cid:97)(cid:95)(cid:110)(cid:103)(cid:114)(cid:95)(cid:30) (cid:30) (cid:49)(cid:47)(cid:118)(cid:30) (cid:65)(cid:102)(cid:103)(cid:108)(cid:95) (cid:34)(cid:48)(cid:53)(cid:50)(cid:45)(cid:97)(cid:95)(cid:110)(cid:103)(cid:114)(cid:95) (cid:38)(cid:83)(cid:81)(cid:34)(cid:30)(cid:96)(cid:103)(cid:106)(cid:106)(cid:103)(cid:109)(cid:108)(cid:113)(cid:39) (cid:30) (cid:49)(cid:50)(cid:35)(cid:30)(cid:65)(cid:63)(cid:69)(cid:80) (cid:38)(cid:48)(cid:46)(cid:46)(cid:51)(cid:43)(cid:48)(cid:46)(cid:47)(cid:49)(cid:39) (cid:30) (cid:47)(cid:50)(cid:53)(cid:44)(cid:48) (cid:47)(cid:48)(cid:48)(cid:44)(cid:53) (cid:55)(cid:48)(cid:44)(cid:52) (cid:53)(cid:48)(cid:44)(cid:46) (cid:51)(cid:54)(cid:44)(cid:53) (cid:47)(cid:55)(cid:35)(cid:30)(cid:65)(cid:63)(cid:69)(cid:80) (cid:38)(cid:48)(cid:46)(cid:46)(cid:46)(cid:43)(cid:48)(cid:46)(cid:46)(cid:51)(cid:39) (cid:52)(cid:44)(cid:55) (cid:53)(cid:44)(cid:53) (cid:55)(cid:44)(cid:50) (cid:47)(cid:46)(cid:44)(cid:49) (cid:47)(cid:50)(cid:44)(cid:47) (cid:47)(cid:52)(cid:44)(cid:49) (cid:51)(cid:44)(cid:55) (cid:50)(cid:46)(cid:44)(cid:46) (cid:48)(cid:51)(cid:44)(cid:51) (cid:46)(cid:47) (cid:46)(cid:49) (cid:46)(cid:51) (cid:46)(cid:53) (cid:46)(cid:55) (cid:47)(cid:47) (cid:47)(cid:49) Source: WHO 2014 report (2011 data). Source: Deutsche Bank, CEIC, Ministry of Health. 26 HUTCHISON CHINA MEDITECH LIMITED 2014 Annual Report China Healthcare In 2013, healthcare coverage for the approximately and 250 traditional Chinese medicine (“TCM”) drugs. In summary, our China Healthcare Division’s 570 million people (2012: 536m) enroled in the The LPDL policy is aimed at making low-price drugs competitive advantages are: (1) two nationally medical insurance scheme for urban employees more profitable for manufacturers to produce and recognised household name brands (Bai Yun Shan and residents was reasonably comprehensive with thereby motivate the healthcare system to shift focus and Shang Yao) underpinned by high quality average scheme out fl ow of about $175 per capita away from the high-priced drugs that are burdening products; (2) our involvement in two of the biggest (2012: $156). The 802 million people (2012: 805m) the ever-expanding reimbursement system. The and most widely distributed therapeutic areas, covered by the rural cooperative medical scheme LPDL establishes criteria/caps for the daily cost at cardiovascular and cold/flu; (3) major commercial received less with average scheme outflow ofUS$30 million Net Sales US$15 - 30 million Net Sales US$5 - 15 million Net Sales < US$5 million Net Sales 2014 Sales: US$509.4m up +29% • About 3,000 sales people • Covering over 600 cities and towns • Detailing drugs to over 80,000 physicians • Products distributed in over 13,500 hospitals Operations Review - China Healthcare 2929 OTC Drugs – HBYS: Sales in HBYS increased 19% in 2014 to $300.8 Sales of FFDS tablets, HBYS’ OTC treatment for angina, DoH has stated that overall influenza activity has grew 6% in 2014 to $76.3 million (2013: $71.9m). continued to rise rapidly since late December 2014 million (2013: $252.5m). Driving the increase this The market price of Sanqi, the main natural raw and is currently at a very high level, including the year was strong performance in sales of HBYS’s material in FFDS, increased from about 50 RMB per admission rate of infl uenza among elderly aged 65 secondary products, along with increased revenues kilogram in 2008 to 800 RMB per kilogram in mid- years or above, exceeding the peak levels observed in from cooperation between HBYS and our partner 2013 prompting HBYS to raise ex-factory pricing on the past few years. Guangzhou Pharmaceutical, through our new FFDS aggressively from 2009 to 2012. As expected, HBYS subsidiary, Hutchison Whampoa Guangzhou due to the major increase in cultivation from 2009 to The sales of HBYS’ secondary products were in Baiyunshan Health & Wellness Co. Ltd. (“HBYS H&W”). 2013 the supply of Sanqi during 2014 out stripped aggregate up 36% to $41.4 million (2013: $30.5m) This growth was partially offset by a decline in demand and led to the price of Sanqi gradually during 2014. Kou Yan Qing granules for periodontitis Banlangen granules sales as well as some continued dropping from 390 RMB per kilogram in the last grew sales 13% to $18.3 million (2013: $16.3m); shedding of some lower margin or loss-making quarter of 2013 to 300 RMB per kilogram by July Nao Xin Qing tablets for heart disease and stroke legacy OTC drug GSP distribution activities. 2014. With 2015 Sanqi supply forecast to exceed prevention was up 45% to $14.7 million (2013: demand by approximately four-times, there was a $10.1m); and sales of Xiao Yan Li Dan tablets for liver/ HBYS holds a portfolio of 147 registered drug licenses complete collapse of pricing late in 2014 with the gall bladder more than doubled sales to $8.3 million in China. By the end of 2014, a total of 69 HBYS average market price dropping to 130 RMB per (2013: $4.1m). In recent years, significant efforts products (2013: 69) were included in the China NMC kilogram. HBYS, which buys about 500,000 kilograms have been made to increase the marketability of with 34 designated as Type-A and 35 as Type-B of Sanqi per year, making it one of the largest buyers HBYS’ secondary products. This includes: research on and that 90% of all HBYS sales in 2014 could be of Sanqi in China, was able to pay as low as 102 RMB Nao Xin Qing tablets which resulted in HBYS winning reimbursed under the National Insurance Systems. per kilogram in late 2014. This should materially the China State Council Science and Technology In addition, a total of 28 HBYS drugs, of which 9 are benefi t the growth prospects and profi tability of FFDS Achievement Silver Medal Award; and formulation in active production, were included on the Essential and HBYS during 2015. research to establish a new dosage form of Kou Yan Medicines List. Qing (throat lozenge). Sales of HBYS’ market leading generic anti-viral, The disease categories, in which our two main OTC Banlangen granules, was down 25% to $55.6 million New revenue streams also emerged in 2014 from products compete, are cardiovascular (FFDS) and in 2014, against all-time record sales of $74.2 million deeper operational integration and synergy with cold/flu (Banlangen). The cardiovascular category in 2013, which had been driven by widespread our partner Guangzhou Pharmaceutical through the has been discussed above in the context of SHPL’s publicity and consumer anxiety around the avian HBYS H&W subsidiary. HBYS H&W recorded sales of SXBXP and the growth potential also applies to FFDS influenza (H7N9) virus outbreak in China during $63.4 million (2013: $10.2m) primarily from sales tablets. The second key category in which HBYS the first half of 2013. 2014 was an abnormally of various Guangzhou Pharmaceutical health and competes, cold/fl u, is also a very relevant market in quiet flu season in China, however we see that wellness drinks and health food products as well China. According to a Citigroup rural hospital survey, Banlangen is returning to growth given that 2015 as centralised raw material purchasing, thereby over 80% of responders identifi ed cold/fl u as the most appears to be turning into a serious flu season in enabling Guangzhou Pharmaceutical and HBYS common disease diagnosed/treated in rural areas, the region. The most reliable source of third party to leverage joint scale to gain efficiencies. The and cold/fl u also rated as the third fastest growing information to gauge the severity of the fl u season operations of HBYS H&W are profitable, albeit low disease category. We expect this trend to lead to in China (particularly southern China) would be the single digit margin, and represent an important substantial growth in the cold/flu drug market in Hong Kong Department of Health (“HK DoH”) which strategic building-block for HBYS. It is the intention of China and, given HBYS’ leadership market share in the reported 300 severe cases, requiring intensive care both HBYS and Guangzhou Pharmaceutical to expand generic Banlangen subcategory, a subcategory which unit admission, of influenza (210 deaths) from 2 these activities, for example, by utilising the low- represented about 7% of the entire cold/fl u market in January through 16 February 2015, as compared cost extraction capacity of our new Bozhou factory, China in 2010, we believe the outlook for Banlangen to 266 severe cases (133 deaths) in the entire flu detailed below, to provide extraction services to the growth is positive. season last year (January to late April 2014). The broader Guangzhou Pharmaceutical group. predominant virus being infl uenza A (H3N2), the HK 30 HUTCHISON CHINA MEDITECH LIMITED 2014 Annual Report China Healthcare HBYS has been working to upgrade to new Chinese thereby both reducing contractor margins and house commercial capability it will work closely with GMP standards, and expand its production facilities increasing direct control on quality. the new SHPL GSP Company to leverage its existing approximately three-fold through migration of activities from its existing site in Bai Yun district (about 9km from Guangzhou city centre). Originally, our plan was to split future manufacturing activities into two functions, extraction (processing) in Bozhou Prescription Drug Marketing and C o m m e r c i a l i s a t i o n – H u t c h i s o n Sinopharm: In April 2014 we commenced operation of the new national medical sales network in attracting new business opportunities. During 2014 and early 2015, Hutchison Sinopharm signed several deals with both related and third party (Anhui province) and formulation (final product/ Hutchison Sinopharm business, our 51% Chi-Med held companies to begin providing drug marketing and packaging) in Zhong Luo Tan (Guangdong province). drug marketing and commercialisation company During the past year we have broadened the plan in China. Sinopharm, China’s largest distributor of for Bozhou, because of its low cost structure and pharmaceutical and healthcare products and a commercialisation services including: (1) exclusive rights in several provinces to commercialise Concor®, Merck Serono’s beta-blocker (hypertension) with logistic effi ciencies due to its central China location, to leading value added supply chain service provider, global sales of over $530 million in 2014 and the include formulation on both FFDS and Banlangen. holds the balance 49% share. Hutchison Sinopharm Since breaking ground on the approximately 230,000 Holding HuYong Pharmaceutical (Shanghai) Co., was established by the acquisition of Sinopharm number two market position in China; (2) exclusive rights across all China to commercialise Seroquel®, AstraZeneca’s bi-polar disorder/schizophrenia drug square metre plot of land for the Bozhou plant in Ltd. (“Huyong”), an existing Shanghai-based GSP with global sales of $1.4 billion in 2014 and the 2013, HBYS has completed all major construction company, thereby giving the company a base of leading market position including original patent works on the first phase of the Bozhou plant and operations from which to make a fast start. holder status in China, which allows for preferential is on-track to receive GMP certification and begin pricing; and (3) exclusive rights in Shanghai migrating extraction and formulation to this site in During 2014 the integration of Huyong went to plan community hospitals to commercialise Kou Yan Qing late-2015. Given the increase in scope of Bozhou, our and sales of Hutchison Sinopharm totalled $50.2 granules, HBYS’ prescription periodontitis drug. mid-term plan, to build a new formulation facility on million (2013: nil). Gross profi t on the existing low an approximately 66,000 square metre plot of land in margin legacy logistics and distribution business of On average, the gross profit margins for full- Zhong Luo Tan district (about 40km from Guangzhou Hutchison Sinopharm was 4.8% or $2.4 million, which service drug marketing and commercialisation can city centre), has been scaled-down and timing we are now investing into building the organisation range from 25% to 60% depending on the product, pushed-back. needed to transform Hutchison Sinopharm from geography and performance relative to annual sales The resulting capacity expansion, primarily from into a higher margin, full-service prescription drug opportunity for Chi-Med, particularly if group Bozhou, will allow HBYS to scale-back the $15.5 commercialisation company. While Hutchison synergies can keep incremental costs under control. a low margin logistics and distribution business targets thereby making it an attractive business million spent in 2014 on contract manufacturing, Sinopharm builds-out its own organisation and in- Operations Review - China Healthcare 3131 ) s n o i l l i m $ S U ( . d t L . o C ) S Y B H . l c n i ( f f a t s 0 7 2 1 ~ , : s p e R s e a S l i a n h C n i s e i t i c 0 0 6 : s e c i f f o s e a S l o a b n a u G g n a y n a N : y t i r o n M i . o C l a i c r e m m o C ] 1 [ P S G a m r a h P ) f f a t s 0 5 ~ ( H S l : s e a S / e s u o h e r a W p u o r G m r a h p o n i S : r e n t r a P i a n h C n i m r o f t a l p l a i c r e m m o c l u f r e w o p A ® r o c n o C & ® l e u q o r e S – s t c u d o r p y t r a p d r 3 y t i l a u q g n i r u c e s y l k c i u Q d e t a l e R & y t r a P d r 3 s t c u d o r P y t r a P % 0 8 N O I S I % 0 5 O C D L O H % 0 6 s g u r D ) C T O ( r e t n u o c - e h t - r e v O - - ] 2 [ S Y B H l . s d H a m r a h P u o h z g n a u G : r e n t r a P s e s n e c i l g n i r u t c a f u n a m g u r d 7 4 1 ) f f a t s 0 9 7 ~ ( y r o t c a F u o h z g n a u G ) . m 8 0 0 2 $ :: 3 1 0 2 ( . m 2 1 5 2 $ : s e l a S 4 1 0 2 I V D E R A C H T L A E H A N H C I % 1 5 % 0 0 1 ) . m 2 8 3 1 $ : 3 1 0 2 ( . m 7 4 5 1 $ : s e l a S 4 1 0 2 % 0 5 p u o r G a m r a h P i a h g n a h S : r e n t r a P s g u r D n o i t p i r c s e r P - - L P H SS s e s n e c i l g n i r u t c a f u n a m g u r d 4 7 ) f f a t s 0 0 5 ~ ( y r o t c a F i a h g n a h S l a i c r e m m o c C T O - - ] 1 [ P S G S Y B H / B G Y N m r a h p o n i S n o s i h c t u H l a i c r e m m o c g u r D x R - - . o C ]] 1 [ P S G L P H S ) . m 6 1 5 $ : 3 1 0 2 ( . m 7 9 4 $ : s e l a S 4 1 0 2 ) l i n : 3 1 0 2 ( . m 2 0 5 $ : s e l a S 4 1 0 2 ) l i n : 3 1 0 2 ( m 0 0 $ . : s e l i a n h C n i s e i t i c 4 9 2 : s e c i f f o s e a S l f f a t s 0 0 7 1 ~ , : s p e R s e a S l a S 4 1 0 2 s s e n l l i e W & h t l a e H n a h s n u y a B u o h z g n a u G a o p m a h W n o s i h c t u H – y r a d i s b u s % 0 0 1 S Y B H g n d u l c n i i i ] 2 [ ; ) s t c u d o r p g u r d y t r a p d r i h t e t u b i r t s i d d n a l l e s o t e s n e c i l ( n o i t a c i f i t r e C e c i t c a r P y p p u S d o o G = P S G l ] 1 [ 32 HUTCHISON CHINA MEDITECH LIMITED 2014 Annual Report China Healthcare Nutritional Supplements – HHL: In 2014, the sales of our wholly-owned subsidiary product for use by pregnant and lactating women to formulaic calculation, nor that this compensation to promote brain and retinal development in babies; ZLT HBYS should materialise at some point in the short to HHL declined 9% to $3.6 million (2013: $4.0m) as calcium powder for bone growth; and ZLT probiotic mid-term. a result of our strategy of tightening of working powder for toddler immunity. capital focusing on profi tability. Consequently, HHL net profit attributable to Chi-Med equity holders grew 64% to $1.0 million (2013: $0.6m). Actual retail sales of HHL’s Zhi Ling Tong (“ZLT”) infant and P r o p e r t y U p d a t e o n H B Y S / S H P L Production Expansion: HBYS’ existing facilities currently occupy two plots We have made progress in negotiations with local government in Shanghai regarding the return of land use rights on SHPL’s existing approximately 58,000 square metre site in Pu Tuo district. Importantly, in pregnant mother supplements products totalled of land, which after planning adjustments, totalled 2014, the Shanghai Municipal Government published approximately $20 million in 2014 (approximately 86,100 square metres. The main HBYS factory is on a a detailed plan for the redevelopment of a 4.6 square 450,000 units at an average retail price of $45/unit). 59,400 square metre plot of land and on the second kilometre zone in Tao Pu district. SHPL’s existing site This refl ects HHL’s ex-factory price being only about 26,700 square metre plot of land (“Plot 2”) there is is located in the centre of this redevelopment zone 18% of the retail price due to our exclusive distributor a disused printing facility. Our strategy has been to within 300 metres of the Wu Wei road metro station commercialisation model in which the distributor hand-back and receive compensation on the disused and has been classifi ed as Category 3 residential. The pays all marketing and commercialisation cost. This Plot 2 as soon as possible. Infrastructure is already in cost of the move to the new SHPL factory in Feng Pu, contract sales and marketing system has been used in place, including the Tong He metro station which was with three times the designed capacity of our existing the past given that HHL has been sub-scale and could opened in November 2010 and is only 800 metres factory, is estimated at approximately $90 million. not support the cost of an in-house organisation from Plot 2. Precedent auction values for similar plots We expect to receive compensation that should come to manage ZLT. We expect that this structure might of land in the immediate vicinity of Plot 2 would, close to offsetting this investment. The book value evolve in future as Hutchison Sinopharm now gives under current policy, result in compensation to HBYS of the existing SHPL site in Pu Tuo district was $4.0 us an alternative commercial pathway controlled for Plot 2 alone of approximately $66 million as million as at 31 December 2014. directly by Chi-Med. compared to the current HBYS book value, as at 31 December 2014, of $1.4 million. During 2014 we All HHL’s sales were accounted for by its ZLT infant encountered several hurdles at the local government and pregnant mother supplements brand. Pregnancy level in Guangzhou that have delayed the transaction supplementation is an important market in China in of Plot 2, and it is unclear exactly when these issues which HHL currently sells three ZLT licensed health will be resolved. However, what is not in doubt is supplement products: ZLT DHA capsules, the omega-3 the order of magnitude of compensation, due to its Consumer Products 3333 Consumer Products Division Our Consumer Products Division is an extension of Hutchison Hain Organic: HHO has made continued progress in the distribution our China Healthcare operation which enables Chi- of the broad range of several hundred imported Hain Med to capture part of the growing consumer trend Celestial organic and natural products. HHO sales towards healthy living and to capitalise on the in 2014 grew 14% to $11.5 million (2013: $10.2 considerable consumer products synergies with the million). This was driven primarily by 125% growth, China remains the major market that we are trying to break into with HHO and in 2015 we will renew our efforts to enter the China infant formula market with a launch of Earth’s Best® organic infant formula. In late 2010 we launched Earth’s Best® organic infant formula in China, but as a result of issues at our Swiss- broader Hutchison Whampoa group. We aim to build a profi table scale business systematically over time to $2.3 million, in organic and natural baby food business under the Earth’s Best® brand. based contract manufacturer, we were forced to discontinue the initiative in 2013. Since that time we behind a portfolio of relevant and unique health- initiated arbitration proceedings against the Swiss- related consumer products. Sales of the broad range of HHO’s products grew 13% based manufacturer and were subsequently awarded in our established Hong Kong market to $6.7 million, and received $2.5 million in damages in June 2014. Overall, the Consumer Products Division’s sales grew and made very good in-roads in the Philippines Furthermore, we have worked closely with Hain 6% in 2014 to $13.2 million (2013: $12.5m). This where sales were up 46% to $1.3 million; Singapore Celestial and their US-based infant formula suppliers was driven primarily by solid growth in the HHO up 29% to $1.2 million; and Taiwan up 68% to $1.3 business despite a change in the commercial model million. Sales in China however dropped 81% to $0.1 we employ in China. Net profit attributable to Chi- million (2013: $0.6m) as we moved to an exclusive to procure Chinese organic certification on a US- produced Earth’s Best® organic infant formula product which we intend to launch in 2015. We believe this Med equity holders was $1.3 million (2013: net loss third party distributor model versus our previous loss initiative will be highly unique to Chinese consumers $1.9m) resulting from: reduced HHO losses in China making in-house commercial model. This change and with stable and reliable product supply has a as well as increased scale throughout the balance of will not only improve the profitability of HHO good chance to succeed. Asia; and an award resulting from a positive outcome significantly in 2015 but free up our organisation in arbitration proceedings against a Swiss infant to focus on easier to access markets and specific formula supplier. initiatives tailored to the Chinese consumer. The Consumer Products Division has two main operating entities: an organic and natural products business, HHO, which is a JV with Hain Celestial; and Hutchison Consumer Products Limited, a consumer products distribution operation. Through these entities, the Consumer Products Division distributes and markets 31 brands of primarily healthy living focused products in 48 food, beverage, baby, and beauty care categories. 34 HUTCHISON CHINA MEDITECH LIMITED 2014 Annual Report Operations Review Current Trading and Outlook for the Group We believe that 2015 should be another very good globally ourselves. We also intend to start Phase I studies on HMPL-689 (PI3Kδ) and HMPL-453 (FGFR) on Concor®. We are also continuing to work towards creating considerable value through our plans late in the year as well as, hopefully, our Janssen to relocate and expand our China manufacturing year for Chi-Med across all three divisions. collaboration compound. Mid-year, we will also capabilities and hope to see compensation begin to decide next steps for HMPL-004, a drug candidate we fl ow through in this year. We look forward to publishing extensive clinical data continue to believe has good potential, with Nestlé across multiple drug candidates during 2015. We will Health Science. publish data from fruquintinib’s third line colorectal cancer and NSCLC Phase II PoC studies along with We believe that these activities will further prove the important results from the Phase Ib dose finding effi cacy and safety of our pipeline and lead to a rapid study in second line gastric cancer. AZD6094 is set increase in their market value as well as triggering The Consumer Products Division has started the year well and we expect to focus HHO on the successful re- launch of Earth’s Best® organic infant formula in China in 2015. to report interim data on the Phase II PRCC study milestone payments from existing partners and/or We look forward to 2015 with the expectation of along with results from several of our seven other further licensing and collaboration activity. making continued great strides forward on all Chi- Phase Ib gastric and lung cancer studies in aberrant Med’s businesses. c-Met patient populations. HMPL-523 will complete Sales and profit in our China Healthcare Division and publish its eagerly awaited Phase I data in 2015, have started the year well ahead of 2014 levels. The which if positive, should lead to a major global steep drop in key raw material prices late last year licensing deal on this important first-in-class Syk will help us throughout 2015, and the increasingly inhibitor in infl ammation. In all cases, we will outline severe 2014/15 flu season in China looks set to next stage clinical plans when we report results. continue. The new commercial structure that was established in 2014 around the Hutchison Sinopharm Christian Hogg Chief Executive Offi cer We will imminently start US Phase Ib/II trials on and SHPL GSP companies is set to get off to a very sulfatinib in NET, the first oncology candidate that we have taken through PoC in China and expanded good start in 2015 behind the new commercial deals with AstraZeneca on Seroquel® and Merck Serono 25 February 2015 Biographical Details Of Directors 35 1 Simon TO Executive Director and Chairman 2 3 Christian HOGG Executive Director and Chief Executive Offi cer Johnny CHENG Executive Director and Chief Financial Offi cer Mr To, aged 63, has been a Director since 2000 and an Executive Director and Chairman since 2006. He is also Chairman of the Remuneration C o m m i t t e e a n d 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 49, has been an Executive Director a n d C h i e f E x e c u t i v e Officer 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. 9 5 4 8 1 3 6 7 2 M r C h e n g , a g e d 4 8 , 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, Hutchison MediPharma (Suzhou) Limited and Hutchison MediPharma (Yulin) 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. 36 HUTCHISON CHINA MEDITECH LIMITED 2014 Annual Report Biographical Details Of Directors 4 5 Shigeru ENDO Non-executive Director 6 Mr Endo, aged 80, has been a Non-executive Director since 2008. He is chief executive officer and a director of Hutchison Whampoa Japan K.K. and a director of Sanwa Enterprises Limited. 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. Christian SALBAING Non-executive Director 7 M r S a l b a i n g , a g e d 65, has been a Non- executive Director since 2 0 0 6 . H e i s d e p u t y chairman of Hutchison W h a m p o a ( E u r o p e ) Limited, the European headquarters company of Hutchison Whampoa. He is also deputy chairman of Hutchison Whampoa Europe Investments 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 and the GSMA Limited Board. 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. 8 Edith SHIH Non-executive Director and Company Secretary Christopher HUANG Independent Non- executive Director Ms Shih, aged 63, has been a Non-executive Director and Company Secretary since 2006 and company secretary o f G r o u p c o m p a n i e s since 2000. She is also head group general counsel and company secretary of Hutchison Whampoa, 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 the Vice President of The Institute of Chartered Secretaries and Administrators and the Immediate Past President of The Hong Kong Institute of Chartered Secretaries. She is also 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. 9 Michael HOWELL Independent Non- executive Director Mr Howell, aged 67, 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). P r o f e s s o r H u a n g , aged 63, has been an I n d e p e n d e n t N o n - e x e c u t i v e D i r e c t o r s i n c e 2 0 0 6 . H e i s 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 (BA) and Clinical Medicine (BMBCh) at The Queen’s College, Oxford, and his postgraduate (PhD) degree at the University of Cambridge. He has also been awarded higher medical (DM) and scientifi c (DSc) 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. Christopher NASH Independent Non- executive Director Mr Nash, aged 56, 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 Chairman of Tempus Energy Limited, a non-executive director of GKN Evo eDrive Systems Ltd and Gasrec Limited and until recently, was a non-executive director of NTR plc and a Director of Current OpenGrid Limited. Mr Nash’s career has spanned over thirty fi ve 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 3737 The Directors have pleasure in submitting to shareholders their report and statement of audited accounts for the year ended 31 December 2014. 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 52 and shows the Group’s results for the year ended 31 December 2014. DIVIDENDS No interim dividend for the year ended 31 December 2014 was declared and the Directors do not recommend the payment of a fi nal dividend for the year ended 31 December 2014. RESERVES Movements in the reserves of the Group during the year are set out in the Consolidated Statement of Changes in Equity on pages 56 to 57. NON-CURRENT ASSETS Particulars of the movements of non-current assets of the Group are set out in Notes 14 to 19 to the accounts. SHARE CAPITAL Details of the share capital of the Company are set out in Note 23 to the accounts. DIRECTORS The Directors of the Company as at 31 December 2014 were: Executive Directors: Simon To Christian Hogg Johnny Cheng 38 HUTCHISON CHINA MEDITECH LIMITED 2014 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 Shigeru Endo, Mr Christian Salbaing, Ms Edith Shih, Mr Christopher Nash, Mr Michael Howell and Professor Christopher Huang 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 35 to 36. DIRECTORS’ INTERESTS IN SHARES As at 31 December 2014, the interests in the shares of the Company held by the Directors and their families were as follows: Name of Director Christian Hogg Johnny Cheng Michael Howell Simon To Christopher Nash Edith Shih Christopher Huang Number of ordinary shares held 1,088,182 192,108 153,600 41,000 30,542 20,000 2,475 SHARE OPTION SCHEMES AND DIRECTORS’ RIGHTS TO ACQUIRE SHARES (i) Share option scheme of the Company The Company conditionally adopted a share option scheme on 4 June 2005 which was amended on 21 March 2007 (the “Share Option Scheme”). 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 share options to subscribe for shares of the Company. Report Of The Directors 3939 The following share options were outstanding under the Share Option Scheme during the year ended 31 December 2014: 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 2014 2014 2014 during 2014 31 December 2014 share options share options Directors Christian Hogg Johnny Cheng Employees in aggregate Total: Notes: 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 40,857 102,628 177,600 150,000 896,386 2,303,317 – – – – – – – – – – (768,182) – (76,818) – – (102,628) (77,600) – – – – – – – – – – – 19.5.2006 to 3.6.2015 64,038 25.8.2008 to 24.8.2018 – 19.5.2006 to 3.6.2015 26,808 40,857 11.9.2006 to 18.5.2016 18.5.2007 to 17.5.2017 – 28.6.2010 to 27.6.2020 100,000 1.12.2010 to 30.11.2020 150,000 24.6.2011 to 23.6.2021 (593,686) (5) 302,700 20.12.2013 to 19.12.2023 (1,025,228) (593,686) 684,403 £ 1.090 1.260 1.090 1.715 1.535 3.195 4.967 4.405 6.100 (1) The share options were granted on 4 June 2005, conditionally upon the Company’s admission to AIM 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 effective date of grant. (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 effective date of grant. (5) 593,686 share options were cancelled with the consent of the relevant eligible employees in exchange for new share options of a subsidiary. (ii) Share option schemes for existing shares of Hutchison MediPharma Holdings Limited Hutchison MediPharma Holdings Limited (“HMHL”), a subsidiary of the Company, adopted a share option scheme on 6 August 2008 (as amended on 15 April 2011) and another share option scheme on 17 December 2014 (together the “HMHL Share Option Schemes”). The HMHL Share Option Schemes are share-based incentive programmes for employees or directors of HMHL and any of its holding company, subsidiaries and affi liates (each an “Eligible Employee”). Each Eligible Employee is eligible to participate in the HMHL Share Option Schemes and share options may be granted to him or her to acquire existing shares in HMHL subject to the rules of the HMHL Share Option Schemes. 40 HUTCHISON CHINA MEDITECH LIMITED 2014 Annual Report Report Of The Directors The following share options were outstanding under the HMHL Share Option Schemes during the year ended 31 December 2014: 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 2014 2014 2014 during 2014 31 December 2014 share options share options Employees in aggregate 6.8.2008 5.10.2009 3.5.2010 2.8.2010 (1) 18.4.2011 (2) 17.12.2014 (3) 57,000 50,000 300,000 25,000 106,420 – – – – – N/A 1,187,372 (40,000) (30,000) – (10,000) (924) – (17,000) (20,000) (300,000) (10,000) (86,096) – – – 6.8.2008 to 5.8.2014 5.10.2009 to 4.10.2015 3.5.2010 to 2.5.2016 5,000 2.8.2010 to 1.8.2016 19,400 18.4.2011 to 17.4.2017 – 1,187,372 17.12.2014 to 19.12.2023 US$ 1.28 1.52 2.12 2.24 2.36 7.82 Total: Notes: (1) (2) 538,420 1,187,372 (80,924) (433,096) (4) 1,211,772 The outstanding share options are fully vested and exercisable within a period of 6 years from the effective date of grant. 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 effective date of grant. (3) The share options granted are exercisable subject to, amongst other relevant vesting criteria, the vesting schedule of 25% on 20 December 2014 and 25% on each of the fi rst, second and third anniversaries of such date. (4) Out of 433,096 share options, (a) 39,884 were cancelled with the consent of the relevant eligible employees in exchange for cash consideration payable over a period of four years and (b) 393,212 lapsed following cessation of employment of the relevant eligible employees. SIGNIFICANT SHAREHOLDINGS As at 17 February 2015, according to the records of the Company, the following holders held interests in 3% or more of the issued share capital of the Company: Name Hutchison Healthcare Holdings Limited (1) (“HHHL”) Computershare Company Nominees Limited (2) (“CCNL”) FIL Limited (3) Slater Investments Limited (3) Notes: Number of ordinary shares held 36,666,667 16,331,180 2,640,514 2,263,000 Approximate % of issued share capital 69.08% 30.77% 4.97% 4.26% (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 4141 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 Friday, 24 April 2015 at 10:00 am at 4th Floor, Hutchison House, 5 Hester Road, Battersea, London. 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 25 February 2015 42 HUTCHISON CHINA MEDITECH LIMITED 2014 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 interests 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 2014, 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 35 to 36 and on the website of the Company (www.chi-med.com). During 2014, the Board reviewed its practices on Board diversity, formalised and adopted a policy which recognises the benefi ts of a Board that possesses a balance of skills, experience, expertise, independence and knowledge and diversity of perspectives appropriate to the requirements of the businesses of the Company. Board appointment has been, and will continue to be, made based on attributes of candidates that complement and expand the skills, experience, expertise, independence and knowledge of the Board as a whole, taking into account gender, age, professional experience and qualifi cations, cultural and educational background, and any other factors that the Board might consider relevant and applicable from time to time towards achieving a diverse Board. The Board diversity policy is available on the website of the Company (www.chi-med.com). The Board will review and monitor from time to time the implementation of the policy to ensure its effectiveness and application. 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 4343 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 2014 with 100% attendance of its members. Position Chairman Executive Directors: Non-executive Directors: Independent Non-executive Directors: Name of Director Simon To Christian Hogg Johnny Cheng Shigeru Endo Christian Salbaing Edith Shih Michael Howell Christopher Huang Christopher Nash Attended/Eligible to attend 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. 44 HUTCHISON CHINA MEDITECH LIMITED 2014 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, press releases 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 inside 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 51 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 4545 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 annual 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 responsibilities 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 reviews 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 plans for its audits for the Group together with its resource requirements and considers the reports 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 reports 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 website of the Company. 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 three meetings in 2014 with 100% attendance of its members. Name of Member Michael Howell (Chairman) Christopher Huang Christopher Nash Attended/Eligible to attend 3/3 3/3 3/3 46 HUTCHISON CHINA MEDITECH LIMITED 2014 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 annual results, 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 2014, all the fees paid to PwC were for 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 4747 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 2014 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. 48 HUTCHISON CHINA MEDITECH LIMITED 2014 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 responses or fi lings to relevant regulatory and/or government authorities and consultations, as the case may be. The Department 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 website of the Company. 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 three meetings in 2014 with 100% attendance of its members. During the year, the Remuneration Committee reviewed background information on market data (including economic indicators, statistics and the Remuneration Bulletin), headcount and staff costs. It also reviewed and approved the proposed 2015 directors’ fees, year end bonus and 2015 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 4949 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 2014 are as below: Taxable benefi ts Pension contributions Share option benefi ts Total US$ US$ Name of Director 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$ 19,503 (1) (4) 348,888 (2) (4) 273,551 (2) 19,503 (3) 19,503 (1) 19,503 (3) (4) 51,488 51,488 51,488 Bonus US$ – 615,385 217,949 – – – – – – US$ – 14,810 – – – – – – – US$ – 24,000 21,482 – – – – – – – – (5) – (5) 19,503 1,003,083 512,982 – – – – – – – 19,503 19,503 19,503 51,488 51,488 51,488 1,748,541 Aggregate emoluments 854,915 833,334 14,810 45,482 Notes: (1) (2) (3) (4) Such Director’s fees were paid to Hutchison Whampoa (China) Limited. Emoluments paid include Director’s fees of US$19,503. 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 2014. 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. The Terms of Reference for the Technical Committee adopted by the Board are published on the website of the Company. The Technical Committee held one meeting in 2014 with 100% attendance of its members. 50 HUTCHISON CHINA MEDITECH LIMITED 2014 Annual Report Corporate Governance Report 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, press releases, 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, press releases, interim and annual reports. An updated version of the Memorandum and Articles of Association of the Company is published on the website of the Company. Moreover, additional information on the Group is also available to shareholders through the Investor Relations page on the website of the Company. 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 website of the Company for shareholders. The latest shareholders’ meeting of the Company was the 2014 Annual General Meeting which was held on 8 May 2014 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 25 February 2015 Independent Auditor’s Report 5151 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 52 to 113, which comprise the consolidated statement of fi nancial position as at 31 December 2014, 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 2014, 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, 25 February 2015 52 HUTCHISON CHINA MEDITECH LIMITED 2014 Annual Report Consolidated Income Statement For the year ended 31 December 2014 Continuing operations Revenue Cost of sales Gross profi t Selling expenses Administrative expenses Other net operating (expenses)/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 Profi t/(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 2014 US$’000 2013 US$’000 5 6 18 7 8 9 10 24 11(a) 11(b) 11(a) 11(b) 91,813 (72,049) 19,764 (4,112) (22,572) (182) 15,202 8,100 (1,516) 6,584 (1,343) 5,241 2,034 7,275 4,357 1,017 5,374 1,901 7,275 0.0829 0.0824 0.1022 0.1016 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 Consolidated Statement Of Comprehensive Income For the year ended 31 December 2014 5353 Profi t for the year Other comprehensive (loss)/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 2014 US$’000 2013 US$’000 7,275 7,042 (2,819) 4,456 1,825 1,017 2,842 1,614 4,456 3,342 10,384 10,360 (1,503) 8,857 1,527 10,384 54 HUTCHISON CHINA MEDITECH LIMITED 2014 Annual Report Consolidated Statement Of Financial Position As at 31 December 2014 ASSETS Non-current assets Property, plant and equipment Leasehold land Goodwill Other intangible asset Investments in joint ventures Deferred tax assets Current assets Inventories Trade and other receivables Other prepayments and deposits Amounts due from related parties Cash and bank balances Total assets EQUITY Capital and reserves attributable to the Company’s equity holders Share capital Reserves Non-controlling interests Total equity Note 31 December 2014 US$’000 31 December 2013 US$’000 14 15 16 17 18 19 20 21 31 22 23 24 7,482 1,436 1,953 666 113,014 257 5,028 1,508 407 – 111,405 285 124,808 118,633 4,405 34,446 2,563 1,591 51,125 94,130 1,420 14,789 1,977 1,985 46,863 67,034 218,938 185,667 53,076 41,813 94,889 24,994 52,051 36,819 88,870 15,966 119,883 104,836 Consolidated Statement Of Financial Position 5555 Note 31 December 2014 US$’000 31 December 2013 US$’000 25 26 31 27 19 27 20,427 13,638 8,716 26,282 122 69,185 2,947 26,923 29,870 99,055 24,945 4,163 15,389 7,374 51,508 – 78,434 2,397 – 2,397 80,831 (11,400) 149,753 107,233 218,938 185,667 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 tax liabilities Bank borrowing Total liabilities Net current assets/(liabilities) Total assets less current liabilities Total equity and liabilities Simon To Director Christian Hogg Director 56 HUTCHISON CHINA MEDITECH LIMITED 2014 Annual Report Consolidated Statement Of Changes In Equity For the year ended 31 December 2014 Attributable to equity holders of the Company Share capital US$’000 Share-based compensation reserve US$’000 Share 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$’000 As at 1 January 2013 52,048 93,669 4,974 9,380 496 (89,989) 70,578 11,620 82,198 Profi t for the year Other comprehensive income that has been or may be reclassifi ed subsequently to profi t or loss: Exchange translation differences arising from: — subsidiaries — joint ventures Total comprehensive income for the year (net of tax) Issue of shares (Note 23(a)) Share-based compensation expenses Transfer between reserves Dilution of interest in a subsidiary (Note 28) Dividend paid to a non-controlling shareholder of a subsidiary (Note 31(a)) – – – – – 3 – – – – – – – – – 6 – – – – – – – – – (2) 332 (168) (120) – – – 5,915 5,915 1,127 7,042 662 2,280 2,942 2,942 – – – (243) – – – – – – – – – – – – – 662 2,280 2,942 62 338 400 724 2,618 3,342 5,915 8,857 1,527 10,384 – – 168 9,459 – 7 332 – 9,096 – 25 – 3,371 7 357 – 12,467 – (577) (577) As at 31 December 2013 52,051 93,675 5,016 12,079 496 (74,447) 88,870 15,966 104,836 Consolidated Statement Of Changes In Equity 5757 Attributable to equity holders of the Company Share capital US$’000 Share-based Share compensation reserve US$’000 premium US$’000 Exchange reserve US$’000 General Accumulated losses reserves US$’000 US$’000 Total US$’000 Non– controlling interests US$’000 Total equity US$’000 As at 1 January 2014 52,051 93,675 5,016 12,079 496 (74,447) 88,870 15,966 104,836 – – 5,374 5,374 1,901 7,275 Profi t for the year Other comprehensive loss that has been or may be reclassifi ed subsequently to profi t or loss: Exchange translation differences arising from: — subsidiaries — joint ventures Total comprehensive (loss)/income for the year (net of tax) Issue of shares (Note 23(a)) Share-based compensation expenses Transfer between reserves Acquisition of a subsidiary (Note 29(b)) Exercise of share options of a subsidiary (Note 23(b)(ii)) Dividend paid to a non-controlling shareholder of a subsidiary (Note 31(a)) Purchase of additional interests in a subsidiary of a joint venture Capital contribution from a non-controlling shareholder of a subsidiary Repayment of loan to a non-controlling shareholder of a subsidiary – – – – – – – – – – – – – – – 1,025 – – – 4,598 – – – (2,943) 773 (182) – (933) (1,599) (2,532) (2,532) – – – – – – – – – – – – – – (3) (4) – – – – – – – – – – – – – – 25 – – – – – – – – – (933) (1,599) (11) (276) (944) (1,875) (2,532) (287) (2,819) 5,374 2,842 1,614 4,456 – – 157 – (35) – 2,680 773 – – – 95 – 7,526 (42) 163 2,680 868 – 7,526 121 – (1,179) (1,179) (234) (234) – (234) – – – – 3,059 3,059 (2,250) (2,250) As at 31 December 2014 53,076 98,273 2,661 9,543 521 (69,185) 94,889 24,994 119,883 58 HUTCHISON CHINA MEDITECH LIMITED 2014 Annual Report Consolidated Statement Of Cash Flows For the year ended 31 December 2014 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 operating activities Cash fl ows from investing activities Purchase of property, plant and equipment Loan to a joint venture Increase in bank deposits maturing over three months Acquisition of a subsidiary Net cash used in investing activities Cash fl ows from fi nancing activities Capital contribution from a non-controlling shareholder of a subsidiary Repayment of loan to a non-controlling shareholder of a subsidiary Dividend paid to a non-controlling shareholder of a subsidiary New short-term bank loans Repayment of short-term bank loans Net proceeds from exercise of share options of a subsidiary Net proceeds from issuance of ordinary shares Net cash (used in)/generated from fi nancing activities Net (decrease)/increase 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 bank balances – Cash and cash equivalents – Bank deposits maturing over three months Note 29(a) 29(b) 22 22 2014 US$’000 2013 US$’000 (490) 275 (1,466) (908) 15,949 13,360 (3,729) (5,000) (12,179) 689 (20,219) 3,059 (2,250) (1,179) 8,205 (11,277) 121 2,680 (641) (7,500) 46,863 (417) 38,946 38,946 12,179 51,125 (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 46,863 – 46,863 Notes To The Accounts 5959 1 GENERAL INFORMATION Hutchison China MediTech Limited (the “Company”) and its subsidiaries (together the “Group”) are principally engaged in researching, developing, manufacturing and selling pharmaceuticals and health-related 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. In 2013, 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 25 February 2015. 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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. 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 2014. 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. (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 Note 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. In the consolidated accounts, subsidiaries are accounted for as described in Note 2(a) above. 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. 60 HUTCHISON CHINA MEDITECH LIMITED 2014 Annual Report Notes To The Accounts 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (b) Subsidiaries (Continued) Business combinations The Group applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Identifi able assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. Non-controlling interests in the acquiree that are present ownership interests’ proportionate share in the recognised amounts of the acquiree’s identifi able net assets. All other components of non-controlling interests are measured at their acquisition date fair value, unless another measurement basis is required by IFRS. Acquisition-related costs are expensed as incurred. The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the identifi able net assets acquired is recorded as goodwill. (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. (d) Joint arrangements Investments in joint arrangements are classifi ed as either joint operations or joint ventures depending on the contractual rights and obligations of each investor. 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. Notes To The Accounts 6161 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (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. (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. 62 HUTCHISON CHINA MEDITECH LIMITED 2014 Annual Report Notes To The Accounts 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (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. (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) Other intangible asset Other intangible asset has definite useful live and is carried at historical cost less accumulated amortisation and accumulated impairment losses. Amortisation is calculated using the straight-line method to allocate its costs over its estimated useful live of 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. Notes To The Accounts 6363 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (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. (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 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. 64 HUTCHISON CHINA MEDITECH LIMITED 2014 Annual Report Notes To The Accounts 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (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. 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 had been classifi ed as liabilities and 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. As the conditions set out in the relevant agreements are satisfi ed, the convertible preference shares had been reclassifi ed from liability to equity of the relevant subsidiary. (s) Current and deferred income tax (i) Current income tax The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period in the countries where the company’s subsidiaries and joint ventures operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. (ii) 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. Notes To The Accounts 6565 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (t) Employee benefi ts (Continued) (ii) Share-based payments The Group operates certain equity-settled share-based compensation plans (“compensation plan”). 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 the 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. If the terms of a compensation plan are modifi ed, at a minimum an expense is recognised as if the terms had not been modifi ed. An additional expense is recognised for any modifi cation that increases the total fair value of the compensation plan, or is otherwise benefi cial to the employee, as measured at the date of modifi cation. If a compensation plan is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised is recognised immediately. However, if a new compensation plan is substituted for the cancelled compensation plan, and designated as a replacement compensation plan on the date that it is granted, the cancelled and new compensation plans are treated as if they were a modifi cation of the original compensation plan, as described in the previous paragraph. (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. 66 HUTCHISON CHINA MEDITECH LIMITED 2014 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. The Group recognises revenue when the amount of revenue can be reliably measured; when it is probable that future economic benefi ts will fl ow to the entity; and when specifi c criteria have been met for each of the Group’s activities, as described below. 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) 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 recognised as revenue when it is probable that future economic benefi ts will fl ow to the entity 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 milestone that represent a separate earnings process. (iii) 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 6767 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 1 (Amendments) (2) IAS 16 and IAS 38 (Amendments) (2) IAS 16 and IAS 41 (Amendments) (2) IAS 19 (Amendments) (1) IAS 27 (Amendments) (2) IFRS 9 (4) IFRS 10 and IAS 28 (Amendments) (2) IFRS 10, IFRS 12 and IAS 28 (Amendments) (2) IFRS 11 (Amendments) (2) IFRS 14 (2) IFRS 15 (3) Annual improvements 2010-2012 cycle (1) Annual improvements 2011-2013 cycle (1) Annual improvements 2012-2014 cycle (2) Disclosure Initiative Clarifi cation of Acceptable Methods of Depreciation and Amortisation Agriculture: Bearer Plants Defi ned Benefi t Plans: Employee Contributions Equity Method in Separate Financial Statements Financial Instruments Sale or Contribution of Assets between an Investor and its Associate or Joint Venture Investment Entities: Applying the Consolidated Exception Accounting for Acquisitions of Interests in Joint Operations Regulatory Deferral Accounts Revenue from Contracts with Customers Improvements to IFRSs Improvements to IFRSs Improvements to IFRSs (1) (2) (3) (4) 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 2017. Effective for the Group for annual periods beginning on or after 1 January 2018. 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. 68 HUTCHISON CHINA MEDITECH LIMITED 2014 Annual Report Notes To The Accounts 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. (ii) Credit risk The carrying amounts of cash at bank, bank deposits, trade and other receivables and amounts 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 is exposed to credit risk with respect to one major customer which represents 28.5% (2013: 30.4%) of the outstanding trade and other receivables as at 31 December 2014. Management considers that the credit risk in respect of this customer is low after considering the fi nancial position and historical experience in collection of receivables with this customer. Management makes periodic assessment on the recoverability of trade and other receivables and amounts 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. Notes To The Accounts 6969 3 FINANCIAL RISK MANAGEMENT (Continued) (a) Financial risk factors (Continued) (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 Note 22. 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 27. 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 after taxation of a 100 basis-point shift would be a maximum increase/decrease of US$565,000 and US$509,000 for the years ended 31 December 2014 and 2013 respectively. (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 2013 and 2014, 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 27 and 28. 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$392,000 (2013: US$69,000). (b) Capital risk management The Group’s objectives when managing capital are to safeguard the Group’s ability to provide returns for shareholders and benefi ts for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. The Group regularly reviews and manages its capital structure to ensure optimal capital structure to maintain a balance between higher shareholders’ return that might be possible with higher levels of borrowings and advantages and security afforded by a sound capital position, and makes adjustments to the capital structure in light of changes in economic conditions. The Group monitors capital on the basis of the gearing ratio. This ratio is calculated as total bank borrowings divided by total equity attributable to the Company’s equity holders as shown on the consolidated statement of fi nancial position. 70 HUTCHISON CHINA MEDITECH LIMITED 2014 Annual Report Notes To The Accounts 3 FINANCIAL RISK MANAGEMENT (Continued) (b) Capital risk management (Continued) Currently, it is the Group’s strategy to maintain a reasonable gearing ratio. The gearing ratios as at 31 December 2014 and 2013 were as follows: Total bank borrowings (Note 27) Total equity attributable to the Company’s equity holders Gearing ratio 2014 US$’000 53,205 94,889 56.1% 2013 US$’000 51,508 88,870 58.0% The decrease in the gearing ratio was primarily resulted from the increase of total equity attributable to the Company’s equity holders during 2014. (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, amounts 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. Notes To The Accounts 7171 4 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (Continued) (a) Revenue recognition The Group accounts for licensing, co-development and commercialisation income in respect of the research and development projects using the percentage of completion method. The percentage of completion method takes into consideration whether different milestone payments represent a separate earnings process and whether the milestone payments represent probable economic benefi t that will fl ow to the Group. The application of the percentage of completion method requires signifi cant judgement and places considerable importance on (1) accurate estimates of the extent of progress towards completion for each milestone, (2) total estimated development costs and remaining costs to completion, (3) corresponding effort and risks for each milestone and (4) whether the achievement of milestone was considered probable. During the year ended 31 December 2014, the Group initiated the Phase II double-blind clinical trial of fruquintinib in colorectal cancer patients in China (the “clinical trial”) pursuant to an exclusive license and collaboration agreement with Eli Lilly (the “Collaboration Agreement”). In accordance with the terms of the Collaboration Agreement, the Group is entitled to receive certain development milestone income and reimbursement of development costs from Eli Lilly if the outcome of the clinical trial fulfi ls the specifi c pre-determined development milestone criteria. Although the clinical trial was double-blinded and still in progress as at 31 December 2014, management has exercised signifi cant judgement in assessing the outcome of the clinical trial. The assessment has taken into account the following assumptions and factors: – – – – Estimation of patients’ profi le based on their side effects which are generally unique to patients who have taken fruquintinib; Previous experience of a similar clinical trial for fruquintinib; Results of scientifi c and statistical analysis performed in assessing the potential outcome of the clinical trial; and Result of statistical sensitivity analysis performed on the key assumption to the estimated outcome of the clinical trial. Although the related clinical trial has not yet been completed as at 31 December 2014 and is still subject to the final confirmation from Eli Lilly, management considered that the outcome of the clinical trial could be reliably estimated and after evaluation of the above statistical and sensitivity analysis, management assessed it is highly probable that the clinical trial’s result would meet the specifi c pre-determined milestone criteria stipulated in the Collaboration Agreement as at 31 December 2014. Accordingly, the Group recognised US$9.8 million service revenue (Note 5) as calculated using the percentage of completion method on expected total receipts (including the milestone income and reimbursement of development costs in respect of the clinical trial) for the year ended 31 December 2014. 72 HUTCHISON CHINA MEDITECH LIMITED 2014 Annual Report Notes To The Accounts 4 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (Continued) (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. (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 joint ventures, 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) 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 outcomes 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. (f) Allocation of purchase price amongst identifi able assets acquired and liabilities assumed in the business combination The Group accounts for the business combination as detailed in Note 29(b) in accordance with IFRS 3 “Business Combinations”. At the date of initial recognition, it is required to recognise separately, the Group’s share of identifi able assets and liabilities that satisfy the recognition criteria regardless of whether they have been previously recognised in acquiree’s fi nancial statements. The determination of the fair value in respect of the intangible assets was referenced to the infl ow of future economic benefi ts and the outfl ow of future economic resources required to settle the obligation which requires signifi cant amount of judgement and estimate. An independent professional valuer was engaged to assist in determining the fair values of the assets acquired and liabilities assumed in the business combination. Notes To The Accounts 7373 5 REVENUE AND SEGMENT INFORMATION The Group is principally engaged in researching, developing, manufacturing and selling pharmaceuticals and health-related consumer products. Revenues recognised for the year are as follows: Continuing operations: Sales of goods (note (i)) Income from research and development projects (note (ii)) Discontinued operations: Sales of goods Notes: 2014 US$’000 66,985 24,828 91,813 2013 US$’000 16,470 29,500 45,970 – (40) 91,813 45,930 (i) Included in US$67.0 million sales of goods for the year ended 31 December 2014, US$50.2 million is attributable from Hutchison Whampoa Sinopharm Pharmaceuticals (Shanghai) Company Limited (“Hutchison Sinopharm”) which was newly acquired during 2014. (ii) Income from research and development projects include upfront income and milestone income of US$8.4 million (2013: US$22.2 million) from two (2013: three) global licensing, co-development and commercialisation agreements and income from the provision of research and development services of US$16.4 million (2013: US$7.3 million). Included in US$24.8 million income from research and development projects, US$9.8 million represents unbilled service income from a third party in relation to a clinical trial which has not yet been completed as at 31 December 2014. Details of signifi cant accounting judgement and estimates are disclosed in Note 4(a). 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, marketing 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-related 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 share of profi ts less losses after tax of joint ventures, 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. Details of the discontinued operations are included in Note 10. 74 HUTCHISON CHINA MEDITECH LIMITED 2014 Annual Report Notes To The Accounts 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 2014 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 53,832 24,828 217 12,936 91,813 – 91,813 EBIT/(LBIT) 1,156 (2,614) (337) 999 (796) (6,865) (7,661) Interest income 72 33 Share of profi ts less losses after tax of joint ventures 23,611 (8,409) 8 – 3 – 116 443 559 15,202 – 15,202 Operating profi t/(loss) 24,839 (10,990) (329) 1,002 14,522 (6,422) 8,100 Finance costs 87 – Additions to non-current assets (other than fi nancial instrument and deferred tax assets) Depreciation/amortisation 915 68 3,695 1,145 – – 3 19 106 1,410 1,516 2 7 4,612 1,223 6 42 4,618 1,265 Total assets 136,767 52,606 1,173 7,050 197,596 21,342 218,938 Notes To The Accounts 7575 5 REVENUE AND SEGMENT INFORMATION (Continued) Discontinued operations China healthcare PRC Drug R&D PRC As at and for the year ended 31 December 2014 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$’000 Revenue from external customers EBIT Operating profi t Additions to non-current assets (other than fi nancial instrument and deferred tax assets) Depreciation/amortisation Total assets – – – – – – – – – – – – – 2,096 2,096 – – – – – – – – – – – – – – – – – – – – – – 2,096 2,096 – – – – – – – – – – 2,096 2,096 – – – 76 HUTCHISON CHINA MEDITECH LIMITED 2014 Annual Report Notes To The Accounts 5 REVENUE AND SEGMENT INFORMATION (Continued) Continuing operations China healthcare PRC US$’000 Drug R&D PRC US$’000 As at and for the year ended 31 December 2013 Consumer products Reportable segment PRC US$’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) 806 6,495 Interest income 9 31 (80) 12 Share of profi ts less losses after tax of joint ventures 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 Notes To The Accounts 7777 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 Revenue from external customers is after elimination of inter-segment sales. The amount eliminated attributable to China healthcare segment within the PRC is US$271,000 (2013: nil) and consumer products segment from Hong Kong to the PRC is US$105,000 (2013: US$628,000). Sales between segments are carried out at mutually agreed terms. Unallocated expenses mainly represent corporate expenses which include corporate employee benefi t expenses and the relevant share-based compensation expenses. Unallocated assets mainly comprise cash at banks. A reconciliation of (LBIT)/EBIT for reportable segments to profi t before taxation and discontinued operations is provided as follows: (LBIT)/EBIT for reportable segments Unallocated expenses Interest income Share of profi ts less losses after tax of joint ventures Finance costs Profi t before taxation 2014 US$’000 (796) (6,865) 559 15,202 (1,516) 6,584 2013 US$’000 6,735 (6,568) 451 10,937 (1,485) 10,070 As at 31 December 2014, the total non-current assets, other than investment in joint ventures and deferred tax assets, located in the PRC and Hong Kong were US$11,458,000 (2013: US$6,823,000) and US$79,000 (2013: US$120,000) respectively. 78 HUTCHISON CHINA MEDITECH LIMITED 2014 Annual Report Notes To The Accounts 6 OTHER NET OPERATING (EXPENSES)/INCOME Continuing operations: Interest income Net foreign exchange (losses)/gains Other operating income Other operating expenses 7 OPERATING PROFIT Operating profi t is stated after charging the following: Continuing operations: Auditor’s remuneration Amortisation of leasehold land Amortisation of other intangible asset Cost of inventories recognised as expense (note (i)) Depreciation of property, plant and equipment Write-off of inventories (note (ii)) Provision for inventories (note (ii)) Provision for receivables Loss on disposal of property, plant and equipment Operating lease rentals in respect of land and buildings Research and development expense Employee benefi t expenses (Note 13) Notes: 2014 US$’000 2013 US$’000 559 (480) 20 (281) (182) 451 1,217 4 (69) 1,603 2014 US$’000 2013 US$’000 607 37 48 62,464 1,180 143 – 185 36 810 4,574 21,297 408 38 – 16,823 925 41 88 42 17 672 4,475 16,517 (i) Included in US$62.5 million cost of inventories recognised as expense for the year ended 31 December 2014, US$47.8 million is attributable from Hutchison Sinopharm which was newly acquired during 2014. (ii) Provision for inventories and write-off of inventories amounted to nil (2013: US$88,000) and US$143,000 (2013: US$41,000) respectively mainly related to obsolete or damaged inventories. 8 FINANCE COSTS Continuing operations: Interest expense on bank borrowings Interest expense on loan from a non-controlling shareholder of a subsidiary (Note 31(a)) Guarantee fee on bank borrowings (Note 31(a)) Interest expense on amount due to immediate holding company (Note 31(a)) 9 TAXATION CHARGE Continuing operations: Current tax – HK – PRC Deferred income tax (Note 19) Taxation charge Notes To The Accounts 7979 2014 US$’000 2013 US$’000 913 19 471 113 922 – 471 92 1,516 1,485 2014 US$’000 2013 US$’000 14 849 480 1,343 – 1,186 (136) 1,050 (a) Hong Kong profi ts tax has been provided for at the rate of 16.5% (2013: 16.5%) on the estimated assessable profi ts less estimated available tax losses. (b) Taxation in the PRC has been provided for at the applicable rate on the estimated assessable profi ts less estimated available tax losses. 80 HUTCHISON CHINA MEDITECH LIMITED 2014 Annual Report Notes To The Accounts 9 TAXATION CHARGE (Continued) (c) The taxation charge on the Group’s profi t before taxation differs from the theoretical amount that would arise using the Group’s weighted average tax rate as follows: Continuing operations: Profi t before taxation Tax calculated at the domestic tax rates of respective companies Tax effect of joint ventures’ result Tax losses for which no deferred tax asset was recognised Expenses not deductible for tax purposes Utilisation of previously unrecognised tax losses Withholding tax on unremitted earnings Others Taxation charge 2014 US$’000 2013 US$’000 6,584 10,070 4,464 (5,620) 1,469 607 (1,062) 1,161 324 1,343 5,115 (4,453) 952 770 (2,673) 1,029 310 1,050 The weighted average tax rate calculated at the domestic tax rates of respective companies for the year was 67.8% (2013: 50.8%). The fl uctuation in the weighted average applicable tax rate arose because of the changes in the relative profi tability of the Group’s operations in different tax jurisdictions. The effective tax rate for the year was 20.4% (2013: 10.4%). Notes To The Accounts 8181 10 RESULTS AND CASH FLOWS OF DISCONTINUED OPERATIONS In June 2013, the Group discontinued its consumer products operation in France, which represented a geographical area of the Group’s business, and a major business line in the PRC consumer products operation, as their performances were below expectation in light of increased competitive activities in the consumer product market. The results and cash fl ows of the discontinued operations are set out below. Revenue and income (note (i)) Expenses (note (ii)) Profi t/(loss) before taxation from discontinued operations Taxation charge Profi t/(loss) for the year from discontinued operations Cash fl ow from discontinued operations Net cash generated from/(used in) operating activities Net increase/(decrease) in cash and cash equivalents Notes: (i) Revenue and income include: Sales of goods Other income 2014 US$’000 2013 US$’000 2,096 – 2,096 (62) 2,034 2,515 2,515 2014 US$’000 – 2,096 2,096 (31) (1,947) (1,978) – (1,978) (1,239) (1,239) 2013 US$’000 (40) 9 (31) The income from the discontinued operations for the year ended 31 December 2014 represented the compensation income from the arbitration proceedings against a supplier, being the excess of US$2.5 million compensation proceeds received over the carrying amount of US$0.4 million receivables recorded in prior years. (ii) Expenses include: Cost of inventories recognised as expense Employee benefi t expenses Loss on disposal of property, plant and equipment Operating lease rentals in respect of land and building Write-off of inventories Selling expenses 2014 US$’000 2013 US$’000 – – – – – – 7 239 1 198 96 840 82 HUTCHISON CHINA MEDITECH LIMITED 2014 Annual Report Notes To The Accounts 11 EARNINGS PER SHARE (a) Basic earnings/(losses) per share Basic earnings/(losses) per share are calculated by dividing the profi t/(loss) attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the year. Weighted average number of outstanding ordinary shares in issue 52,563,387 52,050,988 2014 2013 Profi t/(loss) for the year attributable to equity holders of the Company – Continuing operations (US$’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) 4,357 1,017 5,374 0.0829 0.0193 0.1022 7,323 (1,408) 5,915 0.1407 (0.0271) 0.1136 (b) Diluted earnings per share Diluted earnings per share are 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. Notes To The Accounts 8383 2014 2013 52,563,387 337,758 52,050,988 827,438 52,901,145 52,878,426 4,357 1,017 5,374 7,323 (1,408) 5,915 0.0824 0.1385 0.1016 0.1119 11 EARNINGS PER SHARE (Continued) (b) Diluted earnings per share (Continued) 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) Diluted earnings per share for profi t from continuing and discontinued operations attributable to equity holders of the Company (US$ per share) Diluted earnings per share from discontinued operations for the year ended 31 December 2014 are US$0.0192 (2013: the diluted loss per share are 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 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$9,442,000 (2013: US$5,256,000) is included in cost of sales. 2014 US$’000 271 1,432 45 1,748 2014 US$’000 15,864 1,370 3,195 868 21,297 2013 US$’000 280 1,381 43 1,704 2013 US$’000 12,953 1,096 2,111 357 16,517 84 HUTCHISON CHINA MEDITECH LIMITED 2014 Annual Report Notes To The Accounts 14 PROPERTY, PLANT AND EQUIPMENT Buildings situated in Leasehold Plant and the PRC improvements equipment US$’000 US$’000 US$’000 Furniture and fi xtures, other equipment and motor Construction vehicles US$’000 in progress US$’000 Cost As at 1 January 2014 Exchange differences Acquisition of a subsidiary (Note 29(b)) Additions Disposals Transfers 2,551 (60) – – – – 2,583 (68) – 126 (21) 1,671 85 (2) – 8 – – 10,421 (248) 181 1,215 (388) 1,097 1,248 (28) – 2,380 – (2,768) Total US$’000 16,888 (406) 181 3,729 (409) – As at 31 December 2014 2,491 4,291 91 12,278 832 19,983 Accumulated depreciation As at 1 January 2014 Exchange differences Acquisition of a subsidiary (Note 29(b)) Charge for the year Disposals As at 31 December 2014 Net book value As at 31 December 2014 761 (19) – 210 – 952 2,377 (56) – 380 (19) 2,682 75 (2) – 2 – 75 8,647 (201) 112 588 (354) 8,792 – – – – – – 11,860 (278) 112 1,180 (373) 12,501 1,539 1,609 16 3,486 832 7,482 Notes To The Accounts 8585 14 PROPERTY, PLANT AND EQUIPMENT (Continued) Buildings situated in Leasehold Plant and the PRC improvements equipment US$’000 US$’000 US$’000 Cost As at 1 January 2013 Exchange differences Additions Disposals 2,472 2,467 79 – – 79 55 (18) As at 31 December 2013 2,551 2,583 Accumulated depreciation As at 1 January 2013 Exchange differences Charge for the year Disposals As at 31 December 2013 Net book value 625 21 115 – 761 2,302 73 19 (17) 2,377 As at 31 December 2013 1,790 206 78 3 4 – 85 60 2 13 – 75 10 Furniture and fi xtures, other equipment and motor Construction vehicles US$’000 in progress US$’000 9,059 299 1,211 (148) – 18 1,230 – Total US$’000 14,076 478 2,500 (166) 10,421 1,248 16,888 7,745 255 778 (131) 8,647 – – – – – 10,732 351 925 (148) 11,860 1,774 1,248 5,028 86 HUTCHISON CHINA MEDITECH LIMITED 2014 Annual Report Notes To The Accounts 15 LEASEHOLD LAND The Group’s interests in leasehold land represent prepaid operating lease payments and are located in the PRC. Cost As at 1 January Exchange differences As at 31 December Accumulated amortisation As at 1 January Exchange differences Amortisation charge As at 31 December Net book value As at 31 December 16 GOODWILL Cost As at 1 January Acquisition of a subsidiary (Note 29(b)) As at 31 December 2014 US$’000 2013 US$’000 1,761 (41) 1,720 253 (6) 37 284 1,706 55 1,761 208 7 38 253 1,436 1,508 2014 US$’000 2013 US$’000 407 1,546 1,953 407 – 407 Goodwill is allocated to Hutchison Healthcare Limited (“HHL”) and Hutchision Sinopharm, subsidiaries of the Group, to the extent of US$407,000 (2013: US$407,000) and US$1,546,000 (2013: nil), respectively. For the purposes of impairment reviews, the recoverable amount of goodwill is determined based on value-in-use calculations. The value-in-use calculations use cash fl ow projections based on fi nancial budgets approved by management covering a fi ve-year period. Projections in excess of fi ve years are used to take into account increasing market share and growth momentum. Notes To The Accounts 8787 16 GOODWILL (Continued) There are a number of assumptions and estimates involved for the preparation of cash fl ow projections for the period covered by the approved budget. Key assumptions are set out below: Expected growth in revenue Pre-tax discount rate Long-term growth rate HHL Hutchison Sinopharm 2014 5% 11.0% 5% 2013 5% 11.0% 5% 2014 20% 11.6% 5% 2013 – – – Management prepared the fi nancial budgets taking into account actual and prior year performance and market development expectations. Judgement is required to determine key assumptions adopted in the cash fl ow projections and changes to key assumptions can signifi cantly affect these cash fl ow projections. 17 OTHER INTANGIBLE ASSET Cost As at 1 January Exchange differences Acquisition of a subsidiary (Note 29(b)) As at 31 December Accumulated amortisation As at 1 January Amortisation charge As at 31 December Net book value As at 31 December Other intangible asset represents the Good Supply Practice license (“GSP license”). 2014 US$’000 2013 US$’000 – 6 708 714 – 48 48 666 – – – – – – – – 88 HUTCHISON CHINA MEDITECH LIMITED 2014 Annual Report Notes To The Accounts 18 INVESTMENTS IN JOINT VENTURES Unlisted shares Share of undistributed post acquisition reserves Loan to a joint venture (Note 31(b)) Particulars regarding the principal joint ventures are set below: 31 December 2014 US$’000 31 December 2013 US$’000 61,883 46,131 5,000 61,883 49,522 – 113,014 111,405 Name Hutchison Whampoa Guangzhou Baiyunshan Chinese Medicine Company Limited (“HBYS”) Shanghai Hutchison Pharmaceuticals Limited (“SHPL”) Principal place of business Equity interest attributable to the Group Nature of relationship Measurement method The PRC 40% (note (i)) Manufacture and distribution Equity of Traditional Chinese Medicine (“TCM”) products The PRC 50% Manufacture and distribution Equity of TCM products Nutrition Science Partners Hong Kong 43.79% (note (ii)) Provide research and Equity Limited (“NSP”) development of pharmaceutical products All of the above joint ventures are private companies and there is no quoted market price available for its shares. Notes: (i) There is 20% non-controlling interest in the intermediate holding company which holds 50% equity interest in HBYS. (ii) There is 12.42% (2013: 12.24%) non-controlling interest in the intermediate holding company which holds 50% equity interest in NSP. Notes To The Accounts 8989 18 INVESTMENTS IN JOINT VENTURES (Continued) Summarised fi nancial information for joint ventures Set out below are the summarised fi nancial information for the joint ventures which are included under the China healthcare operating segment (“China healthcare JVs”) and Drug R&D operating segment (“Drug R&D JV”) and accounted for using the equity method. (i) Summarised statement of fi nancial position China healthcare JVs HBYS 31 December SHPL 31 December R&D JV NSP 31 December 2014 US$’000 2013 US$’000 2014 US$’000 2013 US$’000 2014 US$’000 2013 US$’000 Cash and bank balances Other current assets (excluding cash and bank balances) 51,837 51,587 18,874 30,331 6,249 17,031 92,734 94,110 56,569 44,828 2,299 30 Total current assets 144,571 145,697 75,443 75,159 8,548 17,061 Non-current assets 73,552 59,446 67,731 35,646 30,000 30,000 Current fi nancial liabilities (excluding trade and other payables) Other current liabilities (including trade and other payables) (625) – (7,476) (820) (10,000) – (98,260) (91,760) (44,576) (38,484) (2,902) (4,604) Total current liabilities (98,885) (91,760) (52,052) (39,304) (12,902) (4,604) Non-current liabilities (3,858) (3,180) (19,216) (5,025) – – Net assets 115,380 110,203 71,906 66,476 25,646 42,457 90 HUTCHISON CHINA MEDITECH LIMITED 2014 Annual Report Notes To The Accounts 18 INVESTMENTS IN JOINT VENTURES (Continued) Summarised fi nancial information for joint ventures (Continued) (ii) Summarised statement of comprehensive income China healthcare JVs HBYS SHPL R&D JV NSP 2014 US$’000 2013 US$’000 2014 US$’000 2013 US$’000 2014 US$’000 2013 US$’000 300,842 (3,645) 1,317 91 24,553 (3,735) 20,818 (2,352) 252,465 (3,598) 1,103 (44) 20,386 (3,408) 16,978 3,879 154,703 (2,651) 257 – 31,505 (5,103) 26,402 (1,895) 138,160 (2,612) 197 – 26,620 (4,196) 22,424 848 – – – – – – – – (16,811) – (16,811) – (17,543) – (17,543) – Revenue Depreciation and amortisation Interest income Finance cost Profi t/(loss) before taxation Taxation charge Post-tax profi t/(loss) Other comprehensive income Total comprehensive income 18,466 20,857 24,507 23,272 (16,811) (17,543) Dividends declared 12,820 6,462 19,077 16,154 – – Note: The post-tax loss and total comprehensive loss for other individual immaterial joint venture for the year ended 31 December 2014 are approximately US$5,000 (2013: profi t US$15,000) and US$20,000 (2013: total comprehensive income US$24,000) respectively. Notes To The Accounts 9191 18 INVESTMENTS IN JOINT VENTURES (Continued) Summarised fi nancial information for joint ventures (Continued) (iii) Reconciliation of summarised fi nancial information Reconciliation of the summarised fi nancial information presented to the carrying amount of investment in the joint ventures. China healthcare JVs HBYS As at 31 December 2014 US$’000 2013 US$’000 SHPL As at 31 December 2014 US$’000 2013 US$’000 R&D JV NSP As at 31 December 2014 US$’000 2013 US$’000 110,203 95,808 66,476 59,358 42,457 60,000 (469) 20,818 (12,820) (2,352) – 16,978 (6,462) 3,879 – 26,402 (19,077) (1,895) – 22,424 (16,154) 848 – (16,811) – – – (17,543) – – Opening net assets at 1 January Purchase of additional interests in a subsidiary of a joint venture Profi t/(loss) for the year Dividend declared Other comprehensive income Closing net assets at 31 December 115,380 110,203 71,906 66,476 25,646 42,457 Group’s share of net assets in joint ventures @50% Goodwill Loan to a joint venture Non-controlling interests Carrying value Note: 57,690 55,102 35,953 33,238 12,823 21,229 – – (1,901) – – (1,700) 3,205 – – 3,282 – – – 5,000 – – – – 55,789 53,402 39,158 36,520 17,823 21,229 The carrying value for other individual immaterial joint venture as at 31 December 2014 is approximately US$244,000 (2013: US$254,000). The joint ventures had the following operating lease commitments and capital commitments: Operating lease commitments Capital commitments 31 December 2014 US$’000 31 December 2013 US$’000 1,656 61,170 1,329 8,379 92 HUTCHISON CHINA MEDITECH LIMITED 2014 Annual Report Notes To The Accounts 19 DEFERRED INCOME TAX Deferred tax assets Deferred tax liabilities Net deferred tax liabilities The movements in net deferred income tax liabilities are as follows: At 1 January Acquisition of a subsidiary (Note 29(b)) (Charged)/credited to the consolidated income statement – withholding tax on unremitted earnings – deferred tax on amortisation of intangible assets – utilisation of previously recognised tax losses 31 December 2014 US$’000 31 December 2013 US$’000 257 (2,947) (2,690) 2014 US$’000 (2,112) (98) (363) 11 (128) 285 (2,397) (2,112) 2013 US$’000 (2,248) – 136 – – At 31 December (2,690) (2,112) 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$7,877,000 as at 31 December 2014 (2013: US$9,036,000). These unrecognised tax losses can be carried forward against future taxable income and will expire in the following years: No expiry date 2014 2015 2016 2017 2018 2019 2014 US$’000 23,531 – 10,098 – 4,097 1,148 633 39,507 2013 US$’000 14,855 8,647 10,341 336 5,672 1,347 – 41,198 20 INVENTORIES Raw materials Finished goods Notes To The Accounts 9393 31 December 2014 US$’000 31 December 2013 US$’000 291 4,114 4,405 483 937 1,420 Included in the US$4.4 million inventories as at 31 December 2014, US$3.4 million is attributable from Hutchison Sinopharm which was newly acquired during 2014. 21 TRADE AND OTHER RECEIVABLES Trade and other receivables from third parties Trade receivables from related parties ((Note 31(b)) 31 December 2014 US$’000 31 December 2013 US$’000 32,524 1,922 34,446 11,803 2,986 14,789 Substantially all the trade and other receivables are denominated in RMB and HK$ and are due within one year from the end of the reporting period. Included in the US$32.5 million trade and other receivables from third parties as at 31 December 2014, US$16.4 million is attributable from Hutchison Sinopharm which was newly acquired during 2014 and US$9.8 million (2013: nil) represents an unbilled service income from a customer. The carrying value of trade and other 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$1,793,000 (2013: US$1,670,000) are aged over 6 months. 2014 US$’000 1,670 185 (62) 1,793 2013 US$’000 1,554 42 74 1,670 94 HUTCHISON CHINA MEDITECH LIMITED 2014 Annual Report Notes To The Accounts 21 TRADE AND OTHER RECEIVABLES (Continued) As at 31 December 2014, trade receivables of approximately US$2,130,000 (2013: US$3,703,000) were past due but not impaired. These related to a number of independent customers for whom there is no recent history of default. The ageing analysis of these receivables is as follows: Up to 3 months 4 to 6 months 6 to 12 months 2014 US$’000 – 24 2,106 2,130 2013 US$’000 1,136 959 1,608 3,703 The credit quality of trade receivables neither past due nor impaired has been assessed by reference to historical information about the counterparty default rates. The existing counterparties do not have defaults in the past. 22 CASH AND BANK BALANCES Cash at bank and in hand Short-term bank deposits (note (a)) Bank deposits maturing over three months (note (a)) Denominated in: US dollars RMB (note (b)) UK Pound Sterling HK$ Euro Notes: 31 December 2014 US$’000 31 December 2013 US$’000 32,019 6,927 12,179 51,125 2014 US$’000 8,104 40,213 247 2,543 18 51,125 20,946 25,917 – 46,863 2013 US$’000 12,203 32,139 212 1,651 658 46,863 (a) The weighted average effective interest rate on bank deposits, with maturity ranging from 7 to 185 days (2013: 7 to 90 days), was 2.2% (2013: 2.1%) 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 Number of shares of US$1 each Nominal amount US$’000 75,000,000 75,000 Number of Shares US$’000 52,048,448 52,048 3,000 52,051,448 52,051,448 1,025,228 53,076,676 3 52,051 52,051 1,025 53,076 23 SHARE CAPITAL (a) Authorised and issued share capital Authorised: As at 1 January 2013, 31 December 2013, 1 January 2014 and 31 December 2014 Issued and fully paid: As at 1 January 2013 Issue of shares under share option scheme (note) As at 31 December 2013 As at 1 January 2014 Issue of shares under share option scheme (note) As at 31 December 2014 Note: Issue date 26 February 2013 3 June 2014 23 June 2014 24 October 4 December 2014 2014 Number of ordinary shares of US$1 each allotted and issued by the Company Issue price Aggregate cash consideration (US$’000) Weighted average share price at the exercise date 3,000 £1.535 7 £4.40 768,182 £1.090 1,415 £8.35 76,818 £1.090 141 £8.35 102,628 £3.195 523 £11.55 77,600 £4.967 601 £14.58 All the above new shares rank pari passu in all respects with the then existing shares. 96 HUTCHISON CHINA MEDITECH LIMITED 2014 Annual Report Notes To The Accounts 23 SHARE CAPITAL (Continued) (b) Share option schemes (i) Share option scheme of the Company The Company conditionally adopted a share option scheme (the “HCML Share Option Scheme”) on 4 June 2005 which was amended 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 share options to subscribe for shares of the Company. The following share options were outstanding under the HCML Share Option Scheme as at 31 December 2014: Effective date of grant of share options Name or category of participants Director Exercise period of share options Exercise price of Number of shares share options subject to the options Johnny Cheng 25 August 2008 (note (A)) From 25 August 2008 £1.260 64,038 to 24 August 2018 Employees in aggregate 11 September 2006 (note (B)) From 11 September 2006 £1.715 26,808 to 18 May 2016 18 May 2007 (note (C)) From 18 May 2007 £1.535 40,857 to 17 May 2017 1 December 2010 (note (A)) From 1 December 2010 £4.967 100,000 to 30 November 2020 24 June 2011 (note (A)) From 24 June 2011 £4.405 150,000 to 23 June 2021 20 December 2013 (note (A)) From 20 December 2013 £6.100 302,700 to 19 December 2023 684,403 Notes To The Accounts 9797 23 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: 2014 2013 Weighted average exercise price in £ per share 3.67 – 1.59 – 6.10 4.67 Number of options 2,303,317 – (1,025,228) – (593,686) 684,403 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 As at 1 January Granted Exercised Lapsed Cancelled (note (D)) 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 granted, exercised, lapsed or cancelled during the year ended 31 December 2014. Notes: (A) 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 effective date of grant. (B) 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. (C) 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 effective date of grant. (D) 593,686 share options were cancelled with the consent of the relevant eligible employees in exchange for new share options of a subsidiary (Note 23(b)(ii) (D)). This was accounted for as the modifi cation of the original share options granted which did not result in any incremental fair value to the Group. (E) As at 31 December 2014, the fair value of share options in connection with the 684,403 share options outstanding but remaining unvested amounted to £144,000 (equivalent to US$224,000). The amount is to be recognised as an expense of the Group over the remaining vesting periods of the relevant share options as mentioned in note (A) above. The amount recognised as an expense for the year ended 31 December 2014 amounted to US$808,000 (31 December 2013: US$206,000). 98 HUTCHISON CHINA MEDITECH LIMITED 2014 Annual Report Notes To The Accounts 23 SHARE CAPITAL (Continued) (b) Share option schemes (Continued) (i) Share option scheme of the Company (Continued) The fair value of share options granted under the HCML Share Option Scheme determined by the Binomial Model is as follows: Effective date of grant of share options 11 September 2006 18 May 2007 25 August 1 December 24 June 20 December 2008 2010 2011 2013 Value of each share option £0.553 £0.533 £0.569 £1.995 £1.841 £3.154 Signifi cant inputs into the valuation model: Exercise price Share price at effective date of grant Expected volatility (notes (i) to (v)) Risk-free interest rate Expected life of share options Expected dividend yield Notes: £1.715 £1.7325 38.8% 4.766% £1.535 £1.5400 40.0% 5.098% £1.260 £1.2600 35.0% 4.700% £4.967 £4.6000 48.4% 3.360% £4.405 £4.3250 46.6% 3.130% £6.100 £6.100 36.0% 3.160% 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 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 share options is estimated with reference to the historical volatility of the comparable companies for the past one to two years as of the valuation date, since there was no or only a relatively short period of trading record of the Company’s shares at the respective effective dates of grant. (ii) For share options granted on 25 August 2008, the volatility of the underlying stock during the life of the share 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 1 December 2010, the volatility of the underlying stock during the life of the share 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 share 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 share options is estimated with reference to the volatility of Company seven years prior to the issuance of share options. Notes To The Accounts 9999 23 SHARE CAPITAL (Continued) (b) Share option schemes (Continued) (ii) Share option schemes of a subsidiary Hutchison MediPharma Holdings Limited (“HMHL”), a subsidiary of the Company, adopted a share option scheme on 6 August 2008 (as amended on 15 April 2011) and another share option scheme on 17 December 2014 (together the “HMHL Share Option Schemes”). Pursuant to the HMHL Share Option Schemes, 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 Schemes subject to the discretion of the board of directors of HMHL. The following share options were outstanding under the HMHL Share Option Schemes as at 31 December 2014: Category of participants Effective date of grant of share options Exercise period of Exercise Price Number of shares share options of share options subject to the options Employees in aggregate 2 August 2010 (note (A)) From 2 August 2010 US$2.24 5,000 to 1 August 2016 18 April 2011 (note (B)) From 18 April 2011 US$2.36 19,400 to 17 April 2017 17 December 2014 (note (C)) From 17 December 2014 US$7.82 1,187,372 to 19 December 2023 1,211,772 100 HUTCHISON CHINA MEDITECH LIMITED 2014 Annual Report Notes To The Accounts 23 SHARE CAPITAL (Continued) (b) Share option schemes (Continued) (ii) Share option schemes of a subsidiary (Continued) Movements in the number of share options outstanding and their related weighted average exercise prices are as follows: 2014 2013 Weighted average exercise price in US$ per share 2.03 7.82 1.50 2.15 1.70 7.71 Weighted average exercise price in US$ per share 1.87 – – 2.03 1.79 2.03 Number of options 538,420 1,187,372 (80,924) (393,212) (39,884) 1,211,772 Number of options 3,144,505 – – (120,896) (2,485,189) 538,420 As at 1 January Granted (note (D)) Exercised (note (E)) Lapsed Cancelled (note (F)) As at 31 December Notes: (A) The outstanding share options are fully vested and exercisable within a period of 6 years from the effective date of grant. (B) 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 effective date of grant. (C) The share options granted are exercisable subject to, amongst other relevant vesting criteria, the vesting schedule of 25% on 20 December 2014 and 25% on each of the fi rst, second, and third anniversaries of such date. (D) 1,187,372 share options were issued as a replacement award for share options of the Company cancelled under Note 23(b)(i)(D). (E) The weighted average share price as at the date of exercise is US$4.55. (F) The share options 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. (G) As at 31 December 2014, the fair value of share options in connection with the 1,211,772 share options outstanding but remaining unvested amounted to US$400,000. The amount is to be recognised as an expense of the Group over the remaining vesting periods of the relevant share options. The amount recognised as an expense for the year ended 31 December 2014 amounted to US$60,000 (2013: US$151,000). Notes To The Accounts 101101 23 SHARE CAPITAL (Continued) (b) Share option schemes (Continued) (ii) Share option schemes of a subsidiary (Continued) The fair value of options granted under the HMHL Share Option Schemes determined using the Binomial Model is as follows: Value of each share option US$0.258 US$0.923 US$3.490 Effective date of grant of share options 2 August 2010 18 April 2011 17 December 2014 Signifi cant inputs into the valuation model: Exercise price Share price at effective date of grant Expected volatility (note) Risk-free interest rate Expected life of share options Expected dividend yield Note: US$2.240 US$1.030 49% 2.007% 6 years 0% US$2.360 US$2.048 55% 2.439% 6 years 0% US$7.820 US$7.820 48.4% 1.660% 5.26 years 0% The volatility of the underlying stock during the life of the share options is estimated with reference to the historical volatility of the comparable companies for the past fi ve to six years as of the valuation date. 102 HUTCHISON CHINA MEDITECH LIMITED 2014 Annual Report Notes To The Accounts 24 NON-CONTROLLING INTERESTS The total non-controlling interest as at 31 December 2014 is approximately US$24,994,000 (2013: US$15,966,000) of which US$11,068,000 (2013: US$10,587,000) is attributable to Hutchison BYS (Guangzhou) Holding Limited (“HGHL”) and its subsidiaries (together the “HGHL Group”), US$5,598,000 (2013: US$3,626,000) is attributable to HMHL and its subsidiaries (together the “HMHL Group”), US$776,000 (2013: US$1,753,000) is attributable to Hutchison Hain Organic Holdings Limited (“HHOH”) and its subsidiaries (together the “HHOH Group”) and US$7,552,000 (2013: Nil) is attributable to Hutchison Sinopharm. Set out below are the particulars and summarised fi nancial information for each subsidiary that has non-controlling interests that are material to the Group. Name HGHL HMHL (note (i)) HHOH (note (ii)) Principle place of business British Virgin Islands Cayman Islands British Virgin Islands Hutchison Sinopharm (note (iii)) The PRC Notes: (i) The Group has 4 voting rights out of total of 5 voting rights. Equity interest attributable to the non-controlling interest 20% 12.42% 50% 49% (ii) The portion of equity interest is in proportion to the portion of voting rights. The Group has one additional casting vote in the event of deadlock. (iii) The Group has 3 voting rights out of total of 5 voting rights. (i) Summarised consolidated statement of fi nancial position HGHL Group 31 December HMHL Group 31 December HHOH Group 31 December Hutchison Sinopharm 31 December 2014 US$’000 2013 US$’000 2014 US$’000 2013 US$’000 2014 US$’000 2013 US$’000 2014 US$’000 2013 US$’000 Current assets Non-current assets Current liabilities Non-current liabilities 207 55,722 (897) (3,434) 172 53,335 (1,060) (3,265) 27,965 27,026 (11,456) – 21,215 28,104 (19,928) – 5,884 9 (4,253) (5,100) 8,230 45 (4,734) (9,600) 33,251 819 (18,346) (186) Net assets/(liabilities) 51,598 49,182 43,535 29,391 (3,460) (6,059) 15,538 – – – – – Notes To The Accounts 103103 24 NON-CONTROLLING INTERESTS (Continued) (ii) Summarised consolidated statement of comprehensive income HGHL Group HMHL Group HHOH Group Hutchison Sinopharm 2014 US$’000 2013 US$’000 2014 US$’000 2013 US$’000 2014 US$’000 2013 US$’000 2014 US$’000 2013 US$’000 Revenue – – 24,828 29,500 11,531 10,157 50,202 Profi t/(loss)before taxation 10,272 8,286 (11,219) (2,238) 2,721 (1,215) 106 Taxation charge (489) (446) – (21) (193) – (51) Post-tax profi t/(loss) 9,783 7,840 (11,219) (2,259) 2,528 (1,215) Other comprehensive income/(loss) (1,470) 1,352 (408) 295 71 48 Total comprehensive income/(loss) 8,313 9,192 (11,627) (1,964) 2,599 (1,167) 55 124 179 Dividends paid to non-controlling interests (Note 31(a)) 1,179 577 – – – – – – – – – – – – 104 HUTCHISON CHINA MEDITECH LIMITED 2014 Annual Report Notes To The Accounts 24 NON-CONTROLLING INTERESTS (Continued) (iii) Summarised consolidated statement of cash fl ows HGHL Group HMHL Group HHOH Group Hutchison Sinopharm 2014 US$’000 2013 US$’000 2014 US$’000 2013 US$’000 2014 US$’000 2013 US$’000 2014 US$’000 2013 US$’000 Net cash generated from/(used in) operating activities Net cash (used in)/generated from investing activities Net cash generated from/(used in) fi nancing activities Net increase/(decrease) in cash and 36 163 (17,521) 2,903 3,516 (136) 6,858 – – – – (3,734) (2,457) – 20,000 3,982 (4,500) – – 10,274 (4,769) cash equivalents 36 163 (1,255) 4,428 (984) (136) 12,363 Cash and cash equivalents at beginning of year Exchange differences on cash and cash equivalents Cash and cash equivalents at end of year 171 – 8 – 12,969 8,227 4,525 4,609 (265) 314 (38) 52 – – 207 171 11,449 12,969 3,503 4,525 12,363 The information above is the amount before inter-company eliminations. Transactions with non-controlling interests are set out in Note 31. – – – – – – – 25 TRADE PAYABLES Trade payables due to third parties Trade payable due to a related party (Note 31(b)) Notes To The Accounts 105105 31 December 2014 US$’000 31 December 2013 US$’000 18,237 2,190 20,427 1,811 2,352 4,163 Substantially all the trade payables due to third parties are denominated in US dollars, HK$ and RMB and due within one year from the end of the reporting period. Included in US$18.2 million trade payables due to third parties as at 31 December 2014, US$16.9 million is attributable from Hutchison Sinopharm which was newly acquired during 2014. Trade payable due to a related party is denominated in US dollars and due within one year from the end of the reporting period. The carrying value of trade payables approximates their fair values due to their short-term maturities. 26 OTHER PAYABLES, ACCRUALS AND ADVANCE RECEIPTS Other payables and accruals Accrued operating expenses Accrued salaries Other payables Advance receipts Payments in advance from customers Deferred government incentives 31 December 2014 US$’000 31 December 2013 US$’000 3,988 3,178 5,908 5,327 3,047 3,895 13,074 12,269 564 – 564 248 2,872 3,120 13,638 15,389 106 HUTCHISON CHINA MEDITECH LIMITED 2014 Annual Report Notes To The Accounts 27 BANK BORROWINGS Bank borrowings Non-current (note (i)) Current (notes (i) and (ii)) Total borrowings Weighted average effective interest rate Notes: 31 December 2014 US$’000 31 December 2013 US$’000 26,923 26,282 53,205 1.60% – 51,508 51,508 1.80% (i) As at 31 December 2014, the long-term bank borrowing of US$26,923,000 is unsecured, interest bearing, guaranteed by Hutchison Whampoa Limited and will mature in 2018. It was classifi ed as a short-term bank borrowing as at 31 December 2013. The carrying amount of the bank borrowings approximates its fair values. (ii) All short-term bank borrowings are unsecured and interest bearing and the carrying amount of these bank borrowings approximates their fair values. (a) The Group’s bank borrowings are repayable as follows: Within 1 year Between 2 and 5 years (b) The carrying amounts of the Group’s bank borrowings are denominated in the following currencies: HK$ RMB 28 CONVERTIBLE PREFERENCE SHARES 2014 US$’000 26,282 26,923 53,205 2014 US$’000 53,205 – 53,205 2013 US$’000 51,508 – 51,508 2013 US$’000 48,718 2,790 51,508 In March 2013, as a result of the satisfaction of the terms and conditions as set out in the relevant agreements, the remaining 4,574,780 convertible preference shares amounting to US$12.47 million was reclassifi ed from fi nancial liabilities to equity of HMHL. The Group’s interest in HMHL has been diluted from 100% to 87.76%, and the difference between the Group’s proportionate share of the carrying amount of the net assets of HMHL diluted and the consideration received has been credited to equity in 2013 accordingly. 29 NOTES TO THE CONSOLIDATED STATEMENT OF CASH FLOWS (a) Reconciliation of profi t for the year to net cash used in operations: Profi t for the year Adjustments for: Taxation charge Share-based compensation expenses Amortisation of leasehold land Amortisation of other intangible asset Write-off of inventories Provision for inventories Provision for receivables Depreciation on property, plant and equipment Loss on disposal of property, plant and equipment Interest income Share of profi ts less losses after tax of joint ventures Finance costs Exchange differences Notes To The Accounts 107107 2014 US$’000 2013 US$’000 7,275 7,042 1,405 868 37 48 143 – 185 1,180 36 (559) (15,202) 1,516 165 1,050 357 38 – 137 88 42 925 18 (451) (10,937) 1,485 493 Operating (loss)/profi t before working capital changes (2,903) 287 Changes in working capital: – decrease/(increase) in inventories – increase in trade and other receivables – decrease/(increase) in other prepayments and deposits – decrease/(increase) in amount due from a fellow subsidiary – decrease/(increase) in amount due from joint ventures – increase in amount due from the ultimate holding company – increase in trade payables – (decrease)/increase in other payables, accruals and advance receipts – increase in amount due to immediate holding company – increase/(decrease) in amount due to a fellow subsidiary Net cash used in operations Attributable to: – Continuing operations – Discontinued operations (Note 10) 80 (451) 1,412 89 324 (19) 2,170 (2,534) 1,320 22 (490) (3,005) 2,515 (490) (55) (5,323) (394) (89) (614) (88) 980 160 1,157 (86) (4,065) (2,826) (1,239) (4,065) 108 HUTCHISON CHINA MEDITECH LIMITED 2014 Annual Report Notes To The Accounts 29 NOTES TO THE CONSOLIDATED STATEMENT OF CASH FLOWS (Continued) (b) Acquisition of a subsidiary In April 2014, the Group invested approximately US$9,597,000 in cash for the subscription of 51% equity interests in the enlarged share capital of Hutchison Sinopharm. The purpose of Hutchison Sinopharm is to provide sales, distribution, and marketing services to major domestic and multi-national third party pharmaceutical manufacturers. It will also provide a broadened sales and marketing platform for synergy across the Group. The following table summarises the amount invested in Hutchison Sinopharm and the amounts of the assets acquired and liabilities assumed recognised at the acquisition date: Capital injection Fair value Cash and bank balances Property, plant and equipment Other intangible asset (note (i)) Deferred tax assets Inventories Trade and other receivables Trade and other payables Current tax liabilities Deferred tax liabilities Bank borrowing Non-controlling interest (note (ii)) Total identifi able net assets Goodwill arising on acquisition (Note 16 and note (iii)) Net cash infl ow arising from acquisition Cash and cash equivalents acquired Less: cash injected US$’000 9,597 10,286 69 708 100 3,208 21,105 (14,827) (105) (198) (4,769) (7,526) 8,051 1,546 9,597 10,286 (9,597) 689 Notes To The Accounts 109109 29 NOTES TO THE CONSOLIDATED STATEMENT OF CASH FLOWS (Continued) (b) Acquisition of a subsidiary (Continued) Notes: (i) Other intangible asset represents the GSP license. (ii) The non-controlling interest is measured as the proportion of net assets acquired shared by the non-controlling interest. (iii) Goodwill of US$1,546,000 arising from this acquisition is from the premium attributable to a pre-existing, well positioned business in a competitive market. This goodwill is recorded at the consolidation level and is not expected to be deductible for tax purposes. (iv) Hutchison Sinopharm contributed revenue of US$50,202,000 and net profi t of US$55,000 to the Group for the period from 25 April 2014 to 31 December 2014. If the acquisition had occurred on 1 January 2014, the revenue and net profi t attributed by Hutchison Sinopharm for the year ended 31 December 2014 would have been US$71,344,000 and US$125,000 respectively. (v) Acquisition related costs of approximately US$23,000 have been charged to income statement during the year. 30 COMMITMENTS (a) Capital commitments The Group had the following capital commitments: Property, plant and equipment contracted but not provided for (b) Operating lease commitments 31 December 2014 US$’000 31 December 2013 US$’000 719 459 The Group leases various factories and offi ces under non-cancellable operating lease agreements. The future aggregate minimum lease payments in respect of land and buildings under non-cancellable operating leases were as follows: Not later than one year Later than one year and not later than fi ve years Later than fi ve years 2014 US$’000 980 1,425 329 2,734 2013 US$’000 748 1,654 486 2,888 110 HUTCHISON CHINA MEDITECH LIMITED 2014 Annual Report Notes To The Accounts 31 SIGNIFICANT RELATED PARTY TRANSACTIONS Save as disclosed above, the Group has the following signifi cant transactions during the year with related parties which were carried out in the normal course of business at terms determined and agreed by the relevant parties: (a) Transactions with related parties: Sales of goods to – Fellow subsidiaries Provision of research and development services – A joint venture Purchase of goods from – A non-controlling shareholder of a subsidiary – Joint ventures Rendering of marketing services from – Fellow subsidiaries Management service fee to – An intermediate holding company Interest paid to – An immediate holding company (Note 8) – A non-controlling shareholder of a subsidiary (Note 8) Guarantee fee on bank borrowing to – The ultimate holding company (Note 8) Dividend paid to – A non-controlling shareholder of a subsidiary 2014 US$’000 2013 US$’000 7,823 7,803 4,191 3,612 6,727 2,480 9,207 480 989 113 19 132 471 1,179 6,304 – 6,304 569 914 92 – 92 471 577 No transactions have been entered into with the directors of the Company (being the key management personnel) during the years ended 31 December 2013 and 2014 other than the emoluments paid to them (being the key management personnel compensation) as disclosed in Note 12. Details of guarantee provided by the ultimate holding company for bank borrowing are disclosed in Note 27. Notes To The Accounts 111111 31 December 2014 US$’000 31 December 2013 US$’000 1,922 2,986 2,190 2,352 107 – 1,484 1,591 5,000 8,694 22 8,716 579 2,550 3,129 88 89 1,808 1,985 – 7,374 – 7,374 579 4,800 5,379 31 SIGNIFICANT RELATED PARTY TRANSACTIONS (Continued) (b) Balances with related parties included in: Trade receivables from related parties: – Fellow subsidiaries (Note 21 and note (i)) Trade payable due to a related party: – A non-controlling shareholder of a subsidiary (Note 25 and note (i)) Amounts due from related parties: – The ultimate holding company (note (i)) – A fellow subsidiary (note (i)) – Joint ventures (note (i)) Joint venture: – Loan to a joint venture (note (ii)) Amounts due to related parties: – Immediate holding company (note (iii)) – A fellow subsidiary (note (i)) Non-controlling shareholders: – Loan from a non-controlling shareholder of a subsidiary (note (iv)) – Loan from a non-controlling shareholder of a subsidiary (note (v)) 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) Loan to a joint venture is unsecured, interest-free and is recorded in investments in joint ventures. (iii) Amount due to immediate holding company is unsecured, interest-bearing and repayable on demand. The carrying values of balances with related parties approximate their fair values due to their short-term maturities. (iv) Loan from a non-controlling shareholder of a subsidiary is unsecured, interest-free and recorded in non-controlling interests. (v) Loan from a non-controlling shareholder of a subsidiary is unsecured, interest-bearing (2013: interest-free) and recorded in non-controlling interests. 112 HUTCHISON CHINA MEDITECH LIMITED 2014 Annual Report Notes To The Accounts 32 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. 33 APPROVAL OF ACCOUNTS The consolidated accounts set out on pages 52 to 113 were approved by the Board of Directors on 25 February 2015. 34 PARTICULARS OF PRINCIPAL SUBSIDIARIES AND JOINT VENTURES Place of establishment and operation Nominal value of issued ordinary share capital/ registered capital Equity interest attributable to the Group As at 31 December 2014 2013 Type of legal entity Principal activities Name Subsidiaries Hutchison MediPharma The PRC US$37,500,000 87.58% 87.76% Limited liability Research and Limited company development of pharmaceutical products Hutchison Healthcare The PRC RMB207,460,000 100% 100% Limited liability Manufacture and Limited company distribution of healthcare 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 Hain Organic The PRC US$3,000,000 50% 50% Limited liability Wholesale and (Guangzhou) Limited (‘HHOGZL”) (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 Whampoa The PRC RMB63,570,000 51% – Limited liability Provision of sales, Sinopharm Pharmaceuticals (Shanghai) Company Limited company distribution and marketing services to pharmaceutical manufacturers Notes To The Accounts 113113 34 PARTICULARS OF PRINCIPAL SUBSIDIARIES AND JOINT VENTURES (Continued) Place of establishment and operation Nominal value of issued ordinary share capital/ registered capital Equity interest attributable to the Group As at 31 December 2014 2013 Type of legal entity Principal activities Name Joint ventures Hutchison Whampoa The PRC RMB200,000,000 40% 40% Limited liability Manufacture and Guangzhou Baiyunshan Chinese Medicine Company Limited Shanghai Hutchison Pharmaceuticals Limited Nutrition Science Partners Limited Note: company distribution of TCM products The PRC RMB229,000,000 50% 50% Limited liability Manufacture and company distribution of TCM products Hong Kong HK$20,000 43.79% 43.88% Limited liability Research and company development of pharmaceutical 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. 114 HUTCHISON CHINA MEDITECH LIMITED 2014 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: Edith Shih Non-executive Director & Company Secretary ediths@hwl.com.hk +852 2128 1778 E-mail: Facsimile: 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 23 April 2015 to 24 April 2015 24 April 2015 July 2015 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.