(Incorporated in the Cayman Islands with limited liability)
2016 Annual Report
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Corporate Information
REMUNERATION COMMITTEE
Simon TO (Chairman)
Paul CARTER
Graeme JACK
TECHNICAL COMMITTEE
Karen FERRANTE (Chairman)
Paul CARTER
Christian HOGG
Weiguo SU
Simon TO
COMPANY SECRETARY
Edith SHIH
NOMINATED ADVISER
Panmure Gordon (UK) Limited
CORPORATE BROKERS
Panmure Gordon (UK) Limited
UBS Limited
AUDITOR
PricewaterhouseCoopers
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
Weiguo SU, BSc, PhD (Note 1)
Chief Scientific Officer
Non-executive Directors
Dan ELDAR, BA, MA, MA, PhD (Note 2)
Shigeru ENDO, BA (Note 3)
Christian SALBAING, BA, LLL, JD (Note 4)
Edith SHIH, BSE, MA, MA, EdM, Solicitor, FCIS, FCS(PE)
Independent Non-executive Directors
Paul CARTER, BA, FCMA (Note 5)
Senior Independent Director
Karen FERRANTE, MD, BSc (Note 5)
Michael HOWELL, MA, MBA, MBA, HonFCGI (Note 6)
Christopher HUANG, BA, BMBCh, PhD, DM, DSc, FRSB, FESC (Note 3)
Graeme JACK, BCom, CA (ANZ), FHKICPA (Note 7)
Christopher NASH, BSc, MBA, ACGI (Note 3)
AUDIT COMMITTEE
Graeme JACK (Chairman)
Paul CARTER
Karen FERRANTE
Note 1: Appointed on March 27, 2017
Note 2: Appointed on August 1, 2016
Note 3: Resigned on February 1, 2017
Note 4: Resigned on August 1, 2016
Note 5: Appointed on February 1, 2017
Note 6: Resigned on March 1, 2017
Note 7: Appointed on March 1, 2017
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Contents
Corporate Information
Contents
Our Business
Highlights
Chairman’s Statement
Financial Review
Operations Review
Biographical Details Of Directors
Report Of The Directors
Corporate Governance Report
Form 20-F
Information For Shareholders
2
HUTCHISON CHINA MEDITECH LIMITED 2016 Annual Report
Our Business
Chi-Med is a globally-focused innovative
biopharmaceutical company based in China
Innovation Platform
Broad late-stage pipeline
Commercial Platform
Solid cash flow from operations
3 8 oncology drug candidates in 30 studies worldwide.
3 >3,300-person China Sales Team (~2,200 med. reps).
3 1st positive Ph.III result – fruquintinib – launch 2018.
3 To commercialize Innovation Platform drugs in China.
3 7 further Phase III trials; 3 underway & 4 in-planning.
3 2016 sales(1) up 21% to $627.4 million.
3 ~330-person Scientific Team.
3 2016 net income(2) up 180% to $70.3 million.(3)
(1) Aggregate sales of consolidated subsidiaries ($180.9 million) and non-consolidated joint ventures ($446.5 million);
(2) Net income attributable to Chi-Med;
(3)
Includes the share of gain from land compensation of Shanghai Hutchison Pharmaceuticals Limited in Prescription Drugs business ($40.4 million).
3
Highlights
Group:
Record revenue, net income and clinical investment in 2016
Group revenue up 21% to $216.1 million (2015: $178.2m);
Net income attributable to Chi-Med up 46% to $11.7 million (2015: $8.0m), including $76.1 million
in research and development expenses on an adjusted basis (2015: $55.8m);
Completed Nasdaq listing, raising net proceeds of $95.9 million; cash resources of $173.7 million at
Group level as of December 31, 2016 ($38.8m as of December 31, 2015), including cash and cash
equivalents, short-term investments and unutilized bank facilities.
Innovation Platform:
First successful pivotal Phase III outcome with launch now
targeted for 2018
Fruquintinib: Positive Phase III pivotal study in third-line colorectal cancer (“CRC”) – designed to be
global best-in-class in terms of efficacy and safety relative to Stivarga® (regorafenib), full data set to
be presented mid-2017. Target 2018 launch in China as the first approved treatment for third-line
CRC patients;
8 drug candidates now in 30 active clinical trials (2015: 19) around the world with four pivotal Phase III
studies underway; and plans to initiate a further four Phase III studies during 2017;
Presented positive proof-of-concept data over the past year on savolitinib in papillary renal
cell carcinoma (“PRCC”); fruquintinib non-small cell lung cancer (“NSCLC”) and gastric cancer in
combination with Taxol® (paclitaxel); epitinib in NSCLC patients with brain metastasis; and sulfatinib
in neuroendocrine tumors (“NET”). All now moved/moving to Phase III pivotal studies;
Currently conducting Phase I studies on multiple novel drug candidates including HMPL-523 against
spleen tyrosine kinase (“Syk”); HMPL-453 against fibroblast growth factor receptor 1/2/3 (“FGFR”);
and HMPL-689 against phosphoinositide 3-kinase delta (“PI3Kδ”).
Commercial Platform:
High-performance drug marketing and distribution platform
covers ~300 cities/towns in China with >3,300 sales people. High
value products and household-name brands
Total consolidated sales up 43% to $180.9 million (2015: $126.2m);
Total sales of non-consolidated joint ventures up 14% to $446.5 million (2015: $392.7m);
Total consolidated net income attributable to Chi-Med up 180% to $70.3 million (2015: $25.2m), or
up 19% to $29.9 million on an adjusted basis which excludes a one-time property gain.
All figures are reported in U.S. dollars unless otherwise stated.
4
HUTCHISON CHINA MEDITECH LIMITED 2016 Annual Report
Highlights
Innovation Platform: First positive Phase III read-out, fruquintinib in third-line CRC, reported on March 3, 2017 – a major
achievement for Chi-Med and the biotech industry in China. Multiple opportunities for near-term pivotal success: three further Phase
III studies underway and four more planned to start in 2017 with multiple read-outs expected over the next three years.
Savolitinib: Potential global first-in-class selective mesenchymal epithelial transition factor (“c-Met”) inhibitor currently in
12 active clinical studies worldwide in multiple tumor types including kidney, lung and gastric cancers as a monotherapy or in
combination with other targeted and immunotherapy agents. Developing globally in partnership with AstraZeneca AB (publ)
(“AstraZeneca”):
1.
Kidney cancer:
a.
Presented Phase II global multicenter study in advanced PRCC at the 2017 ASCO Genitourinary Cancers
Symposium with clear efficacy signal with savolitinib monotherapy in c-Met-driven patients. Median progression
free survival (“PFS”) of 6.2 months in c-Met-driven patients as compared with 1.4 months (p<0.0001) in c-Met-
independent patients. Objective response rate (“ORR”) was 18.2% in c-Met-driven patients vs. 0% (p=0.002) in
c-Met independent patients. Encouraging durable response and safety profile were reported in savolitinib treated
patients. Global Phase III protocol is finalized and the companion diagnostic kit developed. The Phase III study is
now set to initiate in Q2 2017;
b.
Initiated global Phase Ib dose finding study of savolitinib in combination with anti-programmed death-1 receptor
ligand (“PD-L1”) antibody, durvalumab, in clear cell renal cell carcinoma (“ccRCC”) patients. A combination dose
now confirmed and ccRCC expansion phase initiated.
2.
Lung cancer:
a.
b.
Initiated global Phase IIb study of savolitinib in combination with Tagrisso® in second-line NSCLC patients with
epidermal growth factor receptor (“EGFR”) mutations who have failed first-line EGFR tyrosine kinase inhibitor (“TKI”)
therapy and harbor c-Met gene amplification. This triggered a $10 million milestone from AstraZeneca to
Chi-Med in June 2016. Phase IIb results will be presented at a scientific event in 2017 and we hope to initiate a
global Phase III registration study in 2017;
Initiated or continued four further Phase Ib/II studies in NSCLC patients, including: (i) as a monotherapy in first-
line NSCLC patients with c-Met mutations that result in Exon 14 skipping; (ii) as a combination therapy with
Iressa® (gefitinib) in NSCLC patients with EGFR mutations and who have failed first-line EGFR TKI therapy; (iii)
as a monotherapy in pulmonary sarcomatoid carcinoma (“PSC”) patients with c-Met mutations; and (iv) as a
combination therapy with Tagrisso® in third-line NSCLC patients who have failed Tagrisso® therapy.
3.
Gastric cancer:
a.
b.
A proof-of-concept study of savolitinib as a monotherapy in gastric cancer patients with c-Met gene amplification
is ongoing in both South Korea and China; promising response data was presented by Dr. Jeeyun Lee of Samsung
Medical Center in 2016;
Two Phase Ib studies of savolitinib in combination with Taxotere® (docetaxel) in gastric cancer patients with c-Met
over-expression or c-Met gene amplification is ongoing in South Korea.
Highlights
55
Fruquintinib: Designed to be a global best-in-class selective inhibitor of vascular endothelial growth factor receptor 1/2/3
(“VEGFR”) – developing in China in partnership with Eli Lilly and Company (“Lilly”) and independently outside China:
1.
2.
3.
4.
5.
6.
CRC (third-line or above): Reported that fruquintinib has convincingly met the primary endpoint of overall survival (“OS”)
and all secondary endpoints in the FRESCO Phase III study as a monotherapy among third-line CRC patients in China;
further, that the adverse events (“AEs”) demonstrated in FRESCO did not identify any new or unexpected safety issues;
plan now to submit the China NDA and present full data-set at a scientific conference in mid-2017; subject to China
FDA approval we, and our partner Lilly, expect to launch fruquintinib in China in 2018; based on the patient population
in third-line CRC in China, as well as the sales performance of TKIs launched in recent years in China, we estimate peak
fruquintinib revenues in third-line CRC alone could reach ~$110-160 million resulting in peak net income to Chi-Med of
~$20-35 million.
NSCLC (third-line): Presented positive Phase II study showing fruquintinib was well tolerated with an ORR of 16.4%
vs. 0% (p=0.02) and median PFS of 3.8 months vs. 1.1 months (p<0.001) for fruquintinib vs. placebo. In late 2015, we
began enrolling a Phase III study, named FALUCA, with a primary end point of median OS, to test fruquintinib in third-
line NSCLC patients in China; expect to complete enrollment in 2017; top-line Phase III data expected to be reported in
2018; subject to positive FALUCA outcome, we plan to submit China NDA during 2018.
Gastric cancer (second-line): Presented positive Phase I/Ib dose finding/expansion study which established a well-
tolerated combination dose of 4mg fruquintinib with 80mg/m2 weekly of Taxol® with encouraging efficacy, including
ORR of 36%; DCR of 68%; ≥16 week PFS of 50% and ≥7 month OS of 50%. On-track now to initiate a Phase III registration
study in China during 2017.
NSCLC (first-line): In January 2017, we initiated a Phase II study of fruquintinib in combination with Iressa® in first-line
EGFR-mutant NSCLC patients in China.
Production facility in Suzhou, China, fully operational and ready to support potential commercial launch of fruquintinib
in 2018.
Received U.S. FDA Investigational New Drug (“IND”) application clearance for fruquintinib in 2016 and plan to initiate
Phase I dose confirmation study in Caucasian patients in the U.S. in 2017.
Sulfatinib: A unique angio-immuno kinase inhibitor therapy with high potency against VEGFR, FGFR1 and colony
stimulating factor receptor 1 (“CSF-1R”) with emerging strong efficacy in multiple solid tumor settings – enrolling two pivotal
Phase III studies:
1.
Neuroendocrine tumors (“NET”):
a.
Presented positive Phase II study showing sulfatinib was well tolerated with highly encouraging efficacy in
both pancreatic NET (ORR 17.1%; DCR 90.2%; and median PFS 19.4 months) and non-pancreatic NET (ORR 15.0%;
DCR 92.5%; and median PFS 13.4 months) with 100% DCR in twelve patients that had previously failed on
targeted therapies such as Sutent® (sunitinib) and Afinitor® (everolimus); now enrolling two Phase III studies in
China, named SANET-p (in pancreatic NET patients) and SANET-ep (in non-pancreatic NET patients), with primary
endpoint median PFS; Phase III top-line data expected in 2018;
b.
U.S. Phase I dose confirmation study in Caucasian patients is near completion and dose expansion in tumor types
of interest is being planned.
6
HUTCHISON CHINA MEDITECH LIMITED 2016 Annual Report
Highlights
2.
Thyroid cancer: In March 2016, we initiated a Phase II proof-of-concept study in patients with locally advanced or
metastatic radioactive iodine-refractory differentiated thyroid cancer or medullary thyroid cancer in China; we have
observed encouraging early efficacy.
3.
Biliary tract cancer: Initiated a Phase II proof-of-concept study in China in January 2017.
Epitinib: Highly differentiated EGFR TKI designed for optimal blood-brain barrier penetration allowing for higher drug
exposure in the brain than currently marketed first generation EGFR TKIs:
1.
NSCLC with brain metastasis: Presented positive Phase Ib study in EGFR mutation positive NSCLC patients with brain
metastasis showing epitinib was well tolerated and demonstrated encouraging efficacy with an overall ORR (lung and
brain) of 62% in all EGFR TKI naïve patients (those patients not previously treated with an EGFR TKI) and an ORR of 70% in
EGFR TKI naïve patients who also had measurable brain metastasis and were c-Met negative, including both confirmed
and unconfirmed Partial Response (“PR”). Based on these data we plan to initiate a Phase III registration study in 2017.
2.
Glioblastoma: Planning underway to start a Phase II study in glioblastoma, a primary brain cancer that harbors high
levels of EGFR gene amplification, in 2017.
HMPL-523: Potential global first-in-class Syk inhibitor in oncology and immunology:
1.
2.
Hematological cancer: China FDA granted IND approval in May 2016 and we subsequently initiated China Phase I dose
escalation study in patients with hematologic malignancies in late 2016 which we expect to complete during 2017, at
which time we will begin dose expansion with single agent HMPL-523 and/or innovative combination regimens.
Immunology: Australia Phase I study completed with no evidence of the hypertension/gastrointestinal toxicities
encountered by the first-generation Syk inhibitor (fostamatinib); U.S. IND application submitted in 2016 – U.S. FDA
feedback received, now preparing to submit additional data.
HMPL-689: Potential global best-in-class, highly selective PI3Kδ inhibitor, which is over five times more potent than
Zydelig® (idelalisib):
Hematological cancer: Completed Phase I study in healthy volunteers in Australia, with recommended starting dose in Phase I
hematology study of 5mg twice daily; now progressing into Phase I in patients with lymphomas in China where we received
IND clearance in February 2017.
Theliatinib: EGFR inhibitor, with high binding affinity to wild-type EGFR protein, with potential in patients with solid tumors
presenting EGFR gene amplification or protein overexpression:
Esophageal cancer: Phase I dose escalation study is continuing, with preliminary activity observed; a Phase II expansion in
esophageal cancer patients with a high level of EGFR activation, including gene amplification and protein over-expression has
been initiated.
HMPL-453: Potential global first-in-class and/or best-in-class selective FGFR 1/2/3 inhibitor:
Solid tumors: In February 2017, we initiated a Phase I dose escalation study in Australia; the IND in China has also been
cleared and Phase I dose escalation is set to initiate in Q2 2017.
Highlights
77
Commercial Platform: Continued strong growth in cash flow and profit – representing a stable financial base that underpins a
significant portion of Chi-Med’s current market value.
Prescription Drugs business continuing to drive growth – consolidated sales up 42% to $149.9 million
(2015: $105.5m); and total sales of non-consolidated Prescription Drugs joint venture up 23% to $222.4 million
(2015: $181.1m).
1.
2.
She Xiang Bao Xin (“SXBX”) pill – our most important commercial product, is a prescription vasodilator proprietary to our
joint venture: Accounted for about 12% of China’s over $1.5 billion botanical coronary artery disease prescription drug
market, full patent protection through 2029; 2016 sales up 23% to $195.4 million (2015: $159.3m); SXBX pill represents
88% of the sales of Shanghai Hutchison Pharmaceuticals Limited (“SHPL”), our joint venture, which contributed 89% of
the $22.3 million (2015: $16.4m) consolidated Prescription Drugs business operating profit on an adjusted basis which
excludes the one-time property gain.
Seroquel® – prescription antipsychotic under exclusive commercial license from AstraZeneca within China: Accounted
for approximately 5% of China’s antipsychotic prescription drug and 46% of the generic quetiapine market; Seroquel® is
the only extended release (“XR”) quetiapine formulation approved in China; 2016 sales were up 63% to $34.4 million
(2015: $21.1m); 2016 is the first full year of Seroquel® commercialization under Chi-Med.
Completed move to new factory in Shanghai, almost tripling the manufacturing capacity of our Prescription
Drugs joint venture. Triggering $113 million total cash compensation and subsidies to SHPL for the surrender of the land-
use rights to its old factory site.
Consumer Health business stable despite over-the-counter (“OTC”) drug production capacity constraints –
consolidated sales up 50% to $31.0 million (2015: $20.7m); and total sales of non-consolidated Consumer Health
joint venture up 6% to $224.1 million (2015: $211.6m). Sales in our OTC drug joint venture increased marginally due
to tight manufacturing capacity resulting from the move to our new factory in Bozhou, Anhui province; despite this, our OTC
drug joint venture’s portfolio of market leading products contributed 88% of our $11.6 million (2015: $11.8m) consolidated
Consumer Health business operating profit in 2016.
8
HUTCHISON CHINA MEDITECH LIMITED 2016 Annual Report
Highlights
2017 Catalysts
We target to present multiple clinical data updates during 2017, including:
Savolitinib:
1.
2.
3.
Phase II median OS data (mature) in PRCC;
Phase II data in second-line NSCLC in combination with Tagrisso® and Iressa®;
Phase II dose finding data in ccRCC in combination with durvalumab (PD-L1).
Fruquintinib: Phase III FRESCO study full data set publication in third-line CRC.
Sulfatinib: Preliminary Phase II data in medullary and differentiated thyroid cancer.
HMPL-523: Preliminary Phase Ib expansion proof-of-concept data in hematological cancer.
We target to achieve multiple clinical and regulatory milestones during 2017, including:
Savolitinib:
1.
2.
Initiate global Phase III study in PRCC;
Initiate global Phase III study in second-line NSCLC in combination with Tagrisso®.
Fruquintinib:
1.
2.
3.
4.
Submit NDA in China in third-line CRC;
Initiate China Phase III study in second-line gastric cancer;
Complete enrollment of Phase III FALUCA study in third-line NSCLC;
Initiate U.S. Phase I dose confirmation study in Caucasian patients.
Epitinib:
1.
2.
Initiate China Phase III study in first-line EGFR-mutant NSCLC patients with brain metastasis;
Initiate China Phase II study in glioblastoma (primary brain cancer).
Sulfatinib: Initiate U.S. Phase II study in NET.
HMPL-523 (Syk): Initiate Australian Phase Ib/II expansion study in hematological cancer.
HMPL-689 (PI3Kδ): Initiate Phase I study in China in hematological cancer patients.
HMPL-453 (FGFR-1/2/3): Initiate Phase I studies in Australia/China in solid tumor patients.
9
Chairman’s Statement
Chi-Med’s aim remains to become a large-scale
innovative global biopharmaceutical company based
in China.
The progress in 2016 in advancing savolitinib and
fruquintinib toward submissions for approval is
particularly encouraging. Approval of these drug
candidates, if successful, would propel Chi-Med
into a new era, in which its six other clinical drug
candidates, and the proven discovery capability of
its scientific team, could take the company to
new heights.
For over fifteen years, Chi-Med and its partners have
invested over $400 million in pursuit of this aim. The
approximately 330-person strong scientific team has
created a broad portfolio of differentiated products
in the global targeted therapy arena in oncology
and immunology. Chi-Med has focused on creating
highly selective drug candidates against multiple
novel and validated molecular targets with the
potential to be global first-in-class or best-in-class. It
is intended that these drug candidates will be used
as monotherapies or in combination treatments with
other oncology and immunology therapies and as a
result, improve global patient outcomes and create
shareholder value.
The 2016 amendment of the global collaboration
agreement on savolitinib with AstraZeneca is further
evidence of our belief in savolitinib’s potential across
multiple oncology indications.
Key elements of Chi-Med’s strategy are:
To design novel drug candidates against well-
characterized targets with global first-in-class
potential – Chi-Med believes its most significant
market opportunity is developing innovative drug
therapies that have global first-in-class potential in
areas of high unmet needs. In order to limit its risk,
the scientific team has focused on novel tyrosine
kinase targets, which have a deep body of evidence
to support their role in cell signaling in cancer or
inflammation, such as c-Met, Syk and FGFR.
Simon To
Chairman
Fruquintinib has convincingly met all
the primary and secondary endpoints
of its Phase III pivotal study, the FRESCO
study, in third-line CRC. The NDA will be
submitted in China in mid-2017.
10 HUTCHISON CHINA MEDITECH LIMITED 2016 Annual Report
Chairman’s Statement
Highly selective drug candidates
E.g. Savolitinib(1) ~1,000-fold more selective to c-Met than next kinase (PAK3)
c-Met (wild-type & mutants)
PAK3
>90% inhibition at 1 µM
70-90% inhibition at 1 µM
40-70% inhibition at 1 µM
<40% inhibition at 1 µM
Screening at 1µM against 253 kinases
China are conducted to global Good Clinical Practice
standards, predominantly using global Contract
Research Organizations. On novel targets, Chi-Med
accepts higher risk and pursues global clinical
development from day one in order to maximize the
chance of achieving a global first-in-class position.
To deploy a risk-balanced approach to financing
long-term investment in innovation – Chi-Med has
followed an unconventional path to reach its current
stage of development as a company. Risk has been
balanced in every manner possible, focusing on
building a financially sustainable operation with a
low chance of negative binary outcome. Starting
with the above risk-balanced portfolio approach
to choosing the novel/validated kinase targets
on which to focus research; to the partnerships
with AstraZeneca and Lilly which have broadened
[1] W. Su, et al, 2014 American Association of Cancer Research (note legend yellow = >50%; green = < 50%).
development plans, and provided technical support
and global reach; to basing the operations of
To use a chemistry-focused approach centered
improved patient tolerability and efficacy. This
Chi-Med in China where generally lower operating
on kinase selectivity to create global best-in-class
scientific approach should be strongly validated once
costs allow for a scientific team large enough to
products – In addition to novel targets, risk is also
the full data set of the FRESCO study on fruquintinib
manage development of such a broad pipeline;
balanced by creating drug candidates against
is presented in mid-2017.
proven validated targets including VEGFR, EGFR
and PI3Kδ. The belief being that there is a lot of
room to improve on the first generation of TKIs that
To pursue a practical, efficient and global best
the relationship with its majority shareholder, CK
practice clinical and regulatory strategy – China’s
Hutchison, who has had a long-term, practical,
to building a powerful Commercial Platform
which provides steady cash flow; and finally, to
have emerged over the last fifteen years. Chi-Med
large patient population, combined with lower
mind-set. These factors distinguish Chi-Med from,
works to develop differentiated next generation
clinical trial costs, as compared to the West, allows
and provide competitive advantages over, the more
TKIs characterized by high selectivity and superior
for rapid and lower risk development through
common path of evolution of many emerging
pharmacokinetic (“PK”) properties leading to
proof-of-concept on validated targets. All studies in
biotech companies.
Chemistry is our edge
e.g. use of co-crystal structures
Focus on small
molecules interactions
with kinases
� Optimize binding to
on-target protein,
for potency.
� Minimize binding to
off-target proteins
for selectivity.
As always, I would like to express my deep appreciation
for the support of the investors, directors and partners
of Chi-Med and for the commitment and dedication
of all of the management and staff of Chi-Med.
Simon To
Chairman
March 13, 2017
11
Financial Review
Chi-Med Group revenues for the year ended
D e c e m b e r 3 1 , 2 0 1 6 i n c r e a s e d b y 2 1 % t o
$216.1 million (2015: $178.2m), due to a 43%
increase in revenue generated by our Commercial
Platform to $180.9 million in 2016 (2015: $126.2m)
driven by the progress of our consolidated
joint venture Hutchison Whampoa Sinopharm
Pharmaceuticals (Shanghai) Company Limited
(“Hutchison Sinopharm”). The foregoing was offset
in part by a 32% decrease in revenue from our
Innovation Platform revenue to $35.2 million in
2016 (2015: $52.0m), reflecting a lower level of
milestone payments, service fees and clinical cost
reimbursements received from AstraZeneca, Lilly
and Nutrition Science Partners Limited (“NSP”)
compared to the prior year. It should be noted that
Group revenues do not include the revenues of our
two large-scale, 50/50 joint ventures in China, SHPL
and Hutchison Whampoa Guangzhou Baiyunshan
Chinese Medicine Company Limited (“HBYS”), since
these are accounted for using the equity method.
Our equity in earnings of our non-consolidated
joint ventures, net of tax, increased by 193% to
$66.2 million in 2016 (2015: $22.6m).
Our Commercial Platform, which continues to be
Chi-Med’s primary profit and cash source, grew
operating profit by 163% to $74.3 million (2015:
$28.2m) as a result of growth in SHPL’s coronary
artery disease Prescription Drug business and a
major one-time property gain. The Innovation
Platform incurred an operating loss of $40.8 million
(2015: -$3.8m) as a result of expansion of clinical
development activities, rapid organization
growth to support these clinical activities and
investment in the expansion of small molecule
manufacturing operations.
Net corporate unallocated expenses, primarily Chi-Med
Group overhead and operating costs, increased
to $12.9 million (2015: $11.0m) principally due
to our Nasdaq listing and the resulting increased
organization and third-party advisor costs in the
audit and compliance areas.
Consequently, Chi-Med Group operating profit was
$20.5 million (2015: $13.4m).
Christian Hogg
Chief Executive Officer
We significantly advanced the
oncology and immunology
pipeline of clinical drug candidates,
managing 30 active clinical trials.
12 HUTCHISON CHINA MEDITECH LIMITED 2016 Annual Report
Financial Review
The aggregate of interest and income tax expenses
of Chi-Med Group, as well as net income attributable
to non-controlling interests during the period
increased to $8.8 million (2015: $5.4m) driven
largely by 5% withholding taxes accrued on the net
income of our Commercial Platform joint ventures
during the period.
Limited (“HMHL”), held by Mitsui & Co., Ltd. (“Mitsui”).
In July 2015, we completed a transaction to roll-
up Mitsui’s preferred shares in HMHL into Chi-Med
ordinary shares and thereby eliminated the chance
that cash would be needed to redeem the preferred
shares as well as the need for further future non-
cash accretion charges.
The resulting total Group net income attributable to
Chi-Med was therefore $11.7 million (2015: $8.0m).
In 2015, in accordance with U.S. generally accepted
accounting principles (“U.S. GAAP”), Chi-Med recorded
a non-cash accretion charge of $43.0 million
which was equivalent to the estimated value of
redeemable preferred shares in our Innovation
Platform subsidiary, Hutchison MediPharma Holdings
Revenue
(% change 2016 vs. 2015)
+21%
Net Income
Attributable to
Chi-Med
(US$ million)
11.7
As a result, Group net income attributable to ordinary
shareholders of Chi-Med in 2016, was $11.7 million,
or $0.20 per ordinary share/$0.10 per American
depositary share (“ADS”), compared to a net loss
attributable to ordinary shareholders of Chi-Med of
$35.0 million, or $0.64 per ordinary share/$0.32 per
ADS, in 2015.
Cash and Financing
In the past five years, as our clinical spending has
escalated, we endeavored to remain consistently
cash-positive at the Chi-Med Group level and in
2016, we used $9.6 million (2015: $9.4m) in
net cash in our operating activities. This result
was driven by increased dividends paid by our
non-consolidated Commercial Platform joint
ventures, payments received from AstraZeneca,
Lilly, and NSP, our joint venture with Nestlé
Health Science S.A. (“Nestlé”), which, in aggregate,
came close to offsetting our $76.1 million
(2015: $55.8m) in research and development
expenses on an adjusted basis.
In March 2016, we completed our Nasdaq listing
and raised $110.2 million in new equity capital, or
$95.9 million net of expenses incurred, to strengthen
our balance sheet and support development plans,
through to planned NDA submissions, for certain of
our lead drug candidates.
As of December 31, 2016, we had available cash
resources of $173.7 million (December 31, 2015:
$38.8m) at the Chi-Med Group level including cash
and cash equivalents and short-term investments of
$103.7 million (December 31, 2015: $31.9m) and
unutilized bank borrowing facilities of $70.0 million
(December 31, 2015: $6.9m). Aggregate borrowing
facilities of $70 million, with an average 18 month
term, were subsequently renewed in February 2017.
In addition, as of December 31, 2016, our non-
consolidated joint ventures (SHPL, HBYS and NSP)
held $91.0 million (December 31, 2015: $80.9m)
in available cash resources. In late-2016, our
Prescription Drug joint venture, SHPL, received
about $72 million of property compensation and
subsidies from the Shanghai government. This
cash injection led Chi-Med to record a one-time
gain of $40.4 million in 2016 at the Group level
and will fund the expected one-time dividend of
approximately $40 million to the Chi-Med Group
level in the first half of 2017. Subject to Guangzhou
urban redevelopment policy, we hope to conclude
negotiations for the return of land use rights
for unused land under the HBYS joint venture in
Guangzhou in 2017, thereby triggering further
cash compensation.
Outstanding bank loans as of December 31, 2016
amounted to $46.8 million (December 31, 2015:
$49.8m) at the Chi-Med Group level, of which
$26.8 million is guaranteed by a wholly-owned
subsidiary of CK Hutchison. Our total Chi-Med Group
weighted average cost of borrowing in 2016 on
both unsecured and guaranteed loans, including
all interest and guarantees fees, was 2.4%. As
of December 31, 2016, our non-consolidated
joint ventures had no outstanding bank loans
(December 31, 2015: $26.5m).
In summary, we believe that the cash resources
that we currently hold are sufficient to fund all our
near-term activities, including the increased cash
requirements resulting from the amendment to the
savolitinib collaboration with AstraZeneca made in
August 2016.
13
Operations Review
INNOVATION PLATFORM
The Chi-Med pipeline of drug candidates has been
by $76.1 million (2015: $55.8m) in research and
as promising signs of clinical efficacy in patients
development spending on our pipeline of eight
with c-Met gene alterations in PRCC, NSCLC, CRC and
created and developed by the in-house research and
oncology and immunology drug candidates on
gastric cancer. We are currently testing savolitinib in
development operation which was started in 2002.
an adjusted basis. Since inception, the Innovation
partnership with AstraZeneca in multiple Phase Ib/II
Since then, we have assembled a large team of
Platform has dosed almost 2,900 patients/subjects
studies, both as a monotherapy and in combination
about 330 scientists and staff (December 31, 2015:
in clinical trials of our drug candidates with about
with other targeted therapies, and expect to start
310) based in China and operating a fully-integrated
711 dosed in 2016 (2015: 705) primarily driven by
global Phase III registration studies in 2017.
drug discovery and development operation covering
the enrollment of the four Phase III studies that we
chemistry, biology, pharmacology, toxicology,
currently have underway.
chemistry and manufacturing controls for clinical
and commercial supply, clinical and regulatory
and other functions. Looking ahead, we plan to
Product Pipeline Progress
Savolitinib (AZD6094): Savolitinib is a potential
AstraZeneca collaboration amendment: On
August 1, 2016, Chi-Med agreed to contribute up to
$50 million, spread primarily over three years, to the
joint development costs of the global pivotal Phase III
continue to leverage this platform, as we have in
global first-in-class inhibitor of c-Met, an enzyme
study in c-Met-driven PRCC. Subject to approval in the
the past decade, to produce a stream of novel drug
which has been shown to function abnormally in
PRCC indication, Chi-Med will receive a 5 percentage
candidates with global potential.
many types of solid tumors. We designed savolitinib
point increase in the global (excluding China) tiered
to be a potent and highly selective oral inhibitor,
royalty rate payable on savolitinib sales across all
Innovation Platform revenue in 2016 was $35.2 million
which through chemical structure modification
indications, thereby increasing to a tiered royalty
(2015: $52.0m) reflecting a lower level of
addressed human metabolite-related renal toxicity,
rate of 14% to 18%. After total aggregate sales of
milestone payments, service fees and clinical cost
the primary issue that halted development on
savolitinib have reached $5 billion, the royalty will
reimbursements received from AstraZeneca and
several other selective c-Met inhibitors. In clinical
step down over a two year period, to an ongoing
Lilly than last year. Net loss attributable to Chi-Med
studies to date, involving about 460 patients,
royalty rate of 10.5% to 14.5%. All other provisions of
increased to $40.7 million (2015: -$3.8m) driven
savolitinib has exhibited no renal toxicity as well
the 2011 agreement will remain unchanged.
14 HUTCHISON CHINA MEDITECH LIMITED 2016 Annual Report
Innovation Platform
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16 HUTCHISON CHINA MEDITECH LIMITED 2016 Annual Report
Innovation Platform
Savolitinib – PRCC Phase II:
Median PFS –
big advantage in c-MET +ve patients
c-MET +ve
(n=44)
34 (77.3%)
c-MET –ve
(n=46)
43 (93.5%)
Events, n
Median, mo.
6.2 (4.1, 7.0)
1.4 (1.4, 2.7 )
Stratified HR [95% CI]:
0.33 [0.20-0.52]
P<0.0001
c-MET+ve
c-MET-ve
c-MET unk.
Study 2 – Enrolling – Phase II study of multiple
TKIs in metastatic PRCC (U.S.) – A Phase II study,
sponsored by the U.S. National Cancer Institute, and
named the PAPMET study, is to assess the efficacy of
multiple TKIs in metastatic PRCC including Sutent®;
Cabometyx® (cabozantinib); Xalkori® (crizotinib) and
savolitinib. PAPMET will enroll about 180 patients in
over 70 locations in the U.S. and report in 2019.
Study 3, Study 4 and Study 5 – Enrolling – Phase Ib
study of savolitinib (600mg daily) monotherapy
and in combination with durvalumab (anti-PD-L1)
in both PRCC and ccRCC patients (U.K.) – A Phase Ib
dose finding study began in 2016, named the
CALYPSO study, at St. Bartholomew’s Hospital in
London, to assess safety/tolerability of savolitinib
100
80
)
%
(
y
t
i
l
i
b
a
b
o
r
P
60
40
20
0
0
2
4
6
8
Months
10
12
14
1
6
18
and durvalumab combination therapy as well
as preliminary efficacy of the savolitinib as a
monotherapy or combination therapy in several
Savolitinib – Kidney cancer: High proportion of
In February 2017, we presented the results of our
c-Met-driven kidney cancer patient populations.
MET-driven patients. Four active studies underway.
109 patient global Phase II study in PRCC, the largest
During 2016, the dose-finding section of the
and most comprehensive clinical study in PRCC ever
CALYPSO study successfully established the
Study 1 – Completed/awaiting mature OS data (now
conducted. Of 109 patients treated with savolitinib,
combination dose of savolitinib and durvalumab and
progressing to Phase III) – Phase II PRCC savolitinib
PRCC was c-Met-driven in 44 patients (40%), c-Met-
the study has now moved on to the expansion stage
600mg once daily (“QD”) monotherapy (U.S.,
independent in 46 (42%) and MET status unknown in
in ccRCC patients to further explore efficacy.
Canada, U.K. and Spain) – PRCC is the most common
19 (17%). c-MET-driven PRCC was strongly associated
of the non-clear cell renal cell carcinomas (“RCCs”)
with encouragingly durable response to savolitinib
Savolitinib – Lung cancer: Savolitinib’s largest
representing 14% of kidney cancer. Approximately
with ORR in the c-Met-driven group of 18.2% (8/44)
market opportunity. Five active studies underway.
366,000 new cases of kidney cancer were diagnosed
as compared to 0% (0/46) in the c-Met-independent
globally in 2015, equating to about 50,000 cases
group (P=0.002). Median PFS for patients with
Study 6 – Enrolling – Phase II expansion NSCLC (second-
of PRCC, approximately half of whom harbor c-Met-
c-Met-driven and c-Met-independent PRCC was 6.2
line), EGFR TKI refractory, savolitinib (600mg QD) in
driven disease. No systemic therapies/TKIs have
months (95% CI: 4.1–7.0) and 1.4 months (95% CI:
combination with Tagrisso® (Global) – In June 2015,
been approved in PRCC, and to date only modest
1.4–2.7), respectively (hazard ratio = 0.33; 95% CI:
we presented the TATTON Phase I dose finding
efficacy in non-ccRCC has been reported in sub-
0.20–0.52; log-rank P<0.0001). OS is not yet mature
study at ASCO, reporting a 55% ORR and 100% DCR
group analyses of broader RCC studies of VEGFR
for savolitinib treatment of c-Met-driven patients
among Iressa® or Tarceva® refractory T790M+/-
(e.g. Sutent®) and mammalian target of rapamycin
and will be presented in due course once median OS
(“mTOR”) (e.g. Afinitor®) TKIs, with ORRs of <10% and
median PFS in first-line setting of 4-6 months and
second-line setting of only 1-3 months (ESPN study,
has been reached. Savolitinib was well tolerated with
no treatment related Grade ≥3 adverse events (“AE”),
with >5% incidence, associated with savolitinib.
Tannir N. M. et al.).
Total aggregate savolitinib treatment related Grade
≥3 AEs occurred in just 19% of patients comparing
very well to the 70-75% Grade ≥3 AE level recorded
in VEGFR inhibitors such as Sutent® and Votrient®
(pazopanib) in multiple RCC studies.
1,000
Savolitinib – NSCLC Phase II:
EGFR TKI Resistant,
T790M+, C-MET+
Prolonged & total
tumor growth
suppression with
savolitinib/Tagrisso®
combo in T790M+ &
c-MET+ tumors.[1]
(
e
m
u
o
v
r
o
m
u
T
m
m
400
600
800
)
3
l
200
Vehicle
Savolitinib
Tagrisso®
Savolitinib + Tagrisso®
0
0
20
40
80
60
Days on study
100
120
[1] In xenograft model H820, with EGFRm, T790M+ and MET CN gain. D’Cruz CM et al; #761 Preclinical data
for changing the paradigm of treating drug resistance in NSCLC: Novel combinations of AZD6094, a
selective MET inhibitor, and AZD9291 an irreversible, selective (EGFRm and T790M) EGFR TKI; American
Association of Cancer Research Annual Meeting; April 19, 2015.
Operations Review – Innovation Platform
1717
Study 8 – Enrolling – Phase II NSCLC (second-line),
EGFR TKI-refractory, savolitinib (600mg QD) in
combination with Iressa® (China) – We will complete
this Phase II study and present results during 2017.
Study 9 and Study 10 – Enrolling – Phase II c-Met-
driven NSCLC (first-line) savolitinib (600mg QD)
monotherapy (China) – Phase II studies of savolitinib
are also ongoing in first-line NSCLC and PSC patients,
focusing on patients with c-Met Exon-14 skipping.
Savolitinib – Gastric cancer: Three active Phase Ib
gastric cancer clinical studies in China and a multi-
arm Phase Ib study, named the VIKTORY study, being
run at Samsung Medical Center in South Korea.
Study 11 – Enrolling – Phase Ib gastric cancer,
savolitinib monotherapy, patients with c-Met gene
amplification (South Korea/China) – Phase Ib study
patients, meaning that the patient’s T790M status
Tagrisso® (i.e. T790M+/c-Met+). Data presented
of savolitinib is ongoing, and to date we have seen
was known. Since then we have continued to enroll
in June 2016 at ASCO (rociletinib) suggested that
promising preliminary clinical efficacy in the roughly
patients to confirm safety and efficacy and to further
in this third-line EGFR/T790M TKI-resistant NSCLC
5-10% of gastric cancer patients that harbor c-Met
define the molecular types that benefit from the
population about 18% of patients harbor c-Met
gene amplification.
combination therapy. We have now initiated a global
gene amplification.
Savolitinib – Gastric Cancer Phase Ib:
VIKTORY trial – 34-year old male; surgery ruled-out; failed 4-cycles XELOX.
Baseline
PET CT…
… after
3 weeks
savolitinib
600mg.
Phase II expansion study in second-line NSCLC, for
which AstraZeneca paid Chi-Med a $10 million
milestone in mid-2016, aiming to recruit 25 further
c-Met gene amplified and T790M-patients. We target
to complete this Phase II expansion study in 2017,
and if ORR and duration of response are in line
with what we have seen to date, we will consider
moving to a pivotal global Phase III study and
seeking potential U.S. FDA Breakthrough Therapy
designation. In this second-line EGFR TKI refractory
NSCLC population, c-Met-driven disease exists in
15-20% of patients or approximately 35,000-40,000
new patients per year globally.
Study 7 – Enrolling – Phase II NSCLC (third-line),
EGFR/T790M TKI-refractory, savolitinib (600mg QD)
in combination with Tagrisso® (Global) – A second
study arm has begun enrollment for a Phase II trial
to evaluate the use of savolitinib in combination with
Tagrisso® in patients with c-Met gene amplification
who have progressed following treatment with
Jeeyun Lee, AACR 2016.
18 HUTCHISON CHINA MEDITECH LIMITED 2016 Annual Report
Innovation Platform
Fruquintinib – 3L Colorectal Cancer Phase II:
Progression Free Survival [1]
100
)
%
(
y
t
i
l
i
b
a
b
o
r
P
S
F
P
90
80
70
60
50
40
30
20
10
0
0
1
2
Fruquintinib
(n=47)
36 (76.6%)
4.7 (2.9, 5.6)
Placebo
(n=24)
21 (87.5%)
1.0 (1.0, 1.6)
Events, n
Median, mo.
Stratified HR [95% CI]:
0.30 [0.15-0.59]
P<0.001
3
4
Time from randomization (months)
5
6
7
8
[1] Median PFS = Local Physician Assessment – mPFS under Blinded Independent Clinical
Review 3.7 mo. vs. 1.0 mo.
Study 12 and Study 13 – Enrolling – Phase Ib studies
of savolitinib (600mg QD) in combination with
Taxotere® in c-Met over-expression or c-Met gene
amplification gastric cancer (South Korea/China) –
Phase Ib dose finding studies are underway to
assess safety/tolerability of savolitinib and Taxotere®
combination as well as preliminary efficacy of the
savolitinib monotherapy and combination therapy
in the approximately 40% of gastric cancer patients
harboring c-Met over-expression.
Fruquintinib (HMPL-013): Fruquintinib is a highly
selective and potent oral inhibitor of VEGFR 1/2/3
that was designed to be a global best-in-class
VEGFR inhibitor for many types of solid tumors.
Fruquintinib’s unique kinase selectivity has been
shown to reduce off-target toxicity thereby allowing
for full VEGFR inhibition 24-hours a day, as well
as possible use in combination with other TKIs
and chemotherapy in earlier lines of treatment.
We believe these are points of meaningful
differentiation compared to other approved small
molecule VEGFR inhibitors, such as Sutent®, Nexavar®
(sorafenib) and Stivarga® (regorafenib). In addition
to the FRESCO study in third-line CRC in China, we
are also enrolling FALUCA, a pivotal Phase III study
of fruquintinib in third-line NSCLC, and are in final
planning on a Phase III study of fruquintinib in
combination with Taxol® in the second-line setting
for gastric cancer. Furthermore, a Phase II study
of fruquintinib in combination with Iressa® in first-
line EGFR-mutant NSCLC began in early 2017 and a
Phase I study of fruquintinib in the U.S. is set to start
this year.
Study 14 – Primary and secondary endpoints
met – Phase III study in CRC (third-line or above),
fruquintinib monotherapy (China) – The FRESCO
study, is a pivotal Phase III study in 416 patients with
locally advanced or metastatic CRC who have failed
at least two prior systemic chemotherapies. Patients
were randomized at a 2:1 ratio to receive either 5mg
of fruquintinib QD orally, on a 3 weeks on/1 week off
cycle, plus best supportive care or placebo plus best
supportive care. FRESCO met its primary endpoint
(OS) as well as secondary endpoints (PFS, ORR and
DCR) and fruquintinib was well tolerated in FRESCO
with no unexpected safety events. We now intend
to present the full FRESCO data set and are on-track
to submit fruquintinib’s NDA to the China FDA by
mid-2017. Subject to approvals, we expect
fruquintinib will launch in China in 2018 thereby
benefiting the approximately 50,000-60,000
new third-line CRC patients per year across China.
We believe that fruquintinib in third-line CRC
has approximately $110-160 million peak sales
potential, and based on the terms of our agreement
with Lilly, this would equate to about $20-35
million in incremental net income to Chi-Med. The
basis of these estimates are Phase II level median
PFS; wholesaler acquisition cost similar to that of
TKIs in China; the above estimated incidence of
third-line CRC; and estimated eventual penetration to
20-30% of these patients. A relevant cross-reference
point for the estimate of fruquintinib’s third-line
CRC potential peak sales in China is apatinib, a
multi-kinase VEGFR inhibitor approved in China
in third-line gastric cancer (a similar sized patient
population to third-line CRC), of over $100 million
in 2016, its first full year post launch – we believe
apatinib’s rapid growth is aided by off-label usage
beyond third-line gastric cancer due to the current
lack of therapeutic alternatives in third-line NSCLC
and third-line CRC in China.
Fruquintinib – 3L NSCLC Phase II:
Progression Free Survival
Events, n
Median, mo.
Fruquintinib
(n=61)
40 (65.6%)
3.8 (2.8, 4.6)
Placebo
(n=30)
21 (70.0%)
1.1 (1.0, 1.9)
Stratified HR [95%CI]:
0.34 [0.20-0.57]
P<0.001
)
%
(
y
t
i
l
i
b
a
b
o
r
P
S
F
P
100
90
80
70
60
50
40
30
20
10
0
0
1
2
3
4
6
5
10
Time from randomization (months)
9
7
8
11
12
13
14
Operations Review – Innovation Platform
1919
2016. A Phase I study in Caucasian cancer patients is
now set to begin in the U.S. in 2017.
Study 18 – Completed (now progressing to Phase III)
– Phase Ib study of fruquintinib in combination with
Taxol® in gastric cancer (second-line) (China) – In
early 2017, we presented results of an open label,
multi-center Phase Ib dose finding/expansion study
of fruquintinib in combination with Taxol® in second-
line gastric cancer. A total of 32 patients were
enrolled in the study and the recommended phase II
dose (“RP2D”) of fruquintinib was determined to
be 4mg QD 3 weeks on/1 week off in combination
with 80mg/m2 weekly of Taxol®. A total of 28 of 32
patients were efficacy evaluable with an ORR of 36%
and a DCR of 68%. At fruquintinib RP2D, ≥16 week
PFS was 50% and ≥7 month OS was 50%. Tolerability
of the RP2D combination was as expected
with treatment related Grade ≥3 AEs, with >5%
incidence, of neutropenia (41%), leukopenia (28%),
Study 15 – Enrolling – Phase III NSCLC third-
care, or placebo plus best supportive care. The
decreased hemoglobin (6%), hand-foot syndrome
line fruquintinib monotherapy (China) – In
primary endpoint is OS, with secondary endpoints
(6%), neurophlegmon (6%), and hypertension
December 2016, we presented positive Phase II
including PFS, ORR, DCR and duration of response.
(6%), with higher frequencies in the 4mg cohort as
results in third-line NSCLC patients, which showed
We expect to complete FALUCA enrollment in 2017
compared with lower doses and with neutropenia
median PFS of 3.8 months for the fruquintinib group
and reach OS endpoint maturity by 2018. There are
and leukopenia being common Taxol® AEs. The
compared to 1.1 months for the placebo group
approximately 60,000-70,000 new third-line NSCLC
combination regime resulted in a ~30% increase
(hazard ratio=0.27, p<0.001); an ORR of 16.4%
patients per year in China.
for the fruquintinib group compared to 0% for the
in Taxol® exposure in patients, indicating potential
adjust down Taxol® dose in future development.
placebo group (p=0.02); a DCR of the fruquintinib
Study 16 – Enrolling – Phase II study of fruquintinib in
Based on Phase Ib data, we plan to move directly
group significantly higher than that of the placebo
combination with Iressa® in first-line NSCLC (China) –
into a Phase III registration trial in China in 2017.
group with a difference of 53.8% (36.3, 71.4; 95%
In January 2017, we initiated a multi-center,
There are approximately 250,000-300,000 new
CI, p<0.001). Fruquintinib was well tolerated with
treatment related Grade ≥3 AEs, with >5% incidence,
associated with fruquintinib of hypertension
single-arm, open-label Phase II study of fruquintinib
second-line gastric cancer patients per year in China.
in combination with Iressa® in the first-line setting for
patients with advanced or metastatic NSCLC with EGFR
(8.2%). In December 2015, we initiated the
activating mutations. The objectives of the Phase II
FALUCA study in China, which is a pivotal Phase III
study are to evaluate the safety and tolerability as well
study in advanced non-squamous NSCLC patients
as preliminary efficacy of the combination therapy.
who have failed two prior systemic chemotherapies.
Patients are randomized at a 2:1 ratio to receive
Study 17 – Planning – Phase I fruquintinib
either 5mg of fruquintinib orally once per day, on
monotherapy in advanced solid tumors (U.S.) – Our
a 3 weeks on/1 week off cycle plus best supportive
U.S. FDA IND was cleared on fruquintinib in late
20 HUTCHISON CHINA MEDITECH LIMITED 2016 Annual Report
Innovation Platform
Sulfatinib’s unique angio-immuno kinase profile & MoA(1) activates &
enhances the body’s immune system, namely T-cells, via VEGFR/FGFR
while inhibiting the production of macrophages (CSF-1R) which cloak
cancer cells.
VEGFR / FGFR
Anti-angiogenesis
(minimizes T-cell
loss/seepage)
FGFR
Antigen release
(activates T-cells)
CSF-1R
Blocks negative regulators
(suppresses macrophage cloak)
[1] MoA = Mechanism of Action
Sulfatinib (HMPL-012): Sulfatinib is an oral
in 21 NET patients reported strong efficacy in
Last week at the European Neuroendocrine Tumor
drug candidate with a unique angio-immuno
terms of ORR (>30%) and PFS (>18 months) across
Society conference we reported the results of an open-
kinase profile which we believe activates and
a broad spectrum of NET sub-types. These Phase
label, single-arm Phase II study in China to assess the
effectively enhances the body’s immune system,
I data compared favorably to the less than 10%
efficacy and safety of sulfatinib 300mg QD monotherapy
specifically T-cells, via VEGFR/FGFR and CSF-1R
ORR and 11.4 month median PFS for Sutent® and
in patients with advanced grade 1 or 2 NETs. A total of
inhibition. Importantly, in 2016 we presented
Afinitor®, the two approved single agent therapies
81 patients (41 pancreatic NET and 40 extra-pancreatic
pre-clinical data for the first time that show
for pancreatic NET. Sulfatinib is the first oncology
NET) were enrolled. The majority of patients had grade
sulfatinib, in addition to VEGFR and FGFR1, is a
candidate that we have taken through proof-
2 disease (79%) and had failed previous systemic
potent inhibitor of CSF-1R, a signaling pathway
of-concept in China and subsequently started
treatments (69%). As of January 2017, 13 patients had
involved in blocking the activation of tumor-
clinical development in the U.S. We are currently
confirmed PR and 61 patients had stable disease (“SD”)
associated macrophages, which cloak cancer cells
conducting six clinical studies and retain all rights
corresponding to an overall ORR of 16.0% (13/81), with
from attack from T-cells. Our Phase I clinical data
to sulfatinib worldwide.
17.1% (7/41) in pancreatic NET and 15.0% (6/40) in extra-
Operations Review – Innovation Platform
2121
Sulfatinib – China NET Phase II:
Progression Free Survival
y
t
i
l
i
b
a
b
o
r
P
S
F
P
100%
80%
60%
40%
20%
0%
Median PFS
(months)
16.6m
(13.4, 19.4)
19.4m
(13.8, 22.1)
All NET
(n=81)
P-NET
(n=41)
Non-P
NET (n=40)
13.4m
(7.6, 16.7)
PDs or
Deaths
(% pts)
51.9%
(42/81)
39.0%
(16/41)
65.0%
(26/40)
All NET
Pancreatic NET
Non-pancreatic NET
0
3
6
9
12
15
18
21
Time (months)
Data has yet to reach maturity – data cut-off
as of Jan 20, 2017.
Study 20 – Enrolling – Phase III extra-pancreatic
NET sulfatinib monotherapy (China) – In December
2015, we initiated the SANET-ep study, which is
a pivotal Phase III study in patients with low- or
intermediate-grade advanced extra-pancreatic NET.
Patients are randomized at a 2:1 ratio to receive
either 300mg of sulfatinib orally QD, or placebo,
on a 28-day treatment cycle. The primary endpoint
is PFS, with secondary endpoints including ORR,
DCR, time to response, duration of response, OS,
safety and tolerability. We expect to complete
enrollment in 2018 and present top-line results in
2019. If the SANET-ep Phase III data is consistent
with the 15.0% ORR and estimated 13.5 month
median PFS reported in the above Phase II study, the
pancreatic NET, and an overall DCR of 91.4%. Median
Study 19 – Enrolling – Phase III pancreatic NET
benefit to the approximately 50,000-60,000 new
overall PFS has not been reached, but is estimated
sulfatinib monotherapy (China) – In March 2016, we
non-pancreatic NET patients per year in China will
to be 16.6 months (95% CI: 13.6, 19.4) with longer
initiated the SANET-p study, which is a pivotal Phase
also be highly significant over their current limited
median PFS in pancreatic NET estimated at 19.4
III study in patients with low- or intermediate-
treatment alternatives.
months and shorter median PFS in extra-pancreatic
grade, advanced pancreatic NET. Patients are
NET estimated at 13.4 months. Importantly, in the
randomized at a 2:1 ratio to receive either 300mg
Study 21 – Enrolling – Phase I sulfatinib monotherapy
context of our potential global development strategy,
of sulfatinib orally QD, or placebo, on a 28-day
in advanced solid tumors (U.S.) – A Phase I study
there were twelve patients who had progressed after
treatment cycle. The primary endpoint is PFS, with
in Caucasian cancer patients began in the U.S. in
treatment with targeted therapies (e.g. Sutent® and
secondary endpoints including ORR, DCR, time to
November 2015. We are currently in the 300mg
Afinitor®) and all benefited from sulfatinib treatment (3
response, duration of response, OS, safety and
QD cohort and expect to complete dose escalation
PRs and 9 SDs). Sulfatinib was well tolerated with Grade
≥3 AEs, with >5% incidence, regardless of causality of
hypertension (31%), proteinuria (14%), hyperuricemia
tolerability. We expect to complete enrollment
shortly. Once the RP2D among Caucasian patients is
in 2018 and present top-line results in 2019. If
established, we intend to begin full development in
the SANET-p Phase III data is consistent with the
several tumor types in 2017.
(10%), hypertriglyceridemia (9%), diarrhea (7%) and ALT
17.1% ORR and estimated 19.4 month median PFS
increase (6%). Based on the above promising Phase I and
reported in the above Phase II study, the benefit to
Study 22 and Study 23 – Enrolling – Phase II study in
Phase II efficacy data and tolerability in patients with
the approximately 5,000-6,000 new pancreatic NET
recurrent/refractory thyroid cancer patients (China) –
advanced NETs, two randomized Phase III trials (Studies
patients per year in China will be significant over
In March 2016, we began a Phase II proof-of-
19 and 20 below) are ongoing.
their current treatment options.
concept study in patients with recurrent/refractory
Sulfatinib – China NET Phase II:
Baseline
Week 52
2
G
T
E
N
m
u
n
e
d
o
u
D
t
n
e
i
t
a
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t
i
r
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p
o
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r
&
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e
v
i
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p
i
t
l
u
m
/
w
s
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s
a
t
s
a
t
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d
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p
m
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22 HUTCHISON CHINA MEDITECH LIMITED 2016 Annual Report
Innovation Platform
Epitinib Phase Ib[1] – monotherapy in EGFRm+ NSCLC
patients – efficacy in lung in-line with Iressa®/Tarceva®
Objective Response Rate
Disease Control Rate
EGFR TKI naïve
(N=21)
61.9% (13/21) #
90.5% (19/21) #
EGFR TKI naïve
excl. c-MET +ve (N=19)
68.4% (13/19) #
100.0% (19/19) #
EGFR TKI Pre-treated
EGFR TKI Naïve
EGFR TKI Naïve c-MET +ve
SD
SD SD
PD
SD SD SD SD
SD
PD
^
SD
SD
SD
SD
SD SD
PD
^
SD
PR
*
PR
SD
PR
Note: The two EGFR TKI
naÏve patients that
progressed were c-MET +ve
PR PR
*
PR
PR
PR
* PR
PR PR
PR PR
SD
)
%
(
e
n
i
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40
30
20
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-10
-20
-30
-40
-50
-60
[1] Dose expansion stage – data cut-off as of Sept 20, 2016;
* Unconfirmed partial response, due to no further assessment at cut-off date;
#
^ c-MET amplification/high expression identified.
Includes both confirmed and unconfirmed partial responses;
Epitinib – Phase Ib:
Lung Baseline
+28 days
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Brain Baseline
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medullary or differentiated thyroid cancer and have
observed encouraging early efficacy in this open
label study in China where there are few safe and
effective treatment options. We target to present
preliminary Phase II data in late 2017.
S t u d y 2 4 – E n r o l l i n g – P h a s e I I s t u d y i n
chemotherapy refractory biliary tract cancer patients
(China) – In January 2017, we began a Phase II
proof-of-concept study in patients with biliary tract
cancer, a heterogeneous group of rare, but fatal,
malignancies arising from the biliary tract epithelia.
Gemcitabine is the current approved first-line
therapy for the approximately 18,000 new biliary
tract cancer patients per year in the U.S. (National
Cancer Institute), but median survival is less than
12 months for patients with unresectable or
metastatic disease at diagnosis. As a result, we see
a major unmet medical need for patients who have
progressed on gemcitabine, and sulfatinib may offer
a new targeted treatment option in this tumor type.
Epitinib (HMPL-813): A significant portion of
patients, estimated at approximately 50%, with
NSCLC go on to develop brain metastasis. Patients
with brain metastasis suffer from poor prognosis
with a median OS of less than 6 months and low
quality of life with limited treatment options. Epitinib
is a potent and highly selective oral EGFR inhibitor
which has demonstrated brain penetration and
efficacy in pre-clinical and now clinical studies. EGFR
inhibitors have revolutionized the treatment of NSCLC
with EGFR activating mutations. However, approved
EGFR inhibitors such as Iressa® and Tarceva® cannot
penetrate the blood-brain barrier effectively, leaving
the majority of patients with brain metastasis, which
total approximately 60,000-70,000 new patients per
year in China, without an effective targeted therapy.
We currently retain all rights to epitinib worldwide.
Study 25 – Continues to enroll (now progressing to
Phase III) – Phase Ib epitinib monotherapy in NSCLC
patients with activating EGFR-mutation positive with
brain metastasis (China) – In December 2016 we
presented the results of an open label, multi-center
Phase I dose expansion study. A total of 34 patients
Operations Review – Innovation Platform
2323
Theliatinib Phase I – monotherapy in wild-type
EGFR NSCLC
CASE STUDY – EGFR protein over expression
A 62-year old man, diagnosed with stage IV esophageal squamous cell
cancer cT3N0M1with liver metastasis on May 4, 2016.
High protein overexpression – EGFR IHC local test: >75% of tumor cells 3+.
Previous anti-cancer treatments: May 4, 2016 to September 23, 2016 –
nimotuzumab/placebo + paclitaxel + cisplatin – six cycles with best
tumor response: disease progression.
October 11, 2016 began theliatinib 400mg daily treatment.
December 12, 2016 – Cycle 3 Day 1 (C3D1) tumor assessment: Target
lesion (liver metastasis) shrank -33% (36mm to 23mm diameter) –
unconfirmed partial response.
Withdrew from study on January 23, 2017 due to AEs – Grade 1
(diarrhea/pruritus/dental ulcer) Grade 2 (epifolliculitis/dermatitis).
9/23/2016 Baseline
12/12/2016 C3D1
(13 EGFR TKI pretreated and 21 EGFR TKI treatment
naïve) were efficacy evaluable with an ORR of 38%
(13/34), including 3 unconfirmed responses. All
confirmed and unconfirmed responses occurred in
EGFR TKI treatment naïve patients resulting in an
ORR of 62% (13/21) and in the 11 EGFR TKI naïve
patients who also had measurable brain metastasis
(lesion diameter>10 mm per RECIST 1.1), the ORR
was 64% (7/11). Furthermore, when the two patients
with c-Met gene amplification were excluded,
epitinib ORR increased to 68% (13/19) in EGFR TKI
treatment naïve patients and 70% (7/10) of those
patients who also had measurable brain metastasis.
Epitinib was well tolerated with treatment related
Grade ≥3 AEs, with >5% incidence, associated with
epitinib of elevations in ALT (19%), gamma-GGT
(11%), elevations in AST (11%), hyperuricemia (5%)
and skin rash (5%). Based on these encouraging data,
and driven by the major unmet medical need, we
are now planning to start a Phase III pivotal study
of epitinib in EGFR mutant NSCLC patients with brain
metastasis in China in 2017.
Study 26 – Phase II study in glioblastoma –
Glioblastoma is a primary brain cancer that harbors
high levels of EGFR gene amplification. Planning
is underway to start a Phase II study in China
during 2017.
Theliatinib (HMPL-309): Like epitinib, theliatinib is
a novel molecule EGFR inhibitor under investigation
for the treatment of solid tumors. Tumors with wild-
types with a high incidence of wild-type EGFR
efficacy has been observed with an unconfirmed PR
type EGFR activation, for instance, through gene
activation. We currently retain all rights to
in an esophageal cancer patient with a high level of
amplification or protein over-expression, are less
theliatinib worldwide.
EGFR protein expression.
sensitive to current EGFR TKIs, Iressa® and Tarceva®,
due to sub-optimal binding affinity. Theliatinib has
Study 27 – Enrolling – Phase I study of theliatinib
Study 28 – Enrolling – Phase Ib expansion theliatinib
been designed with strong affinity to the wild-type
monotherapy in wild-type EGFR NSCLC (China) – We
monotherapy in esophageal cancer (China) – In
EGFR kinase and has been shown to be five to ten
are conducting an open-label Phase I dose escalation
January 2017, we began a Phase Ib proof-of-
times more potent than Tarceva®. Consequently,
study that has completed eight once-daily dose
concept expansion study of theliatinib 300mg
we believe that theliatinib could benefit patients
cohorts. While the maximum tolerated dose has not
QD dose in esophageal cancer patients with EGFR
with esophageal and head and neck cancer, tumor-
yet been reached and dose escalation is continuing,
protein over-expression or gene amplification.
24 HUTCHISON CHINA MEDITECH LIMITED 2016 Annual Report
Innovation Platform
HMPL-523: HMPL-523 is a potential global first-
cohorts, from 200mg QD through 400mg QD for
consumption increases the relative bioavailability
in-class oral inhibitor targeting Syk, a key protein
14 days. A total of 118 adult male healthy subjects
of HMPL-523. Human PK exposures at 200mg QD
involved in B-cell signaling. Modulation of the B-cell
were enrolled at baseline and 114 (96.6%) subjects
and above can be expected to provide the target
signaling system has proven significant potential
completed the study. A total of 83 treatment
coverage required for clinical efficacy based on
for the treatment of certain chronic autoimmune
emergent AEs were reported with 38.9% in the
the preclinical PK/PD analysis and as a result, a
diseases, such as rheumatoid arthritis as well as
HMPL-523 groups, and 32.1% in the placebo groups,
multiple-dose regimen of 300mg or less of
hematological cancers. We believe HMPL-523, as
respectively. Two SAEs were reported in the Phase I
HMPL-523, administered QD, is the RP2D for clinical
an oral drug candidate, has important advantages
study and when HMPL-523 was discontinued in
trials in autoimmune diseases. We have submitted
over intravenous monoclonal antibody immune
those subjects the SAEs were resolved. Off-target
our U.S. immunology IND application and engaged
modulators in rheumatoid arthritis in that small
toxicities such as diarrhea and hypertension, which
with the U.S. FDA around our plan for development
molecule compounds clear the system faster,
led to the failure of the first-generation Syk inhibitor
in rheumatoid arthritis; we are now preparing
thereby reducing the risk of infections from
fostamatinib, were not observed.
for submission of additional data to the U.S. FDA
sustained suppression of the immune system.
after which we will consider our U.S. development
In an ex-vivo human whole blood pharmacodynamic
strategy in immunology.
Study 29 and Study 30 – Complete (progressing
(“PD”) assay, HMPL-523 inhibited anti-IgE-induced
to Phase II) – Phase I study (healthy volunteers)
basophil activation (CD63+) in a concentration-
Study 31 and Study 32 – Enrolling – Phase I study
(Australia/China) – In November 2016, we presented
dependent manner with an estimated half maximal
of HMPL-523 in hematological cancer (second/
results of our Phase I dose escalation study on
effective concentration (EC50) of 47.70ng/mL.
third-line) (Australia/China) – In early 2016,
HMPL-523 in healthy volunteers. We successfully
Systemic exposure of HMPL-523 was increased up
we initiated a Phase I dose escalation study of
completed ten single dose cohorts, from 5mg QD
to 1.5 fold when administered in a fed condition
HMPL-523 in Australia in patients with relapsed
through to 800mg QD; and three multiple dose
compared to a fasted condition, indicating that food
and/or refractory B-cell non-Hodgkin’s lymphoma
HMPL-523 – Far superior selectivity to fostamatinib
Selectivity
Syk enzyme
HMPL-523 IC50 (nM)
25 ± 5 (n=10)*
fostamatinib IC50 (nM)
54 ± 16 (n=10)*
JAK 1,2,3 enzyme
>300, >300, >300*
FGFR 1,2,3
FLT3 enzyme
LYN enzyme
Ret enzyme
KDR enzyme
KDR cell
>3,000, >3,000, >3,000
63*
921*
>3,000*
120, 30, 480*
89, 22, 32*
9*
160*
5**
390 ± 38 (n=3)*
61 ± 2 (n=3)*
5,501 ± 1,607 (n=3)*
422 ± 126 (n=3)*
* HMPL data and Eun-ho Lee, 2011; ** Birth Defects Research (Part A) 2009, 85: 130-6.
Operations Review – Innovation Platform
2525
related toxicity, such as the high level of liver toxicity
in several solid tumor settings. We currently retain all
observed with the first generation PI3Kδ inhibitor
Zydelig®. HMPL-689’s PK properties have been
rights to HMPL-453 worldwide.
found to be favorable with expected good oral
Study 35 and Study 36 – Enrolling – Phase I dose
absorption, moderate tissue distribution and low
escalation (Australia and China) – In February 2017,
clearance in preclinical PK studies. We also expect
we announced the initiation of a first-in-human
HMPL-689 will have low risk of drug accumulation
Phase I dose escalation study in Australia to evaluate
and drug-to-drug interaction. Given this, we believe
safety, tolerability, PK and preliminary anti-tumor
that HMPL-689 has the potential to be a global
activity in patients with advanced or metastatic solid
or chronic lymphocytic leukemia for whom there
is no standard therapy. We have completed the
best-in-class PI3Kδ agent. We currently retain all
rights to HMPL-689 worldwide.
100mg, 200mg, 400mg, 600mg QD cohorts and
tumors, who have failed or cannot tolerate standard
therapies or for whom no standard therapies exist. In
late 2016, we received IND clearance for HMPL-453
are now in the 800mg dose level in Australia. In
Study 33 and Study 34 – Complete – Phase I dose
in China where we are now preparing to initiate a
mid-2016, we received clearance from the China
escalation study in healthy volunteers (Australia) – In
Phase I dose escalation study in solid tumor patients
FDA on our hematological cancer IND application
2016, we completed a Phase I dose escalation study
and expect first patient dose in Q2 2017.
and as a result, in January 2017, we started Phase I
in healthy adult volunteers to evaluate HMPL-689’s
dose escalation in B-cell non-Hodgkin’s lymphoma
PK and safety profile following single oral dosing.
HM004-6599: HMPL-004 is a proprietary botanical
or chronic lymphocytic leukemia patients in China.
Results were as expected with linear PK properties
drug for the treatment of inflammatory bowel
Once our maximum tolerated dose or RP2D is
and good safety profile. Detailed Phase I data will
diseases, which we are developing through NSP, a
reached, we intend to expand into proof-of-concept
be presented at a scientific conference in 2017. We
50/50 joint venture with Nestlé. We are working with
Phase Ib/II study with several cohorts of tumor
have now received IND clearance in China and plan
Nestlé to prepare an IND application for HM004-
sub-types as either monotherapy or in combination
to initiate a Phase I dose escalation and expansion
6599 which we expect to submit in China in 2017.
with other therapies hoping in both cases to produce
study in patients with hematologic malignancies
HM004-6599 is an enriched/purified re-formulation
preliminary proof-of-concept data on HMPL-523
in 2017.
in hematological cancer during 2017. We base our
of HMPL-004, our drug candidate that reported
positive Phase II results in ulcerative colitis in 2010
hope to reach this objective in 2017 on the strong
HMPL-453: HMPL-453 is a potential first-in-class
but then went on to prove futile in an interim analysis
efficacy (albeit suboptimal safety) reported on
novel, highly selective and potent small molecule
of the subsequent Phase III study in 2014. We believe
Gilead’s Syk inhibitor Entospletinib in 2016.
that targets FGFR 1/2/3, a sub-family of receptor
that re-formulation should effectively address the
tyrosine kinases. Aberrant FGFR signaling has
primary reasons for the results of the Phase III study.
HMPL-689: HMPL-689 is a novel, highly selective
been found to be a driving force in tumor growth
and potent small molecule inhibitor targeting
(through tissue growth and repair), promotion of
the isoform PI3Kδ, a key component in the B-cell
receptor signaling pathway. We have designed
angiogenesis and resistance to anti-tumor therapies.
To date, there are no approved therapies specifically
HMPL-689 with superior PI3Kδ isoform selectivity,
in particular to not inhibit PI3Kγ (gamma), to
minimize the risk of serious infection caused by
targeting the FGFR signaling pathway. In pre-clinical
studies, HMPL-453 demonstrated superior kinase
selectivity and safety profile as well as strong anti-
immune suppression. HMPL-689’s strong potency,
tumor potency, as compared to drug candidates in
particularly at the whole blood level, also allows
the same class. Abnormal FGFR gene alterations are
for reduced daily doses to minimize compound
believed to be the drivers of tumor cell proliferation
26 HUTCHISON CHINA MEDITECH LIMITED 2016 Annual Report
Commercial Platform
A powerful Prescription Drugs Commercial Platform in China
NORTH
Pop’n: 320m (23%)
CV medical reps:
CNS medical reps:
HSP sales staff:
458 (23%)
32 (22%)
0 (0%)
490
(23%)
124
(6%)
568
(26%)
EAST
Pop’n: 393m (28%)
CV medical reps:
CNS medical reps:
HSP sales Staff:
808 (40%)
61 (43%)
31 (100%)
900
(41%)
CENTRAL-SOUTH
Pop’n: 383m (28%)
CV medical reps:
CNS medical reps:
HSP sales staff:
535 (27%)
33 (23%)
0 (0%)
WEST
Pop’n:
100m (7%)
CV medical reps:
CNS medical reps:
HSP sales staff:
76 (4%)
5 (3%)
0 (0%)
81
(4%)
SOUTHWEST
Pop’n: 190m (14%)
CV medical reps:
CNS medical reps:
HSP sales staff:
112 (6%)
12 (9%)
0 (0%)
Notes: 2010 Population – China State Census; CV = Cardiovascular; CNS = Central nervous system.
Chi-Med Rx sales team data = December 31, 2016.
2016 Sales*:
US$372.3m
up +30%
* Sales of Prescription Drugs subsidiary and non-consolidated
joint venture.
National Coverage:
~300 cities & towns.
~18,700 hospitals.
~87,000 doctors.
About 2,200 Rx sales people.
New team of 143 CNS reps built since 2015.
Operations Review – Commercial Platform
2727
COMMERCIAL PLATFORM
In 2016, sales of our Commercial Platform’s
selling primarily market-leading household-
therapy approved to treat coronary artery disease,
name OTC pharmaceutical products through our
which includes stable/unstable angina, myocardial
subsidiaries grew by 43% to $180.9 million (2015:
non-consolidated joint venture HBYS.
infarction and sudden cardiac death. There are over
$126.2m), and sales of our Commercial Platform’s
non-consolidated joint ventures, SHPL and HBYS,
grew by 14% to $446.5 million (2015: $392.7m)
Prescription Drugs business:
In 2016, sales of our Prescription Drugs subsidiary
1 million deaths due to coronary artery disease per
year in China, with this number set to rise due to
an aging population with high levels of smoking
resulting in consolidated net income attributable
grew by 42% to $149.9 million (2015: $105.5m),
(34% of adults), increasing levels of obesity (28% of
to Chi-Med from our Commercial Platform which
and sales of our non-consolidated Prescription Drugs
adults overweight) and hypertension (26% of adults).
increased by 180% to $70.3 million (2015: $25.2m).
joint venture (SHPL) grew by 23% to $222.4 million
SXBX pill is the third largest botanical prescription
(2015: $181.1m) and consolidated net income
drug in this indication in China, with a 12% national
During 2016, Chi-Med booked a one-time gain of
attributable to Chi-Med from our Prescription
market share. Sales of SXBX pill have grown more
$40.4 million resulting from land compensation
Drugs business increased by 284% to $61.1 million
than twenty-fold since 2001, including 23% in 2016
paid by the Shanghai government to SHPL. Adjusted
(2015: $15.9m). Adjusted consolidated net income
to $195.4 million (2015: $159.3m) as a result of
consolidated net income attributable to Chi-Med
attributable to Chi-Med grew 30% to $20.7 million
continued geographical expansion of sales coverage.
from our Commercial Platform grew by 19% to
(2015: $15.9m) representing 69% of our overall
$29.9 million (2015: $25.2m) which excludes a one-
Commercial Platform net income which excludes a
SXBX pill is protected by a formulation patent that
time property gain. These results were particularly
one-time property gain.
encouraging given the weakening of the Chinese
expires in 2029 and is one of less than two dozen
proprietary prescription drugs represented on China's
RMB which reduced both our top- and bottom-
SHPL: Our own-brand Prescription Drugs business,
National Essential Medicines List, which means that
line growth rates by over -6% in U.S. dollar terms
operated through our non-consolidated joint venture
all Chinese state-owned health care institutions
during 2016.
SHPL, continues to perform well with 23% sales
are required to carry the drug. SXBX pill is a low-
growth, primarily fueled by growth in sales of SXBX
cost drug, fully reimbursed in all provinces in China,
The Commercial Platform, which has been built over
pill, leading to a 27% increase in net income after tax
listed on China’s Low Price Drug List (“LPDL”) with
the past 16 years, is focused on two core business
of $39.7 million (2015: $31.3m) excluding property
areas. The first area is our Prescription Drugs
compensation. Including the one-time gain of
business, a high margin/profit business operated
$80.8 million resulting from property compensation
through our joint ventures SHPL and Hutchison
paid by the Shanghai government, SHPL recorded
Sinopharm, in which we nominate management
a 285% increase in net income after tax to
and run the day-to-day operations. Our Prescription
$120.5 million (2015: $31.3m). Our 50% shareholding
Drugs business is a platform that we plan to use to
in SHPL therefore resulted in consolidated net income
launch our un-partnered drug candidates, such as
attributable to Chi-Med during 2016 of $60.3 million
sulfatinib, epitinib, theliatinib, HMPL-523, HMPL-689
(2015: $15.7m).
and HMPL-453 once approved in China. The second
area is our Consumer Health business, which is
SXBX pill: SHPL’s key product is SXBX pill, an oral
a profitable and cash flow generating business
vasodilator and pro-angiogenesis prescription
She Xiang Bao Xin pills
Coronary artery disease (Rx)
28 HUTCHISON CHINA MEDITECH LIMITED 2016 Annual Report
Commercial Platform
business versus just eight months in 2015. Hutchison
Sinopharm is migrating its operation towards being
a higher margin, full-service, third-party prescription
drugs commercial services company in China. In
2016, Hutchison Sinopharm invested in expanding
its commercial team to support the exclusive deals
on Seroquel® (AstraZeneca) and Concor® (Merck
Serono) as well as the full take-back of the Chi-Med
owned Zhi Ling Tong brand infant nutrition business
from a third-party distributor. Regulatory reform
in the China pharmaceutical industry, expected
to be announced in 2017, appears that it might
limit the number of distributors allowed between
a manufacturer and each hospital to one, which
may affect the rate of sales growth of Hutchison
Sinopharm in 2017. As a result, sales growth
an average daily cost of RMB3.50, or approximately
SHPL to return the land use rights of its old factory
Guidance for Hutchison Sinopharm in 2017 has been
$0.50. In the coming years, we anticipate stable
located 12 kilometers from the center of Shanghai.
limited. This regulatory reform will have no impact
growth in sales of SXBX pill given the strength of its
As compensation for returning the old factory’s land
on Hutchison Sinopharm profitability or commercial
proposition, head-room to potentially increase price
use rights, the local government has paid SHPL cash
team expansion plans.
under the LPDL and the expected expansion of the
and subsidies totaling about $113 million. As at
coronary artery disease market in China driven by
December 31, 2016, SHPL had received $103 million
Seroquel®: Seroquel® (quetiapine tablets) is an
an aging population and trends in diet leading to
in cash thereby allowing the Chi-Med Group to record
antipsychotic therapy approved for bi-polar
increasing obesity.
the aforementioned one-time gain of $40.4 million
disorder and schizophrenia, conditions that are
in 2016. The remaining $10 million was received
underdiagnosed in China. Seroquel® holds an
The SHPL operation is large-scale in both the
in February 2017 and now the Chi-Med Group
approximately 5% market share in China’s anti-
commercial and manufacturing areas. The
will likely receive a dividend of about $40 million
psychotic prescription drug market, and 46% of
commercial team now has about 2,200 medical sales
from SHPL.
representatives which allows for the promotion and
scientific detailing of our prescription drug products
Hutchison Sinopharm: Our Prescription Drugs
not just in hospitals in provincial capitals and medium-
commercial services business, which is operated
sized cities, but also in the majority of county-level
through Hutchison Sinopharm, focuses on providing
hospitals in China. In late 2016, SHPL transitioned to
logistics services to, and distributing and marketing
a new, Good Manufacturing Practice-certified factory
prescription drugs manufactured by, third-party
located 40 kilometers south of Shanghai, which
pharmaceutical companies in China. In 2016,
holds 74 drug product manufacturing licenses and
Hutchison Sinopharm made good progress with
is operated by over 500 manufacturing staff. The
sales up 42% to $149.9 million (2015: $105.5m) as
move to this new higher capacity factory allowed
a result of full period consolidation of the Seroquel®
Seroquel® tablets
Bi-polar disorder/schizophrenia (Rx)
Operations Review – Commercial Platform
2929
China’s generic quetiapine market, primarily as
operations in three pilot territories in China and
HBYS: Our OTC business operated through our non-
a result of being the first-mover and original
create synergy with our existing cardiovascular
consolidated joint venture HBYS focuses on the
patent holder on quetiapine. Seroquel® is the
medical sales team by detailing Concor® alongside
manufacture, marketing and distribution of market-
only brand in China to have an XR formulation
the SXBX pill on a fee-for-service basis. Sales of
leading household-name OTC pharmaceutical
which provides it with competitive advantage
Concor® in our territories grew by 43% in 2016
products and has been an important source of cash
over quetiapine generics. In Q2 2015, Hutchison
resulting in service fees of $1.4 million (2015:
for Chi-Med. HBYS sales have grown over five-fold
Sinopharm became the exclusive first-tier
$0.9m). We expect growth in these fees will be
since its establishment in 2005 and, during this
distributor to distribute and market Seroquel®
driven by cardiovascular market expansion as well
period, HBYS has adopted a low-capex strategy
tablets in China, and subsequently built a team of
as potential territorial expansion of Hutchison
of expanding mainly through the use of contract
over 140 dedicated medical sales representatives
Sinopharm’s activities.
(2015: 100) to market Seroquel®. This led to sales
growth of 63% in 2016 to $34.4 million (2015:
$21.1m). We target double-digit growth in sales
Consumer Health business:
In 2016, sales of our Consumer Health subsidiaries
more difficult, so HBYS recently moved to expand
in-house production capacity three-fold through
manufacturers. However, China FDA policy changes
in recent years have made contract manufacturing
of Seroquel® over the next several years due to
increased by 50% to $31.0 million (2015: $20.7m)
the establishment of a new factory in Bozhou.
the XR formulation and expected expansion in
and sales of our non-consolidated Consumer
The Bozhou factory is approaching completion
diagnosis and treatment of antipsychotic diseases
Health joint venture (HBYS) increased by 6% to
and is expected to commence operations in 2017;
in China.
$224.1 million (2015: $211.6m). Consolidated net
however, supply constraints affected HBYS results in
income attributable to Chi-Med from our Consumer
2016 with its sales, as shown above, increasing by 6%
Concor®: Concor® (Bisoprolol tablets) is a cardiac
Health business remained flat at $9.2 million (2015:
and leading to a 5% decline in net income after tax
beta1-receptor blocker, relieving hypertension and
$9.3m) as a result of tight OTC capacity ahead of
of $20.4 million (2015: $21.4m). Our shareholding in
reducing high blood pressure. Concor® is the number
our new factory opening in 2017, representing
HBYS therefore resulted in consolidated net income
two beta-blocker in China with an approximately
31% of our overall Commercial Platform net income
attributable to Chi-Med during 2016 of $8.2 million
19% national market share. We control commercial
attributable to Chi-Med in 2016 on an adjusted basis.
(2015: $8.6m).
HBYS – New factory in Bozhou
30 HUTCHISON CHINA MEDITECH LIMITED 2016 Annual Report
Commercial Platform
Fu Fang Dan Shen (“FFDS”) tablets and Banlangen
Based on precedent land transactions in the vicinity,
granules: FFDS tablets (angina) and Banlangen
we expect the auction value for Plot 2 to be well
granules (anti-viral cold/flu) are generic OTC drugs
over $100 million of which 40% would be paid to
with leadership national market share in China of
HBYS as compensation for return of the land use
32% and 51%, respectively. Sales in 2016 of these
rights. In addition, the move away from HBYS’s larger
two products grew marginally to $116.6 million
Plot 1 (59,400 sqm.) will be contingent on how
(2015: $115.1m) due to tightness in contract
the Bozhou factory develops, but, when auctioned,
manufacturer supply relating to the move to Bozhou.
Plot 1 could bring HBYS compensation per sqm.
While sales of both products in any given year will
comparable to Plot 2.
vary based on the severity of climate/flu season,
we anticipate that sales of these key OTC drugs
Commercial Platform dividends: The increasing
will benefit from the underlying general market
profits of the Commercial Platform continue to pass
expansion and the low risk of price erosion due to
through to the Chi-Med Group through dividend
our focus on the retail pharmacy channel.
payments from our non-consolidated joint ventures,
SHPL and HBYS. Dividends of $30.5 million (2015:
HBYS is well established in the OTC industry in China.
$6.4m) were paid from these joint ventures to the
Its Bai Yun Shan brand (literally meaning “White Cloud
Chi-Med Group level during 2016. Net income from
Mountain,” a famous scenic spot in Guangzhou) is a
SHPL and HBYS have totaled $369 million since
household name, established over the past 40 years,
2005, of which a total of $205 million has been paid
and known by the majority of Chinese consumers.
in dividends to Chi-Med and its partners, with the
In addition to its over 730 manufacturing staff and
balance retained primarily to fund factory upgrades,
178 drug product licenses, HBYS has a commercial
expansion and relocation. As of December 31, 2016,
team of about 1,200 sales staff that fully covers
SHPL and HBYS held in aggregate $85.6 million in
the retail pharmacy channel nationally in China. We
cash equivalents and short term investments with
believe that HBYS’s move to build the Bozhou factory,
no outstanding bank borrowing. We expect material
expanding capacity and decreasing reliance on
one-time dividends in 2017 and 2018, resulting
contract manufacturers, will position us well for long-
from property compensation payments to SHPL
term and sustainable growth.
and HBYS.
HBYS property update – HBYS’s vacant Plot 2
(26,700 sqm.) in Guangzhou has now been listed
for sale as part of the Guangzhou municipal
government’s urban redevelopment scheme plan
for 2016. Subject to Guangzhou government policy,
Christian Hogg
Chief Executive Officer
the public auction of this land should occur in 2017.
March 13, 2017
Fu Fang Dan Shen tablets
Angina (OTC)
Banlangen granules
Anti-viral cold/flu (OTC)
Operations Review
3131
Use of Non-GAAP Financial Measures and
Reconciliation: In addition to financial information
prepared in accordance with U.S. GAAP, this
announcement also contains certain non-GAAP
financial measures based on management’s view of
performance including:
•
•
•
•
Adjusted research and development
expenses;
A d j u s t e d c o n s o l i d a t e d n e t i n c o m e
attributable to Chi-Med from our Commercial
Platform;
Adjusted consolidated operating profit from
our Prescription Drugs business; and
A d j u s t e d c o n s o l i d a t e d n e t i n c o m e
attributable to Chi-Med from our Prescription
Drugs business.
Management uses such measures internally for
planning and forecasting purposes and to measure
the Chi-Med Group’s overall performance. We believe
these adjusted financial measures provide useful
and meaningful information to us and investors
because they enhance investors’ understanding
of the continuing operating performance of
our business and facilitate the comparison of
performance between past and future periods.
These adjusted financial measures are non-GAAP
measures and should be considered in addition to,
but not as a substitute for, the information prepared
in accordance with U.S. GAAP. Other companies
may define these measures in different ways.
The following items are excluded from adjusted
financial results:
Adjusted research and development expenses: We
exclude the impact of the revenue received from
external customers of our Innovation Platform,
which is reinvested into our clinical trials, to derive
our adjusted research and development expense.
Revenue received from external customers of our
Innovation Platform consists of milestone and other
payments from our collaboration partners. The
variability of such payments makes the identification
of trends in our ongoing research and development
activities more difficult. We believe the presentation
of adjusted research and development expenses
provides useful and meaningful information about
our ongoing research and development activities
by enhancing investors’ understanding of the scope
of our normal, recurring operating research and
development expenses.
Adjusted consolidated net income attributable to
Chi-Med from our Commercial Platform, adjusted
consolidated operating profit from our Prescription
Drugs business and adjusted consolidated net
income attributable to Chi-Med from our Prescription
Drugs business: We exclude the impact of a
$40.4 million one-time gain which was triggered by
the payment of $113 million in land compensation
and subsidies from the Shanghai government
to SHPL.
Reconciliation of GAAP to adjusted research and development expenses:
$’000
Segment operating loss – Innovation Platform
Less: Segment revenue from external customers – Innovation Platform
Adjusted research and development expenses
Year Ended
December 31, 2016
Year Ended
December 31, 2015
(40,837)
(35,228)
(76,065)
(3,810)
(52,016)
(55,826)
Reconciliation of GAAP to adjusted consolidated net income attributable to Chi-Med from our Commercial Platform:
$’000
Consolidated net income attributable to Chi-Med – Commercial Platform
Less: One-time gain associated with land compensation
Adjusted consolidated net income attributable to Chi-Med – Commercial Platform
Reconciliation of GAAP to adjusted consolidated operating profit from our Prescription Drugs business:
$’000
Consolidated operating profit – Prescription Drugs business
Less: One-time gain associated with land compensation
Adjusted consolidated operating profit – Prescription Drugs business
Year Ended
December 31, 2016
Year Ended
December 31, 2015
70,337
(40,416) –
29,921
25,155
25,155
Year Ended
December 31, 2016
Year Ended
December 31, 2015
62,696
(40,416) –
22,280
16,443
16,443
Reconciliation of GAAP to adjusted consolidated net income attributable to Chi-Med from our Prescription Drugs business:
$’000
Consolidated net income attributable to Chi-Med – Prescription Drugs business
Less: One-time gain associated with land compensation
Adjusted consolidated net income attributable to Chi-Med – Prescription Drugs business
Year Ended
December 31, 2016
Year Ended
December 31, 2015
61,120
(40,416) –
20,704
15,934
15,934
32 HUTCHISON CHINA MEDITECH LIMITED 2016 Annual Report
Biographical Details Of Directors
Simon TO
Executive Director
and Chairman
Mr To, aged 65, has
been a Director since
2000 and an Executive
D i r e c t o r a n d t h e
Chairman since 2006.
He is also the Chairman
of the Remuneration
Committee and a member of the Technical Committee
of the Company. He is managing director of Hutchison
Whampoa (China) Limited (“Hutchison China”) and has
been with Hutchison China for over 36 years, building
its business from a small trading company to a multi-
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 36 years.
He is the original founder of Hutchison Whampoa
Limited’s (currently a subsidiary of CK Hutchison
Holdings Limited (“CKHH”)) 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 (graduated top 5% of his class).
Christian HOGG
Executive Director
and Chief Executive
Officer
Johnny CHENG
Executive Director
and Chief Financial
Officer
M r H o g g , a g e d 5 1 ,
has been an Executive
Director and the Chief
Executive Officer since
2 0 0 6 . H e i s a l s o 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 United States 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.
M r C h e n g , a g e d 5 0 ,
has been an Executive
Director since 2 0 1 1
and the Chief Financial
Officer 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 (currently PricewaterhouseCoopers) in
Australia and then KPMG in Beijing before spending
eight years with Nestlé China where he was in charge
of a number of finance 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.
Biographical Details Of Directors
33
Dan ELDAR
Non-executive
Director
5
Dr Eldar, aged 63, has
been a Non-executive
Director since 2016.
He has more than 30
years of experience as a
senior executive, leading
global operations in
telecommunications, water, biotech and healthcare.
He is an executive director of Hutchison Water Israel
Ltd, a subsidiary of the CKHH group, which focuses on
large scale projects including desalination, wastewater
treatment and water reuse. He was formerly an
independent non-executive director of Leumi Card, a
subsidiary of Bank Leumi Le-Israel B.M., one of Israel’s
leading credit card companies.
Dr Eldar holds a Doctor of Philosophy degree in
Government from Harvard University, a Master of
Arts degree in Government from Harvard University,
a Master of Arts degree in Political Science and
Public Administration from the Hebrew University of
Jerusalem and a Bachelor of Arts degree in Political
Science from the Hebrew University of Jerusalem.
Weiguo SU
Executive Director
and Chief Scientific
Officer
Dr Su, aged 59, has been
an Executive Director
since March 27, 2017.
He is also a member of
the Technical Committee
of the Company. He has
been the Executive Vice President and Chief Scientific
Officer of the Company since 2012. Dr Su has headed
all drug discovery and research since he joined the
Company, including master-minding the Company’s
scientific strategy, being a key leader of the Innovation
Platform, and responsible for the discovery of each and
every small molecule drug candidate in the Company’s
product pipeline. Prior to joining the Company in
2005, Dr Su spent 15 years with the U.S. Research
and Development Department of Pfizer, Inc. with his
last position as director of the Medicinal Chemistry
Department.
In March 2017, Dr Su was granted the prestigious
award by the China Pharmaceutical Innovation and
Research Development Association (PhIRDA) as one of
the Most Influential Drug R&D Leader in China.
Dr Su received a Bachelor of Science degree in
Chemistry from Fudan University in Shanghai. He
completed a PhD and Post-doctoral Fellowship in
Chemistry at Harvard University under the guidance of
Nobel Laureate Professor E. J. Corey.
Edith SHIH
Non-executive
Director and
Company Secretary
6
Ms Shih, aged 65, has
been a Non-executive
Director and Company
Secretary since 2006
and company secretary
of Group companies
since 2000. She is also an executive director, Head
Group General Counsel and Company Secretary of
CKHH, and a non-executive director of Hutchison
Telecommunications Hong Kong Holdings Limited and
Hutchison Port Holdings Management Pte. Limited
as the trustee-manager of Hutchison Port Holdings
Trust, as well as director and company secretary of
various subsidiaries and associated companies under
the CKHH group. She has over 34 years of experience
in legal, regulatory, corporate finance, compliance
and corporate governance fields. She is at present
the Senior Vice President and Executive Committee
member of the Institute of Chartered Secretaries and
Administrators in the United Kingdom and a past
President and current council member and chairperson
of various committees and panels of The Hong Kong
Institute of Chartered Secretaries.
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 qualified
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.
3
7
6
2
1
8
5
9
4
34 HUTCHISON CHINA MEDITECH LIMITED 2016 Annual Report
Biographical Details Of Directors
Paul CARTER
Senior Independent
Non-executive
Director
7
Mr Carter, aged 56,
has been the Senior
I n d e p e n d e n t N o n -
executive Director since
February 1, 2017. He
is also a member of
the Audit Committee, Remuneration Committee and
Technical Committee of the Company. He has more
than 25 years of experience in the pharmaceutical
industry. From 2006 to 2016, Mr Carter served in
various senior executive roles at Gilead Sciences,
Inc. (“Gilead”), a research-based biopharmaceutical
company, with the last position as Executive Vice
President, Commercial Operations. In this role,
Mr Carter headed the worldwide commercial organization
responsible for the launch and commercialization of all
of Gilead’s products. Prior to joining Gilead, he spent
14 years with GlaxoSmithKline PLC (GSK) and its group
companies, with the last position as Regional Head
of the International Business in Asia. He is currently a
director of Alder Biopharmaceuticals, Inc.
Mr Carter holds a degree in Business Studies from
the Ealing School of Business and Management (now
merged into the University of West London) and is
a Fellow of the Chartered Institute of Management
Accountants in the United Kingdom.
Karen FERRANTE
Independent Non-
executive Director
Graeme JACK
Independent Non-
executive Director
9
Mr Jack, aged 66, has
been an Independent
Non-executive Director
since March 1, 2017.
He is also the Chairman
of the Audit Committee
and a member of the
Remuneration Committee of the Company. He has
more than 40 years of experience in finance and audit.
He retired as partner of PricewaterhouseCoopers in
2006 after a distinguished career with the firm for
over 33 years. He is currently an independent non-
executive director of The Greenbrier Companies, Inc.
(an international supplier of equipment and services
to the freight rail transportation markets), Hutchison
Port Holdings Management Pte. Limited as the trustee-
manager of Hutchison Port Holdings Trust (a developer
and operator of deep water container terminals) and
of COSCO SHIPPING Development Co., Ltd., formerly
known as “China Shipping Container Lines Company
Limited” (an integrated financial services platform
principally engaged in vessel and container leasing).
He holds a Bachelor of Commerce degree and is a
Fellow of the Hong Kong Institute of Certified Public
Accountants and an Associate of Chartered Accountants
Australia and New Zealand.
8
Dr Ferrante, aged 59, has
been an Independent
Non-executive Director
since February 1, 2017.
She is also the Chairman of
the Technical Committee
and a member of the
Audit Committee of the Company. She has more
than 20 years of experience in the pharmaceutical
industry. She was the former Chief Medical Officer
and Head of Research and Development of Tokai
Pharmaceuticals, Inc., a biopharmaceutical company
focused on developing and commercializing innovative
therapies for prostate cancer and other hormonally
driven diseases. From September 2007 to July 2013,
Dr Ferrante held senior positions at Millennium
Pharmaceuticals, Inc. and its parent company, Takeda
Pharmaceutical Company Limited, including Chief
Medical Officer and most recently as Oncology
Therapeutic Area and Cambridge USA Site Head.
From 1999 to 2007, she held positions of increasing
responsibility at Pfizer, Inc., with the last position as
Vice President, Oncology Development. Dr Ferrante
is currently a member of the board of directors of
Progenics Pharmaceuticals, Inc., and MacroGenics, Inc.
She was previously a director of Baxalta Incorporated
until it was acquired by Shire plc in 2016.
Dr Ferrante has been an author of a number of papers
in the field of oncology, an active participant in
academic and professional associations and symposia
and a holder of several patents. Dr Ferrante holds a
Bachelor of Science degree in Chemistry and Biology
from Providence College and a Doctor of Medicine from
Georgetown University.
3535
Report Of The Directors
The Directors have pleasure in submitting to shareholders their report and statement of audited financial statements for the year ended December 31, 2016.
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 the research,
development, manufacture and sales of pharmaceuticals and healthcare 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 Statements of Operations are set out on page F-4 of Form 20-F and show the Group’s results for the year ended December 31, 2016.
DIVIDENDS
No interim dividend for the year ended December 31, 2016 was declared and the Directors do not recommend the payment of a final dividend for the year ended
December 31, 2016.
RESERVES
Movements in the reserves of the Group during the year are set out in the Consolidated Statements of Changes in Shareholders’ Equity on page F-6 of Form 20-F.
NON-CURRENT ASSETS
Particulars of the movements of non-current assets of the Group are set out in notes 12 to 15 to the Consolidated Financial Statements on pages F-24 to F-28 of Form 20-F.
SHARE CAPITAL
The share capital of the Company is set out in the Consolidated Balance Sheets on page F-3 of Form 20-F. Details of the ordinary shares of the Company are set out in note
21 to the Consolidated Financial Statements on page F-31 of Form 20-F.
36
HUTCHISON CHINA MEDITECH LIMITED 2016 Annual Report
Report Of The Directors
DIRECTORS
The Directors of the Company as of December 31, 2016 were:
Executive Directors:
Simon To
Christian Hogg
Johnny Cheng
Non-executive Directors:
Dan Eldar
Shigeru Endo
Edith Shih
Independent Non-executive Directors:
Christopher Nash
Michael Howell
Christopher Huang
On August 1, 2016, Dr Dan Eldar was appointed as Non-executive Director and Mr Christian Salbaing resigned as Non-executive Director.
On February 1, 2017, Mr Paul Carter and Dr Karen Ferrante were appointed as Independent Non-executive Directors, Mr Shigeru Endo resigned as Non-executive Director,
Mr Christopher Nash and Professor Christopher Huang resigned as Independent Non-executive Directors.
On March 1, 2017, Mr Graeme Jack was appointed as Independent Non-executive Director and Mr Michael Howell resigned as Independent Non-executive Director.
Mr Paul Carter, Mr Johnny Cheng, Dr Dan Eldar, Dr Karen Ferrante, Mr Graeme Jack and Ms Edith Shih will retire by rotation at the forthcoming annual general meeting under
the provisions of Articles 90(3) and 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 32 to 34.
DIRECTORS’ INTERESTS IN SHARES
As of December 31, 2016, 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
Simon To
Michael Howell
Edith Shih
Christopher Nash
Christopher Huang
Number of ordinary
Number of American
shares held
depositary shares held
1,088,182
256,146
180,000
118,600
60,000
39,596
2,475
36,600
–
70,000
–
40,741
–
–
Report Of The Directors
3737
SHARE OPTION SCHEMES AND DIRECTORS’ RIGHTS TO ACQUIRE SHARES
(i)
Share option scheme adopted in 2005 by the Company
The Company conditionally adopted a share option scheme on June 4, 2005 which was amended on March 21, 2007 (the “2005 Share Option Scheme”). Pursuant
to the 2005 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
affiliates, and subsidiaries or affiliates of the Company share options to subscribe for shares of the Company. The 2005 Share Option Scheme has a term of 10
years. It expired in 2016 and no further share option can be granted.
The following share options were outstanding under the 2005 Share Option Scheme during the year ended December 31, 2016:
Effective date of
Number of share
Granted
Exercised Expired/lapsed/
Number of share
Category
of participants
grant of share
options held at
during
during
canceled
options held at
Exercise period of Exercise price of
options
January 1, 2016
2016
2016
during 2016 December 31, 2016
share options
share options
Employees in aggregate
11.9.2006 (2)
18.5.2007 (3)
24.6.2011 (1)
20.12.2013 (1)
Total:
Notes:
26,808
37,857
75,000
302,700
442,365
–
–
–
–
–
(26,808)
(26,201)
–
(39,696)
–
–
–
–
11.9.2006 to 18.5.2016
11,656
75,000
18.5.2007 to 17.5.2017
24.6.2011 to 23.6.2021
(3,750)
259,254
20.12.2013 to 19.12.2023
(92,705)
(3,750)
345,910
£
1.715
1.535
4.405
6.100
(1)
The share options granted are exercisable subject to, amongst other relevant vesting criteria, the vesting schedule of 25% on each of the first, second, third and fourth
anniversaries of the effective date of grant.
(2)
The share options granted are exercisable subject to, amongst other relevant vesting criteria, the vesting schedule of one-third on each of May 19, 2007, May 19, 2008 and
May 19, 2009.
(3)
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.
38
HUTCHISON CHINA MEDITECH LIMITED 2016 Annual Report
Report Of The Directors
(ii)
Share option scheme adopted in 2015 by the Company
The Company conditionally adopted a share option scheme on April 24, 2015 (the “2015 Share Option Scheme”). Pursuant to the 2015 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 affiliates, and subsidiaries or affiliates
of the Company share options to subscribe for shares of the Company.
The following share options were outstanding under the 2015 Share Option Scheme during the year ended December 31, 2016:
Effective date of
Number of share
Granted
Exercised Expired/lapsed/
Number of share
Category
of participants
grant of share
options held at
during
during
canceled
options held at
Exercise period of Exercise price of
options
January 1, 2016
2016
2016
during 2016 December 31, 2016
share options
share options
Employees in aggregate
15.06.2016 (1)
15.06.2016 (2)
Total:
Notes:
–
–
–
593,686
100,000
693,686
–
–
–
–
–
–
593,686
15.06.2016 to 19.12.2023
100,000
15.06.2016 to 27.06.2024
693,686
£
19.700
19.700
(1)
The share options granted are exercisable subject to, amongst other relevant vesting criteria, the vesting schedule of approximately 50% on the day after the acceptance of the
offer, approximately 25% on December 20, 2016 and approximately 25% on December 20, 2017.
(2)
The share options granted are exercisable subject to, amongst other relevant vesting criteria, the vesting schedule of approximately 50% on the day after the acceptance of the
offer, approximately 25% on June 28, 2017 and approximately 25% on June 28, 2018.
(iii)
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 August 6, 2008 (as amended on April 15,
2011) and such scheme has a term of 6 years. It expired in 2014 and no further share options can be granted. Another share option scheme was adopted on
December 17, 2014 (the “HMHL Share Option Scheme”). The HMHL Share Option Scheme is share-based incentive programmes for employees or directors of HMHL
and any of its holding company, subsidiaries and affiliates (each an “Eligible Employee”). Each Eligible Employee is eligible to participate in the HMHL Share Option
Scheme 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 Scheme.
The following share options were outstanding under the HMHL Share Option Scheme during the year ended December 31, 2016:
Effective date of
Number of share
Granted
Exercised Expired/lapsed/
Number of share
Category of
participants
grant of share
options held at
during
during
canceled
options held at
Exercise period of Exercise price of
options
January 1, 2016
2016
2016
during 2016 December 31, 2016
share options
share options
Employees in aggregate
17.12.2014 (1) (2)
1,187,372
Total:
Notes:
1,187,372
–
–
–
–
(1,187,372)
–
17.12.2014 to 19.12.2023
(1,187,372)
–
US$
7.82
(1)
The share options granted are exercisable subject to, amongst other relevant vesting criteria, the vesting schedule of 25% on December 20, 2014 and 25% on each of the first,
second and third anniversaries of such date.
(2)
On June 15, 2016, 1,187,372 share options pursuant to the HMHL Share Option Scheme was canceled with the consent of the relevant eligible employees in exchange for
593,686 new share options of the Company pursuant to the HCML Share Option Scheme.
Report Of The Directors
3939
LONG TERM INCENTIVE PLAN
The Company adopted a Long Term Incentive Plan on April 24, 2015 (the “LTIP”). The Directors (including Executive Directors, Non-executive Directors and Independent
Non-executive Directors), the directors of the Company’s subsidiaries and the employees of the Group are eligible to participate in the LTIP. The LTIP awards grant
participating directors or employees a conditional right to receive ordinary shares in the Company or the equivalent American depositary shares (collectively the “Ordinary
Shares”), to be purchased by an independent third party trustee (the “Trustee”) up to a maximum cash amount depending upon the achievement of annual performance
targets for each financial year of the Company stipulated in the LTIP awards.
On October 19, 2015, the Company granted awards under the LTIP to 2 Executive Directors and 41 senior managers and executives, giving each a conditional right to
receive Ordinary Shares to be purchased by the Trustee up to a certain maximum cash amount depending upon the achievement of annual performance targets from 2014
to 2016. Details of the grants are as follows:
Name or category of participants
period stipulated in the LTIP awards
Maximum US$ amount per annum for the LTIP
Executive Directors
Christian Hogg
Johnny Cheng
Senior managers and executives in aggregate
Total:
329,385
101,619
1,370,893
1,801,897
Vesting will occur one business day after the publication date of the annual report for the financial year falling two years after the financial year to which the LTIP award
relates. Based on the annual performance targets in 2015, 11,242 Ordinary Shares have been allocated to senior managers and executives. The allocation of shares is due
to vest one business day after the publication date of the 2017 annual report.
On March 24, 2016, the Company granted awards under the LTIP to senior managers, giving them conditional rights to receive Ordinary Shares to be purchased by the
Trustee up to a maximum cash amount of US$312,500 in aggregate that do not stipulate performance targets. Shares under such LTIP awards are subject to the vesting
schedule of 25% on each of the first, second, third and fourth anniversaries of the date of grant.
Any Ordinary Shares purchased on behalf of an LTIP grantee are to be held by the Trustee until they are vested. Vesting will also depend upon the continued employment
of the award holder and will otherwise be at the discretion of the Board.
40
HUTCHISON CHINA MEDITECH LIMITED 2016 Annual Report
Report Of The Directors
SIGNIFICANT SHAREHOLDINGS
As of March 2, 2017, 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”)
Mitsui & Co., Ltd. (2)
FIL Limited (2)
Slater Investments Limited (2)
Notes:
Number of ordinary
shares held
36,666,667
3,214,404
2,560,184
2,299,000
Approximate
% of issued
share capital
60.40%
5.30%
4.22%
3.79%
(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 CK Hutchison Holdings
Limited which is a Cayman Islands company registered and listed in Hong Kong.
(2)
Major interests in shares of the Company notified to the Company under the provisions of rule 5 of the Disclosure Rules and Transparency Rules of the UK Financial Conduct Authority
which have been incorporated by reference into the Company’s articles of association.
AUDITOR
The financial statements have been audited by PricewaterhouseCoopers who will retire and, being eligible, will offer themselves for re-appointment.
ANNUAL GENERAL MEETING
The annual general meeting (“AGM”) of the Company will be held on Thursday, April 27, 2017 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
March 13, 2017
Corporate Governance Report
4141
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 emphasize a quality board of Directors (the “Board”), effective risk management, 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 adopted and applied the principles of the UK Corporate Governance Code (the “Code”) applicable to companies listed on the London Stock
Exchange with a premium listing notwithstanding its shares are traded on AIM, and hence not subject to the Code. Although the Company’s American depositary shares
are listed on Nasdaq Stock Market (“Nasdaq”), being a foreign private issuer, it is permitted to follow “home country” corporate governance practices. Nevertheless, the
Company is subject to and complies with applicable requirements of the Sarbanes-Oxley Act (the “SOX”).
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 satisfied 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 Officer.
As of December 31, 2016, the Board comprised nine Directors. Following the change of Directors on February 1, 2017 and March 1, 2017, the Board comprised eight
Directors, including the Chairman, Chief Executive Officer, Chief Financial Officer, two Non-executive Directors and three Independent Non-executive Directors (one of
whom is Senior Independent Non-executive Director). Biographical details of the Directors are set out in the “Biographical Details of Directors” section on pages 32 to 34
and on the website of the Company (www.chi-med.com).
The Board has adopted a policy which recognizes the benefits 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 qualifications, cultural and educational background, and any other
factors that the Board may 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. The Board will review and monitor from time to time the implementation of the policy to ensure
its effectiveness and application.
Ms Edith Shih has served as Non-executive Director of the Company for more than nine years. Notwithstanding the length of her service, Ms Shih continues to demonstrate
her commitment as Non-executive Director, providing direction on Company strategy, assisting generally on business operations, monitoring and implementing corporate
governance, attending to regulatory compliance and liaising with the majority shareholder.
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HUTCHISON CHINA MEDITECH LIMITED 2016 Annual Report
Corporate Governance Report
The Board believes that the knowledge and experience of the Group’s business and the general business acumen of Ms Shih continue to generate significant contribution
to the Company and the shareholders as a whole.
The Board has assessed the independence of all the Independent Non-executive Directors of the Company and considers all of them to be independent having regard
to (i) their annual confirmation on independence, (ii) the absence of involvement in the daily management of the Company and (iii) the absence of any relationships or
circumstances which would interfere with the exercise of their independent judgment.
The role of the Chairman is separate from that of the Chief Executive Officer. 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, 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.
The Chief Executive Officer, 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
Officer implements the decisions of the Board and its Committees. He maintains an ongoing dialog 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 identified and met as well as leading
the communication program 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 meetings. 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.
Corporate Governance Report
4343
Attended/Eligible to attend
13/13
13/13
13/13
2/2
13/13
11/11
13/13
12/13
12/13
13/13
The Company held 13 Board meetings in 2016 with overall attendance of approximately 98%.
Position
Chairman
Executive Directors:
Non-executive Directors:
Independent Non-executive Directors:
Notes:
(1)
(2)
Appointed on August 1, 2016
Resigned on August 1, 2016
Name of Director
Simon To
Christian Hogg
Johnny Cheng
Dan Eldar (1)
Shigeru Endo
Christian Salbaing (2)
Edith Shih
Michael Howell
Christopher Huang
Christopher Nash
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 Non-executive 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 questionnaire. The results
of the evaluation were reviewed by the Board with the objective of ensuring the Board, its Committees and the Chairman of each Committee continue to act effectively in
fulfilling the duties and responsibilities expected of them.
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.
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HUTCHISON CHINA MEDITECH LIMITED 2016 Annual Report
Corporate Governance Report
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 specific duties.
COMPANY SECRETARY
The Company Secretary, Ms Shih, is accountable to the Board for ensuring that Board procedures are followed and Board activities are efficiently 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 organizes seminars on specific 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 and Nasdaq listing rules (collectively,
the “Rules”), including the preparation, publication and dispatch of annual and interim reports within the time limits laid down in the Rules, the timely dissemination to
shareholders and the market of announcements, press releases and information relating to the Group and assisting in the notification of Directors’ dealings in securities
of the Group.
Furthermore, the Company Secretary advises the Directors on related party transactions and price-sensitive inside information, and Directors’ obligations for disclosure of
interests and dealings in the Company’s securities, to ensure that the standards and disclosures requirements of the Rules are complied with and, where required, reported
in the annual and interim reports of the Company. In relation to related party transactions, detailed analysis is 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 financial statements is set out below. This should be read in conjunction with, but distinguished from, the Independent
Auditor’s Report on page F-2 of Form 20-F which acknowledges the reporting responsibility of the Group’s Auditor.
Annual Report and Financial Statements
The Directors acknowledge their responsibility for the preparation of the annual report and financial statements of the Company, ensuring that the annual report and
financial statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s position,
performance, business model and strategy in accordance with the Code, Cayman Islands Companies Law and the applicable accounting standards.
Accounting Policies
The Directors consider that in preparing the financial statements, the Group has applied appropriate accounting policies that are consistently adopted and made judgments
and estimates that are reasonable in accordance with the applicable accounting standards.
Accounting Records
The Directors are responsible for ensuring that the Group keeps accounting records which disclose the financial position of the Group upon which financial statements of
the Group could be prepared in accordance with the Group’s accounting policies.
Corporate Governance Report
4545
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 inquiries, 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 financial statements.
Audit Committee
Under the Terms of Reference of the Audit Committee, the Audit Committee is required to review the Group’s annual and interim results, and annual and interim financial
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 authorized
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 effective risk management and internal control systems. 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 risk management and internal control systems and the adequacy
of resources, qualifications and experience of staff in the Group’s accounting and financial reporting function, and their training programs 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 risk management and 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 financial 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 financial management experience and skills to
understand financial statements and contribute to the financial governance, internal controls and risk management of the Company. It was chaired by Mr Michael Howell
with Professor Christopher Huang and Mr Christopher Nash as members. After the change of Directors on February 1, 2017 and March 1, 2017, the Audit Committee is now
chaired by Mr Graeme Jack with Mr Paul Carter and Dr Karen Ferrante as members. None of the Committee Members is related to the Company’s external auditor.
The Audit Committee held three meetings in 2016 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
The Audit Committee meets with the Chief Financial Officer and other senior management of the Company from time to time for the purposes of reviewing the annual and
interim results, the annual and interim reports and other financial, 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 financial statements are prepared
in accordance with generally accepted accounting principles in the United States. 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 financial report and its annual audit of the
consolidated financial statements. In addition, the Audit Committee holds regular private meetings with the external auditor, the Chief Financial Officer and the internal
auditor of the Group’s holding company separately without the presence of Management.
46
HUTCHISON CHINA MEDITECH LIMITED 2016 Annual Report
Corporate Governance Report
External Auditor
The Audit Committee reviews and monitors the external auditor’s independence, objectivity and effectiveness of the audit process. Each year, the Audit Committee receives
a letter from the external auditor confirming its independence and objectivity. It holds meetings with representatives of the external auditor to consider the scope of its
audit, approves 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 its external auditor for the various services listed below is as follows:
•
Audit services – include audit services provided in connection with the audit of the consolidated financial statements. All such services are to be provided by the
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 an 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 significant taxation related work is undertaken by other parties as appropriate.
•
Other services – include, for example, risk management diagnostics and assessments, and non-financial 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-finding into alleged improprieties.
These services are subject to specific 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 December 31, 2016, fees of US$2.1 million paid to PwC in total were for both audit and non-audit services. The non-audit services, which amounted
to approximately US$0.03 million, were mainly related to the provision of taxation related services. These non-audit services had been reviewed prior to the engagement
by the Audit Committee, which considered such services not having an impairing effect on the independence of the auditor.
INTERNAL CONTROL, LEGAL AND REGULATORY CONTROL AND GROUP RISK MANAGEMENT
The Board has overall responsibility for the Group’s systems 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 identification 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 financial 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.
In preparation for compliance with the requirements of Section 404 of the SOX, the Company has conducted a SOX compliance project, which assessed the management
of internal controls and procedures, and the evaluation of the internal control systems relating to financial reporting of the Company.
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 budgets, plans and business strategies with associated risks identified 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 internal control procedures of the Group 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 Executive Directors as part of the Group’s five-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 identifies, evaluates and reports on the likelihood and potential financial
impact of significant business risks.
Executive Directors review monthly management reports on the financial 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, significant business risk sensitivities and
strategies. In addition, financial 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 finance 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 officer. Capital expenditures are
subject to overall control within the annual budget review and approval process, and more specific 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 risk management and internal control systems, formulating an impartial opinion on the systems, and reporting its findings to the Audit Committee,
the Chief Executive Officer, the Chief Financial Officer 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 significant 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 financial, IT and
operations reviews, recurring and surprise audits, fraud investigations and productivity efficiency reviews.
Reports from the external auditor on internal controls and relevant financial 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 Officer. These reports are reviewed and appropriate actions are taken.
The Board, through the Audit Committee, has monitored the Group’s risk management and internal control systems for the year ended December 31, 2016 covering all
material financial, operational and compliance controls, has conducted a review of their effectiveness, and is satisfied that such systems are effective and adequate. In
addition, it has reviewed and is satisfied with the adequacy of resources, qualifications and experience of the staff of the Group’s accounting and financial reporting and
internal audit functions, and their training programs and budget.
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HUTCHISON CHINA MEDITECH LIMITED 2016 Annual Report
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Legal and Regulatory Control
The Group is committed to ensuring its businesses are operated in compliance with local and international laws, rules and regulations. The 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 finance, 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 Legal
Department is also responsible for overseeing regulatory compliance matters of all Group companies. It analyzes and monitors the regulatory frameworks within which
the Group operates, including reviewing applicable laws and regulations and preparing and submitting responses or filings to relevant regulatory and/or government
authorities on regulatory issues and consultations. In addition, the Department prepares and updates internal policies and conducts tailor-made workshops where
necessary so as to strengthen the internal controls and compliance procedures of the Group. 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 Legal Department organizes
and holds continuing education seminars/conferences on legal and regulatory matters of relevance to the Group for Directors, business executives and the legal team.
Group Risk Management
The Chief Executive Officer and the Group Risk Management Department of the Group’s holding company have the responsibility of developing and implementing
risk mitigation strategies and programs relating to the deployment of insurance to transfer or minimize the financial impact of risks to the business. 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 organizing Group-wide risk reporting. Directors and Officers Liability Insurance is also in place to protect Directors and officers 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 objectives of attracting, retaining and motivating employees of the highest
caliber 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, and was chaired by the Chairman Mr To with Mr Howell and Mr Nash, both Independent Non-executive
Directors, as members who possess experience in human resources and personnel emoluments. After the change of Directors on February 1, 2017 and March 1, 2017, the
Remuneration Committee is chaired by Mr To with Mr Carter and Mr Jack as members. 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 grants of share options and long term incentive plan awards 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 four meetings in 2016 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 2017 directors’ fees, year-end bonus and 2017 remuneration package of Executive Directors and senior executives of the Company. 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 Johnny Cheng, the Executive Directors, and senior executives is determined with reference to their expertise and experience
in the industry, the performance and profitability of the Group and remuneration benchmarks from other local and international companies as well as prevailing market
conditions. Senior management also participates in bonus arrangements which are determined in accordance with the performance of the Group and of the individual. 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 fixed 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 2016 are as below:
Taxable benefits
Pension contributions
Share option benefits
Total
US$
US$
Name of Director
Executive Directors:
Simon To
Christian Hogg
Johnny Cheng
Non-executive Directors:
Dan Eldar (7)
Shigeru Endo
Christian Salbaing (8)
Edith Shih
Independent Non-executive Directors:
Michael Howell
Christopher Huang
Christopher Nash
Salary and fees
US$
67,684 (1) (6)
409,261 (2) (6)
323,064 (3)
29,167
56,434 (4)
27,267 (4)
56,434 (5) (6)
78,750
76,875
73,125
Bonus
US$
–
710,769
263,718
–
–
–
–
–
–
–
US$
–
14,864
–
–
–
–
–
–
–
–
US$
–
25,969
23,385
–
–
–
–
–
–
–
–
67,684
– (9) (10) 1,160,863
– (9) (10)
610,167
–
–
–
–
–
–
–
–
29,167
56,434
27,267
56,434
78,750
76,875
73,125
2,236,766
Aggregate emoluments
1,198,061
974,487
14,864
49,354
Notes:
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Such Director’s fees were paid to Hutchison Whampoa (China) Limited.
Emoluments paid include Director’s fees of US$60,184.
Emoluments paid include Director’s fees of US$56,434.
Such Director’s fees were paid to Hutchison International Limited.
Such Director’s fees were paid to CK Hutchison Global Investments 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.
Appointed on August 1, 2016.
Resigned on August 1, 2016.
The fair value of share options granted to the Executive Director had been fully recognized as expenses in the past few years and no such expenses were recognized in 2016.
(10)
For the year ended December 31, 2016, the Group accrued US$262,425 and US$80,961 with respect to the awards of Long Term Incentive Plan of the Company granted to Mr Hogg
and Mr Cheng respectively, for which such amounts are not included in the table above.
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HUTCHISON CHINA MEDITECH LIMITED 2016 Annual Report
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TECHNICAL COMMITTEE
The Technical Committee was chaired by Professor Huang with Mr To and Mr Hogg, both Executive Directors, as members. After the change of Directors on February 1,
2017, the Technical Committee comprises four members and is chaired by Dr Ferrante with Mr To, Mr Hogg and Mr Carter 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 fit 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 2016 with 100% attendance of its members.
CODE OF ETHICS
The Group places utmost importance on employees’ ethical, personal and professional standards. Every employee is provided with the Group’s Code of Ethics booklet, and
all employees are expected to achieve the highest standards set out in the Code of Ethics including avoiding conflict 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 Officer,
the Group responds to requests for information and queries from the investment community including shareholders, analysts and the media through regular briefing
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 Officer.
The Board is committed to providing clear and full information on the Group to shareholders through the publication of notices, announcements, press releases, annual
and interim 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 financial, business and other information on the Group is made available on the website of the Company for shareholders.
The 2016 Annual General Meeting was held on April 27, 2016 at 4th Floor, Hutchison House, 5 Hester Road, Battersea, London attended by PwC and all 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
March 13, 2017
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
(cid:133)(cid:3) REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
(cid:95)(cid:3) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
(cid:133)(cid:3) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
OR
(cid:133)(cid:3) SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
OR
Date of event requiring this shell company report
Commission file number 001-37710
HUTCHISON CHINA MEDITECH LIMITED
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrant’s name into English)
Cayman Islands
(Jurisdiction of incorporation or organization)
22/F Hutchison House
10 Harcourt Road
Hong Kong
+852 2121 8200
(Address of principal executive offices)
Christian Hogg
Chief Executive Officer
Hutchison China MediTech Limited
Room 2108, 21/F, Hutchison House
10 Harcourt Road
Hong Kong
Telephone: +852 2121 8200
Facsimile: +852 2121 8281
(Name, telephone, email and/or facsimile number and address of Company contact person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class
American depositary shares, each representing one-half of one ordinary share,
par value $1.00 per share
Name of each exchange on which registered
Nasdaq Global Select Market
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the Annual Report:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. (cid:3)(cid:133) Yes (cid:3)(cid:95) No
60,705,823 were issued and outstanding as of December 31, 2016.
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. (cid:3)(cid:133) Yes (cid:3)(cid:95) No
Note—checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. (cid:3)(cid:95) Yes (cid:3)(cid:133) No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). (cid:3)(cid:95) Yes (cid:3)(cid:133) No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
Large Accelerated Filer (cid:133)(cid:3) Accelerated Filer (cid:133) Non-Accelerated Filer (cid:3)(cid:95)(cid:3)
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. (cid:3)(cid:133) Item 17 (cid:3)(cid:133) Item 18
If this is an Annual Report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). (cid:3)(cid:133) Yes (cid:3)(cid:95) No
U.S. GAAP (cid:95)
International Financial Reporting Standards as issued
by the International Accounting Standards Board (cid:133)
Other (cid:133)
Hutchison China MediTech Limited
Table of Contents
Financial Information
The Offer and Listing
Operating and Financial Review and Prospects
Directors, Senior Management and Employees
Introduction
Forward-Looking Statements
Part I.
Identity of Directors, Senior Management and Advisers
Item 1.
Offer Statistics and Expected Timetable
Item 2.
Key Information
Item 3.
Item 4.
Information on the Company
Item 4A. Unresolved Staff Comments
Item 5.
Item 6.
Item 7. Major Shareholders and Related Party Transactions
Item 8.
Item 9.
Item 10. Additional Information
Item 11. Quantitative and Qualitative Disclosures About Market Risk
Item 12. Description of Securities Other Than Equity Securities
Part II.
Item 13. Defaults, Dividend Arrearages and Delinquencies
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
Item 15. Controls and Procedures
Item 16. Reserved
Item 16A. Audit Committee Financial Experts
Item 16B. Code of Ethics
Item 16C. Principal Accountant Fees and Services
Item 16D. Exemptions From The Listing Standards For Audit Committees
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Item 16F. Change In Registrant’s Certifying Accountant
Item 16G. Corporate Governance
Item 16H. Mine Safety Disclosure
Part III.
Item 17.
Item 18.
Item 19. Exhibits
SIGNATURES
Financial Statements
Financial Statements
Page
3
5
7
7
7
7
48
134
134
165
179
184
185
186
197
197
199
199
199
200
201
201
202
202
202
203
203
203
203
203
203
203
204
207
INTRODUCTION
This annual report on Form 20-F contains our audited consolidated statements of operations data for the years
ended December 31, 2016, 2015 and 2014 and our audited consolidated balance sheet data as of December 31, 2016 and
2015. Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting
principles, or U.S. GAAP. Our historical consolidated financial statements which we made publicly available prior to our
listing on the Nasdaq Global Select Market in connection with the listing of our ordinary shares on the AIM market were
prepared in accordance with International Financial Reporting Standards, or IFRS, as issued by the International
Accounting Standards Board, or IASB.
This annual report also includes audited consolidated income statement data for the years ended December 31,
2016, 2015 and 2014 and the audited consolidated statements of financial position as of December 31, 2016 and 2015 for
each of our three non-consolidated joint ventures, Shanghai Hutchison Pharmaceuticals, Hutchison Baiyunshan and
Nutrition Science Partners, which are accounted for using the equity accounting method. These consolidated financial
statements have been prepared in accordance with IFRS as issued by the IASB.
Unless the context requires otherwise, references herein to the “company,” “Chi-Med,” “we,” “us” and “our”
refer to Hutchison China MediTech Limited and its consolidated subsidiaries and joint ventures.
Conventions Used in this Annual Report
Unless otherwise indicated, references in this annual report to:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
“ADRs” are to the American depositary receipts, which evidence our ADSs;
“ADSs” are to our American depositary shares, each of which represents one-half of one ordinary share;
“China” or “PRC” are to the People’s Republic of China, excluding, for the purposes of this annual
report only, Taiwan and the special administrative regions of Hong Kong and Macau;
“CK Hutchison” are to CK Hutchison Holdings Limited, a company incorporated in the Cayman Islands
and listed on The Stock Exchange of Hong Kong Limited, or the Hong Kong Stock Exchange, and the
ultimate parent company of our majority shareholder, Hutchison Healthcare Holdings Limited;
“Guangzhou Baiyunshan” are to Guangzhou Baiyunshan Pharmaceutical Holdings Company Limited,
a leading China-based pharmaceutical company listed on the Shanghai Stock Exchange and the
Hong Kong Stock Exchange;
“Hain Celestial” are to The Hain Celestial Group, Inc., a Nasdaq-listed, natural and organic food and
personal care products company;
“HK$” or “HK dollar” are to the legal currency of the Hong Kong Special Administrative Region;
“Hutchison Baiyunshan” are to Hutchison Whampoa Guangzhou Baiyunshan Chinese Medicine
Company Limited, our non-consolidated joint venture with Guangzhou Baiyunshan in which we have a
50% interest through a holding company in which we have a 80% interest;
“Hutchison Consumer Products” are to Hutchison Consumer Products Limited, our wholly owned
subsidiary;
“Hutchison Hain Organic” are to Hutchison Hain Organic Holdings Limited, our joint venture with Hain
Celestial in which we have a 50% interest;
“Hutchison Healthcare” are to Hutchison Healthcare Limited, our wholly owned subsidiary;
“Hutchison MediPharma” are to Hutchison MediPharma Limited, our subsidiary through which we
operate our Innovation Platform in which we have a 99.8% interest;
3
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
“Hutchison MediPharma Holdings” are to Hutchison MediPharma Holdings Limited, our subsidiary in
which we have a 99.8% interest and which is the indirect holding company of Hutchison MediPharma;
“Hutchison Sinopharm” are to Hutchison Whampoa Sinopharm Pharmaceuticals (Shanghai) Company
Limited, our joint venture with Sinopharm in which we have a 51% interest;
“Nutrition Science Partners” are to Nutrition Science Partners Limited, our non-consolidated joint
venture with Nestlé Health Science S.A. in which we have a 50% interest;
“ordinary shares” or “shares” are to our ordinary shares, par value $1.00 per share;
“RMB” or “renminbi” are to the legal currency of the PRC;
“Shanghai Hutchison Pharmaceuticals” are to Shanghai Hutchison Pharmaceuticals Limited, our non-
consolidated joint venture with Shanghai Pharmaceuticals in which we have a 50% interest;
“Shanghai Pharmaceuticals” are
leading
pharmaceutical company in China listed on the Shanghai Stock Exchange and the Hong Kong
Stock Exchange;
to Shanghai Pharmaceuticals Holding Co., Ltd., a
“Sinopharm” are to Sinopharm Group Co. Ltd., a leading distributor of pharmaceutical and healthcare
products and a leading supply chain service provider in China listed on the Hong Kong Stock Exchange;
“United States” or “U.S.” are to the United States of America;
“$” or “U.S. dollars” are to the legal currency of the United States;
“£” or “pound sterling” are to the legal currency of the United Kingdom; and
“€” or “euro” are to the legal currency of the European Economic and Monetary Union.
Our reporting currency is the U.S. dollar. In addition, this annual report also contains translations of certain
foreign currency amounts into U.S. dollars for the convenience of the reader. Unless otherwise stated, all translations of
pound sterling into U.S. dollar were made at £1.00 to $1.22, all translations of euro into U.S. dollars were made at €1.00
to $1.06 and all translations of HK dollars into U.S. dollars were made at HK$7.76 to $1.00, the noon buying rates on
March 3, 2017 as set forth in the H.10 statistical release of the U.S. Federal Reserve Board dated March 6, 2017. The
exchange rates used in the financial statements and the related notes in this annual report are as indicated therein. We make
no representation that the pound sterling, euro, HK dollar or U.S. dollar amounts referred to in this annual report could
have been or could be converted into U.S. dollars, pounds sterling, euro or HK dollars, as the case may be, at any particular
rate or at all.
Trademarks and Service Marks
We own or have been licensed rights to trademarks, service marks and trade names for use in connection with the
operation of our business, including, but not limited to, our trademark Chi-Med. All other trademarks, service marks or
trade names appearing in this annual report that are not identified as marks owned by us are the property of their respective
owners.
Solely for convenience, the trademarks, service marks and trade names referred to in this annual report are listed
without the ®, (TM) and (sm) symbols, but we will assert, to the fullest extent under applicable law, our applicable rights
in these trademarks, service marks and trade names.
4
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This annual report contains forward-looking statements made under the “safe harbor” provisions of the U.S.
Private Securities Litigation Reform Act of 1995. These statements relate to future events or to our future financial
performance and involve known and unknown risks, uncertainties and other factors which may cause our actual results,
performance or achievements to be materially different from any future results, performance or achievements expressed
or implied by the forward-looking statements. The words “anticipate,” “assume,” “believe,” “contemplate,” “continue,”
“could,” “estimate,” “expect,” “goal,” “intend,” “may,” “might,” “objective,” “plan,” “potential,” “predict,” “project,”
“positioned,” “seek,” “should,” “target,” “will,” “would,” or the negative of these terms or other similar expressions are
intended to identify forward-looking statements, although not all forward-looking statements contain these identifying
words. These forward-looking statements are based on current expectations, estimates, forecasts and projections about our
business and the industry in which we operate and management’s beliefs and assumptions, are not guarantees of future
performance or development and involve known and unknown risks, uncertainties and other factors. These
forward-looking statements include statements regarding:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
the initiation, timing, progress and results of our or our collaboration partners’ pre-clinical and clinical
studies, and our research and development programs;
our or our collaboration partners’ ability to advance our drug candidates into, and/or successfully
complete, clinical studies;
the timing or regulatory filings and the likelihood of favorable regulatory outcomes and approvals;
regulatory developments in China, the United States and other countries;
the adaptation of our Commercial Platform to market and sell our drug candidates and the
commercialization of our drug candidates, if approved;
the pricing and reimbursement of our and our joint ventures’ products and our drug candidates,
if approved;
our ability to contract on commercially reasonable terms with CROs, third-party suppliers and
manufacturers;
the scope of protection we are able to establish and maintain for intellectual property rights covering our
or our joint ventures’ products and our drug candidates;
the ability of third parties with whom we contract to successfully conduct, supervise and monitor clinical
studies for our drug candidates;
estimates of our expenses, future revenue, capital requirements and our needs for additional financing;
our ability to obtain additional funding for our operations;
the potential benefits of our collaborations and our ability to enter into future collaboration
arrangements;
the ability and willingness of our collaborators to actively pursue development activities under our
collaboration agreements;
our or our joint venture Nutrition Science Partners’ receipt of milestone or royalty payments pursuant to
our strategic alliances with AstraZeneca AB (publ), or AstraZeneca, Eli Lilly Trading (Shanghai)
Company Limited, or Eli Lilly, and Nestlé Health Science S.A., or Nestlé Health Science, as applicable;
the rate and degree of market acceptance of our drug candidates;
our status as a PFIC;
our financial performance;
5
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
our ability to attract and retain key scientific and management personnel;
our expectations regarding the period during which we qualify as an emerging growth company under
the JOBS Act or as a foreign private issuer;
our relationship with our joint venture and collaboration partners;
developments relating to our competitors and our industry, including competing drug products; and
changes in tax laws in the jurisdictions that we operate;
Actual results or events could differ materially from the plans, intentions and expectations disclosed in the
forward-looking statements we make. As a result, any or all of our forward-looking statements in this annual report may
turn out to be inaccurate. We have included important factors in the cautionary statements included in this annual report
on Form 20-F, particularly in the section of this annual report on Form 20-F titled “Risk Factors,” that we believe could
cause actual results or events to differ materially from the forward-looking statements that we make. We may not actually
achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue
reliance on our forward-looking statements. Moreover, we operate in a highly competitive and rapidly changing
environment in which new risks often emerge. It is not possible for our management to predict all risks, nor can we assess
the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those contained in any forward-looking statements we may make.
You should read this annual report and the documents that we reference herein and have filed as exhibits hereto
completely and with the understanding that our actual future results may be materially different from what we expect. The
forward-looking statements contained herein are made as of the date of this annual report, and we do not assume any
obligation to update any forward-looking statements except as required by applicable law.
6
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
A.
Selected Financial Data.
Our Selected Financial Data
The following tables set forth our selected consolidated financial data. We have derived the selected consolidated
statement of operations data for the years ended December 31, 2016, 2015 and 2014 and the selected consolidated balance
sheet data as of December 31, 2016 and 2015 from our audited consolidated financial statements, which were prepared in
accordance with U.S. GAAP and are included in this annual report. You should read this data together with such
consolidated financial statements and the related notes and Item 5 “Operating and Financial Review and Prospects.” Our
historical results are not necessarily indicative of the results to be expected for any future periods. All of our operations
are continuing operations and we have not proposed or paid dividends in any of the periods presented.
7
The following selected consolidated financial data for the year ended December 31, 2013 and as of December
31, 2014 have been derived from our audited consolidated financial statements for those years, which were prepared in
accordance with U.S. GAAP and are not included in this annual report.
Year Ended December 31,
2016
2015
2014
2013
(in thousands, except share and per share data)
$
171,058 $
9,794
26,444
355
8,429
216,080
118,113 $
8,074
44,060
2,573
5,383
178,203
$
59,162
7,823
12,336
3,696
4,312
87,329
(149,132)
(7,196)
(66,871)
(17,998)
(21,580)
(262,777)
(46,697)
502
—
609
(1,631)
(139)
(659)
(104,859)
(5,918)
(47,368)
(10,209)
(19,620)
(187,974)
(9,771)
451
—
386
(1,404)
(202)
(769)
(47,356)
(4,331)
66,244
14,557
—
14,557
(2,859)
11,698
—
11,698 $
(10,540)
(1,605)
22,572
10,427
—
10,427
(2,434)
7,993
(43,001)
(35,008) $
(53,477)
(5,372)
(29,914)
(4,112)
(12,713)
(105,588)
(18,259)
559
—
20
(1,516)
(761)
(1,698)
(19,957)
(1,343)
15,180
(6,120)
2,034
(4,086)
(3,220)
(7,306)
(25,510)
(32,816)
0.20 $
— $
(0.64) $
— $
(0.64)
0.02
0.20 $
— $
(0.64) $
— $
59,715,173
59,971,050
54,659,315
54,659,315
$
14,557 $
10,427 $
(10,722)
3,835
(1,427)
(5,557)
4,870
(1,732)
$
2,408 $
3,138 $
(0.64)
0.02
52,563,387
52,563,387
(4,086)
(2,712)
(6,798)
(2,944)
(9,742)
8,667
7,803
14,546
1,919
3,612
36,547
(5,380)
(5,814)
(22,731)
(3,452)
(12,366)
(49,743)
(13,196)
451
30,000
1,221
(1,485)
(69)
30,118
16,922
(1,050)
11,031
26,903
(1,978)
24,925
(983)
23,942
—
23,942
0.49
(0.03)
0.44
(0.03)
52,050,988
52,878,426
24,925
3,243
28,168
(1,296)
26,872
$
$
$
$
$
$
$
Consolidated statements of operations data:
Revenues
Sales of goods—third parties
Sales of goods—related parties
Revenue from license and collaboration agreements—third parties
Revenue from research and development services—third parties
Revenue from research and development services—related parties
Total revenues
Operating expenses
Costs of sales of goods—third parties
Costs of sales of goods—related parties
Research and development expenses
Selling expenses
Administrative expenses
Total operating expenses
Loss from operations
Other income/(expense)
Interest income
Gain on disposal of a business
Other income
Interest expense
Other expense
Total other income/(expense)
(Loss)/income before income taxes and equity in earnings of equity
investees
Income tax expense
Equity in earnings of equity investees, net of tax
Net income/(loss) from continuing operations
Income/(loss) from discontinued operations, net of tax
Net income/(loss)
Less: Net income attributable to non-controlling interests
Net income/(loss) attributable to the company
Accretion on redeemable non-controlling interests
Net income/(loss) attributable to ordinary shareholders of the company
Earnings/(losses) per share attributable to ordinary shareholders of the
company—basic ($ per share)
Continuing Operations
Discontinued Operations
Earnings/(losses) per share attributable to ordinary shareholders of the
company—diluted ($ per share)
Continuing Operations
Discontinued Operations
Number of shares used in per share calculation—basic
Number of shares used in per share calculation—diluted
Net income/(loss)
Other comprehensive (loss)/income:
Foreign currency translation (loss)/income
Total Comprehensive income/(loss)
Less: Comprehensive income attributable to non-controlling interests
Total Comprehensive income/(loss) attributable to the company
8
$
$
$
$
$
Consolidated balance sheet data:
Cash and cash equivalents
Total assets
Total shareholder’s equity
Total current liabilities
Total non-current liabilities
2016
As of December 31,
2015
(in thousands)
2014
$
$
$
$
$
79,431 $
342,437 $
204,060 $
95,119 $
43,258 $
31,941 $
229,599 $
102,277 $
81,062 $
46,260 $
38,946
210,617
56,915
75,299
37,367
Selected Financial Data of Our Non-Consolidated Joint Ventures
We have three non-consolidated joint ventures—Shanghai Hutchison Pharmaceuticals, Hutchison Baiyunshan
and Nutrition Science Partners. The following selected consolidated income and cash flow data of each such joint venture
for the years ended December 31, 2016, 2015 and 2014 and the following selected consolidated statements of financial
position of each such joint venture as of December 31, 2016 and 2015 have been derived from their respective audited
consolidated financial statements, which were prepared in accordance with IFRS as issued by the IASB and are included
elsewhere in this annual report. You should read this data together with such consolidated financial statements of our non-
consolidated joint ventures and the related notes and Item 5 “Operating and Financial Review and Prospects.” The
following selected consolidated financial data for the year ended December 31, 2013 and as of December 31, 2014 have
been derived from their respective audited consolidated financial statements, which were prepared in accordance with
IFRS as issued by the IASB and are not included in this annual report. The historical results of our joint ventures for any
prior period are not necessarily indicative of results to be expected in any future periods.
Shanghai Hutchison Pharmaceuticals
Comprehensive income and cash flow data:
Revenue
Profit for the year
Dividend paid to equity holders
Year Ended December 31,
2016
2015
2014
2013
(in thousands)
$
$
$
222,368 $
120,499 $
(55,057) $
154,703 $
181,140 $
31,307 $
26,402 $
(6,410) $ (19,077) $
138,160
22,424
(17,162)
Our equity in earnings of Shanghai Hutchison Pharmaceuticals reported under U.S. GAAP was $60.3 million,
$15.7 million, $13.2 million and $11.2 million for the years ended December 31, 2016, 2015, 2014 and 2013, respectively.
Financial position data:
Cash and cash equivalents
Total assets
Total company’s equity holders’ equity
Total liabilities
Hutchison Baiyunshan
2016
As of December 31,
2015
(in thousands)
2014
$
$
$
$
20,292 $
244,006 $
150,134 $
93,872 $
43,141 $
224,969 $
93,263 $
131,706 $
16,575
143,174
71,906
71,268
Year Ended December 31,
2016
2015
2014
2013
(in thousands)
Comprehensive income and cash flow data:
Revenue
Profit for the year
Profit for the year attributable to equity holders of Hutchison
Baiyunshan
Dividend paid to equity holders
$
$
$
$
224,131 $
20,128 $
211,603 $ 243,746 $
20,865 $
21,216 $
247,626
17,361
20,376 $
(6,000) $
21,376 $
20,775 $
(6,410) $ (12,820) $
17,165
(6,462)
9
Our equity in earnings of Hutchison Baiyunshan reported under U.S. GAAP was $10.2 million, $10.7 million,
$10.4 million and $8.6 million for the years ended December 31, 2016, 2015, 2014 and 2013, respectively.
Financial position data:
Cash and cash equivalents
Total assets
Total company’s equity holders’ equity
Total liabilities
Nutrition Science Partners
Comprehensive income data:
Revenue
Loss for the year
2016
As of December 31,
2015
(in thousands)
2014
$
$
$
$
23,448
221,735
133,369
88,366
$
$
$
$
31,155
202,646
125,063
77,583
$
$
$
$
31,004
217,171
115,308
101,863
2016
Year Ended December 31,
2015
2014
(in thousands)
2013
$
$
—
(8,482)
$
$
— $
(7,552) $
—
(16,812)
$
$
—
(17,543)
Our equity in loss of Nutrition Science Partners reported under U.S. GAAP was $4.2 million, $3.8 million,
$8.4 million and $8.8 million for the years ended December 31, 2016, 2015, 2014 and 2013, respectively.
2016
As of December 31,
2015
(in thousands)
2014
$
$
$
$
5,393 $
35,393 $
33,611 $
1,782 $
2,624 $
33,034 $
18,093 $
14,941 $
6,249
38,548
25,645
12,903
Financial position data:
Cash and cash equivalents
Total assets
Total company’s equity holders’ equity
Total liabilities
B.
Capitalization and Indebtedness.
Not applicable.
C.
Reasons for the Offer and Use of Proceeds.
Not applicable.
D.
Risk Factors.
Risks Related to Our Financial Position and Need for Capital
We may need substantial funding for our product development programs and commercialization efforts. If we are
unable to raise capital on acceptable terms when needed, we could incur losses and be forced to delay, reduce or
eliminate such efforts.
We expect our expenses to increase significantly in connection with our ongoing activities, particularly as we or
our collaboration partners advance the clinical development of our eight clinical drug candidates, which are currently in
30 active clinical studies in various countries with further studies targeted to begin in 2017, including four Phase III studies,
and continue research and development and initiate additional clinical trials of, and seek regulatory approval for, these and
other future drug candidates. In addition, if we obtain regulatory approval for any of our drug candidates, we expect to
incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution. In
particular, the costs that may be required for the manufacture of any drug candidate that receives regulatory approval may
be substantial as we may have to modify or increase the production capacity at our current manufacturing facilities or
contract with third-party manufacturers. We may also incur expenses as we create additional infrastructure to support our
operations as a U.S. public company. Accordingly, we may need to obtain substantial funding in connection with our
continuing operations through public or private equity offerings, debt financings, collaborations or licensing arrangements
10
or other sources. If we are unable to raise capital when needed or on attractive terms, we could incur losses and be forced
to delay, reduce or eliminate our research and development programs or any future commercialization efforts.
We believe that our expected cashflow from operations (including from our Commercial Platform and milestone
and other payments from our collaboration partners) and our cash and cash equivalents as of December 31, 2016, as well
as the HK$234.0 million (equivalent to $30.0 million as of December 31, 2016) in borrowings available under our
revolving credit facility with The Hongkong and Shanghai Banking Corporation Limited, or HSBC, the HK$210.0 million
(equivalent to $26.9 million as of December 31, 2016) we received pursuant to a four-year term loan from Scotiabank
(Hong Kong) Limited, which we refer to as our 2014 Scotiabank Term Loan, and the aggregate HK$546.0 million
(equivalent to $70.0 million using the exchange rate as of December 31, 2016) in credit facilities entered into with Bank
of America N.A. and Deutsche Bank AG, Hong Kong Branch in February 2017 will enable us to fund our operating
expenses, debt service and capital expenditure requirements for at least the next 12 months. We have based this estimate
on assumptions that may prove to be wrong, and we could use our capital resources sooner than we currently expect. Our
future capital requirements will depend on many factors, including:
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the number and development requirements of the drug candidates we pursue;
the scope, progress, timing, results and costs of researching and developing our drug candidates, and
conducting pre-clinical and clinical trials;
the cost, timing and outcome of regulatory review of our drug candidates;
the cost and timing of future commercialization activities, including product manufacturing, marketing,
sales and distribution, for any of our drug candidates for which we receive regulatory approval;
the amount and timing of any milestone payments from our collaboration partners, with whom we
cooperate with respect to the development and potential commercialization of certain of our drug
candidates;
the cash received, if any, received from commercial sales of any drug candidates for which we receive
regulatory approval;
our ability to establish and maintain strategic partnerships, collaboration, licensing or other arrangements
and the financial terms of such agreements;
the cost, timing and outcome of preparing, filing and prosecuting patent applications, maintaining and
enforcing our intellectual property rights and defending any intellectual property-related claims;
our headcount growth and associated costs; and
the costs of operating as a public company in the United States and on the AIM market.
Identifying potential drug candidates and conducting pre-clinical testing and clinical trials is a time-consuming,
expensive and uncertain process that may take years to complete, and our commercial revenue, if any, will be derived from
sales of products that we do not expect to be commercially available until we receive regulatory approval, if at all. We
may never generate the necessary data or results required to obtain regulatory approval and achieve product sales, and
even if one or more of our drug candidates is approved, they may not achieve commercial success. Accordingly, we will
need to continue to rely on financing to achieve our business objectives. Adequate financing may not be available to us on
acceptable terms, or at all.
If the CK Hutchison group does not renew our existing loan guarantee or does not enter into new guarantees with us,
we may incur significantly higher borrowing costs.
Hutchison Whampoa Limited, a wholly owned subsidiary of CK Hutchison, has guaranteed our 2014 Scotiabank
Term Loan for a guarantee fee. The CK Hutchison group has no obligation to enter into new guarantees. We may incur
significantly higher funding costs if we no longer have the benefit of the CK Hutchison group guarantees or other similar
arrangements by the CK Hutchison group.
11
Raising capital may cause dilution to our shareholders, restrict our operations or require us to relinquish rights to
technologies or drug candidates.
We expect to finance our cash needs in part through cash flow generated by our Commercial Platform, and we
may also rely on raising capital through a combination of public or private equity offerings, debt financings and/or license
and development agreements with collaboration partners. In addition, we may seek capital due to favorable market
conditions or strategic considerations, even if we believe we have sufficient funds for our current or future operating plans.
To the extent that we raise capital through the sale of equity or convertible debt securities, the ownership interest of our
shareholders may be materially diluted, and the terms of such securities could include liquidation or other preferences that
adversely affect the rights of our existing shareholders. Debt financing and preferred equity financing, if available, may
involve agreements that include restrictive covenants that limit our ability to take specified actions, such as incurring
additional debt, making capital expenditures or declaring dividends. Additional debt financing would also result in
increased fixed payment obligations.
In addition, if we raise funds through collaborations, strategic partnerships or marketing, distribution or licensing
arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams,
research programs or drug candidates or grant licenses on terms that may not be favorable to us. We may also lose control
of the development of drug candidates, such as the pace and scope of clinical trials, as a result of such third-party
arrangements. If we are unable to raise funds through equity or debt financings when needed, we may be required to delay,
limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and
market drug candidates that we would otherwise prefer to develop and market ourselves.
Our existing and any future indebtedness could adversely affect our ability to operate our business.
Our outstanding indebtedness combined with current and future financial obligations and contractual
commitments, including any additional indebtedness beyond our current facilities with HSBC, Scotiabank, Bank of
America N.A. and Deutsche Bank AG, could have significant adverse consequences, including:
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requiring us to dedicate a portion of our cash resources to the payment of interest and principal, and
prepayment and repayment fees and penalties, thereby reducing money available to fund working
capital, capital expenditures, product development and other general corporate purposes;
increasing our vulnerability to adverse changes in general economic, industry and market conditions;
subjecting us to restrictive covenants that may reduce our ability to take certain corporate actions or
obtain further debt or equity financing;
limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which
we compete; and
placing us at a competitive disadvantage compared to our competitors that have less debt or better debt
servicing options.
We intend to satisfy our current and future debt service obligations with our existing cash and cash equivalents.
Nevertheless, we may not have sufficient funds, and may be unable to arrange for financing, to pay the amounts due under
our existing debt. Failure to make payments or comply with other covenants under our existing debt instruments could
result in an event of default and acceleration of amounts due.
Risks Related to Our Innovation Platform
Historically, our in-house research and development division, known as our Innovation Platform, has not generated
significant profits or has operated at a net loss.
We do not expect our Innovation Platform to be significantly profitable unless and until we obtain regulatory
approval of, and begin to sell, one or more of our drug candidates. We expect to incur significant sales and marketing costs
as we prepare to commercialize our drug candidates. Even if we initiate and successfully complete clinical trials of our
drug candidates, and our drug candidates are approved for commercial sale, and despite expending these costs, our drug
candidates may not be commercially successful. We may not achieve profitability soon after generating drug sales, if ever.
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If we are unable to generate drug revenue, we will not become profitable and may be unable to continue operations without
continued funding.
All of our drug candidates are still in development. If we are unable to obtain regulatory approval and ultimately
commercialize our drug candidates or experience significant delays in doing so, our business will be materially harmed.
All of our drug candidates are still in development including eight in clinical development. Although we and our
joint venture Nutrition Science Partners receive certain payments from our collaboration partners, including upfront
payments and payments for achieving certain development, regulatory or commercial milestones, for certain of our drug
candidates, our ability to generate revenue from our drug candidates is dependent on their receipt of regulatory approval
for and successfully commercializing such products, which may never occur. Each of our drug candidates will require
additional pre-clinical and/or clinical development, regulatory approval in multiple jurisdictions, manufacturing supply,
substantial investment and significant marketing efforts before we generate any revenue from product sales. The success
of our drug candidates will depend on several factors, including the following:
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successful completion of pre-clinical and/or clinical studies;
successful enrollment in, and completion of, clinical trials;
receipt of regulatory approvals from applicable regulatory authorities for planned clinical trials, future
clinical trials or drug registrations;
successful completion of all safety studies required to obtain regulatory approval in the United States,
China and other jurisdictions for our drug candidates;
adapting our commercial manufacturing capabilities to the specifications for our drug candidates for
clinical supply and commercial manufacturing;
obtaining and maintaining patent and trade secret protection or regulatory exclusivity for our drug
candidates;
launching commercial sales of our drug candidates, if and when approved, whether alone or in
collaboration with others;
acceptance of the drug candidates, if and when approved, by patients, the medical community and
third-party payors;
effectively competing with other therapies;
obtaining and maintaining healthcare coverage and adequate reimbursement;
enforcing and defending intellectual property rights and claims; and
(cid:120) maintaining a continued acceptable safety profile of the drug candidates following approval.
If we do not achieve one or more of these factors in a timely manner or at all, we could experience significant
delays or an inability to successfully commercialize our drug candidates, which would materially harm our business.
Our primary approach to the discovery and development of drug candidates focuses on the inhibition of kinases, some
of which are unproven, and we do not know whether we will be able to develop any products of commercial value.
A primary focus of our research and development efforts is on identifying kinase targets for which drug
compounds previously developed by others affecting those targets have been unsuccessful due to limited selectivity,
off-target toxicity and other problems. We then work to engineer drug candidates which have the potential to have superior
efficacy, safety and other features as compared to such prior drug compounds. We also focus on developing drug
compounds with the potential to be global best-in-class/next generation therapies for validated kinase targets.
Even if we are able to develop compounds that successfully target the relevant kinases in pre-clinical studies, we
may not succeed in demonstrating safety and efficacy of the drug candidates in clinical trials. As a result, our efforts may
13
not result in the discovery or development of drugs that are commercially viable or are superior to existing drugs or other
therapies on the market. While the results of pre-clinical studies and early-stage clinical trials have suggested that certain
of our drug candidates may successfully inhibit kinases and may have significant utility in several cancer indications,
potentially in combination with other cancer drugs and with chemotherapy, we have not yet demonstrated efficacy and
safety for most of our drug candidates in later stage clinical trials.
In addition, we have not yet had a drug candidate receive approval or clearance from the U.S. Food and Drug
Administration, or FDA, the China Food and Drug Administration, or CFDA, or another regulatory authority. While the
FDA and CFDA have approved kinases inhibitors before, the regulatory review process for our drug candidates is
uncertain, and we may be required to conduct additional studies or trials beyond those we anticipate resulting in a longer
regulatory approval pathway.
We may expend our limited resources to pursue a particular drug candidate or indication and fail to capitalize on drug
candidates or indications that may be more profitable or for which there is a greater likelihood of success.
Because we have limited financial and managerial resources, we must limit our research programs to specific
drug candidates that we identify for specific indications. As a result, we may forego or delay pursuit of opportunities with
other drug candidates or for other indications that later prove to have greater commercial potential. Our resource allocation
decisions may cause us to fail to capitalize on viable commercial drugs or profitable market opportunities. In addition, if
we do not accurately evaluate the commercial potential or target market for a particular drug candidate, we may relinquish
valuable rights to that drug candidate through collaboration, licensing or other royalty arrangements when it would have
been more advantageous for us to retain sole development and commercialization rights to such drug candidate.
We have no history of commercializing our internally developed drugs, which may make it difficult to evaluate our
future prospects.
The operations of our Innovation Platform have been limited to developing and securing our technology and
undertaking pre-clinical studies and clinical trials of our drug candidates, either independently or with our collaboration
partners. We have not yet demonstrated the ability to successfully complete development of any drug candidates, obtain
marketing approvals, manufacture our internally developed drugs at a commercial scale, or conduct sales and regulatory
activities necessary for successful product commercialization of our drug candidates. While we believe we will be able to
successfully leverage our existing Commercial Platform to manufacture, sell and market our drug candidates in China
once approved, any predictions about our future success or viability may not be as accurate as they could be if we had a
history of successfully developing and commercializing our internally developed pharmaceutical products.
The regulatory approval processes of the FDA, CFDA and comparable authorities are lengthy, time consuming and
inherently unpredictable, and if we are ultimately unable to obtain regulatory approval for our drug candidates, our
ability to generate revenue will be materially impaired.
Our drug candidates and the activities associated with their development and commercialization, including their
design, testing, manufacture, safety, efficacy, recordkeeping, labeling, storage, approval, advertising, promotion, sale,
distribution, import and export are subject to comprehensive regulation by the FDA, CFDA and other regulatory agencies
in the United States and China and by comparable authorities in other countries. Securing regulatory approval requires the
submission of extensive pre-clinical and clinical data and supporting information to the various regulatory authorities for
each therapeutic indication to establish the drug candidate’s safety and efficacy. Securing regulatory approval also requires
the submission of information about the drug manufacturing process to, and inspection of manufacturing facilities by, the
relevant regulatory authority. Our drug candidates may not be effective, may be only moderately effective or may prove
to have undesirable or unintended side effects, toxicities or other characteristics that may preclude our obtaining regulatory
approval or prevent or limit commercial use.
The process of obtaining regulatory approvals, both in the United States, China and other countries, is expensive,
may take many years if additional clinical trials are required, if approval is obtained at all, and can vary substantially based
upon a variety of factors, including the type, complexity and novelty of the drug candidates involved. Changes in regulatory
approval policies during the development period, changes in or the enactment of additional statutes or regulations, or
changes in regulatory review for each submitted NDA, pre-market approval or equivalent application types, may cause
delays in the approval or rejection of an application. The FDA, CFDA and comparable authorities in other countries have
substantial discretion in the approval process and may refuse to accept any application or may decide that our data are
14
insufficient for approval and require additional pre-clinical, clinical or other studies. Our drug candidates could be delayed
in receiving, or fail to receive, regulatory approval for many reasons, including the following:
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the FDA, CFDA or comparable regulatory authorities may disagree with the number, design, size,
conduct or implementation of our clinical trials;
(cid:120) we may be unable to demonstrate to the satisfaction of the FDA, CFDA or comparable regulatory
authorities that a drug candidate is safe and effective for its proposed indication;
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the results of clinical trials may not meet the level of statistical significance required by the FDA, CFDA
or comparable regulatory authorities for approval;
(cid:120) we may be unable to demonstrate that a drug candidate’s clinical and other benefits outweigh its
safety risks;
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the FDA, CFDA or comparable regulatory authorities may disagree with our interpretation of data from
pre-clinical studies or clinical trials;
the data collected from clinical trials of our drug candidates may not be sufficient to support the
submission of an NDA or other submission or to obtain regulatory approval in the United States
or elsewhere;
the FDA, CFDA or comparable regulatory authorities may fail to approve the manufacturing processes
for our clinical and commercial supplies;
the approval policies or regulations of the FDA, CFDA or comparable regulatory authorities may
significantly change in a manner rendering our clinical data insufficient for approval;
the FDA, CFDA or comparable regulatory authorities may restrict the use of our products to a narrow
population; and
our collaboration partners or the contract research organizations, or CROs, that are retained to conduct
the clinical trials of our drug candidates may take actions that materially and adversely impact the clinical
trials.
In addition, even if we were to obtain approval, regulatory authorities may approve any of our drug candidates
for fewer or more limited indications than we request, may not approve the price we intend to charge for our drugs, may
grant approval contingent on the performance of costly post-marketing clinical trials, or may approve a drug candidate
with a label that does not include the labeling claims necessary or desirable for the successful commercialization of that
drug candidate. Any of the foregoing scenarios could materially harm the commercial prospects for our drug candidates.
If the FDA, CFDA or another regulatory agency revokes its approval of, or if safety, efficacy, manufacturing or supply
issues arise with, any therapeutic that we use in combination with our drug candidates, we may be unable to market
such drug candidate or may experience significant regulatory delays or supply shortages, and our business could be
materially harmed.
We are currently focusing on the clinical development of savolitinib as both a monotherapy and in combination
with immunotherapy (durvalumab), targeted therapies (Tagrisso (osimertinib) and Iressa (gefitinib)) and chemotherapy
(Taxotere (docetaxel)). We are also focusing on the clinical development of our drug candidate fruquintinib as both a
monotherapy and in combination with chemotherapy (Taxol (paclitaxel)), and may focus on additional combinations in
the future. However, we did not develop or obtain regulatory approval for, and we do not manufacture or sell, Tagrisso,
Iressa, Taxotere, Taxol or durvalumab or any other therapeutic we use in combination with our drug candidates. We may
also seek to develop our drug candidates in combination with other therapeutics in the future.
If the FDA, CFDA or another regulatory agency revokes its approval of any of Tagrisso, Iressa, Taxotere, Taxol,
durvalumab or another therapeutic we use in combination with our drug candidates, we will not be able to market our drug
candidates in combination with such revoked therapeutic. If safety or efficacy issues arise with these or other therapeutics
that we seek to combine with our drug candidates in the future, we may experience significant regulatory delays, and we
may be required to redesign or terminate the applicable clinical trials. In addition, if manufacturing or other issues result
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in a supply shortage of Tagrisso, Iressa, Taxotere, Taxol or any other combination therapeutics, we may not be able to
complete clinical development of savolitinib, fruquintinib and/or another of our drug candidates on our current timeline or
at all.
Even if one or more of our drug candidates were to receive regulatory approval for use in combination with
Tagrisso, Iressa, Taxotere, Taxol as applicable, or another therapeutic, we would continue to be subject to the risk that the
FDA, CFDA or another regulatory agency could revoke its approval of the combination therapeutic, or that safety, efficacy,
manufacturing or supply issues could arise with one of these combination therapeutics. This could result in savolitinib,
fruquintinib or one of our other products being removed from the market or being less successful commercially.
We face substantial competition, which may result in others discovering, developing or commercializing drugs before
or more successfully than we do.
The development and commercialization of new drugs is highly competitive. We face competition with respect
to our current drug candidates, and will face competition with respect to any drug candidates that we may seek to develop
or commercialize in the future, from major pharmaceutical companies, specialty pharmaceutical companies and
biotechnology companies worldwide. There are a number of large pharmaceutical and biotechnology companies that
currently market drugs or are pursuing the development of therapies in the field of kinase inhibition for cancer and other
diseases. Some of these competitive drugs and therapies are based on scientific approaches that are the same as or similar
to our approach, and others are based on entirely different approaches. Potential competitors also include academic
institutions, government agencies and other public and private research organizations that conduct research, seek patent
protection and establish collaborative arrangements for research, development, manufacturing and commercialization.
Specifically, there are a large number of companies developing or marketing treatments for cancer, including many major
pharmaceutical and biotechnology companies.
Many of the companies against which we are competing or against which we may compete in the future have
significantly greater financial resources and expertise in research and development, manufacturing, pre-clinical testing,
conducting clinical trials, obtaining regulatory approvals and marketing approved drugs than we do. Mergers and
acquisitions in the pharmaceutical, biotechnology and diagnostic industries may result in even more resources being
concentrated among a smaller number of our competitors. Smaller or early stage companies may also prove to be
significant competitors, particularly through collaborative arrangements with large and established companies. These
competitors also compete with us in recruiting and retaining qualified scientific and management personnel and
establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary
to, or necessary for, our programs.
Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize drugs
that are safer, more effective, have fewer or less severe side effects, are more convenient or are less expensive than any
drugs that we or our collaborators may develop. Our competitors also may obtain FDA, CFDA or other regulatory approval
for their drugs more rapidly than we may obtain approval for ours, which could result in our competitors establishing a
strong market position before we or our collaborators are able to enter the market. The key competitive factors affecting
the success of all of our drug candidates, if approved, are likely to be their efficacy, safety, convenience, price, the level
of generic competition and the availability of reimbursement from government and other third-party payors.
Clinical development involves a lengthy and expensive process with an uncertain outcome.
There is a risk of failure for each of our drug candidates. It is difficult to predict when or if any of our drug
candidates will prove effective and safe in humans or will receive regulatory approval. Before obtaining regulatory
approval from regulatory authorities for the sale of any drug candidate, we or our collaboration partners must complete
pre-clinical studies and then conduct extensive clinical trials to demonstrate the safety and efficacy of our drug candidates
in humans. Clinical testing is expensive, difficult to design and implement and can take many years to complete. The
outcomes of pre-clinical development testing and early clinical trials may not be predictive of the success of later clinical
trials, and interim results of a clinical trial do not necessarily predict final results. Moreover, pre-clinical and clinical data
are often susceptible to varying interpretations and analyses, and many companies that have believed their drug candidates
performed satisfactorily in pre-clinical studies and clinical trials have nonetheless failed to obtain regulatory approval of
their drug candidates. Our future clinical trials may not be successful.
Commencing each of our clinical trials is subject to finalizing the trial design based on ongoing discussions with
the FDA, CFDA or other regulatory authorities. The FDA, CFDA and other regulatory authorities could change their
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position on the acceptability of our trial designs or clinical endpoints, which could require us to complete additional clinical
trials or impose approval conditions that we do not currently expect. Successful completion of our clinical trials is a
prerequisite to submitting a new drug application, or NDA, or analogous filing to the FDA, CFDA or other regulatory
authorities for each drug candidate and, consequently, the ultimate approval and commercial marketing of our drug
candidates. We do not know whether any of our clinical trials will begin or be completed on schedule, if at all.
We and our collaboration partners may incur additional costs or experience delays in completing our pre-clinical or
clinical trials, or ultimately be unable to complete the development and commercialization of our drug candidates.
We and our collaboration partners, including AstraZeneca, Eli Lilly and Nestlé Health Science, may experience
delays in completing our pre-clinical or clinical trials, and numerous unforeseen events could arise during, or as a result
of, future clinical trials, which could delay or prevent us from receiving regulatory approval, including:
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regulators or institutional review boards, or IRBs, or ethics committees may not authorize us or our
investigators to commence or conduct a clinical trial at a prospective trial site;
(cid:120) we may experience delays in reaching, or we may fail to reach, agreement on acceptable terms with
prospective trial sites and prospective contract research organizations, or CROs, who conduct clinical
trials on behalf of us and our collaboration partners, the terms of which can be subject to extensive
negotiation and may vary significantly among different CROs and trial sites;
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clinical trials may produce negative or inconclusive results, and we or our collaboration partners may
decide, or regulators may require us or them, to conduct additional clinical trials or we may decide to
abandon drug development programs;
the number of patients required for clinical trials of our drug candidates may be larger than we anticipate,
enrollment in these clinical trials may be slower than we anticipate or participants may drop out of these
clinical trials or fail to return for post-treatment follow-up at a higher rate than we anticipate;
third-party contractors used in our clinical trials may fail to comply with regulatory requirements or meet
their contractual obligations in a timely manner, or at all, or may deviate from the clinical trial protocol
or drop out of the trial, which may require that we or our collaboration partners add new clinical trial
sites or investigators;
(cid:120) we or our collaboration partners may elect to, or regulators, IRBs or ethics committees may require that
we or our investigators, suspend or terminate clinical research for various reasons, including
non-compliance with regulatory requirements or a finding that the participants are being exposed to
unacceptable health risks;
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the cost of clinical trials of our drug candidates may be greater than we anticipate;
the supply or quality of our drug candidates or other materials necessary to conduct clinical trials of our
drug candidates may be insufficient or inadequate; and
our drug candidates may have undesirable side effects or unexpected characteristics, causing us or our
investigators, regulators, IRBs or ethics committees to suspend or terminate the trials, or reports may
arise from pre-clinical or clinical testing of other cancer therapies that raise safety or efficacy concerns
about our drug candidates.
We could encounter regulatory delays if a clinical trial is suspended or terminated by us or our collaboration
partners, by, as applicable, the IRBs of the institutions in which such trials are being conducted, by the data safety
monitoring board, which is an independent group of experts that is formed to monitor clinical trials while ongoing, or by
the FDA, CFDA or other regulatory authorities. Such authorities may impose a suspension or termination due to a number
of factors, including: a failure to conduct the clinical trial in accordance with regulatory requirements or the applicable
clinical protocols, inspection of the clinical trial operations or trial site by the FDA, CFDA or other regulatory authorities
that results in the imposition of a clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate a
benefit from using a drug, changes in governmental regulations or administrative actions or lack of adequate funding to
continue the clinical trial. Many of the factors that cause a delay in the commencement or completion of clinical trials may
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also ultimately lead to the denial of regulatory approval of our drug candidates. Further, the FDA, CFDA or other
regulatory authorities may disagree with our clinical trial design and our interpretation of data from clinical trials, or may
change the requirements for approval even after it has reviewed and commented on the design for our clinical trials.
If we or our collaboration partners are required to conduct additional clinical trials or other testing of our drug
candidates beyond those that are currently contemplated, if we or our collaboration partners are unable to successfully
complete clinical trials of our drug candidates or other testing, if the results of these trials or tests are not positive or are
only modestly positive or if there are safety concerns, we may:
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be delayed in obtaining regulatory approval for our drug candidates;
not obtain regulatory approval at all;
obtain approval for indications or patient populations that are not as broad as intended or desired;
be subject to post-marketing testing requirements; or
have the drug removed from the market after obtaining regulatory approval.
Our drug development costs will also increase if we experience delays in testing or regulatory approvals. We do
not know whether any of our clinical trials will begin as planned, will need to be restructured or will be completed on
schedule, or at all. Significant pre-clinical study or clinical trial delays also could allow our competitors to bring products
to market before we do and impair our ability to successfully commercialize our drug candidates and may harm our
business and results of operations. Any delays in our clinical development programs may harm our business, financial
condition and prospects significantly.
If we or our collaboration partners experience delays or difficulties in the enrollment of patients in clinical trials, the
progress of such clinical trials and our receipt of necessary regulatory approvals could be delayed or prevented.
We or our collaboration partners may not be able to initiate or continue clinical trials for our drug candidates if
we or our collaboration partners are unable to locate and enroll a sufficient number of eligible patients to participate in
these trials as required by the FDA, CFDA or similar regulatory authorities. In particular, we and our collaboration partners
have designed many of our clinical trials, and expect to design future trials, to include some patients with the applicable
genomic alteration that causes the disease with a view to assessing possible early evidence of potential therapeutic effect.
Genomically defined diseases, however, may have relatively low prevalence, and it may be difficult to identify patients
with the applicable genomic alteration. In addition, for our fruquintinib trials, we focus on enrolling patients who have
failed their first or second-line treatments, which limits the total size of the patient population available for such trials. The
inability to enroll a sufficient number of patients with the applicable genomic alteration or that meet other applicable
criteria for our clinical trials would result in significant delays and could require us or our collaboration partners to abandon
one or more clinical trials altogether.
In addition, some of our competitors have ongoing clinical trials for drug candidates that treat the same indications
as our drug candidates, and patients who would otherwise be eligible for our clinical trials may instead enroll in clinical
trials of our competitors’ drug candidates.
Patient enrollment may be affected by other factors including:
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the severity of the disease under investigation;
the total size and nature of the relevant patient population;
the design and eligibility criteria for the clinical trial in question;
the availability of an appropriate genomic screening test;
the perceived risks and benefits of the drug candidate under study;
the efforts to facilitate timely enrollment in clinical trials;
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the patient referral practices of physicians;
the availability of competing therapies which are undergoing clinical trials;
the ability to monitor patients adequately during and after treatment; and
the proximity and availability of clinical trial sites for prospective patients.
Enrollment delays in our clinical trials may result in increased development costs for our drug candidates, which
could cause the value of our company to decline and limit our ability to obtain financing.
Our drug candidates may cause undesirable side effects that could delay or prevent their regulatory approval, limit the
commercial profile of an approved label, or result in significant negative consequences following regulatory approval,
if any.
Undesirable side effects caused by our drug candidates could cause us or our collaboration partners to interrupt,
delay or halt clinical trials or could cause regulatory authorities to interrupt, delay or halt our clinical trials and could result
in a more restrictive label or the delay or denial of regulatory approval by the FDA, CFDA or other regulatory authorities.
In particular, as is the case with all oncology drugs, it is likely that there may be side effects, for example, hand-foot
syndrome, associated with the use of certain of our drug candidates. Results of our trials could reveal a high and
unacceptable severity and prevalence of these or other side effects. In such an event, our trials could be suspended or
terminated and the FDA, CFDA or comparable regulatory authorities could order us to cease further development of or
deny approval of our drug candidates for any or all targeted indications. The drug-related side effects could affect patient
recruitment or the ability of enrolled patients to complete the trial or result in potential product liability claims. Any of
these occurrences may harm our business, financial condition and prospects significantly.
Further, our drug candidates could cause undesirable side effects related to off-target toxicity. Many of the
currently approved tyrosine-kinase inhibitors have been associated with off-target toxicities because they affect multiple
kinases. While we believe that the kinase selectivity of our drug candidates has the potential to significantly improve the
unfavorable adverse off-target toxicity issues, if patients were to experience off-target toxicity, we may not be able to
achieve an effective dosage level, receive approval to market, or achieve the commercial success we anticipate with respect
to, any of our drug candidates, which could prevent us from ever generating revenue or achieving profitability. Many
compounds that initially showed promise in early stage testing for treating cancer have later been found to cause side
effects that prevented further development of the compound.
Clinical trials assess a sample of the potential patient population. With a limited number of patients and duration
of exposure, rare and severe side effects of our drug candidates may only be uncovered with a significantly larger number
of patients exposed to the drug candidate. If our drug candidates receive regulatory approval and we or others identify
undesirable side effects caused by such drug candidates (or any other similar drugs) after such approval, a number of
potentially significant negative consequences could result, including:
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regulatory authorities may withdraw or limit their approval of such drug candidates;
regulatory authorities may require the addition of labeling statements, such as a “boxed” warning or a
contra-indication;
(cid:120) we may be required to create a medication guide outlining the risks of such side effects for distribution
to patients;
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additional clinical trials or change the labeling of the drug candidates;
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regulatory authorities may require a Risk Evaluation and Mitigation Strategy, or REMS, plan to mitigate
risks, which could include medication guides, physician communication plans, or elements to assure
safe use, such as restricted distribution methods, patient registries and other risk minimization tools;
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(cid:120) we could be sued and held liable for injury caused to individuals exposed to or taking our drug
candidates; and
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our reputation may suffer.
Any of these events could prevent us from achieving or maintaining market acceptance of the affected drug
candidates and could substantially increase the costs of commercializing our drug candidates, if approved, and significantly
impact our ability to successfully commercialize our drug candidates and generate revenue.
We and our collaboration partners have conducted and intend to conduct additional clinical trials for certain of our
drug candidates at sites outside the United States, and the FDA may not accept data from trials conducted in
such locations or may require additional U.S.-based trials.
We and our collaboration partners have conducted, currently are conducting and intend in the future to conduct,
clinical trials outside the United States, particularly in China where our Innovation Platform is headquartered as well as
in Australia.
Although the FDA may accept data from clinical trials conducted outside the United States, acceptance of these
data is subject to certain conditions imposed by the FDA. For example, the clinical trial must be well designed and
conducted by qualified investigators in accordance with current good clinical practices, or GCPs, including review and
approval by an independent ethics committee and receipt of informed consent from trial patients. The trial population must
also adequately represent the U.S. population, and the data must be applicable to the U.S. population and U.S. medical
practice in ways that the FDA deems clinically meaningful. Generally, the patient population for any clinical trial
conducted outside of the United States must be representative of the population for which we intend to seek approval in
the United States. In addition, while these clinical trials are subject to applicable local laws, FDA acceptance of the data
will be dependent upon its determination that the trials also comply with all applicable U.S. laws and regulations. There
can be no assurance that the FDA will accept data from trials conducted outside of the United States. If the FDA does not
accept the data from our clinical trials of savolitinib, fruquintinib, sulfatinib, epitinib or theliatinib in China or HMPL-523,
HMPL-689 and HMPL-453 in Australia and China, for example, or any other trial that we or our collaboration partners
conduct outside the United States, it would likely result in the need for additional clinical trials, which would be costly
and time-consuming and delay or permanently halt our ability to develop and market these or other drug candidates in the
United States.
In addition, there are risks inherent in conducting clinical trials in jurisdictions outside the United States
including:
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regulatory and administrative requirements of the jurisdiction where the trial is conducted that could
burden or limit our ability to conduct our clinical trials;
foreign exchange fluctuations;
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cultural differences in medical practice and clinical research; and
the risk that patient populations in such trials are not considered representative as compared to patient
populations in the United States and other markets.
A Breakthrough Therapy designation by the FDA may not be granted to any of our drug candidates, and even if
granted, may not lead to a faster development or regulatory review or approval process, and it does not increase the
likelihood that our drug candidates will receive regulatory approval.
We intend to seek Breakthrough Therapy designation in the United States for some of our drug candidates,
including savolitinib in patients with papillary renal cell carcinoma, non-small cell lung cancer and gastric cancer,
sulfatinib in patients with neuroendocrine tumors and epitinib in patients with non-small cell lung cancer with brain
metastasis. A Breakthrough Therapy is defined as a drug that is intended, alone or in combination with one or more other
drugs, to treat a serious or life-threatening disease or condition, and preliminary clinical evidence indicates that the drug
may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as
substantial treatment effects observed early in clinical development. For drugs that have been designated as Breakthrough
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Therapies, interaction and communication between the FDA and the sponsor of the trial can help to identify the most
efficient path for clinical development while minimizing the number of patients placed in ineffective control regimens.
Drugs designated as Breakthrough Therapies by the FDA are also eligible for accelerated approval.
Designation as a Breakthrough Therapy is within the discretion of the FDA. Accordingly, even if we believe one
of our drug candidates meets the criteria for designation as a Breakthrough Therapy, the FDA may disagree and instead
determine not to make such designation. In any event, the receipt of a Breakthrough Therapy designation for a drug
candidate may not result in a faster development process, review or approval compared to drugs considered for approval
under conventional FDA procedures and does not assure ultimate approval by the FDA. In addition, even if one or more
of our drug candidates qualify as Breakthrough Therapies, the FDA may later decide that the drugs no longer meet the
conditions for qualification.
If we are unable to obtain and/or maintain CFDA approval for our drug candidates to be eligible for an expedited
registration pathway, the time and cost we incur to obtain regulatory approvals may increase. Even if we receive such
approvals, they may not lead to a faster development, review or approval process.
Under the Special Examination and Approval of the Registration of New Drugs provisions, the CFDA may grant
“green-channel” approval to (i) active ingredients and their preparations extracted from plants, animals and minerals, and
newly discovered medical materials and their preparations that have not been sold in the China market, (ii) chemical drugs
and their preparations and biological products that have not been approved for sale at its origin country or abroad, (iii) new
drugs with obvious clinical treatment advantages for such diseases as AIDS, therioma, and rare diseases, and (iv) new
drugs for diseases that have not been treated effectively. We have achieved green-channel approval from the CFDA for
savolitinib, fruquintinib, sulfatinib, epitinib and theliatinib. We anticipate that we may seek a green-channel development
pathway for certain of our other drug candidates and indications. If granted, the green-channel will enable us to establish
streamlined communication with the relevant review panel of the CFDA, thus improving the efficiency of new
drug approval.
A failure to obtain and/or maintain green-channel approval or any other form of expedited development, review
or approval for our drug candidates would result in a longer time period to commercialization of such drug candidate,
could increase the cost of development of such drug candidate and could harm our competitive position in the marketplace.
In addition, even if we obtain green-channel approval, there is no guarantee that we will experience a faster development
process, review or approval compared to non-accelerated registration pathways or that a drug candidate will ultimately be
approved for sale.
Even if we receive regulatory approval for any of our drug candidates, we will be subject to ongoing obligations and
continued regulatory review, which may result in significant additional expense.
If the FDA, CFDA or a comparable regulatory authority approves any of our drug candidates, the manufacturing
processes, labeling, packaging, distribution, adverse event reporting, storage, advertising, promotion and recordkeeping
for the drug will be subject to extensive and ongoing regulatory requirements. These requirements include submissions of
safety and other post-marketing information and reports, registration, as well as continued compliance with current Good
Manufacturing Practices, or GMPs, and GCPs. Any regulatory approvals that we receive for our drug candidates may also
be subject to limitations on the approved indicated uses for which the drug may be marketed or to the conditions of
approval, or contain requirements for potentially costly post-marketing testing, including Phase IV clinical trials, and
surveillance to monitor the safety and efficacy of the drug.
In addition, regulatory policies may change or additional government regulations may be enacted that could
prevent, limit or delay regulatory approval of our drug candidates. If we are slow or unable to adapt to changes in existing
requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we
may lose any regulatory approval that we may have obtained, which would adversely affect our business, prospects and
ability to achieve or sustain profitability.
We may be subject to penalties if we fail to comply with regulatory requirements or experience unanticipated problems
with any of our drugs that receive regulatory approval.
Once a drug is approved by the FDA, CFDA or a comparable regulatory authority for marketing, it is possible
that there could be a subsequent discovery of previously unknown problems with the drug, including problems with
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third-party manufacturers or manufacturing processes, or failure to comply with regulatory requirements. If any of the
foregoing occurs with respect to our drug products, it may result in, among other things:
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restrictions on the marketing or manufacturing of the drug, withdrawal of the drug from the market, or
drug recalls;
fines, warning letters or holds on clinical trials;
refusal by the FDA, CFDA or comparable regulatory authority to approve pending applications or
supplements to approved applications filed by us, or suspension or revocation of drug license approvals;
drug seizure or detention, or refusal to permit the import or export of drugs; and
injunctions or the imposition of civil or criminal penalties.
Any government investigation of alleged violations of law could require us to expend significant time and
resources and could generate negative publicity. If we or our collaborators are not able to maintain regulatory compliance,
regulatory approval that has been obtained may be lost and we may not achieve or sustain profitability, which would
adversely affect our business, prospects, financial condition and results of operations.
The incidence and prevalence for target patient populations of our drug candidates are based on estimates and
third-party sources. If the market opportunities for our drug candidates are smaller than we estimate or if any approval
that we obtain is based on a narrower definition of the patient population, our revenue and ability to achieve profitability
will be adversely affected, possibly materially.
Periodically, we make estimates regarding the incidence and prevalence of target patient populations for particular
diseases based on various third-party sources and internally generated analysis and use such estimates in making decisions
regarding our drug development strategy, including determining indications on which to focus in pre-clinical or clinical
trials.
These estimates may be inaccurate or based on imprecise data. For example, the total addressable market
opportunity will depend on, among other things, their acceptance by the medical community and patient access, drug
pricing and reimbursement. The number of patients in the addressable markets may turn out to be lower than expected,
patients may not be otherwise amenable to treatment with our drugs, or new patients may become increasingly difficult to
identify or gain access to, all of which would adversely affect our results of operations and our business.
Our future success depends on our ability to retain key executives and to attract, retain and motivate qualified
personnel.
We are highly dependent on the expertise of the members of our research and development team, as well as the
other principal members of our management, including Christian Hogg, our Chief Executive Officer and director, and
Weiguo Su, Ph.D., our Chief Scientific Officer. Although we have entered into employment letter agreements with our
executive officers, each of them may terminate their employment with us at any time with three months’ prior written
notice. We do not maintain “key person” insurance for any of our executives or other employees.
Recruiting and retaining qualified management, scientific, clinical, manufacturing and sales and marketing
personnel will also be critical to our success. The loss of the services of our executive officers or other key employees
could impede the achievement of our research, development and commercialization objectives and seriously harm our
ability to successfully implement our business strategy. Furthermore, replacing executive officers and key employees may
be difficult and may take an extended period of time because of the limited number of individuals in our industry with the
breadth of skills and experience required to successfully develop, gain regulatory approval of and commercialize drugs.
Competition to hire from this limited pool is intense, and we may be unable to hire, train, retain or motivate these key
personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for
similar personnel. We also experience competition for the hiring of scientific and clinical personnel from universities and
research institutions. Failure to succeed in clinical trials may make it more challenging to recruit and retain qualified
scientific personnel.
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Risks Related to Our Commercial Platform
As a significant portion of our Commercial Platform business, which consists of our Prescription Drugs and Consumer
Health divisions, is conducted through joint ventures, we are largely dependent on the success of our joint ventures
and our receipt of dividends or other payments from our joint ventures for cash to fund our operations.
We are party to joint venture agreements with our non-consolidated joint ventures Shanghai Pharmaceuticals and
Guangzhou Baiyunshan, which together form an important part of our Commercial Platform business. Our equity in the
earnings of these non-consolidated joint ventures was $23.6 million, $26.3 million and $70.5 million for the years ended
December 31, 2014, 2015 and 2016, respectively, as recorded in our consolidated financial statements. Furthermore, we
have consolidated joint ventures with each of Sinopharm and Hain Celestial which accounted for substantially all of our
Commercial Platform’s consolidated revenue for the years ended December 31, 2014, 2015 and 2016.
As a result, our ability to fund our operations and pay our expenses or to make future dividend payments, if any,
is largely dependent on the earnings of our joint ventures and the payment of those earnings to us in the form of dividends.
Payments to us by our joint ventures will be contingent upon our joint ventures’ earnings and other business considerations
and may be subject to statutory or contractual restrictions. Each joint venture’s ability to distribute dividends to us is
subject to approval by their respective boards of directors, which in the case of Shanghai Hutchison Pharmaceuticals and
Hutchison Baiyunshan are comprised of an equal number of representatives from each party.
Operationally, our joint venture partners have certain responsibilities and/or certain rights to exercise control or
influence over operations and decision-making under the joint venture arrangements. Therefore, the success of our joint
ventures depends on the efforts and abilities of our joint venture parties to varying degrees. For example, we share the
ability to appoint the general manager of our joint venture with Guangzhou Baiyunshan, with each of us having a rotating
four-year right, and therefore, our ability to manage the day-to-day operations of this joint venture is more limited. On the
other hand, we appoint the general managers of Hutchison Sinopharm and Shanghai Hutchison Pharmaceuticals pursuant
to the joint venture agreements governing these entities and therefore oversee the day-to-day management of these joint
ventures. However, we still rely on our joint venture partners Sinopharm and Shanghai Pharmaceuticals to provide certain
distribution and logistics services. See “—Risks Related to our Dependence on Third Parties—Joint ventures form an
important part of our Commercial Platform business, and our ability to manage and develop the businesses conducted by
these joint ventures depends in part on our relationship with our joint venture partners” for more information.
We intend to use our Commercial Platform’s Prescription Drugs business to commercialize our internally developed
drug candidates, but we may not be successful in adapting this business to successfully manufacture, sell and market
our drug candidates if and when they are approved, and we may not be able to generate any revenue from such products.
Our Prescription Drugs business is operated by our Shanghai Hutchison Pharmaceuticals and Hutchison
Sinopharm joint ventures and currently has a manufacturing, sales and marketing infrastructure in China. If our drug
candidates are approved, we intend to leverage our Prescription Drugs business to commercialize such drug candidates;
however, to do so, we must adapt our Prescription Drugs business to cater to oncology and/or immunology drug sales to
achieve commercial success for any approved drug candidate in these areas. In the future, we may need to expand the sales
and marketing team of these joint ventures or refocus their activities to some of our drug candidates if and when they
are approved.
There are risks involved with adapting our current Prescription Drugs business. For example, recruiting and/or
training a sales force in new therapeutic areas is time consuming and could delay any drug launch. Factors that may inhibit
our efforts to commercialize our drug candidates through our Prescription Drugs business include:
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our joint ventures’ inability to recruit and retain adequate numbers of effective sales and marketing
personnel;
the inability of our joint ventures’ sales personnel to obtain access to physicians or persuade adequate
numbers of physicians to prescribe any future drugs; and
the lack of complementary drugs to be offered by our joint ventures’ sales personnel, which may put our
joint ventures at a competitive disadvantage relative to companies with more extensive product lines.
In such case, our business, results of operations, financial condition and prospects will be materially and adversely
affected.
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Our Commercial Platform faces substantial competition.
Our Commercial Platform’s Prescription Drugs business competes in the pharmaceutical industry in China, which
is characterized by a number of established, large pharmaceutical companies, as well as some smaller emerging
pharmaceutical companies. Our Prescription Drugs business competes with pharmaceutical companies engaged in the
development, production, marketing or sales of prescription drugs, in particular cardiovascular drugs. The identities of the
key competitors with respect to our Prescription Drugs business vary by product and, in certain cases, competitors have
greater financial resources than us and may elect to focus these resources on developing, importing or in-licensing and
marketing products in the PRC that are substitutes for our products and may have broader sales and marketing
infrastructure with which to do so. Our Commercial Platform’s Consumer Health business also competes in a highly
fragmented market in Asia.
The products sold through our Commercial Platform, which may include our drug candidates if they receive
regulatory approval, may compete against products that have lower prices, superior performance, greater ease of
administration or other advantages compared to our products. In some circumstances, price competition may drive our
competitors to conduct illegal manufacturing processes to lower their manufacturing costs. Increased competition may
result in price reductions, reduced margins and loss of market share, whether achieved by either legal or illegal means, any
of which could materially and adversely affect our profit margins. We and our joint ventures may not be able to compete
effectively against current and future competitors.
If we are not able to maintain and enhance brand recognition of the Commercial Platform’s products to maintain its
competitive advantage, our reputation, business and operating results may be harmed.
We believe that market awareness of the products sold through our Commercial Platform, which include our joint
ventures’ branded products, such as Baiyunshan and Shang Yao, and the brands of third-party products which are
distributed through our joint ventures, such as AstraZeneca’s Seroquel, has contributed significantly to the success of our
Commercial Platform. We also believe that maintaining and enhancing such brands is critical to maintaining our
competitive advantage. Although the sales and marketing staff of our Commercial Platform will continue to further
promote such brands to remain competitive, they may not be successful. If our joint ventures are unable to further enhance
brand recognition and increase awareness of their products, or if they are compelled to incur excessive marketing and
promotion expenses in order to maintain brand awareness, our business and results of operations may be materially and
adversely affected. Furthermore, our results of operations could be adversely affected if the Baiyunshan and Shang Yao
brands, or the brands of any other products, or our reputation, are impaired by certain actions taken by our joint venture
partners, distributors, competitors or relevant regulatory authorities.
Reimbursement may not be available for the products currently sold through our Commercial Platform or our drug
candidates in China, the United States or other countries, which could diminish our sales or affect our profitability.
The regulations that govern pricing and reimbursement for pharmaceuticals vary widely from country to country.
Some countries require approval of the sale price of a drug before it can be marketed. In many countries, the pricing review
period begins after regulatory approval is granted. In some foreign markets, pharmaceutical pricing remains subject to
continuing governmental control even after initial approval is granted. Furthermore, once marketed and sold, government
authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which
medications they will pay for and establish reimbursement levels. Adverse pricing reimbursement levels may hinder
market acceptance of products sold by our Commercial Platform or drug candidates.
In China, for example, the Ministry of Labor and Social Security of the PRC or provincial or local labor and
social security authorities, together with other government authorities, review the inclusion or removal of drugs from the
PRC’s National Medical Insurance Catalogue or provincial or local medical insurance catalogues for the National Medical
Insurance Program every other year, and the tier under which a drug will be classified, both of which affect the amounts
reimbursable to program participants for their purchases of those medicines. These determinations are made based on a
number of factors, including price and efficacy. Depending on the tier under which a drug is classified in the provincial
medicine catalogue, a National Medical Insurance Program participant residing in that province can be reimbursed for the
full cost of Tier 1 medicine and for the majority of the cost of a Tier 2 medicine. In some instances, if the price range
designated by the local or provincial government decreases, it may adversely affect our business and could reduce our
total revenue or decrease our profit falls below production costs, we may stop manufacturing certain products. In addition,
in order to access certain local or provincial-level markets, our joint ventures are periodically required to enter into
competitive bidding processes for She Xiang Bao Xin pills (the best selling product of our Shanghai Hutchison
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Pharmaceuticals joint venture), Fu Fang Dan Shen tablets (the best selling product of our Hutchison Baiyunshan joint
venture) and other products with a pre-defined price range. The competitive bidding in effect sets price ceilings for those
products, thereby limiting our profitability.
In the United States, there have been and continue to be a number of legislative initiatives to contain healthcare
costs which may affect reimbursement rates of our drug candidates if approved. For example, in March 2010, the Patient
Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or the Affordable
Care Act, was passed, which substantially changes the way health care is financed by both governmental and private
insurers. The Affordable Care Act, among other things, subjects biologic products to potential competition by lower-cost
biosimilars and establishes annual fees and taxes on manufacturers of certain branded prescription drugs. It also establishes
a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of-sale
discounts off negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period as a
condition for the manufacturer’s outpatient drugs to be covered under Medicare Part D. In addition, other legislative
changes have been proposed and adopted in the United States since the Affordable Care Act was enacted.
Modifications to or repeal of all or certain provisions of the Healthcare Reform Act are expected as a result of the
outcome of the recent presidential election and Republicans maintaining control of Congress, consistent with statements
made by Donald Trump and members of Congress during the presidential campaign and following the election. We cannot
predict the ultimate content, timing or effect of any changes to the Healthcare Reform Act or other federal and state reform
efforts. There is no assurance that federal or state health care reform will not adversely affect our future business and
financial results. We expect that additional U.S. state and federal healthcare reform measures will be adopted in the future,
any of which could limit the amounts that federal and state governments will pay for healthcare products and services,
which could result in reduced demand for our drug candidates or additional pricing pressures. We expect that the
pharmaceutical industry will experience pricing pressures due to the increasing influence of managed care (and related
implementation of managed care strategies to control utilization), additional federal and state legislative and regulatory
proposals to regulate pricing of drugs, limit coverage of drugs or reduce reimbursement for drugs, public scrutiny and the
Trump administration’s agenda to control the price of pharmaceuticals through government negotiations of drug prices in
Medicare Part D and importation of cheaper products from abroad.
Moreover, eligibility for reimbursement in the United States does not imply that any drug will be paid for in all
cases or at a rate that covers our costs, including research, development, manufacture, sale and distribution. Interim
U.S. reimbursement levels for new drugs, if applicable, may also not be sufficient to cover our costs and may not be made
permanent. Reimbursement rates may vary according to the use of the drug and the clinical setting in which it is used, may
be based on reimbursement levels already set for lower cost drugs and may be incorporated into existing payments for
other services. Net prices for drugs may be reduced by mandatory discounts or rebates required by U.S. government
healthcare programs or private payors and by any future relaxation of laws that presently restrict imports of drugs from
countries where they may be sold at lower prices than in the United States. Third-party payors in the United States often
rely upon Medicare coverage policy and payment limitations in setting their own reimbursement policies. Our inability to
promptly obtain coverage and profitable payment rates from both government-funded and private payors for any approved
drugs that we develop could have a material adverse effect on our operating results, our ability to raise capital needed to
commercialize drugs and our overall financial condition.
Sales of products sold by our Prescription Drugs business rely on the ability to win tender bids for the medicine
purchases of hospitals in China.
Our Commercial Platform’s Prescription Drugs business markets to hospitals in China who may make bulk
purchases of a medicine only if that medicine is selected under a government-administered tender process. Periodically, a
bidding process is organized on a provincial or municipal basis. Whether a drug manufacturer is invited to participate in
the tender depends on the level of interest that hospitals have in purchasing this drug. The interest of a hospital in a
medicine is evidenced by:
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the inclusion of this medicine on the hospital’s formulary, which establishes the scope of drug physicians
at this hospital may prescribe to their patients, and
the willingness of physicians at this hospital to prescribe a particular drug to their patients.
We believe that effective marketing efforts are critical in making and keeping hospitals interested in purchasing
the Prescription Drugs sold through our Commercial Platform so that we and our joint ventures are invited to submit the
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products to the tender. Even if we and our joint ventures are invited to do so, competitors may be able to substantially
reduce the price of their products or services. If competitors are able to offer lower prices, our and our joint ventures’
ability to win tender bids during the hospital tender process will be materially affected, and could reduce our total revenue
or decrease our profit.
Counterfeit products in China could negatively impact our revenue, brand reputation, business and results
of operations.
Our Commercial Platform’s products are subject to competition from counterfeit products, especially counterfeit
pharmaceuticals which are manufactured without proper licenses or approvals and are fraudulently mislabeled with respect
to their content and/or manufacturer. Counterfeiters may illegally manufacture and market products under our or our joint
venture’s brand names, the brand names of the third-party products we or they sell, or those of our or their competitors.
Counterfeit pharmaceuticals are generally sold at lower prices than the authentic products due to their low production
costs, and in some cases are very similar in appearance to the authentic products. Counterfeit pharmaceuticals may or may
not have the same chemical content as their authentic counterparts. If counterfeit pharmaceuticals illegally sold under our
or our joint ventures’ brand names or the brand names of third-party products we or they sell result in adverse side effects
to consumers, we or our joint ventures may be associated with any negative publicity resulting from such incidents. In
addition, consumers may buy counterfeit pharmaceuticals that are in direct competition with the products sold through our
Commercial Platform, which could have an adverse impact on our revenue, business and results of operations. The
proliferation of counterfeit pharmaceuticals in China and globally may grow in the future. Any such increase in the sales
and production of counterfeit pharmaceuticals in China, or the technological capabilities of the counterfeiters, could
negatively impact our revenue, brand reputation, business and results of operations.
Pharmaceutical companies in China are required to comply with extensive regulations and hold a number of permits
and licenses to carry on their business. Our and our joint ventures’ ability to obtain and maintain these regulatory
approvals is uncertain, and future government regulation may place additional burdens on the Commercial Platform
business.
The pharmaceutical industry in China is subject to extensive government regulation and supervision. The
regulatory framework addresses all aspects of operating in the pharmaceutical industry, including approval, production,
distribution, advertising, licensing and certification requirements and procedures, periodic renewal and reassessment
processes, registration of new drugs and environmental protection. Violation of applicable laws and regulations may
materially and adversely affect our business. In order to manufacture and distribute pharmaceutical products in China, we
and our joint ventures are required to:
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obtain a pharmaceutical manufacturing permit and GMP certificate for each production facility from the
relevant food and drug administrative authority;
obtain a drug registration certificate, which includes a drug approval number, from the CFDA for each
drug manufactured by us;
obtain a pharmaceutical distribution permit and good supply practice, or GSP, certificate from the
CFDA; and
renew the pharmaceutical manufacturing permits, the pharmaceutical distribution permits, drug
registration certificates, GMP certificates and GSP certificates every five years, among other
requirements.
If we or our joint ventures are unable to obtain or renew such permits or any other permits or licenses required
for our or their operations, we will not be able to engage in the manufacture and distribution of our products and our
business may be adversely affected.
The regulatory framework regarding the pharmaceutical industry in China is subject to change and amendment
from time to time. Any such change or amendment could materially and adversely impact our business, financial condition
and results of operations. The PRC government has introduced various reforms to the Chinese healthcare system in recent
years and may continue to do so, with an overall objective to expand basic medical insurance coverage and improve the
quality and reliability of healthcare services. The specific regulatory changes under the reform still remain uncertain. The
implementing measures to be issued may not be sufficiently effective to achieve the stated goals, and as a result, we may
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not be able to benefit from such reform to the level we expect, if at all. Moreover, the reform could give rise to regulatory
developments, such as more burdensome administrative procedures, which may have an adverse effect on our business
and prospects.
For further information regarding government regulation in China and other jurisdictions, see Item 4.B. “Business
Overview—Regulation—Government Regulation of Pharmaceutical Product Development and Approval,” “Business
Overview—Regulation—Coverage and Reimbursement” and “Business Overview—Regulation—Other Healthcare
Laws.”
Rapid changes in the pharmaceutical industry may render our Commercial Platform’s current products or our drug
candidates obsolete.
Future technological improvements by our competitors and continual product developments in the pharmaceutical
market may render our and our joint ventures’ existing products, our or their third-party licensed products or our drug
candidates obsolete or affect our Commercial Platform’s viability and competitiveness. Therefore, our Commercial
Platform’s future success will largely depend on our and our joint ventures’ ability to:
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improve existing products;
develop innovative drug candidates;
diversify the product and drug candidate portfolio;
license diverse third-party products; and
develop new and competitively priced products which meet the requirements of the constantly changing
market.
If we or our joint ventures fail to respond to this environment by improving our Commercial Platform’s existing
products, licensing new third-party products or developing new drug candidates in a timely fashion, or if such new or
improved products do not achieve adequate market acceptance, our business and profitability may be materially and
adversely affected.
Our Commercial Platform’s principal products involve the cultivation or sourcing of key raw materials including
botanical products, and any quality control or supply failure or price fluctuations could adversely affect our
Commercial Platform’s ability to manufacture our products and/or could materially and adversely affect our operating
results.
The key raw materials used in the manufacturing process of certain of our Commercial Platform’s principal
products are medicinal herbs whose properties are related to the regions and climatic conditions in which they are grown.
Access to quality raw materials and products necessary for the manufacture of our Commercial Platform products is not
guaranteed. We rely on a combination of materials grown by our or our joint ventures’ good agriculture practice, or
GAP-certified entities and materials sourced from third-party growers and suppliers. The availability, quality and prices
of these raw materials are dependent on and closely affected by weather conditions and other seasonal factors which have
an impact on the yields of the harvests each year. The quality, in some instances, also depends on the operations of
third-party growers or suppliers. There is a risk that such growers or suppliers sell or attempt to sell us or our joint ventures
raw materials which are not authentic. If there is any supply interruption for an indeterminate period of time, our joint
ventures may not be able to identify and obtain alternative supplies that comply with our quality standards in a timely
manner. Any supply disruption could adversely affect our ability to satisfy demand for our products, and materially and
adversely affect our product sales and operating results. Moreover, any use by us or our joint ventures of unauthentic
materials illegally sold to us by third-party growers or suppliers in our or our joint ventures’ products may result in adverse
side effects to the consumers, negative publicity, or product liability claims against us or our joint ventures, any of which
may materially and adversely affect our operating results.
The prices of necessary raw materials and products may be subject to price fluctuations according to market
conditions, and any sudden increases in demand in the case of a widespread illness such as SARS, MERS or avian flu may
impact the costs of production. For example, the market price of Sanqi, one of the main natural raw materials in Hutchison
Baiyunshan’s Fu Fang Dan Shen tablets, fluctuated significantly between 2009 and 2016. Our Commercial Platform
sources Sanqi and other necessary raw materials on a purchase order basis and does not have long-term supply contracts
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in place so that it can manage inventory levels to reduce its risk to price fluctuations; however, we cannot guarantee that
we or our joint ventures will be successful. Raw material price fluctuations could increase the cost to manufacture our
Commercial Platform’s products and adversely affect our operating results.
Adverse publicity associated with our company, our joint ventures or our or their products or third-party licensed
products or similar products manufactured by our competitors could have a material adverse effect on our results
of operations.
Sales of the Commercial Platform’s products are highly dependent upon market perceptions of the safety and
quality of our and our joint ventures’ products and the third-party products we and they distribute. Concerns over the safety
of biopharmaceutical products manufactured in China could have an adverse effect on the reputation of our industry and
the sale of such products, including products manufactured or distributed by us and our joint ventures.
We could be adversely affected if any of our or our joint ventures’ products, third-party licensed products or any
similar products manufactured by other companies prove to be, or are alleged to be, harmful to patients. Any negative
publicity associated with severe adverse reactions or other adverse effects resulting from patients’ use or misuse of our
and our joint ventures’ products or any similar products manufactured by other companies could also have a material
adverse impact on our results of operations. We and our joint ventures have not, to date, experienced any significant quality
control or safety problems. If in the future we or our joint ventures become involved in incidents of the type described
above, such problems could severely and adversely impact our financial position and reputation.
We are dependent on our joint ventures’ production facilities in Shanghai, Guangzhou and Anhui, China for the
manufacture of our principal Commercial Platform products.
The principal products sold by our Commercial Platform are mainly produced or expected to be produced at our
joint ventures’ manufacturing facilities in Shanghai, Guangzhou and Anhui, China. A significant disruption at those
facilities, even on a short-term basis, could impair our joint ventures’ ability to timely produce and ship products, which
could have a material adverse effect on our business, financial position and results of operations.
Our joint ventures’ manufacturing operations are vulnerable to interruption and damage from natural and other
types of disasters, including earthquake, fire, floods, environmental accidents, power loss, communications failures and
similar events. If any disaster were to occur, our ability to operate our or our joint ventures’ business at these facilities
would be materially impaired. In addition, the nature of our production and research activities could cause significant
delays in our programs and make it difficult for us to recover from a disaster. We and our joint ventures maintain insurance
for business interruptions to cover some of our potential losses; however, such disasters could still disrupt our operations
and thereby result in substantial costs and diversion of resources.
In addition, our and our joint ventures’ production process requires a continuous supply of electricity. We and
they have encountered power shortages historically due to restricted power supply to industrial users during summers
when the usage of electricity is high and supply is limited or as a result of damage to the electricity supply network.
Because the duration of those power shortages was brief, they had no material impact on our or their operations.
Interruptions of electricity supply could result in lengthy production shutdowns, increased costs associated with restarting
production and the loss of production in progress. Any major suspension or termination of electricity or other unexpected
business interruptions could have a material adverse impact on our business, financial condition and results of operations.
Risks Related to our Dependence on Third Parties
Disagreements with our current or future collaboration partners, or the termination of any collaboration arrangement,
could cause delays in our product development and materially and adversely affect our business.
Our collaborations with AstraZeneca, Eli Lilly and Nestlé Health Science and any future collaborations that we
enter into may not be successful. Disagreements between parties to a collaboration arrangement regarding clinical
development and commercialization matters can lead to delays in the development process or commercializing the
applicable drug candidate and, in some cases, termination of the collaboration arrangement. Because, among other things,
we are much smaller than our collaboration partners and because they or their affiliates may sell competing products, our
interests may not always be aligned. This may result in potential conflicts between our collaborators and us on matters that
we may not be able to resolve on favorable terms or at all.
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Collaborations with pharmaceutical or biotechnology companies and other third parties, including our existing
agreements with AstraZeneca, Eli Lilly and Nestlé Health Science, are often terminable by the other party for any reason
with certain advance notice. For example, we had a collaboration arrangement with Janssen Pharmaceuticals, Inc., or
Janssen, with respect to the development of a compound for a specific target related to inflammation and immunology, but
Janssen gave notice to terminate the arrangement following their scientific review of the compound effective
November 2015. Any such termination or expiration would adversely affect us financially and could harm our business
reputation. For instance, in the event one of the strategic alliances with a current collaborator is terminated, we may require
significant time and resources to secure a new collaboration partner, if we are able to secure such an arrangement at all.
As noted in the following risk factor, establishing new collaboration arrangements can be challenging and time-consuming.
The loss of existing or future collaboration arrangements would not only delay or potentially terminate the possible
development or commercialization of products we may derive from our technologies, but it may also delay or terminate
our ability to test specific target candidates.
We rely on our collaborations with third parties for certain of our drug development activities, and, if we are unable to
establish new collaborations when desired on commercially attractive terms or at all, we may have to alter our
development and commercialization plans.
Certain of our drug development programs and the potential commercialization of certain drug candidates rely
on collaborations with AstraZeneca, Eli Lilly and Nestlé Health Science. In the future, we may decide to collaborate with
additional pharmaceutical and biotechnology companies for the development and potential commercialization of our other
drug candidates.
We face significant competition in seeking appropriate collaborators. Whether we reach a definitive agreement
for collaboration will depend, among other things, upon our assessment of the collaborator’s resources and expertise, the
terms and conditions of the proposed collaboration and the proposed collaborator’s evaluation of a number of factors.
Those factors may include the design or results of clinical trials, the likelihood of approval by the FDA, CFDA or similar
regulatory authorities outside the United States and China, the potential market for the subject drug candidate, the costs
and complexities of manufacturing and delivering such drug candidate to patients, the potential of competing drugs, the
existence of uncertainty with respect to our ownership of technology, which can exist if there is a challenge to such
ownership without regard to the merits of the challenge and industry and market conditions generally. The collaborator
may also consider alternative drug candidates or technologies for similar indications that may be available to collaborate
on and whether such collaboration could be more attractive than the one with us for our drug candidate. The terms of any
additional collaboration or other arrangements that we may establish may not be favorable to us.
We may also be restricted under existing collaboration agreements from entering into future agreements on certain
terms with potential collaborators. Collaborations are complex and time-consuming to negotiate and document. In addition,
there have been a significant number of recent business combinations among large pharmaceutical companies that have
resulted in a reduced number of potential future collaborators.
We may not be able to negotiate additional collaborations on a timely basis, on acceptable terms, or at all. If we
are unable to do so, we may have to curtail the development of the drug candidate for which we are seeking to collaborate,
reduce or delay its development program or one or more of our other development programs, delay its potential
commercialization or reduce the scope of any sales or marketing activities, or increase our expenditures and undertake
development or commercialization activities at our own expense. If we elect to increase our expenditures to fund
development or commercialization activities on our own, we may need to obtain additional capital, which may not be
available to us on acceptable terms or at all. If we do not have sufficient funds, we may not be able to further develop our
drug candidates or bring them to market and generate drug revenue.
Further development and commercialization of our own drug candidates will depend, in part, on strategic alliances
with our collaborators. If our collaborators do not diligently pursue product development efforts, impeding our ability
to collect milestone and royalty payments, our progress may be delayed and our revenue may be deferred.
We rely and expect to continue to rely, to some extent, on our collaborators to provide funding in support of our
own independent research and pre-clinical and clinical testing. We do not currently possess the financial resources
necessary to fully develop and commercialize each of our drug candidates or the resources or capabilities to complete the
lengthy regulatory approval processes that may be required for our drug candidates. Therefore, we rely and plan to continue
to rely on strategic alliances to financially help us develop and commercialize certain of our drug candidates. As a result,
our success depends, in part, on our ability to collect milestone and royalty payments from our existing collaborators,
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AstraZeneca, Eli Lilly, Nestlé Health Science and potential new collaborators. To the extent our collaborators do not
aggressively pursue drug candidates for which we are entitled to such payments or pursue such drug candidates
ineffectively, we will fail to realize these significant revenue streams, which could have an adverse effect on our business
and future prospects.
If the alliances we currently have with AstraZeneca, Eli Lilly and Nestlé Health Science, or future collaborators
with whom we may engage, are unable or unwilling to advance our programs, or if they do not diligently pursue product
development and product approval, this may slow our progress and defer our revenue. Any such failure would have an
adverse effect on our ability to collect key revenue streams and, for this reason, would adversely impact our business,
financial position and prospects. Our collaborators may sub-license or abandon drug candidates or we may have
disagreements with our collaborators, which would cause associated product development to slow or cease. There can be
no assurance that our current strategic alliances will be successful, and we may require significant time to secure new
strategic alliances because we need to effectively market the benefits of our technology to these future alliance partners,
which may direct the attention and resources of our research and development personnel and management away from our
primary business operations. Further, each strategic alliance arrangement will involve the negotiation of terms that may
be unique to each collaborator. These business development efforts may not result in a strategic alliance or may result in
unfavorable arrangements.
Under typical collaboration agreements, we would expect to receive revenue for our selective kinase inhibitors
based on achievement of specific development, sales or regulatory approval milestones, as well as royalties based on a
percentage of sales of the commercialized products. Achieving these milestones will depend, in part, on the efforts of our
partner as well as our own. If we, or any alliance partner, fail to meet specific milestones, then the strategic alliance may
be terminated, which could reduce our revenue.
The third-party vendors upon whom we rely for the supply of the active pharmaceutical ingredient, drug product and
drug substance used in our drug candidates are our sole source of supply, and the loss of any of these suppliers could
significantly harm our business.
The active pharmaceutical ingredients, or API, drug product and drug substance used in our drug candidates are
supplied to us from third-party vendors. Our ability to successfully develop our drug candidates, and to ultimately supply
our commercial drugs in quantities sufficient to meet the market demand, depends in part on our ability to obtain the API,
drug product and drug substance for these drugs in accordance with regulatory requirements and in sufficient quantities
for commercialization and clinical testing. While we do produce small amounts of API, we do not currently have
arrangements in place for a redundant or second-source supply of any such API, drug product or drug substance in the
event any of our current suppliers of such API, drug product and drug substance cease their operations for any reason,
which may lead to an interruption in our production.
For all of our drug candidates, we intend to identify and qualify additional manufacturers to provide such API,
drug product and drug substance prior to submission of an NDA to the FDA and/or CFDA. We are not certain, however,
that our current suppliers will be able to meet our demand for their products, either because of the nature of our agreements
with those suppliers, our limited experience with those suppliers or our relative importance as a customer to those suppliers.
It may be difficult for us to assess their ability to timely meet our demand in the future based on past performance. While
our suppliers have generally met our demand for their products on a timely basis in the past, they may subordinate our
needs in the future to their other customers.
Establishing additional or replacement suppliers for the API, drug product and drug substance used in our drug
candidates, if required, may not be accomplished quickly. If we are able to find a replacement supplier, such replacement
supplier would need to be qualified and may require additional regulatory approval, which could result in further delay.
While we seek to maintain adequate inventory of the API, drug product and drug substance used in our drug candidates,
any interruption or delay in the supply of components or materials, or our inability to obtain such API, drug product and
drug substance from alternate sources at acceptable prices in a timely manner could impede, delay, limit or prevent our
development efforts, which could harm our business, results of operations, financial condition and prospects.
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We and our collaborators rely, and expect to continue to rely, on third parties to conduct certain of our clinical trials
for our drug candidates. If these third parties do not successfully carry out their contractual duties, comply with
regulatory requirements or meet expected deadlines, we may not be able to obtain regulatory approval for or
commercialize our drug candidates and our business could be harmed.
We do not have the ability to independently conduct large-scale clinical trials. We and our collaboration partners
rely, and expect to continue to rely, on medical institutions, clinical investigators, contract laboratories and other third
parties, such as CROs, to conduct or otherwise support certain clinical trials for our drug candidates. Nevertheless, we and
our collaboration partners (as applicable) will be responsible for ensuring that each clinical trial is conducted in accordance
with the applicable protocol, legal and regulatory requirements and scientific standards, and reliance on CROs will not
relieve us of our regulatory responsibilities. For any violations of laws and regulations during the conduct of clinical trials
for our drug candidates, we could be subject to warning letters or enforcement action that may include civil penalties up
to and including criminal prosecution.
Although we or our collaboration partners design the clinical trials for our drug candidates, CROs conduct most
of the clinical trials. As a result, many important aspects of our development programs, including their conduct and timing,
are outside of our direct control. Our reliance on third parties to conduct clinical trials results in less control over the
management of data developed through clinical trials than would be the case if we were relying entirely upon our own
staff. Communicating with outside parties can also be challenging, potentially leading to mistakes as well as difficulties
in coordinating activities. Outside parties may:
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have staffing difficulties;
fail to comply with contractual obligations;
experience regulatory compliance issues;
undergo changes in priorities or become financially distressed; or
form relationships with other entities, some of which may be our competitors.
These factors may materially and adversely affect the willingness or ability of third parties to conduct our and
our collaboration partners’ clinical trials and may subject us or them to unexpected cost increases that are beyond our or
their control.
If any of our and our collaboration partners’ relationships with these third-party CROs terminate, we or they may
not be able to enter into arrangements with alternative CROs on reasonable terms or at all. If CROs do not successfully
carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced or if the quality or
accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols, regulatory
requirements or for other reasons, any clinical trials such CROs are associated with may be extended, delayed or
terminated, and we may not be able to obtain regulatory approval for or successfully commercialize our drug candidates.
As a result, we believe that our financial results and the commercial prospects for our drug candidates in the subject
indication would be harmed, our costs could increase and our ability to generate revenue could be delayed.
We, our collaboration partners or our CROs may fail to comply with the regulatory requirements pertaining to clinical
trials, which could result in fines, adverse publicity and civil or criminal sanctions.
We, our collaboration partners and our CROs are required to comply with regulations for conducting, monitoring,
recording and reporting the results of clinical trials to ensure that the data and results are scientifically credible and
accurate, and that the trial patients are adequately informed of the potential risks of participating in clinical trials and their
rights are protected. These regulations are enforced by the FDA, the CFDA and comparable foreign regulatory authorities
for any drugs in clinical development. In the United States, the FDA regulates GCP through periodic inspections of clinical
trial sponsors, principal investigators and trial sites. If we, our collaboration partners or our CROs fail to comply with
applicable GCPs, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or comparable
foreign regulatory authorities may require additional clinical trials before approving the marketing applications for the
relevant drug candidate. We cannot assure you that, upon inspection, the FDA or other applicable regulatory authority will
determine that any of the future clinical trials for our drug candidates will comply with GCPs. In addition, clinical trials
must be conducted with drug candidates produced under applicable GMP regulations. Our failure or the failure of our
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collaboration partners or CROs to comply with these regulations may require us or them to repeat clinical trials, which
would delay the regulatory approval process and could also subject us to enforcement action. We are also required to
register applicable clinical trials and post certain results of completed clinical trials on a government-sponsored database,
ClinicalTrials.gov, within certain timeframes. Failure to do so can result in fines, adverse publicity and civil sanctions.
Joint ventures form an important part of our Commercial Platform business, and our ability to manage and develop
the businesses conducted by these joint ventures depends in part on our relationship with our joint venture partners.
We are party to joint venture agreements with each of Shanghai Pharmaceuticals, Guangzhou Baiyunshan,
Sinopharm and Hain Celestial, which together form an important part of our Commercial Platform business. Under these
arrangements, our joint venture partners have certain operational responsibilities and/or certain rights to exercise control
or influence over operations and decision-making.
Our equity interests in these operating companies do not provide us with the ability to control actions which
require shareholder approval. In addition, under the joint venture contracts for these entities, the consent of the directors
nominated by our joint venture partners is required for the passing of resolutions in relation to certain matters concerning
the operations of these companies. As a result, although we participate in the management, and in the case of Sinopharm
and Shanghai Pharmaceuticals nominate the management and run the day-to-day operations, we may not be able to secure
the consent of our joint venture partners to pursue activities or strategic objectives that are beneficial to or that facilitate
our overall business strategies. With respect to Hutchison Baiyunshan, which is a jointly controlled and managed joint
venture where we share the ability to appoint the general manager with our partner Guangzhou Baiyunshan, with each of
us having a rotating four-year right, we rely on our relationship with our partner, and our ability to manage the day-to-day
operations of this joint venture is more limited. To the extent Guangzhou Baiyunshan does not, for example, diligently
perform its responsibilities with respect to any aspect of Hutchison Baiyunshan’s operations, agree with or cooperate in
the implementation of any plans we may have for Hutchison Baiyunshan’s business in the future or take steps to ensure
that Hutchison Baiyunshan is in compliance with applicable laws and regulations, our business and ability to comply with
legal, regulatory and financial reporting requirements which will apply to us as a public company, as well as the results of
this joint venture, could be materially and adversely affected. Furthermore, disagreements or disputes which arise between
us and our joint venture partners may potentially require legal action to resolve and hinder the smooth operation of our
Commercial Platform business or adversely affect our financial condition, results of operations and prospects.
We and our joint ventures rely on our distributors for logistics and distribution services for our Commercial Platform
business.
We and our joint ventures rely on distributors to perform certain operational activities, including invoicing,
logistics and delivery of the products we and they market to the end customers. Because we and our joint ventures rely on
third-party distributors, we have less control than if we handled distribution logistics directly and can be adversely
impacted by the actions of our distributors. Any disruption of our distribution network, including failure to renew existing
distribution agreements with desired distributors, could negatively affect our ability to effectively sell our products and
materially and adversely affect the business, financial condition and results of operations of us and our joint ventures.
There is no assurance that the benefits currently enjoyed by virtue of our association with CK Hutchison will continue
to be available.
Historically, we have relied on the reputation and experience of, and support provided by, our founding
shareholder, Hutchison Whampoa Limited (a wholly owned subsidiary of CK Hutchison), to advance our joint ventures
and collaborations in China and elsewhere. CK Hutchison is a Hong Kong-based, multinational conglomerate with
operations in over 50 countries. CK Hutchison is the ultimate parent company of Hutchison Healthcare Holdings Limited,
which as of February 28, 2017, owns 60.4% of our total outstanding share capital. We believe that CK Hutchison group’s
reputation in China has given us an advantage in negotiating collaborations and obtaining opportunities.
We also benefit from sharing certain services with the CK Hutchison group including, among others, legal and
regulatory services, company secretarial support services, tax and internal audit services, shared use of accounting software
system and related services, participation in the CK Hutchison group’s pension, medical and insurance plans, participation
in the CK Hutchison group’s procurement projects with third-party vendors/suppliers, other staff benefits and staff training
services, company functions and activities and operation advisory and support services. We pay a management fee to an
affiliate of CK Hutchison for the provision of such services. In the years ended December 31, 2014, 2015 and 2016, we
paid a management fee of approximately $989,000, $845,000 and $874,000, respectively. In addition, we benefit from the
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fact that two retail chains affiliated with the CK Hutchison group, PARKnSHOP and Watsons, sell certain of our
Commercial Platform products in their stores throughout Hong Kong and in other Asian countries. For the years ended
December 31, 2014, 2015 and 2016, sales of our products to members of the CK Hutchison group amounted to
$7.8 million, $8.1 million and $9.8 million, respectively.
Our business also depends on certain intellectual property rights licensed to us by the CK Hutchison group. See
“—Risks Related to Intellectual Property—We and our joint ventures are dependent on trademark and other intellectual
property rights licensed from others. If we lose our licenses for any of our products, we or our joint ventures may not be
able to continue developing such products or may be required to change the way we market such products” for more
information on risks associated with such intellectual property licensed to us.
There can be no assurance the CK Hutchison group will continue to provide the same benefits or support that
they have provided to our business historically. Such benefit or support may no longer be available to us, in particular, if
CK Hutchison’s ownership interest in our company significantly decreases in the future.
Other Risks and Risks Related to Doing Business in China
We and our joint ventures may be exposed to liabilities under the U.S. Foreign Corrupt Practices Act, or FCPA, the
Bribery Act 2010 of the Parliament of the United Kingdom, or U.K. Bribery Act, and Chinese anti-corruption laws, and
any determination that we have violated these laws could have a material adverse effect on our business or
our reputation.
In the day-to-day conduct of our business, we and our joint ventures are in frequent contact with persons who
may be considered government officials under applicable anti-corruption, anti-bribery and anti-kickback laws, and
therefore, we and our joint ventures are subject to risk of violations under the FCPA, the U.K. Bribery Act, and other laws
in the countries where we do business. We and our joint ventures have operations, agreements with third parties and we
and our joint ventures make most of our sales in China. The PRC also strictly prohibits bribery of government officials.
Our and our joint ventures’ activities in China create the risk of unauthorized payments or offers of payments by the
directors, employees, representatives, distributors, consultants or agents of our company or our joint ventures, even though
they may not always be subject to our control.
It is our policy to implement safeguards to discourage these practices by our and our joint ventures’ employees.
We have implemented and adopted policies designed by the R&D-based Pharmaceutical Association Committee, an
industry association representing 38 global biopharmaceutical companies, to ensure compliance by us and our joint
ventures and our and their directors, officers, employees, representatives, distributors, consultants and agents with the
anti-corruption laws and regulations. We cannot assure you, however, that our existing safeguards are sufficient or that
our or our joint venture’s directors, officers, employees, representatives, distributors, consultants and agents have not
engaged and will not engage in conduct for which we may be held responsible, nor can we assure you that our business
partners have not engaged and will not engage in conduct that could materially affect their ability to perform their
contractual obligations to us or even result in our being held liable for such conduct. Violations of the FCPA, the
U.K. Bribery Act or Chinese anti-corruption laws may result in severe criminal or civil sanctions, and we may be subject
to other liabilities, which could have a material adverse effect on our business, reputation financial condition, cash flows
and results of operations.
Ensuring that our and our joint ventures’ future business arrangements with third parties comply with applicable
laws could also involve substantial costs. It is possible that governmental authorities will conclude that our business
practices do not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or
other healthcare laws and regulations. If our or our joint ventures’ operations were found to be in violation of any of these
laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and
administrative penalties, damages, fines, disgorgement, individual imprisonment and exclusion from government funded
healthcare programs, any of which could substantially disrupt our operations. If the physicians, hospitals or other providers
or entities with whom we and our joint ventures do business are found not to be in compliance with applicable laws, they
may also be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare
programs.
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If we or our joint ventures fail to comply with environmental, health and safety laws and regulations, we or they could
become subject to fines or penalties or incur costs that could have a material adverse effect on the success of
our business.
We and our joint ventures are subject to numerous environmental, health and safety laws and regulations,
including those governing laboratory procedures and the handling, use, storage, treatment and disposal of hazardous
materials and wastes. Our operations involve the use of hazardous and flammable materials, including chemical materials.
Our operations also produce hazardous waste products. We and our joint ventures are therefore subject to PRC laws and
regulations concerning the discharge of waste water, gaseous waste and solid waste during our manufacturing processes.
We and our joint ventures are required to establish and maintain facilities to dispose of waste and report the volume of
waste to the relevant government authorities, which conduct scheduled or unscheduled inspections of our facilities and
treatment of such discharge. We and our joint ventures may not at all times comply fully with environmental regulations.
Any violation of these regulations may result in substantial fines, criminal sanctions, revocations of operating permits,
shutdown of our facilities and obligation to take corrective measures. We and our joint ventures generally contract with
third parties for the disposal of these materials and waste. We and our joint ventures cannot eliminate the risk of
contamination or injury from these materials. In the event of contamination or injury resulting from the use of hazardous
materials, we and/or our joint ventures could be held liable for any resulting damages, and any liability could exceed our
resources. We and/or our joint ventures also could incur significant costs associated with civil or criminal fines
and penalties.
Although we and our joint ventures maintain workers’ compensation insurance to cover costs and expenses
incurred due to on-the-job injuries to our employees and third party liability insurance for injuries caused by unexpected
seepage, pollution or contamination, this insurance may not provide adequate coverage against potential liabilities.
Furthermore, the PRC government may take steps towards the adoption of more stringent environmental regulations. Due
to the possibility of unanticipated regulatory or other developments, the amount and timing of future environmental
expenditures may vary substantially from those currently anticipated. If there is any unanticipated change in the
environmental regulations, we and our joint ventures may need to incur substantial capital expenditures to install, replace,
upgrade or supplement our equipment or make operational changes to limit any adverse impact or potential adverse impact
on the environment in order to comply with new environmental protection laws and regulations. If such costs become
prohibitively expensive, we may be forced to cease certain aspects of our or our joint ventures’ business operations.
Product liability claims or lawsuits could cause us or our joint ventures to incur substantial liabilities.
We and our joint ventures face an inherent risk of product liability exposure related to the use of our drug
candidates in clinical trials, sales of our or our joint ventures’ products or the products we or they license from third parties
through our Commercial Platform. If we and our joint ventures cannot successfully defend against claims that the use of
such drug candidates in our clinical trials or any products sold through our Commercial Platform, including any of our
drug candidates which receive regulatory approval, caused injuries, we and our joint ventures could incur substantial
liabilities. Regardless of merit or eventual outcome, liability claims may result in:
(cid:120)
(cid:120)
decreased demand for any products sold through our Commercial Platform;
significant negative media attention and reputational damage;
(cid:120) withdrawal of clinical trial participants;
(cid:120)
(cid:120)
(cid:120)
(cid:120)
significant costs to defend the related litigation;
substantial monetary awards to trial participants or patients;
loss of revenue; and
the inability to commercialize any drug candidates that we may develop.
Existing PRC laws and regulations do not require us or our joint ventures to have, nor do we or they, maintain
liability insurance to cover product liability claims. We and our joint ventures do not have business liability, or in particular,
product liability for each of our drug candidates or certain of our or their products. Any litigation might result in substantial
costs and diversion of resources. While we and our joint ventures maintain liability insurance for certain clinical trials, this
insurance may not fully cover our potential liabilities. Inability to obtain sufficient insurance coverage at an acceptable
34
cost or otherwise to protect against potential product liability claims could prevent or inhibit the commercialization of
products that we or our collaborators develop.
The PRC’s economic, political and social conditions, as well as governmental policies, could affect the business
environment and financial markets in China, our ability to operate our business, our liquidity and our access to capital.
Substantially all of our and our joint ventures’ business operations are conducted in China. Accordingly, our
results of operations, financial condition and prospects are subject to a significant degree to economic, political and legal
developments in China. China’s economy differs from the economies of developed countries in many respects, including
with respect to the amount of government involvement, level of development, growth rate, control of foreign exchange
and allocation of resources. While the PRC economy has experienced significant growth in the past 30 years, growth has
been uneven across different regions and among various economic sectors of China. The PRC government has
implemented various measures to encourage economic development and guide the allocation of resources. Some of these
measures benefit the overall PRC economy, but may have a negative effect on us or our joint ventures. For example, our
financial condition and results of operations may be adversely affected by government control over capital investments or
changes in tax regulations that are applicable to us or our joint ventures. More generally, if the business environment in
China deteriorates from the perspective of domestic or international investors, our or our joint ventures’ business in China
may also be adversely affected.
Uncertainties with respect to the PRC legal system and changes in laws, regulations and policies in China could
materially and adversely affect us.
We conduct our business primarily through our subsidiaries and joint ventures in China. PRC laws and regulations
govern our and their operations in China. Our subsidiaries and joint ventures are generally subject to laws and regulations
applicable to foreign investments in China, which may not sufficiently cover all of the aspects of our or their economic
activities in China. In particular, some laws, particularly with respect to drug price reimbursement, are relatively new, and
because of the limited volume of published judicial decisions and their non-binding nature, the interpretation and
enforcement of these laws and regulations are uncertain. Furthermore, regulatory reform in the China pharmaceutical
industry, expected to be announced in 2017, appears that it might limit the number of distributors allowed between a
manufacturer and each hospital to one, which may limit the rate of sales growth of Hutchison Sinopharm in future periods.
In addition, the implementation of laws and regulations may be in part based on government policies and internal rules
that are subject to the interpretation and discretion of different government agencies (some of which are not published on
a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware of our or our joint ventures’
violation of these policies and rules until some time after the violation. In addition, any litigation in China, regardless of
outcome, may be protracted and result in substantial costs and diversion of resources and management attention.
For further information regarding government regulation in China and other jurisdictions, see Item 4.B. “Business
Overview—Regulation—Government Regulation of Pharmaceutical Product Development and Approval—PRC
Regulation of Pharmaceutical Product Development and Approval,” “Business Overview—Regulation—Coverage and
Reimbursement—PRC Coverage and Reimbursement” and “Business Overview—Regulation—Other Healthcare Laws—
Other PRC Healthcare Laws.”
Restrictions on currency exchange may limit our ability to receive and use our revenue effectively.
Substantially all of our revenue are denominated in renminbi, which currently is not a freely convertible currency.
A portion of our revenue may be converted into other currencies to meet our foreign currency obligations, including,
among others, payments of dividends declared, if any, in respect of our ordinary shares or ADSs. Under China’s existing
foreign exchange regulations, our subsidiaries and joint ventures are able to pay dividends in foreign currencies or convert
renminbi into other currencies for use in operations without prior approval from the PRC State Administration of Foreign
Exchange, or SAFE, by complying with certain procedural requirements. However, we cannot assure you that the PRC
government will not take future measures to restrict access to foreign currencies for current account transactions.
Our PRC subsidiaries’ and joint ventures’ ability to obtain foreign exchange is subject to significant foreign
exchange controls and, in the case of amounts under the capital account, requires the approval of and/or registration with
PRC government authorities, including the SAFE. In particular, if we finance our PRC subsidiaries or joint ventures by
means of foreign debt from us or other foreign lenders, the amount is not allowed to exceed the difference between the
amount of total investment and the amount of the registered capital as approved by the Ministry of Commerce, or
MOFCOM, and registered with the SAFE. Further, such loans must be registered with the SAFE. If we finance our PRC
35
subsidiaries or joint ventures by means of additional capital contributions, the amount of these capital contributions must
first be approved by the relevant government approval authority. These limitations could affect the ability of our PRC
subsidiaries and joint ventures to obtain foreign exchange through debt or equity financing.
Our business benefits from certain PRC government tax incentives. The expiration of, changes to, or our PRC
subsidiaries/joint ventures failing to continuously meet the criteria for these incentives could have a material adverse
effect on our operating results by significantly increasing our tax expenses.
Certain of our PRC subsidiaries and joint ventures have been granted the special High and New Technology
Enterprise, or HNTE, status (since 2005, 2008 or 2014) and/or the Technological Advance Service Enterprise, or TASE,
status (since 2010) by the relevant PRC authorities. Both of these statuses allow the relevant enterprise to enjoy a reduced
Enterprise Income Tax, or EIT, rate at 15% on its taxable profits. The statuses are valid until the end of 2016 (for HNTE)
or 2018 (for TASE) during which the relevant PRC enterprise must continue to meet the relevant criteria or else the 25%
standard EIT rate will be applied from the beginning of the calendar year when the enterprise fails to meet the relevant
criteria. In addition, it is unclear whether the HNTE/TASE status and tax incentives under the current policy will continue
to be granted after their respective expiration dates. If the rules for such incentives are amended or the statutes are not
renewed, higher EIT rates may apply resulting in increased tax burden which will impact our business, financial condition,
results of operations and growth prospects.
We may be treated as a resident enterprise for PRC Tax purposes under the PRC EIT Law, and our global income may
therefore be subject to PRC income tax.
China’s EIT Law and the Regulation on the Implementation of the EIT Law, effective as of January 1, 2008,
define the term “de facto management bodies” as “bodies that substantially carry out comprehensive management and
control on the business operation, employees, accounts and assets of enterprises.” Under the EIT Law, an enterprise
incorporated outside of China whose “de facto management bodies” are located in China is considered a “resident
enterprise” and will be subject to a uniform 25% EIT rate on its global income. On April 22, 2009, China’s State
Administration of Taxation, or the SAT, in the Notice Regarding the Determination of Chinese-Controlled
Offshore-Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or
Circular 82, further specified certain criteria for the determination of what constitutes “de facto management bodies.” If
all of these criteria are met, the relevant foreign enterprise may be regarded to have its “de facto management bodies”
located in China and therefore be considered a resident enterprise in China. These criteria include: (i) the enterprise’s
day-to-day operational management is primarily exercised in China; (ii) decisions relating to the enterprise’s financial and
human resource matters are made or subject to approval by organizations or personnel in China; (iii) the enterprise’s
primary assets, accounting books and records, company seals, and board and shareholders’ meeting minutes are located or
maintained in China; and (iv) 50% or more of voting board members or senior executives of the enterprise habitually
reside in China. Although Circular 82 only applies to foreign enterprises that are majority-owned and controlled by PRC
enterprises, not those owned and controlled by foreign enterprises or individuals, the determining criteria set forth in
Circular 82 may be adopted by the PRC tax authorities as the test for determining whether the enterprises are PRC tax
residents, regardless of whether they are majority-owned and controlled by PRC enterprises.
Except for our PRC subsidiaries and joint ventures incorporated in China, we believe that none of our entities
incorporated outside of China is a PRC resident enterprise for PRC tax purposes. However, the tax resident status of an
enterprise is subject to determination by the PRC tax authorities, and uncertainties remain with respect to the interpretation
of the term “de facto management body.”
If we are treated as a PRC tax resident, dividends distributed by us to our non-PRC shareholders and ADS holders or
any gains realized by non-PRC shareholders and ADS holders from the transfer of our shares or ADSs may be subject
to PRC tax.
Under the EIT Law, dividends payable by a PRC enterprise to its foreign investor who is a non-PRC resident
enterprise, as well as gains on transfers of shares of a PRC enterprise by such a foreign investor will generally be subject
to a 10% withholding tax, unless such non-PRC resident enterprise’s jurisdiction of tax residency has an applicable tax
treaty with the PRC that provides for a reduced rate of withholding tax.
If the PRC tax authorities determine that we should be considered a PRC resident enterprise for EIT purposes,
any dividends payable by us to our non-PRC resident enterprise shareholders or ADS holders, as well as gains realized by
such investors from the transfer of our shares or ADSs may be subject to a 10% withholding tax, unless a reduced rate is
36
available under an applicable tax treaty. Furthermore, if we are considered a PRC resident enterprise for EIT purposes, it
is unclear whether our non-PRC individual shareholders (including our ADS holders) would be subject to any PRC tax on
dividends or gains obtained by such non-PRC individual shareholders. If any PRC tax were to apply to dividends or gains
realized by non-PRC individuals, it would generally apply at a rate of up to 20% unless a reduced rate is available under
an applicable tax treaty. If dividends payable to our non-PRC resident shareholders, or gains from the transfer of our shares
or ADSs by such shareholders are subject to PRC tax, the value of your investment in our shares or ADSs may decline
significantly.
There is uncertainty regarding the PRC withholding tax rate that will be applied to distributions from our PRC
subsidiaries and joint ventures to their respective Hong Kong immediate holding companies, which could have a
negative impact on our business.
The EIT Law provides that a withholding tax at the rate of 10% is applicable to dividends payable by a PRC
resident enterprise to investors who are “non-resident enterprises” (i.e., that do not have an establishment or place of
business in the PRC or that have such establishment or place of business but the relevant dividend is not effectively
connected with the establishment or place of business). However, pursuant to the Arrangement between the Mainland of
China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of
Fiscal Evasion with respect to Taxes on Income, or the Arrangement, withholding tax at a reduced rate of 5% may be
applicable to dividends payable to non-resident beneficial owners of the dividends by PRC resident enterprises if certain
requirements are met.
There is uncertainty regarding whether the PRC tax authorities will consider us to be eligible to the reduced tax
rate. If the Arrangement is deemed not to apply to dividends payable by our PRC subsidiaries and joint ventures to their
respective Hong Kong immediate holding companies that are ultimately owned by us, the withholding tax rate applicable
to us will be the statutory rate of 10% instead of 5% which may potentially impact our business, financial condition, results
of operations and growth prospects.
We may be treated as a resident enterprise for U.K. corporate tax purposes, and our global income may therefore be
subject to U.K. corporation tax.
U.K. resident companies are taxable in the United Kingdom on their worldwide profits. A company incorporated
outside of the United Kingdom would be regarded as a resident if its central management and control resides in the
United Kingdom. The place of central management and control generally means the place where the high-level strategic
decisions of a company are made.
We are an investment holding company incorporated in the Cayman Islands that is listed on the AIM market of
the London Stock Exchange. Our central management and control resides in Hong Kong, and therefore we believe that we
are not a U.K. resident for corporate tax purposes. However, the tax resident status of a non-resident entity could be
challenged by the U.K. tax authorities.
If the U.K. tax authorities determine that we are a U.K. tax resident, our profits will be subject to U.K. Corporation
Tax rate at 20%, subject to the potential availability of certain exemptions related to dividend income and capital gains.
This may have a material adverse effect on our financial condition and results of operations.
Any failure to comply with PRC regulations regarding our employee equity incentive plans may subject the PRC plan
participants or us to fines and other legal or administrative sanctions, which could adversely affect our business,
financial condition and results of operations.
In February 2012, the SAFE promulgated the Notices on Issues Concerning the Foreign Exchange Administration
for Domestic Individuals Participating in Stock Incentive Plans of Overseas Publicly Listed Companies. Based on this
regulation, PRC residents who are granted shares or share options by a company listed on an overseas stock market under
its employee share option or share incentive plan are required to register with the SAFE or its local counterparts by
following certain procedures. We and our employees who are PRC residents and individual beneficial owners who have
been granted shares or share options have been subject to these rules due to our listing on the AIM market of the London
Stock Exchange and the listing of our ADSs on the Nasdaq Global Select Market. We have registered the option schemes
and the share incentive plan and will continue to assist our employees to register their share options or shares. However,
any failure of our PRC individual beneficial owners and holders of share options or shares to comply with the SAFE
registration requirements in the future may subject them to fines and legal sanctions and may, in rare instances, limit the
ability of our PRC subsidiaries to distribute dividends to us.
37
In addition, the SAT has issued circulars concerning employee share options or restricted shares. Under these
circulars, employees working in the PRC who exercise share options, or whose restricted shares vest, will be subject to
PRC individual income tax, or the IIT. The PRC subsidiaries of an overseas listed company have obligations to file
documents related to employee share options or restricted shares with relevant tax authorities and to withhold IIT of those
employees related to their share options or restricted shares. Although the PRC subsidiaries currently withhold IIT from
the PRC employees in connection with their exercise of share options, if they fail to report and pay the tax withheld
according to relevant laws, rules and regulations, the PRC subsidiaries may face sanctions imposed by the tax authorities
or other PRC government authorities.
Risks Related to Intellectual Property
If we or our joint ventures are unable to protect our or their products and drug candidates through intellectual property
rights, our competitors may compete directly against us or them.
Our success depends, in part, on our ability to protect our and our joint ventures’ products and drug candidates
from competition by establishing, maintaining and enforcing our or their intellectual property rights. We and our joint
ventures seek to protect the products and technology that we and they consider commercially important by filing PRC and
international patent applications, relying on trade secrets or pharmaceutical regulatory protection or employing a
combination of these methods. As of December 31, 2016, we had 131 issued patents, including 25 Chinese patents,
20 U.S. patents and seven European patents,126 patent applications pending in major market jurisdictions, and five
pending Patent Cooperation Treaty, or PCT, patent applications relating to the drug candidates of our Innovation Platform.
As of the same date, our joint venture Nutrition Science Partners had 23 issued patents and six pending patent applications
relating to HMPL-004. Additionally, our joint ventures collectively had 123 issued patents and 15 patent applications in
China relating to our Commercial Platform’s products as of December 31, 2016. For more details, see Item 4.B. “Business
Overview—Patents and Other Intellectual Property.” Patents may become invalid and patent applications may not be
granted for a number of reasons, including known or unknown prior art, deficiencies in the patent application or the lack
of originality of the technology. In addition, the PRC and the United States have adopted the “first-to-file” system under
which whoever first files an invention patent application will be awarded the patent. Under the first-to-file system, third
parties may be granted a patent relating to a technology which we invented. Furthermore, the terms of patents are finite.
The patents we hold and patents to be issued from our currently pending patent applications generally have a twenty-year
protection period starting from the date of application.
We or our joint ventures may become involved in patent litigation against third parties to enforce our or their
patent rights, to invalidate patents held by such third parties, or to defend against such claims. A court may refuse to stop
the other party from using the technology at issue on the grounds that our or our joint ventures’ patents do not cover the
third-party technology in question. Further, such third parties could counterclaim that we or our joint ventures infringe
their intellectual property or that a patent we or our joint ventures have asserted against them is invalid or unenforceable.
In patent litigation, defendant counterclaims challenging the validity, enforceability or scope of asserted patents are
commonplace. In addition, third parties may initiate legal proceedings against us or our intellectual property to assert such
challenges to our intellectual property rights.
The outcome of any such proceeding is generally unpredictable. Grounds for a validity challenge could be an
alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness or non-enablement.
Patents may be unenforceable if someone connected with prosecution of the patent withheld relevant information or made
a misleading statement during prosecution. It is possible that prior art of which we or our joint ventures and the patent
examiner were unaware during prosecution exists, which could render our or their patents invalid. Moreover, it is also
possible that prior art may exist that we or our joint ventures are aware of but do not believe is relevant to our or their
current or future patents, but that could nevertheless be determined to render our patents invalid. The cost to us or our joint
ventures of any patent litigation or similar proceeding could be substantial, and it may consume significant management
time. We and our joint ventures do not maintain insurance to cover intellectual property infringement.
An adverse result in any litigation proceeding could put one or more of our or our joint ventures’ patents at risk
of being invalidated or interpreted narrowly. If a defendant were to prevail on a legal assertion of invalidity or
unenforceability of our patents covering one of our or our joint ventures’ products or our drug candidates, we could lose
at least part, and perhaps all, of the patent protection covering such product or drug candidate. Competing drugs may also
be sold in other countries in which our or our joint ventures’ patent coverage might not exist or be as strong. If we lose a
foreign patent lawsuit, alleging our or our joint ventures’ infringement of a competitor’s patents, we could be prevented
38
from marketing our drugs in one or more foreign countries. Any of these outcomes would have a materially adverse effect
on our business.
Intellectual property and confidentiality legal regimes in China may not afford protection to the same extent as
in the United States or other countries. Implementation and enforcement of PRC intellectual property laws may be deficient
and ineffective. Policing unauthorized use of proprietary technology is difficult and expensive, and we or our joint ventures
may need to resort to litigation to enforce or defend patents issued to us or them or to determine the enforceability, scope
and validity of our proprietary rights or those of others. The experience and capabilities of PRC courts in handling
intellectual property litigation varies, and outcomes are unpredictable. Further, such litigation may require a significant
expenditure of cash and may divert management’s attention from our or our joint ventures’ operations, which could harm
our business, financial condition and results of operations. An adverse determination in any such litigation could materially
impair our or our joint ventures’ intellectual property rights and may harm our business, prospects and reputation.
Developments in patent law could have a negative impact on our business.
From time to time, authorities in the United States, China and other government authorities may change the
standards of patentability, and any such changes could have a negative impact on our business.
For example, in the United States, the Leahy-Smith America Invents Act, or the America Invents Act, which was
signed into law in 2011, includes a number of significant changes to U.S. patent law. These changes include a transition
from a “first-to-invent” system to a “first-to-file” system, changes to the way issued patents are challenged, and changes
to the way patent applications are disputed during the examination process. As a result of these changes, patent law in the
United States may favor larger and more established companies that have greater resources to devote to patent application
filing and prosecution. The U.S. Patent and Trademark Office, or USPTO, has developed new and untested regulations
and procedures to govern the full implementation of the America Invents Act, and many of the substantive changes to
patent law associated with the America Invents Act, and, in particular, the first-to-file provisions became effective on
March 16, 2013. Substantive changes to patent law associated with the America Invents Act may affect our ability to
obtain patents, and if obtained, to enforce or defend them. Accordingly, it is not clear what, if any, impact the America
Invents Act will have on the cost of prosecuting our or our joint ventures’ patent applications and our or their ability to
obtain patents based on our or our joint ventures’ discoveries and to enforce or defend any patents that may issue from our
or their patent applications, all of which could have a material adverse effect on our business.
If we are unable to maintain the confidentiality of our and our joint ventures’ trade secrets, the business and competitive
position of ourselves and our joint ventures may be harmed.
In addition to the protection afforded by patents and the PRC’s State Secret certification, we and our joint ventures
rely upon unpatented trade secret protection, unpatented know-how and continuing technological innovation to develop
and maintain our competitive position. We seek to protect our and our joint ventures’ proprietary technology and processes,
in part, by entering into confidentiality agreements with our and their collaborators, scientific advisors, employees and
consultants, and invention assignment agreements with our and their consultants and employees. We and our joint ventures
may not be able to prevent the unauthorized disclosure or use of our or their technical know-how or other trade secrets by
the parties to these agreements, however, despite the existence generally of confidentiality agreements and other
contractual restrictions. If any of the collaborators, scientific advisors, employees and consultants who are parties to these
agreements breaches or violates the terms of any of these agreements, we and our joint ventures may not have adequate
remedies for any such breach or violation, and we could lose our trade secrets as a result. Enforcing a claim that a
third-party illegally obtained and is using our or our joint ventures’ trade secrets, like patent litigation, is expensive and
time consuming, and the outcome is unpredictable. In addition, courts in China and other jurisdictions outside the
United States are sometimes less prepared or willing to protect trade secrets.
Our and our joint ventures’ trade secrets could otherwise become known or be independently discovered by our
or their competitors. For example, competitors could purchase our drugs and attempt to replicate some or all of the
competitive advantages we derive from our development efforts, willfully infringe our intellectual property rights, design
around our protected technology or develop their own competitive technologies that fall outside of our intellectual property
rights. If any of our or our joint ventures’ trade secrets were to be lawfully obtained or independently developed by a
competitor, we and our joint ventures would have no right to prevent them, or others to whom they communicate it, from
using that technology or information to compete against us or our joint ventures. If our or our joint ventures’ trade secrets
are unable to adequately protect our business against competitors’ drugs, our competitive position could be adversely
affected, as could our business.
39
We and our joint ventures are dependent on trademark and other intellectual property rights licensed from others. If
we lose our licenses for any of our products, we or our joint ventures may not be able to continue developing such
products or may be required to change the way we market such products.
We and our joint ventures are parties to licenses that give us or them rights to third-party intellectual property
that are necessary or useful for our or our joint ventures’ businesses. In particular, the “Hutchison,” “Chi-Med” and
“China-MediTech” brands, among others, have been licensed to us by Hutchison Whampoa Enterprises Limited, an
affiliate of our majority shareholder, Hutchison Healthcare Holdings Limited. Hutchison Whampoa Enterprises Limited
grants us a royalty-free, worldwide license to such brands. Hutchison Whampoa Enterprises Limited has the right to
terminate the license during the 12-month period following each time the interest of Hutchison Whampoa Limited, an
indirect shareholder of Hutchison Healthcare Holdings Limited, in us is reduced below 50%, 40%, 30% or 20%. Currently,
Hutchison Whampoa Limited’s interest in our company is less than 20%, but we do not anticipate that Hutchison Whampoa
Enterprises Limited will terminate such license in the foreseeable future. In addition, the “Baiyunshan” brand, which is a
key brand used by Hutchison Baiyunshan on its products, has been licensed to Hutchison Baiyunshan by our joint venture
partner, Guangzhou Baiyunshan, for use during the 50-year joint venture period; however, Guangzhou Baiyunshan has the
right to terminate the license if its interest in Hutchison Baiyunshan falls below 50%. If any such license is terminated, our
or Hutchison Baiyunshan’s business, and our or their positioning in the Chinese market and our financial condition, results
of operations and prospects may be materially and adversely affected.
In some cases, our licensors have retained the right to prosecute and defend the intellectual property rights
licensed to us or our joint ventures. We depend in part on the ability of our licensors to obtain, maintain and enforce
intellectual property protection for such licensed intellectual property. Such licensors may not successfully maintain their
intellectual property, may determine not to pursue litigation against other companies that are infringing on such intellectual
property, or may pursue litigation less aggressively than we or our joint ventures would. Without protection for the
intellectual property we or our joint ventures license, other companies might be able to offer substantially identical
products or branding, which could adversely affect our competitive business position and harm our business prospects.
If our or our joint ventures’ products or drug candidates infringe the intellectual property rights of third parties, we
and they may incur substantial liabilities, and we and they may be unable to sell these products.
Our commercial success depends significantly on our and our joint ventures’ ability to operate without infringing
the patents and other proprietary rights of third parties. In the PRC, invention patent applications are generally maintained
in confidence until their publication 18 months from the filing date. The publication of discoveries in the scientific or
patent literature frequently occurs substantially later than the date on which the underlying discoveries were made and
invention patent applications are filed. Even after reasonable investigation, we may not know with certainty whether any
third-party may have filed a patent application without our knowledge while we or our joint ventures are still developing
or producing that product. While the success of pending patent applications and applicability of any of them to our or our
joint ventures’ programs are uncertain, if asserted against us or them, we could incur substantial costs and we or they may
have to:
(cid:120)
(cid:120)
(cid:120)
obtain licenses, which may not be available on commercially reasonable terms, if at all;
redesign products or processes to avoid infringement; and
stop producing products using the patents held by others, which could cause us or them to lose the use
of one or more of our or their products.
To date, we and our joint ventures have not received any material claims of infringement by any third parties. If
a third-party claims that we or our joint ventures infringe its proprietary rights, any of the following may occur:
(cid:120) we or our joint ventures may have to defend litigation or administrative proceedings that may be costly
whether we or they win or lose, and which could result in a substantial diversion of management
resources;
(cid:120) we or our joint ventures may become liable for substantial damages for past infringement if a court
decides that our technology infringes a third-party’s intellectual property rights;
40
(cid:120)
a court may prohibit us or our joint ventures from producing and selling our or their product(s) without
a license from the holder of the intellectual property rights, which may not be available on commercially
acceptable terms, if at all; and
(cid:120) we or our joint ventures may have to reformulate product(s) so that it does not infringe the intellectual
property rights of others, which may not be possible or could be very expensive and time consuming.
Any costs incurred in connection with such events or the inability to sell our or our joint ventures’ products may
have a material adverse effect on our business and results of operations.
We and our joint ventures may not be able to effectively enforce our intellectual property rights throughout the world.
Filing, prosecuting and defending patents on our or our joint venture’s products or drug candidates in all countries
throughout the world would be prohibitively expensive. The requirements for patentability may differ in certain countries,
particularly in developing countries. Moreover, our or our joint ventures’ ability to protect and enforce our or their
intellectual property rights may be adversely affected by unforeseen changes in foreign intellectual property laws.
Additionally, the patent laws of some foreign countries do not afford intellectual property protection to the same extent as
the laws of the United States. Many companies have encountered significant problems in protecting and defending
intellectual property rights in certain foreign jurisdictions. The legal systems of some countries, particularly developing
countries, may not favor the enforcement of patents and other intellectual property rights. This could make it difficult for
us or our joint ventures to stop the infringement of our or their patents or the misappropriation of our or their other
intellectual property rights. For example, many foreign countries have compulsory licensing laws under which a patent
owner must grant licenses to third parties. Consequently, we may not be able to prevent third parties from practicing our
or our joint ventures’ inventions throughout the world. Competitors may use our or our joint ventures’ technologies in
jurisdictions where we or they have not obtained patent protection to develop their own drugs and, further, may export
otherwise infringing drugs to territories where we or our joint ventures have patent protection, if our or our joint ventures’
ability to enforce our or their patents to stop infringing activities is inadequate. These drugs may compete with our drug
candidates, and our patents or other intellectual property rights may not be effective or sufficient to prevent them
from competing.
Proceedings to enforce our or our joint ventures’ patent rights in foreign jurisdictions, whether or not successful,
could result in substantial costs and divert our or their efforts and resources from other aspects of our and their businesses.
Furthermore, while we intend to protect our intellectual property rights in the major markets for our drug candidates, we
cannot ensure that we will be able to initiate or maintain similar efforts in all jurisdictions in which we may wish to market
our drug candidates. Accordingly, our efforts to protect the intellectual property rights of our drug candidates in such
countries may be inadequate.
We and our joint ventures may be subject to damages resulting from claims that we or they, or our or their employees,
have wrongfully used or disclosed alleged trade secrets of competitors or are in breach of non-competition or
non-solicitation agreements with competitors.
We and our joint ventures could in the future be subject to claims that we or they, or our or their employees, have
inadvertently or otherwise used or disclosed alleged trade secrets or other proprietary information of former employers or
competitors. Although we try to ensure that our and our joint ventures’ employees and consultants do not improperly use
the intellectual property, proprietary information, know-how or trade secrets of others in their work for us or our joint
ventures, we or our joint ventures may in the future be subject to claims that we or they caused an employee to breach the
terms of his or her non-competition or non-solicitation agreement, or that we, our joint ventures, or these individuals have,
inadvertently or otherwise, used or disclosed the alleged trade secrets or other proprietary information of a former employer
or competitor. Litigation may be necessary to defend against these claims. Even if we and our joint ventures are successful
in defending against these claims, litigation could result in substantial costs and could be a distraction to management. If
our or our joint ventures’ defenses to these claims fail, in addition to requiring us and them to pay monetary damages, a
court could prohibit us or our joint ventures from using technologies or features that are essential to our or their products
or our drug candidates, if such technologies or features are found to incorporate or be derived from the trade secrets or
other proprietary information of the former employers. An inability to incorporate such technologies or features would
have a material adverse effect on our business, and may prevent us from successfully commercializing our drug candidates.
In addition, we or our joint ventures may lose valuable intellectual property rights or personnel as a result of such claims.
Moreover, any such litigation or the threat thereof may adversely affect our or our joint ventures’ ability to hire employees
or contract with independent sales representatives. A loss of key personnel or their work product could hamper or prevent
41
our ability to commercialize our drug candidates, which would have an adverse effect on our business, results of operations
and financial condition.
Risks Related to Our ADSs
Certain shareholders own a significant percentage of our ordinary shares, which limits the ability of other shareholders
to influence corporate matters.
As of February 28, 2017, Hutchison Healthcare Holdings Limited owns approximately 60.4% of our ordinary
shares. Accordingly, Hutchison Healthcare Holdings Limited has a significant influence over the outcome of any corporate
transaction or other matter submitted to shareholders for approval and the interests of Hutchison Healthcare Holdings
Limited may differ from the interests of our other shareholders. Because we are incorporated in the Cayman Islands, certain
matters, such as amendments to our memorandum and articles of association, require approval of at least two-thirds of our
shareholders by law subject to higher thresholds which we may set in our memorandum and articles of association.
Therefore, Hutchison Healthcare Holdings Limited’s approval will be required to achieve any such threshold. In addition,
Hutchison Healthcare Holdings Limited will have a significant influence over the management and the strategic direction
of our company.
We may be at an increased risk of securities class action litigation.
Historically, securities class action litigation has often been brought against a company following a decline in the
market price of its securities. This risk is especially relevant for us because biotechnology and biopharmaceutical
companies have experienced significant share price volatility in recent years. If we were to be sued, it could result in
substantial costs and a diversion of management’s attention and resources, which could harm our business.
If securities analysts do not publish research or reports about our business or if they publish negative evaluations of
our business, the price of our ADSs could decline.
The trading market for our ADSs will rely in part on the research and reports that industry or financial analysts
publish about us or our business. We may never obtain research coverage by industry or financial analysts. If one or more
of the analysts covering our business downgrade their evaluations of our stock, the price of our stock could decline. If one
or more of these analysts cease to cover our stock, we could lose visibility in the market for our stock, which in turn could
cause our stock price to decline.
If we fail to establish and maintain proper internal financial reporting controls, our ability to produce accurate
financial statements or comply with applicable regulations could be impaired.
Pursuant to Section 404 of the Sarbanes-Oxley Act, we will be required to file a report by our management on
our internal control over financial reporting, including an attestation report on internal control over financial reporting
issued by our independent registered public accounting firm in our second annual report as a foreign private issuer.
However, if we remain an “emerging growth company,” as defined in Section 2(a) of the Securities Act, we will not be
required to include an attestation report on internal control over financial reporting issued by our independent registered
public accounting firm. The presence of material weaknesses in internal control over financial reporting could result in
financial statement errors which, in turn, could lead to errors in our financial reports and/or delays in our financial
reporting, which could require us to restate our operating results. We might not identify one or more material weaknesses
in our internal controls in connection with evaluating our compliance with Section 404 of the Sarbanes-Oxley Act. In order
to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial
reporting, we will need to expend significant resources and provide significant management oversight. Implementing any
appropriate changes to our internal controls may require specific compliance training of our directors and employees,
entail substantial costs in order to modify our existing accounting systems, take a significant period of time to complete
and divert management’s attention from other business concerns. These changes may not, however, be effective in
maintaining the adequacy of our internal control.
If we are unable to conclude that we have effective internal control over financial reporting, investors may lose
confidence in our operating results, the price of the ADSs could decline and we may be subject to litigation or regulatory
enforcement actions. In addition, if we are unable to meet the requirements of Section 404 of the Sarbanes-Oxley Act, the
ADSs may not be able to remain listed on Nasdaq.
42
As a foreign private issuer, we are not subject to certain U.S. securities law disclosure requirements that apply to a
domestic U.S. issuer, which may limit the information publicly available to our shareholders.
As a foreign private issuer we are not required to comply with all of the periodic disclosure and current reporting
requirements of the Exchange Act and therefore there may be less publicly available information about us than if we were
a U.S. domestic issuer. For example, we are not subject to the proxy rules in the United States and disclosure with respect
to our annual general meetings will be governed by the AIM Rules for Companies, or the AIM Rules, and Cayman Islands
requirements. In addition, our officers, directors and principal shareholders are exempt from the reporting and
“short-swing” profit recovery provisions of Section 16 of the Exchange Act and the rules thereunder. Therefore, our
shareholders may not know on a timely basis when our officers, directors and principal shareholders purchase or sell our
ordinary shares or ADSs.
As a foreign private issuer, we are permitted to adopt certain home country practices in relation to corporate governance
matters that differ significantly from Nasdaq corporate governance listing standards. These practices may afford less
protection to shareholders than they would enjoy if we complied fully with corporate governance listing standards.
As a foreign private issuer, we are permitted to take advantage of certain provisions in the Nasdaq listing rules
that allow us to follow Cayman Islands law for certain governance matters. Certain corporate governance practices in the
Cayman Islands may differ significantly from corporate governance listing standards as, except for general fiduciary duties
and duties of care, Cayman Islands law has no corporate governance regime which prescribes specific corporate
governance standards. We intend to continue to follow Cayman Islands corporate governance practices in lieu of the
corporate governance requirements of the Nasdaq Global Select Market in respect of the following: (i) the majority
independent director requirement under Section 5605(b)(1) of the Nasdaq listing rules, (ii) the requirement under
Section 5605(d) of the Nasdaq listing rules that a remuneration committee comprised solely of independent directors
governed by a remuneration committee charter oversee executive compensation and (iii) the requirement under
Section 5605(e) of the Nasdaq listing rules that director nominees be selected or recommended for selection by either a
majority of the independent directors or a nominations committee comprised solely of independent directors. Cayman
Islands law does not impose a requirement that our board of directors consist of a majority of independent directors. Nor
does Cayman Islands law impose specific requirements on the establishment of a remuneration committee or nominating
committee or nominating process. Therefore, our shareholders may be afforded less protection than they otherwise would
have under corporate governance listing standards applicable to U.S. domestic issuers. We have voluntarily complied with,
and plan to continue to comply with for the foreseeable future, the principles of the U.K. Corporate Governance Code
published by the U.K. Financial Reporting Council which guides certain of our other corporate governance practices. See
Item 6.C. “Board Practice—U.K. Corporate Governance Code” for more details.
We may lose our foreign private issuer status in the future, which could result in significant additional costs
and expenses.
As discussed above, we are a foreign private issuer, and therefore, we are not required to comply with all of the
periodic disclosure and current reporting requirements of the Exchange Act. The determination of foreign private issuer
status is made annually on the last business day of an issuer’s most recently completed second fiscal quarter, and,
accordingly, the next determination will be made with respect to us on June 30, 2017. We would lose our foreign private
issuer status if, for example, more than 50% of our ordinary shares are directly or indirectly held by residents of the
United States on June 30, 2017 and we fail to meet additional requirements necessary to maintain our foreign private issuer
status. If we lose our foreign private issuer status on this date, we will be required to file with the SEC periodic reports
and registration statements on U.S. domestic issuer forms beginning on January 1, 2018, which are more detailed and
extensive than the forms available to a foreign private issuer. We will also have to mandatorily comply with U.S. federal
proxy requirements, and our officers, directors and principal shareholders will become subject to the short-swing profit
disclosure and recovery provisions of Section 16 of the Exchange Act. In addition, we will lose our ability to rely upon
exemptions from certain corporate governance requirements under the Nasdaq listing rules. As a U.S.-listed public
company that is not a foreign private issuer, we will incur significant additional legal, accounting and other expenses that
we will not incur as a foreign private issuer, and accounting, reporting and other expenses in order to maintain a listing on
a U.S. securities exchange.
43
Certain audit reports included in this annual report were prepared by an auditor who is not inspected by the U.S. Public
Company Accounting Oversight Board, or the PCAOB, and as such, you are deprived of the benefits of such inspection.
Auditors of companies that are registered with the SEC and traded publicly in the United States, including the
independent registered public accounting firm of our company, must be registered with the PCAOB, and are required by
the laws of the United States to undergo regular inspections by the PCAOB to assess their compliance with the laws of the
United States and professional standards. Because we have substantial operations within the PRC, a jurisdiction where the
PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities, our auditor and the
auditors of our joint ventures are not currently inspected by the PCAOB.
In May 2013, the PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement
Cooperation with the China Securities Regulatory Commission, or CSRC, and the Ministry of Finance, which establishes
a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations
undertaken by the PCAOB, the CSRC, or the Ministry of Finance in the United States and the PRC, respectively. The
PCAOB continues to be in discussions with the CSRC and the Ministry of Finance to permit joint inspections in the PRC
of audit firms that are registered with PCAOB and audit Chinese companies that trade on U.S. exchanges.
This lack of PCAOB inspections in China prevents the PCAOB from regularly evaluating audits and quality
control procedures of any auditors operating in China, including our auditor and the auditors of our joint ventures. As a
result, investors may be deprived of the benefits of PCAOB inspections. The inability of the PCAOB to conduct inspections
of auditors in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control
procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may lose confidence
in our reported financial information and procedures and the quality of our financial statements.
We do not currently intend to pay dividends on our securities, and, consequently, your ability to achieve a return on
your investment will depend on appreciation in the price of the ADSs.
We have never declared or paid any dividends on our ordinary shares. We currently intend to invest our future
earnings, if any, to fund our growth. Therefore, you are not likely to receive any dividends on your ADSs at least in the
near term, and the success of an investment in ADSs will depend upon any future appreciation in its value. Consequently,
investors may need to sell all or part of their holdings of ADSs after price appreciation, which may never occur, to realize
any future gains on their investment. There is no guarantee that the ADSs will appreciate in value or even maintain the
price at which our shareholders have purchased the ADSs.
The market price for our ADSs may be volatile which could result in substantial loss to you.
The market price of our ADSs has been volatile. From March 17, 2016 to March 10, 2017, the closing sale price
of our ADSs ranged from a high of $14.95 to a low of $11.26 per ADS.
The market price for our ADSs is likely to be highly volatile and subject to wide fluctuations in response to
factors, including the following:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
announcements of competitive developments;
regulatory developments affecting us, our customers or our competitors;
announcements regarding litigation or administrative proceedings involving us;
actual or anticipated fluctuations in our period-to-period operating results;
changes in financial estimates by securities research analysts;
additions or departures of our executive officers;
release or expiry of lock-up or other transfer restrictions on our outstanding ordinary shares or ADSs; and
sales or perceived sales of additional ordinary shares or ADSs.
44
In addition, the securities markets have from time to time experienced significant price and volume fluctuations
that are not related to the operating performance of particular companies. For example, since August 2008, multiple
exchanges in the United States and other countries and regions, including China, experienced sharp declines in response
to the growing credit market crisis and the recession in the United States. As recently as July 2015, the exchanges in China
experienced a sharp decline. Prolonged global capital markets volatility may affect overall investor sentiment towards our
ADSs, which would also negatively affect the trading prices for our ADSs.
The dual listing of our ordinary shares and the ADSs may adversely affect the liquidity and value of the ADSs.
Our ordinary shares continue to be listed on the AIM market of the London Stock Exchange. The dual listing of
our ordinary shares and the ADSs may dilute the liquidity of these securities in one or both markets and may adversely
affect the development of an active trading market for the ADSs in the United States. The price of the ADSs could also be
adversely affected by trading in our ordinary shares on the AIM market. Furthermore, our ordinary shares trade on the
AIM market of the London Stock Exchange in the form of depository interests, each of which is an electronic book-entry
interest representing one of our ordinary shares. However, the ADSs are backed by physical ordinary share certificates,
and the depositary for our ADS program is unable to accept depository interests into its custody in order to issue ADSs.
As a result, if an ADS holder wishes to cancel its ADSs and instead hold depository interests for trading on the AIM
market or vice versa, the issuance and cancellation process may be longer than if the depositary could accept such
depository interests.
Although our ordinary shares continue to be listed on the AIM market following our initial public offering in the
United States completed in March 2016, we may decide at some point in the future to propose to our ordinary shareholders
to delist our ordinary shares from the AIM market, and our ordinary shareholders may approve such delisting. We cannot
predict the effect such delisting of our ordinary shares on the AIM market would have on the market price of the ADSs on
the Nasdaq Global Select Market.
Fluctuations in the exchange rate between the U.S. dollar and the pound sterling may increase the risk of holding
the ADSs.
Our share price is quoted on the AIM market of the London Stock Exchange in pence sterling, while the ADSs
will trade on Nasdaq in U.S. dollars. Fluctuations in the exchange rate between the U.S. dollar and the pound sterling may
result in temporary differences between the value of the ADSs and the value of our ordinary shares, which may result in
heavy trading by investors seeking to exploit such differences. In addition, as a result of fluctuations in the exchange rate
between the U.S. dollar and the pound sterling, the U.S. dollar equivalent of the proceeds that a holder of the ADSs would
receive upon the sale in the United Kingdom of any shares withdrawn from the depositary and the U.S. dollar equivalent
of any cash dividends paid in pound sterling on our shares represented by the ADSs could also decline.
Fluctuations in the value of the renminbi may have a material adverse effect on your investment.
The value of the renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among
other things, changes in political and economic conditions. On July 21, 2005, the PRC government changed its decade-old
policy of pegging the value of the renminbi to the U.S. dollar, and the renminbi appreciated more than 20% against the
U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation halted, and the exchange
rate between the renminbi and U.S. dollar remained within a narrow band. In June 2010, China’s People’s Bank of China,
or PBOC, announced that the PRC government would increase the flexibility of the exchange rate, and thereafter allowed
the renminbi to appreciate slowly against the U.S. dollar within the narrow band fixed by the PBOC. However, more
recently, on August 11, 12 and 13, 2015, the PBOC significantly devalued the renminbi by fixing its price against the
U.S. dollar 1.9%, 1.6%, and 1.1% lower than the previous day’s value, respectively. From January 1, 2016 to December
31, 2016, the renminbi further depreciated against the U.S. dollar by 6.7%.
Significant revaluation of the renminbi may have a material adverse effect on your investment. For example, to
the extent that we need to convert U.S. dollars into renminbi for our operations, appreciation of the renminbi against the
U.S. dollar would have an adverse effect on the renminbi amount we would receive from the conversion. Conversely, if
we decide to convert our renminbi into U.S. dollars for the purpose of making payments for dividends on our ordinary
shares or ADSs or for other business purposes, appreciation of the U.S. dollar against the renminbi would have a negative
effect on the U.S. dollar amount available to us. In addition, appreciation or depreciation in the value of the renminbi
relative to U.S. dollars would affect our financial results reported in U.S. dollar terms regardless of any underlying change
in our business or results of operations.
45
Very limited hedging options are available in China to reduce our exposure to exchange rate fluctuations. To date,
we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk.
While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges
may be limited and we may not be able to adequately hedge our exposure or at all. In addition, our currency exchange
losses may be magnified by PRC exchange control regulations that restrict our ability to convert renminbi into foreign
currency.
Securities traded on the AIM market of the London Stock Exchange may carry a higher risk than shares traded on
other exchanges and may impact the value of your investment.
Our ordinary shares are currently traded on the AIM market of the London Stock Exchange. Investment in
equities traded on AIM is perceived by some to carry a higher risk than an investment in equities quoted on exchanges
with more stringent listing requirements, such as the New York Stock Exchange or the Nasdaq Stock Market. This is
because the AIM market imposes less stringent ongoing reporting requirements than those other exchanges. You should
be aware that the value of our ordinary shares may be influenced by many factors, some of which may be specific to us
and some of which may affect AIM-listed companies generally, including the depth and liquidity of the market, our
performance, a large or small volume of trading in our ordinary shares, legislative changes and general economic, political
or regulatory conditions, and that the prices may be volatile and subject to extensive fluctuations. Therefore, the market
price of our ordinary shares underlying the ADSs may not reflect the underlying value of our company.
The depositary for our ADSs gives us a discretionary proxy to vote our ordinary shares underlying your ADSs if you
do not vote at shareholders’ meetings, except in limited circumstances, which could adversely affect your interests.
Under the deposit agreement for the ADSs, the depositary gives us a discretionary proxy to vote our ordinary
shares underlying your ADSs at shareholders’ meetings if you do not vote, unless:
(cid:120) we do not wish a discretionary proxy to be given;
(cid:120) we are aware or should reasonably be aware that there is substantial opposition as to a matter to be voted
on at the meeting; or
(cid:120)
a matter to be voted on at the meeting would materially and adversely affect the rights of shareholders.
The effect of this discretionary proxy is that you cannot prevent our ordinary shares underlying your ADSs from
being voted, absent the situations described above, and it may make it more difficult for shareholders to influence the
management of our company. Holders of our ordinary shares are not subject to this discretionary proxy.
Holders of ADSs have fewer rights than shareholders and must act through the depositary to exercise their rights.
Holders of our ADSs do not have the same rights as our shareholders and may only exercise the voting rights
with respect to the underlying ordinary shares in accordance with the provisions of the deposit agreement. Under our
memorandum and articles of association, an annual general meeting and any extraordinary general meeting at which the
passing of a special resolution is to be considered may be called with not less than 21 clear days’ notice, and all other
extraordinary general meetings may be called with not less than 14 clear days’ notice. When a general meeting is convened,
you may not receive sufficient notice of a shareholders’ meeting to permit you to withdraw the ordinary shares underlying
your ADSs to allow you to vote with respect to any specific matter. If we ask for your instructions, we will give the
depositary notice of any such meeting and details concerning the matters to be voted upon at least 30 days in advance of
the meeting date and the depositary will send a notice to you about the upcoming vote and will arrange to deliver our
voting materials to you. The depositary and its agents, however, may not be able to send voting instructions to you or carry
out your voting instructions in a timely manner. We will make all reasonable efforts to cause the depositary to extend
voting rights to you in a timely manner, but we cannot assure you that you will receive the voting materials in time to
ensure that you can instruct the depositary to vote the ordinary shares underlying your ADSs. Furthermore, the depositary
will not be liable for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the
effect of any such vote. As a result, you may not be able to exercise your right to vote and you may lack recourse if your
ADSs are not voted as you request. In addition, in your capacity as an ADS holder, you will not be able to call a
shareholders’ meeting.
46
You may not receive distributions on our ADSs or any value for them if such distribution is illegal or if any required
government approval cannot be obtained in order to make such distribution available to you.
Although we do not have any present plan to pay any dividends, the depositary of our ADSs has agreed to pay to
you the cash dividends or other distributions it or the custodian receives on ordinary shares or other deposited securities
underlying our ADSs, after deducting its fees and expenses and any applicable taxes and governmental charges. You will
receive these distributions in proportion to the number of ordinary shares your ADSs represent. However, the depositary
is not responsible if it decides that it is unlawful or impractical to make a distribution available to any holders of ADSs.
For example, it would be unlawful to make a distribution to a holder of ADSs if it consists of securities whose offering
would require registration under the Securities Act but is not so properly registered or distributed under an applicable
exemption from registration. The depositary may also determine that it is not reasonably practicable to distribute certain
property. In these cases, the depositary may determine not to distribute such property. We have no obligation to register
under the U.S. securities laws any offering of ADSs, ordinary shares, rights or other securities received through such
distributions. We also have no obligation to take any other action to permit the distribution of ADSs, ordinary shares,
rights or anything else to holders of ADSs. This means that you may not receive distributions we make on our ordinary
shares or any value for them if it is illegal or impractical for us to make them available to you. These restrictions may
cause a material decline in the value of our ADSs.
Your right to participate in any future rights offerings may be limited, which may cause dilution to your holdings.
We may from time to time distribute rights to our shareholders, including rights to acquire our securities.
However, we cannot make rights available to you in the United States unless we register the rights and the securities to
which the rights relate under the Securities Act or an exemption from the registration requirements is available. Also,
under the deposit agreement, the depositary bank will not make rights available to you unless either both the rights and
any related securities are registered under the Securities Act, or the distribution of them to ADS holders is exempted from
registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such
rights or securities or to endeavor to cause such a registration statement to be declared effective. Moreover, we may not
be able to establish an exemption from registration under the Securities Act. If the depositary does not distribute the rights,
it may, under the deposit agreement, either sell them, if possible, or allow them to lapse. Accordingly, you may be unable
to participate in our rights offerings and may experience dilution in your holdings.
If we are classified as a passive foreign investment company, U.S. investors could be subject to adverse U.S. federal
income tax consequences.
The rules governing passive foreign investment companies, or PFICs, can have adverse effects for U.S. investors
for U.S. federal income tax purposes. The tests for determining PFIC status for a taxable year depend upon the relative
values of certain categories of assets and the relative amounts of certain kinds of income. As discussed in “Taxation—
Material United States Federal Income Tax Considerations,” we do not believe that we are currently a PFIC.
Notwithstanding the foregoing, the determination of whether we are a PFIC depends on particular facts and circumstances
(such as the valuation of our assets, including goodwill and other intangible assets) and may also be affected by the
application of the PFIC rules, which are subject to differing interpretations. The fair market value of our assets is expected
to depend, in part, upon (1) the market price of the ADSs and (2) the composition of our income and assets, which will be
affected by how, and how quickly, we spend any cash that is raised in any financing transaction. In light of the foregoing,
no assurance can be provided that we are not currently a PFIC or that we will not become a PFIC in any future taxable year.
If we are or become a PFIC, U.S. holders of our ordinary shares and ADSs would be subject to adverse
U.S. federal income tax consequences, such as ineligibility for any preferential tax rates on capital gains or on actual or
deemed dividends, interest charges on certain taxes treated as deferred, and additional reporting requirements under
U.S. federal income tax laws and regulations. Whether U.S. holders of our ordinary shares or ADSs make (or are eligible
to make) a timely qualified electing fund, or QEF, election or a mark-to-market election may affect the U.S. federal income
tax consequences to U.S. holders with respect to the acquisition, ownership and disposition of our ordinary shares and
ADSs and any distributions such U.S. holders may receive. We do not, however, expect to provide the information
regarding our income that would be necessary in order for a U.S. holder to make a QEF election if we are classified as a
PFIC. Investors should consult their own tax advisors regarding all aspects of the application of the PFIC rules to our
ordinary shares and ADSs.
47
You may have difficulty enforcing judgments obtained against us.
We are a company incorporated under the laws of the Cayman Islands, and substantially all of our assets are
located outside the United States. Substantially all of our current operations are conducted in the PRC. In addition, most
of our directors and officers are nationals and residents of countries other than the United States. A substantial portion of
the assets of these persons are located outside the United States. As a result, it may be difficult for you to effect service of
process within the United States upon these persons. It may also be difficult for you to enforce in U.S. courts judgments
obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against us and our officers
and directors, all of whom are not residents in the United States and whose assets are located outside the United States. In
addition, there is uncertainty as to whether the courts of the Cayman Islands or the PRC would recognize or enforce
judgments of U.S. courts against us or such persons predicated upon the civil liability provisions of the securities laws of
the United States or any state.
You may be subject to limitations on transfers of your ADSs.
Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books
at any time or from time to time when it deems expedient in connection with the performance of its duties. In addition, the
depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the
depositary are closed, or at any time if we or the depositary deems it advisable to do so because of any requirement of law
or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.
ITEM 4. INFORMATION ON THE COMPANY
A. History and Development of the Company.
Our company was founded in 2000 by Hutchison Whampoa Limited (which in 2015 became a wholly owned
subsidiary of CK Hutchison), a Hong Kong based multinational conglomerate with operations in over 50 countries. CK
Hutchison is the ultimate parent company of our majority shareholder Hutchison Healthcare Holdings Limited.
We launched our Innovation Platform in 2002 with the establishment of our subsidiary Hutchison MediPharma.
Our Innovation Platform is focused on the discovery and development of small-molecule compounds against novel but
relatively well-characterized targets with global first-in-class potential against these targets, as well as compounds against
validated targets to potentially be global best-in-class, next generation therapies with a superior profile compared to
existing approved drugs that act against these targets.
In the years since the launch of our Innovation Platform, we have assembled a leading drug research and
development team in China to create a large scale and fully-integrated drug discovery and development operation covering
chemistry, biology, pharmacology, toxicology, chemistry and manufacturing controls, clinical and regulatory and other
functions, which work seamlessly together. Our approach has been to create a stable and supportive environment that
allows our research and development team to innovate. We believe we have succeeded in this, and as of December 31,
2016, we and our collaboration partners discussed below have invested over $400 million in the discovery and
development activities of our Innovation Platform. This has resulted in a significant clinical pipeline consisting of eight
drug candidates, which are currently being investigated in clinical studies in various countries.
We have taken a multi-source approach to funding which has been key to our ability to continuously support our
Innovation Platform. We completed our initial public offering and listing on the AIM market of the London Stock
Exchange in 2006 raising gross proceeds of approximately £40 million (equivalent to approximately $75 million at the
prevailing exchange rate at that time). We completed our initial public offering in the United States and listing on the
Nasdaq Global Select Market in 2016, raising gross proceeds of approximately $110.2 million. We have also utilized bank
facilities in the aggregate principal amount of approximately $46.9 million as of December 31, 2016, some of which are
guaranteed by Hutchison Whampoa Limited. In addition, we have received government grants totaling over $15.4 million
and investments from other parties since our establishment, including investments by Mitsui totaling over $15 million in
the aggregate since 2010.
Moreover, to further our research and development activities, we have entered into a number of collaboration
agreements for the research, development and commercialization of certain of our drug candidates with leading global
pharmaceutical and healthcare companies, including Janssen in 2008, AstraZeneca in 2011 and Eli Lilly in 2013. In 2012,
we also entered into a joint venture collaboration with Nestlé Health Science pursuant to which we share research and
development expenses and receive payments for certain services. Under the terms of these collaborations, our partners
48
have made certain upfront, milestone and service fee payments, clinical cost reimbursements and equity contributions,
totaling approximately $230.0 million since 2008. In addition to financial support, we benefit from these arrangements by
gaining access to our partners’ scientific, development, regulatory and commercial capabilities.
Since 2001, we have also developed a profitable Commercial Platform in China, which has paid out dividends to
our company totaling approximately $102.5 million as of December 31, 2016. Our Commercial Platform encompasses
two core areas: Prescription Drugs and Consumer Health products. Our Prescription Drugs business is conducted through
the following two joint ventures for which we nominate the management and run the day-to-day operations:
(cid:120) Shanghai Hutchison Pharmaceuticals, which was formed in 2001 and primarily manufactures, markets and
distributes approximately 74 prescription drug products, originally contributed by our joint venture partner,
as well as third-party prescription drugs. As of December 31, 2016, it held 74 registered drug licenses in
China. 50% of this joint venture is owned by us and 50% by Shanghai Pharmaceuticals, a leading
pharmaceutical company in China listed on the Shanghai Stock Exchange and the Hong Kong Stock
Exchange, and
(cid:120) Hutchison Sinopharm, which was formed in 2014 and focuses on providing logistics services to and
distributing and marketing prescription drugs manufactured by pharmaceutical companies. 51% of this joint
venture is owned by us and 49% is owned by Sinopharm, a leading distributor of pharmaceutical and
healthcare products and a leading supply chain service provider in China listed on the Hong Kong
Stock Exchange.
Through these joint ventures, we have steadily built up an extensive sales and distribution network across China,
with approximately 2,200 medical sales representatives as of December 31, 2016 compared to 1,900 as of December 31,
2015. Net income attributable to our company from our Prescription Drugs business grew by 20.4% from $13.2 million in
2014 to $15.9 million in 2015 and by 283.6% to $61.1 million in 2016. Net income attributable to our company from our
Prescription Drugs business in the year ended December 31, 2016 included a one-time gain of $40.4 million, net of tax,
from land compensation and other government subsidies paid to Shanghai Hutchison Pharmaceuticals by the Shanghai
government.
Our Consumer Health business includes two key joint ventures: Hutchison Baiyunshan, a joint venture which
was formed in 2005 with Guangzhou Baiyunshan and focuses primarily on the manufacture, marketing and distribution of
over-the-counter pharmaceutical products in China, and Hutchison Hain Organic, a joint venture which was established in
2009 and markets and distributes a broad range of natural and organic consumer products under brands owned by Hain
Celestial in nine Asian territories. We also manufacture and distribute various infant nutrition products. Net income
attributable to our company’s shareholders from the continuing operations of our Consumer Health business subsidiaries
and joint ventures decreased by 4.1% from $9.6 million in 2014 to $9.3 million in 2015 and decreased marginally to $9.2
million in 2016. As of December 31, 2016, we were the fourth largest AIM-listed company in terms of market
capitalization.
49
The chart below shows our principal subsidiaries and joint ventures as of February 28, 2017.
Our Organizational Structure
CK Hutchison
Other AIM/
Nasdaq
Shareholders
60.4%
39.6 %
Subsidiaries
Joint Ventures
Non-consolidated Entities
Hutchison China
MediTech Limited
(Cayman Islands)
Innovation Platform
Commercial Platform
99.8%(1)
Hutchison
MediPharma
Holdings Limited
(Cayman Islands)
Prescription Drugs
Consumer Health
80.0%(5)
50.0%(7)
Hutchison BYS
(Guangzhou)
Holding Limited
(BVI)
Hutchison Hain
Organic Holdings
Limited
(BVI)
(5)
100.0%
50.0%(2)
100.0%
100.0%
100.0%
100.0%
Hutchison
MediPharma (HK)
Investment Limited
(Hong Kong)
Nutrition Science
Partners Limited
(Hong Kong)
Shanghai
Hutchison
Chinese
Medicine (HK)
Investment
Limited
(Hong Kong)
Hutchison
Chinese
Medicine GSP
(HK) Holdings
Limited
(Hong Kong)
Guangzhou
Hutchison
Chinese
Medicine (HK)
Investment
Limited
(Hong Kong)
Hutchison Hain
Organic
(Hong Kong)
Limited
(Hong Kong)
Outside the PRC
Inside the PRC
100.0%
Hutchison
MediPharma
Limited
(PRC)
Notes:
50.0%(3)
51.0%(4)
50.0%(6)
100.0%
Shanghai
Hutchison
Pharmaceuticals
Limited
(PRC)
Hutchison
Whampoa
Sinopharm
Pharmaceuticals
(Shanghai)
Company
Limited
(PRC)
Hutchison Hain
Organic
(Guangzhou)
Limited
(PRC)
Hutchison
Whampoa
Guangzhou
Baiyunshan
Chinese
Medicine
Company
Limited
(PRC)
-
(1) Employees of Hutchison MediPharma Limited hold the remaining 0.2% shareholding.
(2) Nestlé Health Science S.A. is the other 50% joint venture partner.
(3) Shanghai Pharmaceuticals Holding Co., Limited is the other 50% joint venture partner.
(4) Sinopharm Group Co. Limited is the other 49% joint venture partner.
(5) Dian Son Development Limited holds the other 20% interest.
(6) Guangzhou Baiyunshan Pharmaceutical Holdings Co. Limited is the other 50% joint venture partner.
(7) The Hain Celestial Group, Inc. is the other 50% joint venture partner.
50
B.
Business Overview.
Overview
We are an innovative biopharmaceutical company based in China aiming to become a global leader in the
discovery, development and commercialization of targeted therapies for oncology and immunological diseases. We have
created a broad portfolio of drug candidates targeting eight molecular targets, including eight clinical-stage drug candidates
that are being investigated in 30 active clinical studies in various countries and further studies targeted to start in 2017,
including four Phase III studies. These drug candidates are being developed to cover a wide spectrum of solid tumors,
hematological malignancies and immunology applications which address significant unmet medical needs and large
commercial opportunities. We believe many of our clinical studies could be in potential U.S. Food and Drug
Administration, or FDA, designated Breakthrough Therapy indications, which are eligible for accelerated regulatory
approval in the United States.
Our pipeline has been developed and progressed by our fully-integrated in-house Innovation Platform that was
supported by an experienced and stable research and development team of approximately 330 scientists and staff as of
December 31, 2016, including particular organizational depth in chemistry, our core competitive competency. Our success
in research and development has led to partnerships with leading pharmaceutical companies, including AstraZeneca, Eli
Lilly and Nestlé Health Science, for three of our eight clinical drug candidates.
Our Innovation Platform focuses on discovering and developing drug candidates that target a class of proteins
and enzymes called kinases. Kinases remain at the forefront of targeted cancer therapy research. However, most of these
proteins and enzymes are yet to be successfully targeted, which we refer to as novel targets, with the majority of FDA-
approved small molecule kinase inhibitors primarily targeting only three of the more than 20 classes of kinases. A key
aspect of our research into kinases has been our strongly held belief that cancer uses multiple molecular pathways to
survive, proliferate and migrate and that treatment may frequently require combinations of drug therapies to shut down
these primary and resistance pathways.
We believe that almost all competitors in the small molecule kinase inhibitor field have to date prioritized speed
over selectivity in developing their drug candidates. This has resulted in most approved drugs being multi-kinase inhibitors
that are not only selective for the intended target of interest. We have always held a different view that multi-kinase
inhibition in a single drug is less desirable form of treatment because it results in off-target toxicities that limit tolerable
dose levels and, as a result, intended target inhibition, thereby reducing efficacy. Furthermore, we believe that if multiple
kinases do need to be targeted to provide clinical benefit, the combination of multiple highly selective kinase inhibitors is
the optimal approach.
As a result, over the last decade, our core research and development philosophy has been to take a highly
disciplined chemistry-focused approach to design uniquely selective small molecule tyrosine kinase inhibitors, deliberately
engineered to improve drug exposure, reduce known class-related toxicities. Accordingly, we believe our drug candidates,
such as savolitinib (targeting c-Met), HMPL-523 (targeting Syk) and HMPL-453 (targeting FGFR1/2/3), have the potential
to be global first-in-class therapies. In the cases of fruquintinib (targeting VEGFR 1/2/3), sulfatinib (targeting
VEGFR/FGFR1/CSF-1R), epitinib (targeting EGFRm+ with brain metastasis), theliatinib (targeting EGFR wild-type) and
HMPL-(cid:25)(cid:27)(cid:28)(cid:3)(cid:11)(cid:87)(cid:68)(cid:85)(cid:74)(cid:72)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:51)(cid:44)(cid:22)(cid:46)(cid:303)(cid:12)(cid:3)(cid:90)(cid:72)(cid:3)(cid:69)(cid:72)(cid:79)(cid:76)(cid:72)(cid:89)(cid:72)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:71)(cid:85)(cid:88)(cid:74)(cid:3)(cid:70)(cid:68)(cid:81)(cid:71)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:86)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:86)(cid:88)(cid:73)(cid:73)(cid:76)(cid:70)(cid:76)(cid:72)(cid:81)(cid:87)(cid:79)(cid:92)(cid:3)(cid:86)(cid:72)(cid:79)(cid:72)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:68)(cid:81)(cid:71)(cid:18)(cid:82)(cid:85)(cid:3)(cid:71)(cid:76)(cid:73)(cid:73)(cid:72)(cid:85)(cid:72)(cid:81)(cid:87)(cid:76)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:69)(cid:72)(cid:3)(cid:83)(cid:82)(cid:87)(cid:72)(cid:81)(cid:87)(cid:76)(cid:68)(cid:79)(cid:3)
global best-in-class, next generation therapies. In particular, we will continue to focus on maximizing patient outcomes
through clinical studies involving combinations or rotations of treatment of our compounds with other targeted therapies,
immuno-oncology agents and chemotherapies.
In addition to our Innovation Platform, we have established a profitable Commercial Platform in China which
manufactures, markets and distributes prescription drugs and consumer health products. This Commercial Platform has
grown to significant scale, with our Prescription Drugs business joint ventures, Shanghai Hutchison Pharmaceuticals and
Hutchison Sinopharm, operating a network of approximately 2,200 medical sales representatives covering over
18,500 hospitals in over 300 cities and towns in China as of December 31, 2016. We intend to leverage this Commercial
Platform to support the launch of products from our Innovation Platform if they are approved for use in China. Outside of
China, we intend to commercialize our products, if approved, in the United States, Europe and other major markets on our
own and/or through partnerships with leading biopharmaceutical companies.
51
Preclin.
Ph.I
Proof-of-concept
Pivotal/Ph.III
* *
Our Innovation Platform
Figure 1: Pipeline Chart
Program
Target
Partner
Study number/Indication
Latest Status
Savolitinib
(AZD6094)
c-Met
Ph.Ib enrolling (dose finding)
Start when Study 2/4 begin Ph.Ib expansion stage
1. Papillary renal cell carcinoma Report Ph.II Feb. 2017; Ph.III start H12017
2. Papillary renal cell carcinoma NCI Ph.II – savo vs. sunitinib vs. cabozan. vs. crizot.
3. Papillary renal cell carcinoma
4. Clear cell renal cell carcinoma
5. Clear cell renal cell carcinoma Ph.Ib enrolling (dose finding)
6. Non-small cell lung cancer
7. Non-small cell lung cancer
8. Non-small cell lung cancer
9. Non-small cell lung cancer
10. Pulmonary sarcomatoid ca.
11. Gastric cancer
12. Gastric cancer
13. Gastric cancer
Ph.IIb expans’n enrolling; Pivotal decision 2017
Ph.II enrolling
Ph.II enrolling
Ph.II enrolling
Ph.II enrolling
Ph.Ib enrolling
Ph.Ib enrolling
Ph.Ib enrolling
Fruquintinib
VEGFR
1/2/3
14. Colorectal cancer
15. Non-small cell lung cancer
16. Non-small cell lung cancer
17. Caucasian bridging
18. Gastric cancer
(in China
only)
Ph.III met all endpoints; NDA mid 2017
Ph.III enrolling
Ph.Ib enrolling (dose finding)
Ph.I dose escalation start 2017
Ph.III (w/ interim analysis) start 2017
Sulfatinib
VEGFR/
CSF1R/
FGFR1
19. Pancreatic NET
20. Non-pancreatic NET
21. Caucasian bridging
22. Medullary thyroid ca.
23. Differentiated thyroid ca.
24. Biliary tract cancer
Ph.III enrolling
Ph.III enrolling
Ph.I dose escalation enrolling
Ph.II enrolling
Ph.II enrolling
Ph.II enrolling
Epitinib
EGFRm+
25. Non-small cell lung cancer
26. Glioblastoma
Ph.III start 2017
Ph.II start 2017
Target patient
Combo therapy
durvalumab (PD-L1)
c-Met-driven
c-Met-driven
All
Line
1st
All
-
2nd VEGF TKI refractory
2nd VEGF TKI refractory durvalumab (PD-L1)
2nd EGFR TKI refractory Tagrisso® (T790M)
3rd EGFR/T790M TKI
Tagrisso® (T790M)
2nd EGFR TKI refractory Iressa® (EGFR)
1st
1st
c-Met+/Ex.14skip
c-Met+/Ex.14skip
3rd/All c-Met+
2nd c-Met+
2nd c-Met O/E
3rd All
3rd All
1st All
-
2nd All
All comers
docetaxel (chemo)
docetaxel (chemo)
Iressa® (EGFR)
paclitaxel (chemo)
1st All
1st All
All comers
-
2nd Radiotherapy ref.
2nd Radiotherapy ref.
2nd Gemcitabine ref.
1st EGFRm+ brain mets
-
Theliatinib
EGFR WT
27. Solid tumors
28. Esophageal cancer
Ph.I dose escalation enrolling (continuing)
Ph.Ib expansion enrolling
- All comers
1st EGFR WT
HMPL-523
Syk
29. Rheumatoid arthritis
30. Immunology
31. Hematological cancers
32. Lymphoma
Ph. I complete; preparing for Ph.II in 2017
Ph.I dose escalation start 2017
Ph.I enrolling; target complete Ph.I 2017
Ph.I dose escalation enrolling
– Methotrexate ref.
- Healthy volunteers
2nd/3rd All comers
- All comers
HMPL-689
PI3Kδ
33. Hematological cancers
34. Lymphoma
Ph.I dose escalation (PK analysis)
Ph.I dose escalation start 2017
- Healthy volunteers
2nd/3rd All comers
HMPL-453
HM004-6599
FGFR
1/2/3
NF-κB
(TNF-α)
35. Solid tumors
36. Solid tumours
Ph.I dose escalation
Ph.I dose escalation start 2017
- All comers
- All comers
Ulcerative colitis (Induction)
Ulcerative colitis (Maintenance)
HMPL-004 reformulation; Re-submit IND 2017
Await positive Ph.II in Ulcerative Colitis (Induction)
2nd 5ASA refractory
2nd 5ASA refractory
NSP DC2
TBD
Immunology
Preclinical complete end 2017
Multiple
TBD
Oncology
Four small molecule/antibody programs in preclin.
Site
Global
US
UK
UK
UK
Global
Global
China
China
China
SK/PRC
SK
SK
China
China
China
US
China
China
China
US
China
China
China
China
China
China
China
Aus
China
Aus
China
Aus
China
Aus
China
China
China
China
TBD
*
*
*
*
*
*
*
*
*
*
*
*
n/a *
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
Oncology
Immunology
Notes: * = when an NDA submission is possible based on the receipt of favorable clinical data; Proof-of-concept = Phase
Ib/II study (the dashed lines delineate the start and end of Phase Ib); combo = in combination with; brain mets = brain
metastasis; VEGFR = vascular endothelial growth factor; TKI = tyrosine kinase inhibitor; EGFR = epidermal growth
factor receptor; NET = neuroendocrine tumors; ref = refractory, which means resistant to prior treatment; T790M= EGFR
resistance mutation; EGFRm+ = epidermal growth factor receptor activating mutations; EGFR wild-type = epidermal
growth factor receptor wild-type; 5ASA = 5-aminosalicyclic acids; chemo = chemotherapy; c-Met+ = c-Met gene
amplification; c-Met O/E = c-Met over-expression; MS = Multiple Sclerosis; RA = Rheumatoid Arthritis; MTC =
Medullary Thyroid Cancer; DTC = Differentiated Thyroid Cancer; Aus = Australia; SK = South Korea; PRC = People’s
Republic of China; UK = United Kingdom; US = United States; EU = Europe; Global = >1 country.
Overview of Our Clinical-stage Drug Candidates
Savolitinib (AZD6094/HMPL-504)
Savolitinib is a potential global first-in-class inhibitor of the mesenchymal epithelial transition factor, or c-Met,
receptor tyrosine kinase, an enzyme which has been shown to function abnormally in many types of solid tumors. We
designed savolitinib as a potent and highly selective oral inhibitor which through chemical structure modification
addressed renal toxicity, the primary issue that has prevented all other selective c-Met inhibitors from gaining regulatory
approval. In our clinical studies, conducted in over 460 patients to date, savolitinib has exhibited no renal toxicity and has
52
shown promising signs of critical efficacy, causing tumor size reduction in patients with c-Met gene amplification, in
papillary renal cell carcinoma, non-small cell lung cancer, colorectal cancer and gastric cancer.
We are currently testing savolitinib in partnership with AstraZeneca in multiple parallel proof-of-concept studies,
both as a monotherapy and in combination with other targeted therapies and chemotherapy. We and AstraZeneca expect
to start global Phase III registration studies in 2017.
The two most advanced indications being studied for savolitinib are papillary renal cell carcinoma and non-small
cell lung cancer. In February 2017, we presented the results of our 109 patient global Phase II study in papillary renal cell
carcinoma, the largest and most comprehensive clinical study in papillary renal cell carcinoma ever conducted. The data
from this Phase II study showed a very clear efficacy signal in c-MET-driven patients as compared with c-MET-
independent patients, an encouraging long duration of response and safety profile. We and AstraZeneca have determined
a global Phase III protocol in consultation with the U.S. FDA and European Medicines Agency, and we plan to initiate the
Phase III trial in the second quarter of 2017. In addition, in June 2016, we also initiated a Phase IIb study investigating the
effects of savolitinib in combination with Tagrisso, a tyrosine kinase inhibitor from AstraZeneca, for patients with non-
small cell lung cancer who have developed resistance to tyrosine kinase inhibitors of the epidermal growth factor receptor,
or EGFR. AstraZeneca received FDA approval for Tagrisso in November 2015 for the treatment of patients with T790M+
EGFR activating mutations, or EGFRm+, tyrosine kinase inhibitor-resistant non-small cell lung cancer, making it one of
the fastest development programs ever recorded at just over two and one-half years from the start of Phase I clinical trials
to FDA approval. If data from the Phase IIb study is supportive, we hope to initiate a Phase III study in 2017 and potentially
seek U.S. FDA Breakthrough Therapy designation. Based on savolitinib showing early clinical benefit as a highly selective
c-Met inhibitor in a number of cancers, in August 2016 we and AstraZeneca amended our global licensing, co-
development, and commercialization agreement for savolitinib to cover multiple c-Met-driven solid tumor indications
including non-small cell lung, kidney, gastric and colorectal cancers.
The terms of our collaboration with AstraZeneca are governed by a December 2011 agreement under which we
granted to AstraZeneca co-exclusive, worldwide rights to develop, and exclusive worldwide rights to manufacture and
commercialize savolitinib for all diagnostic, prophylactic and therapeutic uses. We refer to this agreement as the
AstraZeneca Agreement. Under the original terms of the AstraZeneca Agreement, we and AstraZeneca agreed to share the
development costs for savolitinib in China, with AstraZeneca being responsible for the development costs for savolitinib
in the rest of the world. In August 2016, we and AstraZeneca agreed to amend the AstraZeneca Agreement, whereby we
agreed to contribute up to $50 million, spread primarily over three years, to the joint development costs of the global
pivotal Phase III study in patients with c-Met-driven papillary renal cell carcinoma. Subject to approval in the papillary
renal cell carcinoma indication, we will receive a five percentage point increase in the global tiered royalty rate payable
on savolitinib sales across all indications in all regions excluding China. Taking into account such increase, AstraZeneca
is obligated to pay us tiered royalties from 14.0% to 18.0% annually on all sales made of any product outside of China.
After total aggregate sales of savolitinib have reached $5 billion outside of China, the royalty will step down over a two
year period, to an ongoing royalty rate of 10.5% to 14.5%. See Item 4.B. “Business Overview—Overview of Our
Collaborations—AstraZeneca” for more details.
Fruquintinib (HMPL-013)
Fruquintinib is a highly selective and potent oral inhibitor of vascular endothelial growth factor receptor, or
VEGFR, and consequently we believe that it has the potential to be a global best-in-class VEGFR inhibitor for many types
of solid tumors. Based on pre-clinical and clinical data to date, fruquintinib’s kinase selectivity has been shown to reduce
off-target toxicity. This allows for drug exposure that is able to fully inhibit VEGFR, a receptor tyrosine kinase which
contributes to angiogenesis, the build up of new blood vessels around a tumor, thereby contributing to the growth of
tumors, and use in potential combinations with other targeted therapies and chemotherapy in earlier lines of treatment with
larger patient populations. We believe these are points of meaningful differentiation versus other small molecule VEGFR
inhibitors, such as Sutent, Nexavar and Stivarga, that have already been approved.
In partnership with Eli Lilly, we are currently studying fruquintinib in colorectal cancer, non-small cell lung
cancer and gastric cancer in China.
We recently announced that fruquintinib had met its primary endpoint of overall survival and all secondary
endpoints in a Phase III registration study, called the FRESCO study, in colorectal cancer in China. Furthermore,
fruquintinib was well tolerated in the FRESCO study with safety as expected. The FRESCO study was conducted in 416
patients with locally advanced or metastatic colorectal cancer who had failed at least two prior systemic chemotherapies.
53
We now intend to present the full FRESCO results at a scientific event in 2017 and are on-track to submit fruquintinib’s
NDA to the CFDA by mid-2017. Subject to approvals, we expect fruquintinib will launch in China in 2018.
We completed our Phase II proof-of-concept study in third-line non-small cell lung cancer and the top-line data
demonstrated that this study clearly met the primary endpoint of median progression free survival, or PFS, or the time
taken for a tumor to grow more than 20%. We initiated a Phase III registration study, called the FALUCA study, in third-
line non-squamous non-small cell lung cancer patients in China in December 2015. In January 2017, we initiated a Phase
II study of fruquintinib in combination with Iressa in first-line EGFR-mutant non-small cell lung cancer patients in China.
We believe the most significant global market opportunity for fruquintinib will come by combining it with
chemotherapy for use in earlier line treatments. In January 2017, we presented data Phase I/Ib on fruquintinib in
combination with the chemotherapy agent Taxol in second-line gastric cancer, which established a well tolerated
combination dose with encouraging efficacy. We intend to start a Phase III study in second-line gastric cancer in China in
2017.
We have established a manufacturing (formulation) facility in Suzhou, China, which now produces Phase III
clinical supplies and will be used to produce fruquintinib, as well as our other drugs, for commercial supply if approved.
Sulfatinib (HMPL-012)
Sulfatinib is an oral drug candidate that selectively inhibits the tyrosine kinase activity associated with VEGFR
and fibroblast growth factor receptor 1, or FGFR1, a receptor for a protein which also plays a role in tumor growth, and
colony stimulating factor-1 receptor, or CSF-1R, a signaling pathway involved in blocking the activation of tumor-
associated macrophages, which cloak cancer cells from attack from killer T-cells.
We are currently conducting six clinical trials of sulfatinib and retain all rights to sulfatinib worldwide. We
completed a Phase II study neuroendocrine tumor patients to date in China. We recently reported the results from this
Phase II study in a total of 81 patients which indicated that sulfatinib was well tolerated with highly encouraging efficacy
in patients with both pancreatic neuroendocrine tumors and extra-pancreatic neuroendocrine tumors. Importantly, for
purposes of our potential global development strategy, there were 12 patients who had progressed after treatment with
systemic therapies (e.g., Sutent and Afinitor) and all benefited from sulfatinib treatment.
Sulfatinib is the first oncology candidate that we have taken through proof-of-concept in China and expanded to
a U.S. clinical study ourselves. It is now in a Phase I study in the United States to confirm safety and tolerability in
Caucasian patients. We are currently in the 300 mg cohort, which is equal to the sulfatinib Phase III dose in China. We
expect to initiate a U.S. Phase II neuroendocrine tumors study upon completion of the Phase I study in 2017. We initiated
a Phase II study in patients with locally advanced or metastatic radioactive iodine-refractory differentiated thyroid cancer
or medullary thyroid cancer in China in March 2016. We also initiated a further Phase II study in patients with biliary tract
cancer in January 2017.
As a result of the early positive trends in this open label study, we initiated a Phase III registration study in extra-
pancreatic neuroendocrine tumor patients in China in December 2015. We expect to report top-line data from our Phase
III in 2019. A second Phase III registration study in pancreatic neuroendocrine tumor patients was initiated in March 2016.
Epitinib (HMPL-813)
A significant portion of patients with non-small cell lung cancer go on to develop brain metastasis. Patients with
brain metastasis suffer from poor prognosis with a median overall survival of less than six months and low quality of life
with limited treatment options. Epitinib is a potent and highly selective oral EGFR inhibitor which has demonstrated brain
penetration and efficacy in pre-clinical and now clinical studies. EGFR inhibitors have revolutionized the treatment of
non-small cell lung cancer with EGFR activating mutations. However, approved EGFR inhibitors such as Iressa and
Tarceva cannot penetrate the blood-brain barrier effectively, leaving the majority of patients with brain metastasis without
an effective targeted therapy. We currently retain all rights to epitinib worldwide.
In December 2016, we presented positive results from our Phase Ib proof-of-concept study in non-small cell lung
cancer patients with EGFR activating mutations and brain metastasis, in which epitinib demonstrated encouraging tumor
response efficacy in both the lung and the brain. We are now planning to start a Phase III pivotal study on epitinib in China
in mid-2017. If epitinib is able to provide clinical benefit to non-small cell lung cancer patients with brain metastasis in
these studies, we believe that, subject to regulatory approval, we will be well-positioned to address a major global unmet
54
medical need. Additionally, we plan to initiate a Phase Ib study in patients with glioblastoma, a primary brain cancer that
harbors high levels of EGFR gene amplification, in China in 2017.
Theliatinib (HMPL-309)
Like epitinib, theliatinib is a novel molecule EGFR inhibitor under investigation for the treatment of solid tumors.
Tumors with wild-type EGFR activation, for instance, through gene amplification or protein over-expression, are less
sensitive to current EGFR tyrosine kinase inhibitors, Iressa and Tarceva, due to sub-optimal binding affinity. Theliatinib
has been designed with strong affinity to the wild-type EGFR kinase and has been shown to be five to ten times more
potent than Tarceva. Consequently, we believe that theliatinib could benefit patients with esophageal and head and neck
cancer, tumor-types with a high incidence of wild-type EGFR activation. We currently retain all rights to theliatinib
worldwide.
We are currently conducting a Phase I dose escalation study for theliatinib, with preliminary activity observed,
and have initiated a Phase II study in patients with esophageal cancer with a high level of EGFR activation.
HMPL-523
We believe HMPL-523 is a potential global first-in-class oral inhibitor targeting spleen tyrosine kinase, or Syk,
a key protein involved in B-cell signaling. Modulation of the B-cell signaling system has been proven to significantly
advance the treatment of certain chronic immune diseases, such as rheumatoid arthritis as well as hematological cancers.
To date, only monoclonal antibody immune modulators, which seek to use the patient’s own immune system to treat the
disease, have been approved. As an oral drug candidate, we believe HMPL-523 has important advantages over intravenous
monoclonal antibody immune modulators in rheumatoid arthritis in that as small molecule compounds clear the system
faster, thereby reducing the risk of infections from sustained suppression of the immune system.
Moreover, other drug development companies have tried to design small molecule Syk inhibitors for the treatment
of chronic immune diseases, but designing an efficacious and safe Syk inhibitor has proven to be exceptionally difficult.
No drug products targeting Syk have been approved to date due to severe off-target toxicity, such as hypertension, as a
result of poor kinase selectivity. HMPL-523 is a potent and highly selective oral inhibitor specifically designed to
overcome these off-target toxicity issues. We currently retain all rights to HMPL-523 worldwide.
With respect to the treatment of hematological cancers, Gilead Sciences Inc., or Gilead, and Takeda
Pharmaceutical Company Ltd., or Takeda, both published in late 2015 encouraging proof-of-concept data showing strong
signals of efficacy for their respective small molecule Syk inhibitors. This data is consistent with the major clinical
successes and drug approvals in recent years of inhibitors targeting other kinases in the B-cell signaling pathway such as
Bruton’s tyrosine kinase, or BTK, and phosphoinositide 3’-kinase (cid:303)(cid:15)(cid:3)(cid:82)(cid:85)(cid:3)(cid:51)(cid:44)(cid:22)(cid:46)(cid:303)(cid:17)(cid:3)(cid:58)(cid:75)(cid:76)(cid:79)(cid:72)(cid:3)(cid:87)(cid:75)(cid:72)(cid:86)(cid:72)(cid:3)(cid:37)(cid:55)(cid:46)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:51)(cid:44)(cid:22)(cid:46)(cid:303)(cid:3)(cid:76)(cid:81)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:82)(cid:85)(cid:86)(cid:3)
have been successful, resistance to these inhibitors can emerge over time, leading to loss in efficacy, and new targets in B-
cell signaling such as Syk are potential solutions to this problem.
Our Phase I clinical trial in healthy volunteers completed a single ascending dose segment in mid-2015, where a
single dose is given and the volunteers are observed and tested to confirm safety, and the results were well above the
expected efficacious dose. The multiple ascending dose segment of the trial, where multiple doses are given to learn how
the drug candidate is processed within the body was successfully completed in October 2015. We have submitted our U.S.
immunology IND application and engaged with the FDA around our plan for development in rheumatoid arthritis. We are
now preparing to submit additional data to the FDA after which we will consider our U.S. development strategy in
immunology.
In addition, in early 2016 we initiated a Phase I trial in Australia in patients with relapsed and/or refractory B-
cell non-Hodgkin’s lymphoma or chronic lymphocytic leukemia for whom there is no standard therapy. In mid-2016, we
received clearance from the CFDA on our hematological cancer IND application and as a result, in January 2017, we
started Phase I dose escalation in patients with B-cell non-Hodgkin’s lymphoma or chronic lymphocytic leukemia in China.
Once our maximum tolerated dose is reached, we intend to expand into a proof-of-concept Phase Ib/II study with several
cohorts of tumor sub-types as either monotherapy or in combination with other therapies hoping in both cases to produce
preliminary proof-of-concept data on HMPL-523 in hematological cancer during 2017.
We believe the market potential for a successful Syk inhibitor is substantial. To our knowledge, we are the only
company worldwide, other than Gilead, developing Syk inhibitors for chronic immune diseases as well as oncology.
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HMPL-689
HMPL-(cid:25)(cid:27)(cid:28)(cid:3)(cid:76)(cid:86)(cid:3)(cid:68)(cid:3)(cid:81)(cid:82)(cid:89)(cid:72)(cid:79)(cid:15)(cid:3)(cid:75)(cid:76)(cid:74)(cid:75)(cid:79)(cid:92)(cid:3)(cid:86)(cid:72)(cid:79)(cid:72)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:83)(cid:82)(cid:87)(cid:72)(cid:81)(cid:87)(cid:3)(cid:86)(cid:80)(cid:68)(cid:79)(cid:79)(cid:3)(cid:80)(cid:82)(cid:79)(cid:72)(cid:70)(cid:88)(cid:79)(cid:72)(cid:3)(cid:76)(cid:81)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:82)(cid:85)(cid:3)(cid:87)(cid:68)(cid:85)(cid:74)(cid:72)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:76)(cid:86)(cid:82)(cid:73)(cid:82)(cid:85)(cid:80)(cid:3)(cid:51)(cid:44)(cid:22)(cid:46)(cid:303)(cid:15)(cid:3)(cid:68)(cid:3)(cid:78)(cid:72)(cid:92)(cid:3)
component in the B-cell receptor signaling pathway. We have designed HMPL-(cid:25)(cid:27)(cid:28)(cid:3) (cid:90)(cid:76)(cid:87)(cid:75)(cid:3) (cid:86)(cid:88)(cid:83)(cid:72)(cid:85)(cid:76)(cid:82)(cid:85)(cid:3) (cid:51)(cid:44)(cid:22)(cid:46)(cid:303)(cid:3) (cid:76)(cid:86)(cid:82)(cid:73)(cid:82)(cid:85)(cid:80)(cid:3)
selectivity, in particular to no(cid:87)(cid:3) (cid:76)(cid:81)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3) (cid:51)(cid:44)(cid:22)(cid:46)(cid:1845)(cid:3) (cid:11)(cid:74)(cid:68)(cid:80)(cid:80)(cid:68)(cid:12)(cid:15)(cid:3) (cid:87)(cid:82)(cid:3) (cid:80)(cid:76)(cid:81)(cid:76)(cid:80)(cid:76)(cid:93)(cid:72)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:85)(cid:76)(cid:86)(cid:78)(cid:3) (cid:82)(cid:73)(cid:3) (cid:86)(cid:72)(cid:85)(cid:76)(cid:82)(cid:88)(cid:86)(cid:3) (cid:76)(cid:81)(cid:73)(cid:72)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3) (cid:70)(cid:68)(cid:88)(cid:86)(cid:72)(cid:71)(cid:3) (cid:69)(cid:92)(cid:3) (cid:76)(cid:80)(cid:80)(cid:88)(cid:81)(cid:72)(cid:3)
suppression. HMPL-689’s strong potency, particularly at the whole blood level, also allows for reduced daily doses to
minimize compound related toxicity, such as the high l(cid:72)(cid:89)(cid:72)(cid:79)(cid:3) (cid:82)(cid:73)(cid:3) (cid:79)(cid:76)(cid:89)(cid:72)(cid:85)(cid:3) (cid:87)(cid:82)(cid:91)(cid:76)(cid:70)(cid:76)(cid:87)(cid:92)(cid:3) (cid:82)(cid:69)(cid:86)(cid:72)(cid:85)(cid:89)(cid:72)(cid:71)(cid:3) (cid:90)(cid:76)(cid:87)(cid:75)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:73)(cid:76)(cid:85)(cid:86)(cid:87)(cid:3) (cid:74)(cid:72)(cid:81)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3) (cid:51)(cid:44)(cid:22)(cid:46)(cid:303)(cid:3)
inhibitor Zydelig. HMPL-689’s pharmacokinetic properties have been found to be favorable with expected good oral
absorption, moderate tissue distribution and low clearance in preclinical pharmacokinetic studies. We also expect HMPL-
689 will have low risk of drug accumulation and drug-to-drug interaction. Given this, we believe that HMPL-689 has the
potential to be a global best-in-(cid:70)(cid:79)(cid:68)(cid:86)(cid:86)(cid:3)(cid:51)(cid:44)(cid:22)(cid:46)(cid:303)(cid:3)(cid:68)(cid:74)(cid:72)(cid:81)(cid:87)(cid:17)(cid:3)(cid:3)(cid:58)(cid:72)(cid:3)(cid:70)(cid:88)(cid:85)(cid:85)(cid:72)(cid:81)(cid:87)(cid:79)(cid:92)(cid:3)(cid:85)(cid:72)(cid:87)(cid:68)(cid:76)(cid:81)(cid:3)(cid:68)(cid:79)(cid:79)(cid:3)(cid:85)(cid:76)(cid:74)(cid:75)(cid:87)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:43)(cid:48)(cid:51)(cid:47)-689 worldwide.
In 2016, we completed a Phase I dose escalation study in healthy adult volunteers in China to evaluate HMPL-
689’s pharmacokinetic and safety profile. We have established the likely effective Phase II dose, and we now plan to
transition this into a Phase I in patients with hematologic malignancies in 2017 in Australia and in China where we received
IND application clearance in January 2017.
HMPL-453
HMPL-453 is a potential first-in-class novel, highly selective and potent small molecule that targets FGFR 1/2/3,
a sub-family of receptor tyrosine kinases. Aberrant FGFR signaling has been found to be a driving force in tumor growth
(through tissue growth and repair), promotion of angiogenesis and resistance to anti-tumor therapies. To date, there are no
approved therapies specifically targeting the FGFR signaling pathway. In pre-clinical studies, HMPL-453 demonstrated
superior kinase selectivity and safety profile as well as strong anti-tumor potency, as compared to drug candidates in the
same class. Abnormal FGFR gene alterations are believed to be the drivers of tumor cell proliferation in several solid
tumor settings. We currently retain all rights to HMPL-453 worldwide.
In late 2016, we received clinical trial clearance in Australia and China. We subsequently started a Phase I dose
escalation study in Australia and plan to begin a similar study in China in mid-2017. These first-in-human Phase I studies
aim to evaluate safety, tolerability, pharmacokinetics and preliminary anti-tumor activity in patients with advanced or
metastatic solid malignancies, who have failed or cannot tolerate standard therapies or for whom no standard therapies
exist.
For more detailed information on the pre-clinical and clinical studies of these and our other drug candidates,
please see “—Our Clinical Pipeline.”
Our Commercial Platform
Our Commercial Platform is principally operated through joint ventures with three of the largest China-based
healthcare conglomerates, Shanghai Pharmaceuticals, Sinopharm and Guangzhou Baiyunshan. We are currently focusing
primarily on the distribution and manufacture of cardiovascular and anti-viral products, as well as the distribution of third-
party products such as Concor, a cardiovascular drug from Merck Serono Co., Ltd., or Merck Serono, and Seroquel, a drug
for the treatment of various psychiatric disorders from AstraZeneca. Our Commercial Platform has generated substantial
cashflow over the years and will serve to help bring products from our Innovation Platform to market quickly and
efficiently in China upon regulatory approval. Net income attributable to our company from the continuing operations of
our Commercial Platform grew by 10.1% from $22.8 million in 2014 to $25.2 million in 2015 and further grew by 179.6%
to $70.3 million in 2016. Net income attributable to our company from the continuing operations of our Commercial
Platform in the year ended December 31, 2016 included a one-time gain of $40.4 million, net of tax, from land
compensation and other subsidies paid to Shanghai Hutchison Pharmaceuticals by the Shanghai government.
Our Research and Development Approach
The strategy of our research and development program is to differentiate ourselves from companies developing
and commercializing competing kinase inhibitors with a chemistry-focused approach. Our approach focuses on the
development of kinases inhibitors with:
(cid:120)
unique selectivity to limit target-based toxicity,
56
(cid:120)
(cid:120)
(cid:120)
high potency to optimize the dose selection with the objective to lower the required dose and thereby
limit compound-based toxicity,
chemical structures deliberately engineered to improve drug exposure in the targeted tissue, and
the ability to be combined with other therapeutic agents.
Our approach consists of two main pillars, which we believe provides a balanced risk profile for our Innovation
Platform: (i) developing synthetic compounds against novel targets with global first-in-class potential, which includes
savolitinib (targeting c-Met), HMPL-523 (targeting Syk) and HMPL-453 (targeting FGFR1/2/3); and (ii) developing
synthetic compounds against validated targets with clear differentiation to potentially be a global best-in-class/next
generation therapy in their respective categories, including fruquintinib (targeting VEGFR1/2/3), sulfatinib (targeting
VEGFR/FGFR1/CSF1-R), epitinib (targeting EGFRm+ brain metastasis), theliatinib (targeting EGFR wild type) and
HMPL-(cid:25)(cid:27)(cid:28)(cid:3)(cid:11)(cid:87)(cid:68)(cid:85)(cid:74)(cid:72)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:51)(cid:44)(cid:22)(cid:46)(cid:303)(cid:12)(cid:17)
We are developing many of our drug candidates against multiple indications, which in some cases are common
Our Clinical Pipeline
to one or more of our drug candidates.
Savolitinib c-Met Inhibitor
We first became interested in studying c-Met over a decade ago as it became clear that c-Met functions abnormally
in many types of solid tumors and as such increasingly represented an important possible target in the treatment of cancer.
We designed savolitinib as a potent and highly selective oral inhibitor, which through chemical structure modification
addressed renal toxicity, the primary issue that has prevented c-Met inhibitors developed by other biopharmaceutical
companies from gaining regulatory approval.
Mechanism of Action
C-Met, which is also known as hepatocyte growth factor receptor, or HGFR, is a signaling pathway that has
specific roles in normal mammalian growth and development. However, the HGFR pathway has also been shown to
function abnormally in a range of different cancers, primarily through c-Met gene amplification, c-Met over-expression
and gene mutations. The aberrant activation of c-Met has been demonstrated to be highly correlated in many cancer
indications, including kidney, lung, gastric, colorectal, esophageal and brain cancer, and plays a major role in cancer
pathogenesis (i.e., the development of the cancer), including tumor growth, survival, invasions, metastasis, the suppression
of cell death as well as tumor angiogenesis. As a result, c-Met has become a widely investigated anti-cancer target in recent
years with several c-Met inhibitors under development by different companies, although to date none have received
regulatory approval.
C-Met also plays a role in drug resistance in many tumor types. For instance, c-Met gene amplification has been
found in non-small cell lung cancer and colorectal cancer following anti-EGFR treatment, leading to drug resistance.
Furthermore, c-Met over-expression has been found to emerge in renal cell carcinoma following anti-VEGFR treatment.
Savolitinib Research Background
Around the time of the 2008 American Association for Cancer Research meetings, selective c-Met compounds
were unveiled by multinational pharmaceutical companies such as Pfizer Inc. (PF-04217903), Janssen (JNJ-38877605) as
well as biotech companies including Incyte Corporation (INC280, which was later licensed to Novartis International AG,
or Novartis) and SGX Pharmaceuticals (SGX-523, which was later licensed to Eli Lilly). These compounds all had positive
pre-clinical data that supported their high c-Met selectivity and pharmacokinetic and toxicity profiles, and as a result they
were all progressed into Phase I clinical studies in 2009. Unfortunately, this first wave of selective c-Met inhibitors did
not progress very far in the clinic. The subsequent failure of many of this first wave of c-Met inhibitors was a major
setback, and subsequently led to a decline in research interest in the c-Met target.
However, we took the decline in interest as an opportunity to increase our investment in our selective c-Met
research program. We studied emerging hypotheses around the reason for the kidney toxicity issues in the above mentioned
c-Met inhibitors. The issue appeared to be that certain metabolites of earlier compounds had dramatically reduced
solubility and appeared to crystalize in the kidney, resulting in obstructive toxicity. These metabolites were not evident in
the pre-clinical animal models and only became evident in human testing.
57
During 2010 and 2011, we designed and completed pre-clinical studies for our compound, savolitinib (also known
as AZD6094 and HMPL-504, formerly known as volitinib). Despite replacing the quinoline region of the earlier c-Met
compounds which was believed to help drive their selective properties, savolitinib remains a highly selective compound.
It also has the important advantage that it has not shown any renal toxicity to date and does not appear to carry the same
metabolites problems as the earlier selective c-Met compounds.
Figure 2: Chemical structures of selective c-Met inhibitors versus
savolitinib chemical structure, showing replacement of the quinoline group
Sources:
1. Zou H, et al, 99th Annual Meeting
12 – 16 April 2008; San Diego, USA
for American Association
for Cancer Research (AACR);
2. Perera T, et al, 99th Annual Meeting for American Association for Cancer Research (AACR);
12 – 16 April 2008; San Diego, USA
3. Bounaud et al, WO 2008/051808 A2
4. Liu X, et al, 99th Annual Meeting
12 – 16 April 2008; San Diego, USA
for American Association
for Cancer Research (AACR);
5. Su W, et al, 105th Annual Meeting of the American Association for Cancer Research (AACR); April 2014;
San Diego, USA.
6. Diamond S, et. al, Species-specific metabolism of SGX523 by aldehyde oxidase, Drug Metabolism and
Disposition, 2010, 38, 1277-85
Savolitinib Pre-clinical Evidence
In vitro biological profile
In pre-clinical studies, savolitinib demonstrated strong in vitro activity against c-Met, affecting its downstream
signaling targets and thus blocking the related cellular functions effectively, including proliferation, migration, invasion,
scattering and the secretion of vascular endothelial growth factor, or VEGF, that plays a pivotal role in tumor angiogenesis.
One of our key areas of focus in our pre-clinical studies was to achieve superior selectivity of savolitinib on a
number of kinases. A commonly used quantitative measure of selectivity is IC50, which represents the concentration of a
drug that is required for 50% inhibition of the target kinase in vitro and the plasma concentration required for obtaining
50% of a maximum effect in vivo. High selectivity is achieved with a very low IC50 for the target cells, and a very high
IC50 for the healthy cells (approximately 100 times higher than for the target cells). In the c-Met enzymatic assay, which
58
is a method of measuring enzyme activity, savolitinib showed potent activity with IC50 of 5 nM (nano-mole, a microscopic
unit of measurement for the number of small molecules required to deliver the desired inhibitory effect). In a kinase
selectivity screening with 274 kinases, savolitinib had potent activity against the c-Met Y1268T mutant (comparable to
the wild-type), weaker activity against other c-Met mutants and almost no activity against all other kinases. Savolitinib
was found to be approximately 1,000 times more potent to c-Met than the next non-c-Met kinase.
Figure 3: The high selectivity of savolitinib as shown on a panel of 274 different kinases
Source: W. Su, et al, 2014 American Association for Cancer Research
Note: The red dots shown in the graphic represent the five kinases, all c-Met wild-type or mutations, which are
inhibited over 90% at 1,000 nM (1 (cid:80)M) of savolitinib. The other 269 kinases are inhibited by less than 51%.
In cell-based assays measuring activity against c-Met phosphorylation, savolitinib demonstrated potent activity
in both ligand-independent (gene amplified) or ligand-dependent (over-expression) cells with IC50s at low nanomolar
levels. Phosphorylation is the binding of a phosphate group to a protein or other organic molecule, which has the effect of
activating the function of that protein.
In target related tumor cell function assays, including inhibition on HGF-dependent tumor cell proliferation,
migration, and invasion, savolitinib showed high potency with IC50 of less than 10 nM. In addition, savolitinib
demonstrated potent in vitro anti-angiogenesis activity. Savolitinib inhibited VEGF secretion of lung cancer cell H441 in
a dose-dependent manner with an IC50 of 45 nM and inhibited HGF-dependent human umbilical vein endothelial cells
tube formation with an IC50 of 12 nM.
Furthermore, when we tested savolitinib in several different tumor cell lines, it demonstrated cytotoxicity only
on tumor cells that were c-Met gene amplified or c-Met over-expressed. In other cells, inhibition measurements
demonstrated that IC50 amounts were over 30,000 nM, which is thousands of times higher than the IC50 on c-Met tumor
cells. For example, in testing savolitinib in NCI-H1993 non-small cell lung cancer cells, which have high c-Met gene
amplification, IC50 measurements were less than 10 nM. This suggests that it would require at least 3,000 times as much
savolitinib to inhibit non-c-Met cells to the same degree as it inhibits a NCI-H1993 c-Met cell, thereby demonstrating
savolitinib’s high selectivity for c-Met. Similarly, in c-Met gene amplified gastric cancer cells such as SNU-5 and Hs746T,
59
savolitinib demonstrated IC50s of 3 nM and 5 nM, respectively. The chart below summarizes the c-Met status and IC50on
various cell lines known to have c-Met gene amplification or c-Met over-expression, versus non-c-Met cells.
The data above suggest that (i) savolitinib has potent activity against tumor cell lines with c-Met gene
amplification in the absence of HGF, indicating that there is HGF-independent c-Met activation in these cells;
(ii) savolitinib has potent activity in tumor cell lines with c-Met over-expression, but only in the presence of HGF,
indicating HGF-dependent c-Met activation; and (iii) savolitinib has no activity in tumor cell lines with low c-Met over-
expression/gene amplification, suggesting that savolitinib has strong kinase selectivity.
In vivo efficacy
We tested the in vivo activity of savolitinib on different human tumor xenograft models (a common pre-clinical
technique where human tumor cells are transplanted into various animal models). For example, in a gastric cancer Hs746T
model with c-Met gene amplification, savolitinib was found to inhibit tumor growth potently with good dose response. At
a 2.5 mg/kg (kg weight of the animal) once daily oral dose, savolitinib induced tumor shrinkage, suggesting potent anti-
tumor activity. Moreover, the anti-tumor activity appeared to correlate well with the inhibition of c-Met phosphorylation
and activation.
Similarly and as in the NCI-H1993 in vitro studies, in vivo studies on c-Met gene amplified NCI-H1993
xenografts also showed significant anti-tumor efficacy, with a median effective dose, or ED50, of 4.7 mg/kg per day. The
median effective dose is the dose that produces the desired effect in 50% of the population that takes it.
Savolitinib showed strong synergistic effects with other anti-cancer therapies in certain pre-clinical models. We
developed the HCC827C4R model to test several savolitinib combinations, a model which has high c-Met gene
amplification and is originally derived from a non-small cell cancer cell line that is highly sensitive to EGFR inhibitors.
The combination of savolitinib with the EGFR inhibitor Iressa in the HCC827C4R xenograft model demonstrated strong
synergistic effect, suggesting targeting multiple pathways simultaneously may provide a viable approach for the treatment
of tumors with activation of multiple pathways. These data suggest that there is a strong rationale for patients whose
disease progressed after EGFR tyrosine kinase inhibitor treatment with c-Met gene amplification to use a combination
therapy including savolitinib.
Figure 4: Savolitinib in combination with Iressa in the HCC827C4R Met gene amplification
model to test several savolitinib (HMPL-504) combinations, showing a clear dose-dependent response
Source: Chi-Med pre-clinical data for savolitinib
Note: mpk = mg per kg of animal
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We also studied in several subcutaneous xenograft models the anti-tumor effect of savolitinib in combination
with Taxotere, a commonly used chemotherapy in gastric cancer treatment. In our studies, the combination produced
additive or synergistic anti-tumor effect, and no significant additive or synergistic toxicity between the two drugs
was found.
Savolitinib Early and Completed Clinical Development
As discussed below, we have completed various clinical trials of savolitinib in Australia and China.
Savolitinib Phase I Study in Australia
We conducted the first-in-human Phase I study of savolitinib in patients with advanced solid tumors starting in
2012 in Australia. The study was conducted to determine the maximum tolerated dose or recommended Phase II dose,
dose-limiting toxicities, pharmacokinetics profile and preliminary anti-tumor activity of savolitinib. The first patient was
enrolled in February 2012, and enrollment of a total of 47 patients was completed in June 2015.
The data of 35 patients in the dose escalation stage of this Phase I study were presented at the 2014 annual meeting
of the American Society of Clinical Oncology. Adverse events greater than or equal to grade 3 based on the National
Cancer Institute’s Common Terminology Criteria for Adverse Event, or CTC, which is a set of criteria for the standardized
classification of adverse effects of drugs used in cancer therapy (with 1 and 2 being relatively mild and higher numbers
(up to 5) being more severe) with greater than 5% incidence associated with savolitinib treatment were fatigue (9.1%) and
shortness of breath, or dyspnea (6.1%). Four patients reported five incidences of dose-limiting toxicities, including one
CTC grade 3 incidence of elevated alanine transaminase (600 mg once daily), one incidence of CTC grade 3 fatigue
(800 mg once daily), two incidences of CTC grade 3 fatigue and one incidence of CTC grade 3 headache (1,000 mg once
daily). Notably, no obstructive kidney toxicity was seen in this study.
We identified 800 mg as the maximum tolerated dose of the once daily regimen. A pharmacokinetics analysis
showed savolitinib was rapidly absorbed with a half-life of approximately five hours, and drug exposure increased in a
dose-proportional manner and with no obvious accumulation. This study showed that savolitinib was well tolerated at
doses of up to 800 mg once daily, proving that savolitinib is capable of providing complete target inhibition over 24 hours
based on drug concentration required for complete c-Met phosphorylation inhibition derived in pre-clinical studies.
Savolitinib Phase I study in China
In June 2013, we initiated a Phase I dose escalation study of savolitinib in China. By June 2015, a total of
41 patients had been enrolled across the dose escalation and dose expansion stages of the study. We concluded that the
data from this China Phase I study were consistent with the Australian Phase I study discussed above and that savolitinib
was well tolerated at doses up to 800 mg once daily or 600 mg twice daily. The complete Phase I study results, combining
data from Australia and China, were presented at the American Society of Clinical Oncology’s annual meeting in 2015.
Kidney Cancer
Emerging Efficacy in Papillary Renal Cell Carcinoma
During the Australia Phase I study, our investigators began to notice positive outcomes among papillary renal
cell carcinoma patients with a strong correlation to c-Met gene amplification status. As a result, we became interested in
this area because there are no effective approved treatments to date for papillary renal cell carcinoma.
Out of a total of eight papillary renal cell carcinoma patients in our Australia Phase I study who have been treated
with various doses of savolitinib, three have achieved partial response (tumor measurement reduction of greater than 30%).
One of these patients has been on the drug for over 30 months and has had tumor measurement reduction of greater than
85%. A further three of these eight papillary renal cell carcinoma patients achieved stable disease, which means patients
without partial response but with a tumor measurement increase of less than 20%.
The aggregate objective response rate (the percentage of patients in the study who show either partial response
or complete response) of 38% is very encouraging for papillary renal cell carcinoma, which as stated above currently has
no effective approved treatments on the global market. These responses were also durable as demonstrated by a patient
who has been on the therapy for over 30 months. Prior to savolitinib, the highest objective response rate reported for a
papillary renal cell carcinoma specific Phase II study (of 74 papillary renal cell carcinoma patients) was 13.5% by foretinib
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(a multi-kinase inhibitor of c-Met/VEGFR2, which was not submitted for regulatory approval) in 2012, as reported by the
National Institutes of Health’s National Center for Biotechnology Information.
Importantly, the level of tumor response among these papillary renal cell carcinoma patients correlated closely
with the level of c-Met gene amplification. The chart below shows that patients with consistent c-Met gene amplification
(across the whole tumor) respond most to savolitinib. Patients with c-Met gene amplification on parts of the tumor (focal
Met) respond only if it is a large part of the tumor. Finally, patients with no c-Met gene amplification respond least.
Importantly (and not indicated on the chart below), the magnitude of c-Met gene amplification can vary widely between
patients, with those patients with the highest level of c-Met gene amplification responding most to the treatment.
In addition, a colorectal cancer patient in the Phase I study with high levels of c-Met gene amplification in the
600 mg once daily cohort achieved 29% tumor reduction.
Phase II study of savolitinib monotherapy in papillary renal cell carcinoma in the United States, Canada and
Europe
In February 2017, we presented the results of our 109 patient global Phase II study of savolitinib monotherapy
in first-line papillary renal cell carcinoma, a tumor type which currently has no approved targeted treatments on the global
market. This Phase II study was the largest and most comprehensive clinical study in papillary renal cell carcinoma ever
conducted. The data from this Phase II study showed a clear efficacy signal in c-MET-driven patients as compared to c-
MET-independent patients (with median PFS of 6.2 months versus 1.4 months (p<0.0001 with a hazard ratio of 0.33), and
objective response rate of 18.2% versus 0.0% (p=0.002)), an encouraging long duration of response and safety profile.
Overall survival is not yet mature for c-Met-driven patients. Savolitinib was well tolerated with no adverse events greater
than or equal to CTC grade 3 with more than 5% incidence related to this treatment. Total aggregate CTC grade 3 or 4
adverse events related to this treatment occurred in only 19% of patients studied as compared to an average of 70-75%
CTC grade 3 or 4 adverse events recorded in VEGFR inhibitors (such as sunitinib and votrient (pazopanib)) in multiple
other renal cell carcinomas studies.
Figure 5: Phase II study of savolitinib monotherapy in papillary renal cell carcinoma in the United States, Canada and
Europe. This study clearly demonstrated c-Met driven patients had better progression free survival compared to c-Met
independent patients.
100
80
60
40
20
)
%
(
y
t
i
l
i
b
a
b
o
r
P
0
0
c-MET
driven
(n=44)
c-MET
independent
(n=46)
Events, n
34 (77.3%)
43 (93.5%)
Median, mo.
6.2 (4.1, 7.0)
1.4 (1.4, 2.7 )
Stratified HR [95% CI]:
0.33 [0.20-0.52]
P<0.0001
c-Met driven
c-Met independent
c-Met status unknown
2
4
6
8
10
12
14
16
18
Months
62
Non-Small Cell Lung Cancer
Phase I study of savolitinib in combination with Tagrisso T790M(+/–) non-small cell lung cancer (AstraZeneca
TATTON dose finding study)
In November 2015, AstraZeneca received FDA approval for Tagrisso, its drug candidate for the treatment of
T790M+ EGFR activating mutations, or EGFRm+, tyrosine kinase inhibitor-resistant non-small cell lung cancer. Tagrisso
was granted Breakthrough Therapy designation and expedited approval by the FDA and was one of the fastest development
programs ever recorded at just over two and one-half years from the start of Phase I clinical trials to FDA approval. We
understand that the speed of development and approval of Tagrisso was driven by the clearly defined molecular pathways
(T790M), the existence of a major unmet medical need in the treatment of non-small cell lung cancer, and the high degree
of efficacy demonstrated by Tagrisso. In this T790M+ patient population, Tagrisso recorded an objective response rate of
59% in two large-scale Phase II studies that formed the basis for FDA approval. Another portion of EGFRm+ tyrosine
kinase inhibitor-resistant patients progress because of c-Met gene amplification. The TATTON Phase I study of a
Tagrisso plus savolitinib combination treatment was initiated in August 2014 to determine the safety and tolerability of
the combination therapy and the recommended Phase II dose. Based on the positive safety and tolerability results and
encouraging early clinical efficacy, a Phase IIb proof-of-concept study is currently underway in Japan, South Korea,
Taiwan and the United States to confirm safety and efficacy.
The primary objective of the TATTON Phase I study was to establish a safe and effective combination dose. All
patients were screened for their T790M status (+/–) as well as some for their c-Met gene amplification status, if sufficient
tissue samples were available, although patients of all tumor types were admitted to the trial regardless of status. A total
of 12 patients were dosed with either 600 mg or 800 mg of savolitinib in combination with 80 mg of Tagrisso once daily.
It was found that both 600 mg and 800 mg once daily could be combined with 80 mg of Tagrisso once daily with a safety
profile consistent with single agent use. Furthermore, of the 11 evaluable patients in the study, six partial responses have
been observed to date. This resulted in an objective response rate of 55% and contributed to a disease control rate of 100%.
Figure 6: Best percentage changes in tumor size versus baseline in patients
(with each column representing a single patient) treated with a combination of savolitinib and Tagrisso
in the TATTON Phase I study, by T790M status when available
63
Source: Oxnard et al, Preliminary results of TATTON, a multi-arm Phase Ib trial of AZD9291 combined with
MEDI4736, AZD6094 or selumetinib in EGFR-mutant lung cancer, J Clin Oncol 33, 2015 (suppl; abstr 2509)
Note: 6 patients ongoing treatment at data cut-off
None of the adverse effects in the 600 mg dose were CTC grade 3 or higher, and only two in the 800 mg dose
were CTC grade 3 or higher. These were nausea (8.3%) and decreased white blood cell count (8.3%).
This novel combination of two well-tolerated therapies, albeit on a low base size, has delivered significant
objective response rate levels. As a result, we have now expanded the TATTON Phase Ib study to a further 25 patients to
demonstrate broader proof-of-concept, as discussed below in Study 5.
Savolitinib Current Clinical Development and Near-Term Plans
We are currently testing savolitinib in partnership with AstraZeneca in multiple ongoing clinical studies across
papillary renal cell carcinoma, clear cell renal cell carcinoma, non-small cell lung cancer and gastric cancer, both as a
monotherapy and as a combination therapy with immunotherapy (durvalumab), targeted therapies (Tagrisso and Iressa) or
chemotherapy (Taxol). These trials are being conducted or are expected to begin in the near term in the United States,
Canada, Europe, China, Japan, South Korea and Taiwan.
Kidney Cancer
Phase III papillary renal cell carcinoma, savolitinib monotherapy—in the United States, Canada and Europe
(Study 1 in pipeline chart; Status: planned for 2017)
We, together with AstraZeneca, have determined a global Phase III protocol in consultation with the U.S. FDA
and European Medicines Agency, and plan to initiate the Phase III trial in the second quarter of 2017. In addition, we are
currently conducting a global molecular epidemiology study using archived tissue samples from over 300 papillary renal
cell carcinoma patients in Europe, Asia and North America. This molecular epidemiology study is designed to confirm
that c-Met driven patients have similar or worse outcomes as compared to c-Met independent patients.
Phase II papillary renal cell carcinoma savolitinib versus other tyrosine kinase inhibitors sponsored by the U.S.
National Cancer Institute—(Study 2 in pipeline chart; Status: enrolling)
In a Phase II study sponsored by the U.S. National Cancer Institute, named the PAPMET study, the efficacy of
multiple tyrosine kinase inhibitors are being tested in patients with metastatic papillary renal cell carcinoma. The tyrosine
kinase inhibitors being assessed in this study include Sutent, Cabometyx (cabozantinib), Xalkori (crizotinib) and
savolitinib. The PAPMET study is expected to enroll about 180 patients in over 70 locations in the United States and
report in 2019.
Phase Ib papillary renal cell carcinoma, savolitinib in combination with durvalumab (anti-programmed death
ligand 1 antibody)—in the United Kingdom (Study 3 in pipeline chart; Status: enrolling)
A Phase Ib dose-finding study of savolitinib, named the CALYPSO study, in combination with durvalumab, an
anti-programmed death-ligand 1 antibody, in papillary renal cell carcinoma, was initiated in the first half of 2016 in the
United Kingdom. This study is premised on the hypothesis that a tyrosine kinase inhibitor/immunotherapy combination,
if tolerable, could benefit all papillary renal cell carcinoma patients, not only those patients with c-Met gene amplification.
During 2016, this dose-finding section of the CALYPSO study successfully established the combination dose of savolitinib
with durvalumab, and the study moved on to the expansion stage.
Phase Ib clear cell renal cell carcinoma (second-line), VEGFR tyrosine kinase inhibitor-refractory, savolitinib
monotherapy—in the United Kingdom (Study 4 in pipeline chart; Status: enrolling)
A Phase Ib dose-finding study of savolitinib as a monotherapy, also part of the CALYPSO study, to evaluate
preliminary efficacy as well as safety profile and tolerability among Sutent refractory clear cell renal cell carcinoma
patients, being those patients who had not responded, or stopped responding, to treatment with Sutent, was initiated in the
first half of 2016 in the United Kingdom. A majority of these patients were known to have high levels of c-Met over-
expression and may benefit from exposure to a highly selective c-Met inhibitor. As mentioned above, this dose-finding
section of the CALYPSO study successfully established the combination dose, and we have progressed this CALYPSO
study to the expansion stage in clear cell renal cell carcinoma patients to further explore efficacy.
64
Phase Ib clear cell renal cell carcinoma (second-line), VEGFR tyrosine kinase inhibitor-refractory, savolitinib
in combination with durvalumab (anti-programmed death-ligand 1 antibody) (Study 5 in pipeline chart; Status:
enrolling)
A Phase Ib dose-finding study of savolitinib in combination with durvalumab in clear cell renal cell carcinoma
patients, was initiated in the first half of 2016 in the United Kingdom (also part of the CALYPSO study). This study is
premised on the hypothesis that the tyrosine kinase inhibitor/immunotherapy combination, if tolerable, could be more
effective in treating clear cell renal cell carcinoma by targeting the disease from multiple angles. The dose-finding section
of the CALYPSO study successfully established the combination dose, and the study progressed to the expansion stage in
clear cell renal cell carcinoma patients to further explore efficacy.
Non-small Cell Lung Cancer
Phase II non-small cell lung cancer (second-line), EGFR tyrosine kinase inhibitor-refractory, savolitinib in
combination with Tagrisso (T790M inhibitor)—Global (Study 6 in pipeline chart; Status: enrolling)
As a result of the encouraging study data presented at the American Society of Clinical Oncology annual meeting
in 2015, which showed 55% objective response rate and 100% disease control rate among Iressa/Tarceva refractory
T790M+/– (which means the patient’s T790M status is known) patients in the TATTON Phase I dose finding study, we
have initiated a global Phase II expansion study in second-line non-small cell lung cancer patients to confirm safety and
efficacy and to further define the molecular types that benefit from the combination therapy. One arm of the study aims to
recruit approximately 25 c-Met amplified, T790M– patients in any line of treatment. If the objective response rate among
these patients is in line with the TATTON study, we will consider moving directly to a global Phase III study and applying
for a potential FDA Breakthrough Therapy designation. Among second-line EGFR tyrosine kinase inhibitor-refractory
non-small cell lung cancer patients, c-Met amplification exists in 15-20% cases, or approximately 35,000-40,000 new
patients each year globally.
Phase II non-small cell lung cancer (third-line), EGFR/T790M tyrosine kinase inhibitor-refractory, savolitinib
combination with Tagrisso (T790M inhibitor)—Global (Study 7 in pipeline chart; Status: enrolling)
A second arm of the global Phase II study was initiated in June 2016 to evaluate the use of savolitinib in
combination with Tagrisso in c-Met amplified patients who have progressed following treatment with Tagrisso
(T790M+/c-Met+ patients). Our hypothesis is that tumors develop resistance to third generation EGFR tyrosine kinase
inhibitors such as Tagrisso or rociletinib and c-Met gene amplification is one of the major mechanisms. Therefore, adding
savolitinib to the treatment could extend aggregate PFS. Data presented at the American Society of Clinical Oncology
annual meeting in June 2016 suggested that approximately 18% of patients with third-line EGFR/T790M tyrosine kinase
inhibitor-resistant non-small cell lung cancer harbor c-Met gene amplification.
Phase II non-small cell lung cancer (second-line), EGFR tyrosine kinase inhibitor-refractory, savolitinib
combination with Iressa (EGFR inhibitor)—China (Study 8 in pipeline chart; Status: enrolling)
We are enrolling a Phase II study among Iressa refractory non-small cell lung cancer patients. A significant
portion of these patients are known to be c-Met gene amplified and could benefit from exposure to a highly selective c-
Met inhibitor such as savolitinib. We believe that savolitinib in combination with Iressa could provide a lower-cost
treatment option, as compared to savolitinib in combination with Tagrisso, which can potentially benefit uninsured,
second-line non-small cell lung cancer patients in both developed and emerging markets, given that Iressa’s patent has
recently expired. We plan to complete this Phase II study and present results in 2017.
Phase II non-small cell lung cancer (first-line), EGFR wild-type, c-Met Exon-14 skipping, c-Met gene
amplification—China (Study 9 in pipeline chart; Status: enrolling)
Based on the positive results from our Phase Ib study of savolitinib in wild-type EGFR, c-Met over-expression,
non-small cell lung cancer patients in China, we are currently conducting a Phase II study in China in non-small cell lung
cancer patients with savolitinib as a monotherapy, focusing on patients with c-Met Exon-14 skipping and c-Met gene
amplification based on the hypothesis that patients may benefit if we are able to heavily inhibit c-Met with high doses of
savolitinib.
65
Phase II pulmonary sarcomatoid carcinoma, c-Met Exon-14 skipping, c-Met gene amplification—China
(Study 10 in pipeline chart; Status: enrolling)
We are enrolling a Phase II study in China testing savolitinib as a monotherapy in patients with pulmonary
sarcomatoid carcinoma with c-Met Exon-14 skipping and c-Met gene amplification.
Gastric Cancer
Patient screening for three Phase Ib studies has been underway in China since 2014 and is ongoing. A Multi-arm
Phase Ib study, named the VIKTORY study, was also initiated in South Korea at the Samsung Medical Center.
Phase Ib gastric cancer, savolitinib monotherapy, patients with c-Met gene amplification—China and South
Korea (Study 11 in pipeline chart; Status: enrolling)
A Phase Ib study of savolitinib as a monotherapy in China and South Korea is ongoing, and to date we have seen
promising preliminary clinical efficacy among the approximately 5-10% of gastric cancer patients with high c-Met gene
amplification.
Phase Ib gastric cancer, patients with c-Met gene amplification, savolitinib in combination with chemotherapy
(Taxotere)— South Korea (Study 12 in pipeline chart; Status: enrolling)
A Phase Ib study of savolitinib in combination with chemotherapy (Taxotere) focusing on gastric cancer patients
with c-Met gene amplification South Korea is ongoing.
Phase Ib gastric cancer, patients with c-Met over-expression, savolitinib in combination with chemotherapy
(Taxotere)—China and South Korea (Study 13 in pipeline chart; Status: enrolling)
Phase Ib studies of savolitinib in China and South Korea are ongoing. In these studies, approximately 40% of the
patients have some level of c-Met over-expression. As with other solid tumors, we are only selecting patients with a high
degree of c-Met over-expression for this study based on the hypothesis that patients may benefit if we are able to heavily
inhibit c-Met with high doses of savolitinib.
Partnership with AstraZeneca
In December 2011, we entered into a global licensing, co-development, and commercialization agreement for
savolitinib with AstraZeneca. Given the complexity of many of the signal transduction pathways and resistance
mechanisms in oncology, the industry is increasingly studying combinations of targeted therapies (tyrosine kinase
inhibitors, monoclonal antibodies and immunotherapies) and chemotherapy as potentially the best approach to treating
this complex and constantly mutating disease. Based on savolitinib showing early clinical benefit as a highly selective c-
Met inhibitor in a number of cancers, in August 2016 we and AstraZeneca amended our global licensing, co-development,
and commercialization agreement for savolitinib. We believe that AstraZeneca’s portfolio of proprietary targeted therapies
is well suited to be used in combinations with savolitinib, and we are studying combinations with Iressa (EGFRm+),
Tagrisso (T790M+) and anti-programmed death-ligand 1 antibody durvalumab. These combinations of multiple global
first-in-class compounds are difficult to replicate, and we believe represent a significant opportunity for us and
AstraZeneca.
For more information regarding our partnership with AstraZeneca, see “—Overview of Our Collaborations.”
Fruquintinib VEGFR 1, 2 and 3 Inhibitor
When we established our medicinal chemistry research platform in 2005, our first priority area of interest was to
discover drug candidates to overcome the shortcomings of a few drugs or drug candidates that were in late stage clinical
development at the time, but had a well understood mechanism of action. As a result, we developed fruquintinib (also
known as HMPL-013), a VEGFR inhibitor that we believe is highly differentiated due to its superior kinase selectivity
compared to other small molecule VEGFR inhibitors, which can be prone to excessive off-target toxicities. Fruquintinib
only inhibits VEGFR1, 2 and 3, resulting in fewer off-target toxicities, thereby allowing for full VEGFR inhibition 24
hours a day, as well as possible use in combination with other tyrosine kinase inhibitors.
66
We believe these are meaningful points of differentiation compared to other approved small molecule VEGFR
inhibitors such as Sutent, Nexavar and Stivarga. Consequently, we believe that fruquintinib has the potential to become
the global best-in-class small molecule VEGFR inhibitor for many types of solid tumors.
Mechanism of Action
During the pathogenesis of cancer, tumors at an advanced stage can secrete large amounts of VEGF, a protein
ligand, to stimulate formation of excessive vasculature (angiogenesis) around the tumor in order to provide greater blood
flow, oxygen, and nutrients to fuel the rapid growth of the tumor. Since essentially all solid tumors require angiogenesis
to progress beyond a few millimeters in diameter, anti-angiogenesis drugs have demonstrated benefits in a wide variety of
tumor types. VEGF and other ligands can bind to three VEGF receptors, VEGFR1, 2 and 3, each of which has been shown
to play a role in angiogenesis. Therefore, inhibition of the VEGF/VEGFR signaling pathway can act to stop the growth of
the vasculature around the tumor and thereby starve the tumor of the nutrients and oxygen it needs to grow rapidly.
This therapeutic strategy has been well validated with several first generation VEGF inhibitors having been
approved globally since 2005 and 2006. These include both small molecule tyrosine kinase inhibitor drugs such as Nexavar
and Sutent as well as monoclonal antibodies such as Avastin (bevacizumab). The success of these drugs validated VEGFR
inhibition as a new class of therapy for the treatment of cancer.
Fruquintinib Pre-clinical Evidence
Potency and Selectivity
Pre-clinical studies have demonstrated that fruquintinib is a highly selective VEGFR inhibitor with high potency
and low cell toxicity at the enzymatic and cellular levels. Fruquintinib has been studied in nude mice models bearing
various human tumors and has shown significant inhibition of tumor growth, with human gastric cancer showing the
strongest sensitivity. A daily dose of 2 mg/kg was found to almost completely inhibit tumor growth in mice models.
As a result of off-target side effects, existing VEGFR inhibitors are often unable to dose high enough to
completely inhibit VEGFR, the intended target. In addition, the complex off-target toxicities resulting from inhibition of
multiple signaling pathways are often difficult to manage in clinical practice. Combining such drugs with chemotherapy
can lead to severe toxicities that can cause more harm than benefit to patients. To date, the first generation VEGFR tyrosine
kinase inhibitors are rarely used in combination with other therapies, thereby limiting their potential. Because of the
potency and selectivity of fruquintinib, we believe that it has the potential to be safely combined with other anti-cancer
drugs, which could significantly expand its clinical potential.
The pharmacokinetic properties of fruquintinib in patients have also been found to have high drug exposures at
the optimal 5 mg daily dose of approximately 6,000 h*ng/mL (i.e., hours multiplied by nanogram per milliliter, which is
a measurement of drug exposure over time), well above the exposure of 898 h*ng/mL required to cover the VEGFR target
to EC50 levels in mouse models, suggesting potentially strong target coverage in humans at this dose. At this dose, we
expect fruquintinib to fully inhibit VEGFR for an entire day through a single oral dose based on modeling using pre-
clinical data. In contrast, Sutent achieved a drug exposure of only 592 h*ng/mL at the maximum tolerated dose of 50 mg
per day, which is well below the drug exposures required for target inhibition determined in its pre-clinical models of
2,058 h*ng/mL, suggesting insufficient target coverage in humans. Fruquintinib was also found to have a superior disease
control rate of 82% and an objective response rate of 38% in a Phase I study, compared to Sutent, which had a disease
control rate and objective response rate of 27% and 18%, respectively.
Fruquintinib Early and Completed Clinical Development
As discussed below, we have completed various clinical trials of fruquintinib in China.
Phase I dose escalation study in patients with advanced solid tumors in China
This study was initiated in January 2011, and full results were presented at the American Association for Cancer
Research’s meeting in 2013. A total of 40 subjects with advanced solid tumors were enrolled in this clinical study. The
primary endpoint was evaluation of safety during the first 28-day cycle of therapy following the initiation of multiple
dosing of fruquintinib. The safety variables evaluated in this study were adverse events, physical examinations, vital signs
(specifically including blood pressure), clinical laboratory evaluations including serum chemistry, hematology, urinalysis
(with detailed sediment analysis, proteinuria, and 24-hour urine for collection of protein), and electrocardiograms.
67
Most adverse events were considered mild and graded as CTC grade 1 or 2. Adverse events CTC grade 3 or
higher with greater than 5% incidence related to fruquintinib treatment were hypertension (17.5%), hand-foot syndrome
(17.5%), thrompocytopenia (12.5%), diarrhea (7.5%), fatigue (7.5%) and proteinuria (5.0%).
Furthermore, the Phase I study validated in humans the pre-clinical pharmacokinetic animal model findings of
fruquintinib’s ability to provide strong target coverage. The chart below shows that fruquintinib fully inhibits VEGFR in
humans for the entire day at the optimal 5 mg daily dose level.
Figure 7: Fruquintinib plasma concentration in humans following once daily dosing in comparison to effective
concentrations (EC) of fruquintinib required for VEGFR2 phosphorylation (activation) inhibition in mouse
Source: Chi-Med Phase I study data for fruquintinib
Note: EC50 = concentration of a drug that gives 50% of maximal response; EC80 = concentration of a drug that
gives 80% of maximal response
In terms of efficacy, in the entire intent-to-treat population of 40 subjects, 13 had partial response, 15 had stable
disease, six had progressed disease, and six were not evaluable. The objective response rate was 38% in the 34 evaluable
patients and 33% in the entire intent-to-treat population of 40 patients, and the disease control rate was 82% among
evaluable patients and 70% in the intent-to-treat population. Out of the 34 evaluable patients, only six patients had tumor
growth, with the rest experiencing substantial tumor shrinkage.
In this Phase I study, clear tumor response was observed in multiple tumor types, consistent with the fact that
angiogenesis, driven by VEGFR activation, accelerates the growth of tumors in many settings. The highest objective
response rate in this Phase I study was achieved in non-small cell lung cancer and gastric cancer patients with objective
response rates of over 50%. However, we also observed objective response rates of approximately 30% in colorectal and
breast cancer patients.
As a result of this study, we determined that either 4 mg once daily or 5 mg once daily on a 3 weeks on/1 week
off basis was safe and tolerable. This study also found that doses above 4 mg once daily achieved drug exposures well
above EC80 (the concentration that leads to an 80% maximal response) of the VEGFR phosphorylation inhibition over a
24 hour time period.
68
Studies in Colorectal Cancer
Phase Ib study in third-line or above metastatic colorectal cancer patients in China
In December 2012, we initiated a Phase Ib study in patients with advanced colorectal cancer to compare the safety
and tolerability of a 5 mg once daily 3 weeks on/1 week off regimen versus a 4 mg continuous once daily regimen. The
study was divided into a randomized comparison study with 20 patients taking each regimen. The primary endpoint was
the incidence of adverse effects, including significant adverse events, CTC grades 3 or 4 adverse effects and adverse effects
that lead to dose interruption or dose discontinuation. In this study, both dose regimens demonstrated similar clinical
efficacy and safety profile with the 5 mg once daily 3 weeks on/1 week off regimen showing slightly more favorable
results. An additional 22 patients were subsequently enrolled into the 5 mg once daily 3 weeks on/1 week off regimen to
further confirm the safety and tolerability of this regimen. As a result of this study, we determined the recommended
Phase II dose regimen to be 5 mg, once daily, on a 3 weeks on/1 week off basis. Full results of this study were presented
at the American Society of Clinical Oncology’s annual meeting in 2014.
In August 2014, we completed enrollment for a Phase II double-blind, placebo-controlled, multi-center study in
China in just over four months to test fruquintinib as a monotherapy among third-line metastatic colorectal cancer patients,
using the 5 mg daily, 3 weeks on/1 week off dose regimen determined from our Phase I study discussed above. The goal
of this study was to compare the efficacy, including PFS, of fruquintinib versus placebo in metastatic colorectal cancer
patients who failed at least two prior lines of treatment, including fluorouracil, oxaliplatin and irinotecan. A total of
71 patients were enrolled, with 47 in the fruquintinib arm and 24 in the placebo arm, respectively. Patient baseline
characteristics were similar between the two treatment arms.
Fruquintinib demonstrated strong anti-tumor activity in this study. Median PFS was 4.7 months in the fruquintinib
arm compared to median PFS of 1.0 month in the placebo arm (hazard ratio = 0.30 (p<0.001)). Hazard ratio is the
probability of an event (such as disease progression or death) occurring in the treatment arm divided by the probability of
the event occurring in the control arm of a study, with a ratio of less than one indicating a lower probability of an event
occurring for patients in the treatment arm. P-value is a measure of the probability of obtaining the observed sample results,
with a lower value indicating a higher degree of statistical confidence in these studies. The disease control rate in the
fruquintinib arm was 68.1% compared with 20.8% in the placebo arm (p<0.001). The interim median overall survival rate
was 7.6 months and 5.5 months in the fruquintinib arm and the placebo arm, respectively. In this study, fruquintinib has
not shown any major unexpected safety issues and clearly met its primary endpoint of PFS. The result of 4.7 months in
median PFS compares favorably with results recorded to date in third-line colorectal cancer in trials involving VEGFR
tyrosine kinase inhibitors. The safety profile in this study was also consistent with our Phase Ib trial for fruquintinib in
third-line metastatic colorectal cancer patients. The full results of this study were presented at the European Cancer
Congress in September 2015.
69
Figure 8: Phase II study in China of fruquintinib monotherapy in third-line colorectal cancer.
This study clearly met the median PFS primary endpoint.
Source: Chi-Med
Note: BSC = Best Supportive Care; censoring time = in simple terms, the duration of treatment reached by a
patient at the time of data collection or when a patient was removed from the study for any reason; median
PFS = time needed for >50% to have disease progression
Studies in Non-small Cell Lung Cancer
Phase II Fruquintinib monotherapy in non-small cell lung cancer in China
In June 2014, we initiated a Phase II randomized, double-blind, placebo-controlled, multi-center study of
fruquintinib versus placebo among patients with advanced non-squamous non-small cell lung cancer who failed two lines
of chemotherapy. By early March 2015, enrollment had been completed with a total of 91 patients randomized to 5 mg of
fruquintinib orally once per day, on a 3 weeks on/1 week off regimen plus best supportive care, or placebo plus best
supportive care at a 2:1 ratio.
In September 2015, we reported that fruquintinib had clearly met its primary endpoint of superior median PFS
versus placebo in this study, and in December 2016, we reported the full data from this study, which showed median PFS
of 3.8 months for the fruquintinib group compared with 1.1 months for the placebo group (hazard ratio=0.27, P<0.001),
an objective response rate of 16.4% for the fruquintinib group compared with 0.0% for the placebo group (p=0.02), and a
53.8% increase in disease control rate for the fruquintinib group compared with the placebo group (95% confidence
internal, (36.3, 71.4) P<0.001). Fruquintinib was well tolerated with treatment related adverse events greater than or equal
to CTC grade 3 with 5% incidence being hypertension (8.1%).
70
Figure 9: Phase II study in China of fruquintinib monotherapy in third-line non-small cell lung cancer.
This study clearly met the median PFS primary endpoint.
Fruquintinib (n=61)
Placebo (n=30)
Events, n
40 (65.6%)
21 (70.0%)
Median, mo.
3.8 (2.8, 4.6)
1.1 (1.0, 1.9)
Stratified HR [95% CI]:
0.34 [0.20-0.57]
P<0.001
)
%
(
y
t
i
l
i
b
a
b
o
r
P
S
F
P
100
90
80
70
60
50
40
30
20
10
0
0
1
2
3
4
5
6
7
8
9
10
11
12
Source: Chi-Med
Studies in Gastric Cancer
Time from randomization (Months)
Phase II/Ib study of fruquintinib combined with Taxol in second-line gastric cancer patients in China
In early 2015, we began a Phase Ib dose finding study of fruquintinib in combination with Taxol determine the
recommended Phase II dose. In early 2017, we published results of an open label, multi-center Phase Ib dose
finding/expansion study of fruquintinib in combination with paclitaxel in second-line gastric cancer. A total of 32 patients
were enrolled in the study and the recommended dose was determined to be 4 mg once daily on a 3 weeks on/1 week off
schedule in combination with a weekly dose of 80 mg/m2 of Taxol. A total of 28 out of the 32 patients were efficacy
evaluable with an objective response rate of 36% and a disease control rate of 68%. At the recommended dose, PFS of
(cid:149)(cid:20)(cid:25)(cid:3)(cid:90)(cid:72)(cid:72)(cid:78)(cid:86)(cid:3)(cid:90)(cid:68)(cid:86)(cid:3)(cid:24)(cid:19)(cid:8)(cid:3)(cid:82)(cid:73)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:82)(cid:89)(cid:72)(cid:85)(cid:68)(cid:79)(cid:79)(cid:3)(cid:86)(cid:88)(cid:85)(cid:89)(cid:76)(cid:89)(cid:68)(cid:79)(cid:3)(cid:82)(cid:73)(cid:3)(cid:3)(cid:149)(cid:26)(cid:3)(cid:80)(cid:82)(cid:81)(cid:87)(cid:75)(cid:86)(cid:3)(cid:90)(cid:68)(cid:86)(cid:3)(cid:24)(cid:19)(cid:8)(cid:17)(cid:3)(cid:55)(cid:82)(cid:79)(cid:72)(cid:85)(cid:68)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92) of the recommended dose combination
was as expected. Adverse events greater than or equal to CTC grade 3 related to fruquintinib treatment were neutropenia
(40.6%), leukopenia (28.1%), decreased hemoglobin (6.3%), hand-foot syndrome (6.3%), neurophlegmon (6.3%) and
hypertension (6.3%), with higher frequencies in the 4 mg cohort as compared with lower doses. Neutropenia and
leukopenia are common Taxol adverse events. The combination regime resulted in an approximately 30% increase in
Taxol exposure in patients indicating the potential to decrease the required dose of Taxol in future development. Based on
Phase Ib data, we plan to initiate a Phase III registration trial in China in 2017. There are approximately 250,000-300,000
new second-line gastric cancer patients per year in China.
1
71
Figure 10: Phase Ib/II study of fruquintinib combined with Taxol in gastric cancer. Phase III initiation made on the
basis of this encouraging efficacy data.
A. Waterfall Plots of Best Response
B. Dose Reductions and Interruptions
40
2mg
(n=3)
3mg
(n=3)
4mg dose finding
stage (n=8)
4mg dose expansion
stage (n=19)
Characteristics (Unit)
Drug Expansion Stage (N=19)
Fruquintinib 4 mg
+ paclitaxel 80 mg/m2
Drug
Drug
reduction
interruption
2 (10.5%)
2 (10.5%)
20
0
–20
–30
–40
–60
Dose modification with Fruquintinib N (%)
Dose modification with Paclitaxel N (%)
5 (26.3%)
1 (5.3%)
C. Adverse Events profile
Drug related grade 3 or 4 AEs
(NCI-CTCAE v 4.0) term
Neutropenia
Leukopenia
Hypertension
PLT decreased
Anemia
HFSR
Mucositis oral
Hepatic disorder
Upper gastrointestinal hemorrhage
Dose Expansion Stage (N=19)
Fruquintinib 4 mg
+ paclitaxel 80 mg/m2
11 (57.9%)
4 (21.0%)
2 (10.6%)
1 (5.3%)
1 (5.3%)
1 (5.3%)
1 (5.3%)
1 (5.3%)
1 (5.3%)
Progressive Disease (PD)
Non-Evaluable (NE)
Source: Chi-Med
Fruquintinib Current Clinical Development and Near-Term Plans
As discussed below, we currently have various clinical trials of fruquintinib ongoing or expected to begin in the
near term in China.
We recently announced that fruquintinib had met its primary and secondary endpoints in a Phase III clinical trial
in colorectal cancer in China. In partnership with Eli Lilly, we are also conducting a Phase III study of fruquintinib in
China in non-small cell lung cancer patients, are in the final planning stage of a Phase III study of fruquintinib in
combination with Taxol in the second-line setting for gastric cancer in China. Furthermore, a Phase II study of fruquintinib
in combination with Iressa in first-line EGFRm+ non-small cell lung cancer began in early 2017, and a Phase I study of
fruquintinib in the United States is set to start this year.
Studies in Colorectal Cancer
Phase III study in colorectal cancer (third-line), fruquintinib monotherapy (5 mg daily, 3 weeks on/1 week off)—
China (Study 14 in pipeline chart; Status: primary and secondary endpoints met)
In December 2014, we initiated the Phase III FRESCO study, which is a randomized, double-blind, placebo-
controlled, multi-center, Phase III registration study of fruquintinib as a monotherapy targeted at treating patients with
locally advanced or metastatic colorectal cancer who have failed at least two prior systemic cancer therapies, including
fluoropyrimidine, oxaliplatin and irinotecan. This study involved 416 patients who were randomized at a two-to-one ratio
to receive either 5 mg of fruquintinib orally once per day, on a 3 weeks on/1 week off cycle, plus best supportive care or
placebo plus best supportive care.
We recently announced that both the primary endpoint, which is overall survival, and secondary endpoints,
including PFS, objective response rate, disease control rate and duration of response, have been met. Fruquintinib was
well tolerated in the FRESCO study with no unexpected safety events. We intend to present the full FRESCO results at a
scientific event in mid-2017 and are on-track to submit fruquintinib’s NDA to the CFDA by mid-2017. Subject to CFDA’s
approval, we expect to launch fruquintinib in China in 2018 and potentially benefitting the approximately 50,000-60,000
new third-line colorectal cancer patients across China per year.
72
Studies in Non-small Cell Lung Cancer
Phase III Fruquintinib monotherapy in non-small cell lung cancer (third-line) (5 mg daily, 3 weeks on / 1 week
off)—China (Study 15 in pipeline chart; Status: enrolling)
In December 2015, we initiated the FALUCA study, which is a Phase III registration study in advanced non-
squamous third-line non-small cell lung cancer patients in China who have failed two prior systemic chemotherapies. In
this study, patients are randomized at a two-to-one ratio to receive either 5 mg of fruquintinib orally once per day, on a
3 weeks on/1 week off cycle plus best supportive care, or placebo plus best supportive care. The primary endpoint is
overall survival, with secondary endpoints including PFS, objective response rate, disease control rate and duration of
response. We expect to complete enrollment of this study in 2017 and reach overall survival endpoint maturity in 2018.
There are approximately 60,000-70,000 new third-line non-small cell lung cancer patients per year in China.
Phase II study of fruquintinib in combination with Iressa in non-small cell lung cancer (first-line)—China
(Study 16 in pipeline chart; Status: enrolling)
In January 2017, we initiated a multi-center, single-arm, open-label Phase II study of fruquintinib in combination
with Iressa in the first-line setting for patients with advanced or metastatic non-small cell lung cancer with EGFR activating
mutations. The objectives of the Phase II study are to evaluate the safety and tolerability as well as preliminary efficacy of
fruquintinib in combination with Iressa.
Phase I fruquintinib monotherapy in advanced solid tumors—United States (Study 17 in pipeline chart; Status:
planned for 2017)
We received approval of our IND application for fruquintinib in the United States in late 2016. We are now
planning to initiate a Phase I study in patients with advanced solid tumors in the United States in mid-2017.
Studies in Gastric Cancer
Phase III study of fruquintinib combined with Taxol in gastric cancer (second-line)—China (Study 18 in pipeline
chart; Status: planned for 2017)
Based on the encouraging efficacy data of our Phase Ib/II study of fruquintinib combined with Taxol in gastric
cancer patients discussed above, we plan to begin a Phase III registration trial in China in 2017. There are approximately
250,000-300,000 new second-line gastric cancer patients per year in China.
Partnership with Eli Lilly
In October 2013, we entered into a license agreement with Eli Lilly in order to accelerate and broaden our
fruquintinib development program in China. As a result, we were able to quickly expand the clinical development of
fruquintinib in three indications with major unmet medical needs in China: colorectal cancer, non-small cell lung cancer
and gastric cancer, as discussed above.
Contingent upon strong proof-of-concept and Phase III results in our clinical trials in China, Eli Lilly and
Company (Eli Lilly’s parent company) may exercise the option to help us develop fruquintinib globally under an option
agreement into which we entered in connection with the license agreement. Support from Eli Lilly has also helped us to
establish our manufacturing (formulation) facility in Suzhou, China, which now produces Phase III clinical supplies and
will be used to produce fruquintinib for commercial supply, if approved.
For more information regarding our partnership with Eli Lilly and Eli Lilly and Company, see “—Overview of
Our Collaborations.”
Sulfatinib VEGFR, FGFR1 and CSF-1R Inhibitor
As with fruquintinib, sulfatinib (also known as HMPL-012) was created as part of our initial research goals to
develop better, more selective inhibitors than what was under late stage development at the time, including inhibitors
targeting VEGFR and FGFR, two tyrosine kinase receptors associated with angiogenesis and tumor growth. In early 2008,
we declared our first small molecule oncology drug candidate, sulfatinib, and it was subsequently the first new compound
73
IND application to be submitted, reviewed and approved by the CFDA under its “green channel” fast-track approval
process.
Sulfatinib is an oral small molecule compound with a unique angio-immuno kinase profile which we believe
activates and effectively enhances the body’s immune system, specifically T-cells, via VEGFR, FGFR and CSF-1R
inhibition. Its unique angio-immuno kinase profile provides a promising opportunity and potential therapeutic
differentiation against existing products on the market. Sulfatinib is currently in development as a single agent for
neuroendocrine tumors, thyroid cancer and biliary tract cancer. It also has potential in other tumor types such as breast
cancer with FGFR1 activation.
Our expanded Phase I data indicated that sulfatinib has the highest objective response rate reported to date in
patients with neuroendocrine tumors. An objective response rate of 38.1% in the intent-to-treat population was observed
for sulfatinib in this study, compared to less than 10.0% for Sutent and Afinitor, the two approved single agent therapies
for neuroendocrine tumors.
Sulfatinib is the first oncology candidate that we have taken through proof-of-concept in China and expanded
globally ourselves. We believe sulfatinib has the potential to receive Breakthrough Therapy designation for the treatment
of neuroendocrine tumors if in the U.S. Phase II study we are able to achieve an objective response rate in line with that
seen to date. The FDA allowed our IND application to proceed in early 2015 to study sulfatinib in neuroendocrine tumors
in the United States.
Mechanism of Action
VEGF and fibroblast cell growth factor, or FGF, play key roles in tumor angiogenesis and have become two
molecular targets of intense research for anti-angiogenesis therapies. In addition, aberrant activation of the FGF/FGFR
signaling pathway is considered to be associated with cancer progression by promoting growth, survival, migration and
invasion of the tumor. There is evidence that anti-VEGF therapy treatment could increase FGFR pathway activation,
leading to drug resistance to anti-VEGF therapies. As a result, we believe that simultaneously targeting VEGFR and FGFR
could be an attractive approach to improve clinical efficacy. Inhibition of the CSF-1R signaling pathway blocks the
activation of tumor-associated macrophages, which are involved in suppressing immune responses against tumors.
For more information on the VEGF mechanism of action, see “—Our Clinical Pipeline—Fruquintinib VEGFR
1, 2 and 3 Inhibitor—Mechanism of Action.”
Sulfatinib Pre-clinical Evidence
In pre-clinical testing, sulfatinib demonstrated improved kinase selectivity compared to Sutent and Nexavar. Pre-
clinical safety evaluation results also supported a good safety profile for sulfatinib. In animal efficacy studies, sulfatinib
demonstrated broad-spectrum anti-tumor activity via oral dosing.
Sulfatinib was found to selectively target tyrosine kinases involved in vascular formation, mainly on the VEGFR
family (VEGFR1/2/3) and FGFR1. By using a 32p-adenosine triphosphate incorporation assay, IC50s of sulfatinib on
VEGFR1, 2 and 3 were found to be 2 nM, 24 nM, and 1 nM, respectively. IC50s on the kinase activity of FGFR1, 2,
and 3 were determined as 15 nM, 236 nM and 181 nM, respectively, indicating that sulfatinib inhibits VEGFR1, 2 and 3
and FGFR1 more potently than other kinases. Subsequent studies have also determined IC50s of CSF-1R to be 4 nM.
Sulfatinib has been shown to provide consistent and sustained target inhibition. The inhibitory effect of sulfatinib
on target phosphorylation of VEGFR-2 (also known as KDR, or kinase insert domain receptor), angiogenesis and tumor
growth were evaluated in vivo. The results indicated that upon stimulation with VEGF (with 0.5 g administered to mice
intravenously), KDR phosphorylation (p-KDR) in mouse lung tissue was significantly induced. Sulfatinib orally dosed at
20 and 40 mg/kg completely inhibited VEGF-stimulated KDR phosphorylation for at least 4 hours and at 80 mg/kg for at
least 8 hours, suggesting a dose dependent inhibition. We determined the drug exposure in this experiment. For instance,
at 4 hours after oral administration of 20 mg/kg of sulfatinib, the drug concentration in the plasma reached 181 ng/mL
(AUC for 20 mg/kg was 2720 ng*h/mL). The AUC is the “area under the curve”, a measure of drug concentration in blood
plasma over time. These data provided pharmacokinetic/pharmacodynamic correlation and the effective concentration for
complete p-KDR inhibition (EC100=181 ng/mL), which are useful to guide clinical dose selection.
74
Sulfatinib Early and Completed Clinical Development
As discussed below, we have completed two clinical trials of sulfatinib in China.
First-in-human Phase Ia trial
The multi-center, open-label, dose escalation, first-in-human Phase I study of sulfatinib was initiated in China in
April 2010. Its primary objective was to study the safety and tolerability and determine the maximum tolerated dose or the
recommended Phase II dose of sulfatinib in patients with advanced malignant solid tumors. Secondary endpoints included
pharmacokinetic properties and clinical efficacy. The study consisted of a dose escalation period and dose expansion
period. The initial sulfatinib dose was 50 mg, once daily. By April 2014, 12 dose groups of 50-350 mg sulfatinib per day
had completed the dose escalation study. The maximum tolerated dose was not reached. However, the drug exposures
appeared to stop increasing in proportion to dose from 300 mg to 350 mg. In addition, encouraging activity was seen both
at 300 and 350 mg doses. A dose expansion study was conducted at the 300 mg and 350 mg dose levels to further
investigate the safety, tolerability and pharmacokinetic profile, and preliminary efficacy of sulfatinib.
A total of 77 patients were enrolled in the study. The first 43 patients were enrolled in sulfatinib (formulation
1) in 50 mg, 75 mg, 110 mg, 150 mg, 200 mg, 265 mg and 300 mg once daily, as well as 125 mg and 150 mg twice daily
dose cohorts. As the study progressed, a new milled formulation, formulation 2, was developed with an improved
pharmacokinetic profile to replace formulation 1 and was used in the remaining study. There was no subject treated with
sulfatinib cross-over by formulations (i.e., no subject receiving formulation 1 had crossed over to formulation 2 during
study treatment). A total of 34 patients were enrolled and treated with sulfatinib formulation 2 in dose cohorts of 200 mg,
300 mg and 350 mg once daily in sequence. Twenty-three of the patients were enrolled in the formulation 2 dose escalation
study, and a further 11 were enrolled in an expansion study. All 34 patients completed the safety and pharmacokinetic
evaluation. The maximum tolerated dose was also not reached in this formulation.
Adverse events observed in formulation 2 patients greater than or equal to CTC grade 3 with more than 5%
incidence include proteinuria (14.7%), hypertension (11.7%), increased sevum transaminase (8.8%) diarrhea (5.9%),
fatigue (5.9%), decreased platelet count (5.9%) and hypokalemla (5.9%). No dose-limiting toxicity was observed, and
maximum tolerated dose has not been determined. Overall, in this Phase I dose escalation study, sulfatinib showed a safety
profile that is comparable to the other drugs in the same class and that, as a single agent, it was well tolerated in patients
with advanced solid tumors.
Pharmacokinetic analyses showed that the inter- and intra-individual variability in drug concentration was
optimized and the exposures in terms of Cmax, or the maximum concentration that a drug achieves in a specified test area
of the body after the drug has been administrated and prior to the administration of a second dose, and AUC were increased
compared with formulation 2, indicating optimized oral absorption. Phase Ia pharmacokinetic profile of sulfatinib in
humans was consistent with pre-clinical findings in that sulfatinib at the 300 mg Phase II dose provides for consistent and
sustained target inhibition over 24 hours through an oral dose.
In terms of Phase Ia efficacy, in the formulation 2 dose escalation cohort of 23 patients, tumor response was
observed in 4 patients, including one patient with hepatocellular carcinoma in the 200 mg once daily cohort, two patients
with neuroendocrine tumors in the 300 mg once daily cohort, and one patient with neuroendocrine tumors in the 350 mg
once daily cohort. In the 16 evaluable patients, the objective response rate was 25%, and eight (50%) patients had stable
disease. The recommended Phase II dose was determined to be 300 mg once daily based on overall safety, tolerability and
early clinical efficacy results.
Favorable clinical efficacy has been seen with sulfatinib in patients with neuroendocrine tumors. The formulation
2 expansion study was conducted in neuroendocrine tumor patients who were given 300 mg or 350 mg once daily.
Including dose escalation patients, a total of 21 neuroendocrine tumor patients were treated with formulation 2. There were
eight partial response patients, which yielded an objective response rate of 44.4% in the 18 evaluable neuroendocrine
tumor patients and 38.1% in the entire intent-to-treat population of 21 neuroendocrine tumor patients (compared to an
objective response rate of less than 10% for competing products Sutent and Afinitor). The tumor origins of the eight
neuroendocrine tumor patients with partial responses include pancreas (three patients), duodenum (one patient), rectum
(one patient) and thymus (one patient), with the remaining two patients’ tumors of unknown origin. Furthermore,
neuroendocrine tumor responses to sulfatinib have been observed to improve gradually with time.
This early preliminary clinical efficacy of sulfatinib compares favorably to existing drugs approved for the
treatment of neuroendocrine tumors. As shown below, however, approved therapies for neuroendocrine tumors are very
75
limited with Afinitor and Sutent approved only for pancreatic neuroendocrine tumors (representing less than 10% of total
neuroendocrine tumors) and showing an objective response rate of less than 10% compared to 38% for sulfatinib. Octeotide
and lanreotide are also approved for narrow subsets of gastrointestinal neuroendocrine tumors, but their objective response
rate is even lower at less than 5%. Sulfatinib’s superior objective response rate, and apparent efficacy across many different
neuroendocrine tumor types, as compared to existing approved therapies, are the basis for our view that sulfatinib could
potentially be eligible for Breakthrough Therapy designation.
Phase Ib/II study in neuroendocrine tumors (first-line), sulfatinib monotherapy (300 mg) in China
In early 2015, we began a 30 patient, 300 mg daily, Phase Ib study in China in broad spectrum neuroendocrine
tumor patients (pancreatic, gastrointestinal, liver, lymph and lung, among others) which, due to the major unmet medical
need and strong efficacy of sulfatinib, was expanded to over 65 patients and enrollment was completed in August 2015.
We then amended the protocol from a Phase Ib study to a single arm Phase II study for which enrollment of 81 patients
(41 with pancreatic neuroendocrine tumors and 40 with extra-pancreatic neuroendocrine tumors) was completed in
December 2015.
The majority of the patients enrolled in this Phase II study had grade 2 disease (79%) and had failed previous
systemic treatments (65%). We recently reported the results of this Phase II study at the European Neuroendocrine Tumor
Society conference. As of January 2017, 13 patients had confirmed partial response and 61 patients had stable disease
corresponding to an overall objective response rate of 16.0%, with 17.1% in pancreatic neuroendocrine tumors and 15.0%
in extra-pancreatic neuroendocrine tumors, and an overall disease control rate of 91.4%. Median overall PFS has not been
reached, but is estimated to be 16.6 months, with as-expected, longer median PFS in pancreatic neuroendocrine tumors
estimated to be 19.4 months and shorter median PFS in extra-pancreatic neuroendocrine tumors estimated to be 13.4
months. Importantly, in the context of our potential global development strategy, there were 12 patients who had
progressed after treatment with systemic therapies (Sutent and Afinitor) and all benefited from the sulfatinib treatment
(three patients with partial response and eight patients with stable disease). Sulfatinib was well tolerated with adverse
events greater than or equal to CTC grade 3 with more than 5% incidence being hypertension (30.9%), proteinuria (13.6%),
hyperuricemia (9.9%), hypertriglyceridemia (8.6%), diarrhea (7.4%) and alanine aminotransferase increase (6.2%). Based
on this promising efficacy data and tolerability in patients with advanced pancreatic neuroendocrine tumors, two
randomized Phase III trials, SANET-p and SANET-ep, have been initiated, as discussed below.
76
Figure 11: Phase II study in China of sulfatinib monotherapy in in neuroendocrine tumors.
Interim data Interim data demonstrates promising efficacy.
A. Pancreatic NET Waterfall Chart
e
n
i
l
e
s
a
b
m
o
r
f
e
g
n
a
h
c
t
n
e
c
r
e
p
t
s
e
B
20%
10%
0%
-10%
-20%
-30%
-40%
-50%
-60%
-70%
-80%
ITT
Evaluable
ORR: 17.1% (7/41) 18.4% (7/38)
DCR: 90.2% (37/41) 97.4% (37/38)
C. Progression-Free Survival (PFS)
100%
Median PFS
(months)
PDs or
Deaths
(% pts)
S
F
P
f
o
y
t
i
l
i
b
a
b
o
r
P
80%
60%
40%
20%
0%
All NET
(n=81)
P-NET
(n=41)
16.6m
(13.4, 19.4)
51.9%
(42/81)
19.4m
(13.8, 22.1)
39.0%
(16/41)
Non-P NET
(n=40)
13.4m
(7.6, 16.7)
65.0%
(26/40)
All NET
Pancreatic NET
Non-pancreatic NET
0
3
6
9
12
15
18
21
Time (months)
Data has yet to reach maturity – data cut-
off as of Jan 20, 2017.
Partial Response
Stable Disease
Progressive disease
Prior Sutent
Prior Famitinib (VEGFR)
Prior Afinitor
B. Extra-Pancreatic NET Waterfall Chart
D. Adverse Events
e
n
i
l
e
s
a
b
m
o
r
f
e
g
n
a
h
c
t
n
e
c
r
e
p
t
s
e
B
20%
10%
0%
-10%
-20%
-30%
-40%
-50%
-60%
-70%
-80%
ITT
Evaluable
ORR: 15.0% (6/40) 15.8% (6/38)
DCR: 92.5% (37/40) 97.4% (37/38)
Hypertension
Proteinuria
Hyperuricemia
Hypertriglyceridemia
Diarrhea
ALT increased
Anemia
Hypokalemia
Hepatic function abnormal
Grade ≥3
(≥4pts)
n (%)
25 (30.9)
11 (13.6)
8 (9.9)
7 (8.6)
6 (7.4)
5 (6.2)
4 (4.9)
4 (4.9)
4 (4.9)
Adverse Events (“AEs”) –
Regardless of causality
N=81
n (%)
Any AE
Grade ≥3 AE
Any SAE
Any drug-related AE
Any drug-related grade ≥3 AE
Any drug related SAE
Drug related AE leading to:
dose interruption
dose reduction
drug withdrawal
81 (100.0)
63 (77.8)
21 (25.9)
81 (100)
58 (71.6)
10 (12.3)
40 (49.4)
20 (24.7)
7 (8.6)
Source: European Neuroendocrine Tumour Society Annual Conference 2017. Data cut-off as of Jan 20, 2017.
Sulfatinib Current Clinical Development and Near-Term Plans
We currently have various clinical trials of sulfatinib ongoing or expected to begin in the near term in the
United States and China. Based on the data from our completed Phase Ib/II study in China in neuroendocrine tumors
discussed above, we are progressing to two Phase III trials in China, one in pancreatic neuroendocrine tumor patients and
one in advanced carcinoid (extra-pancreatic neuroendocrine) tumors, with the extra-pancreatic neuroendocrine tumor
study having started enrollment in December 2015 and the pancreatic neuroendocrine tumor study having started
enrollment in March 2016. A Phase I dose escalation study in Caucasian patients started in November 2015 in the
United States. Additionally, two Phase II studies of sulfatinib as monotherapy are ongoing in China for recurrent/refractory
thyroid cancer patients, with another Phase II study being conducted with Gemzar (gemcitabine) refractory biliary tract
cancer patients.
Studies in Neuroendocrine Tumors
Phase III study in pancreatic neuroendocrine tumors, sulfatinib monotherapy (300 mg)—China (Study 19 in
pipeline chart; Status: enrolling)
In March 2016, we initiated the SANET-p study, which is a Phase III study in patients with low- or intermediate-
grade, advanced pancreatic neuroendocrine tumors. In this study, patients are randomized at a two-to-one ratio to receive
either an oral dose of 300 mg of sulfatinib once daily or placebo on a 28-day treatment cycle. The primary endpoint is
PFS, with secondary endpoints an oral dose of including objective response rate, disease control rate, time to response,
duration of response, overall survival, safety and tolerability. We expect to complete enrollment in 2018 and present top-
line results in 2019. If the SANET-p Phase III data is consistent with the 17.1% objective response rate and estimated 19.4
month median PFS reported in the above-mentioned Phase Ib/II study, we believe the benefits of sulfatinib as a
monotherapy to the approximately 5,000 to 6,000 new patients with pancreatic neuroendocrine tumors in China will be
significant as compared to the treatment alternatives currently available to them.
77
Phase III study in extra-pancreatic neuroendocrine tumors, sulfatinib monotherapy (300 mg)—China (Study 20
in pipeline chart; Status: enrolling)
In December 2015, we initiated the SANET-ep study, which is a Phase III study in patients with low- or
intermediate-grade advanced extra-pancreatic neuroendocrine tumors. In this study, patients are randomized at a 2:1 ratio
to receive either 300 mg of sulfatinib orally daily or placebo, on a 28-day treatment cycle. The primary endpoint is PFS,
with secondary endpoints including objective response rate, disease control rate, time to response, duration of response,
overall survival, safety and tolerability. We expect to complete enrollment in 2018 and present top-line results in 2019. If
the SANET-ep Phase III data is consistent with the 15.0% objective response rate and estimated 13.4 month median PFS
reported in the above-mentioned Phase II study, we believe the benefit of sulfatinib as a monotherapy to patients with
extrapancreatic neuroendocrine tumors in China will be significant as compared to the minimal treatment alternatives
currently available to them.
Phase I sulfatinib monotherapy in advanced solid tumors—U.S. (Study 21 in pipeline chart; Status: enrolling)
A Phase I study in Caucasian patients also began in November 2015 in the United States following FDA clearance
of our IND application in early 2015. This study evaluates the safety, tolerability and pharmacokinetics of sulfatinib in
advanced solid tumors to determine the maximum tolerated dose and/or recommended Phase II dose, dose-limiting
toxicities, pharmacokinetics profile, and preliminary anti-tumor activity of sulfatinib in Caucasian patients. As of February
28, 2017, we are currently in the 300 mg cohort and expect to complete dose escalation shortly. Once the Phase II dose
among Caucasian patients is established, we intend to begin full development in several tumor types in 2017.
Phase II sulfatinib monotherapy in recurrent/refractory thyroid cancer (second-line)—China (Studies 22 and 23
in pipeline chart; Status: enrolling)
In March 2016, we initiated two Phase II studies in China to evaluate the safety, pharmacokinetics and efficacy
of sulfatinib in patients with both medullary and differentiated thyroid cancer and are observing encouraging early efficacy
in these open-label studies. We believe that sulfatinib’s VEGFR/FGFR1/CSF-1R inhibition profile has strong potential in
second-line thyroid cancer patients, particularly in China where there are few safe and effective treatment options for this
patient population. We target to present preliminary Phase II results in late 2017.
Phase II sulfatinib monotherapy in refractory biliary tract cancer (second-line)—China (Study 24 in pipeline
chart; Status: enrolling)
In January 2017, we began a Phase II study in patients with biliary tract cancer, a heterogeneous group of rare,
but fatal, malignancies arising from the biliary tract epithelia. Gemzar is the currently approved first-line therapy for biliary
tract cancer patients, with a total of approximately 18,000 new patients per year in the United States according to the
National Cancer Institute, but median survival is less than 12 months for patients with unresectable or metastatic disease
at diagnosis. As a result, we see a major unmet medical need for patients who have progressed on Gemzar, and sulfatinib
may offer a new targeted treatment option in this tumor type.
Epitinib EGFR Inhibitor
Epitinib (also known as HMPL-813) is a potent and highly selective oral EGFR inhibitor designed to optimize
brain penetration. A significant portion of patients with non-small cell lung cancer go on to develop brain metastasis.
Patients with brain metastasis suffer from poor prognosis with a median overall survival of less than six months and low
quality of life with limited treatment options. Epitinib is a potent and highly selective oral EGFR inhibitor which has
demonstrated brain penetration and efficacy in pre-clinical and now clinical studies. EGFR inhibitors have revolutionized
the treatment of non-small cell lung cancer with EGFR activating mutations. However, approved EGFR inhibitors such as
Iressa and Tarceva cannot penetrate the blood-brain barrier effectively, leaving the majority of patients with brain
metastasis without an effective targeted therapy.
Our strategy has been to create targeted therapies in the EGFR area that would go beyond the already approved
EGFRm+ non-small cell lung cancer patient population to address certain areas of unmet medical needs that represent
significant market opportunities, including: (i) brain metastasis and/or primary brain tumors with EGFRm+, which we
seek to address with epitinib; and (ii) tumors with EGFR gene amplification or EGFR over-expression, which we seek to
address with theliatinib as discussed below.
78
Mechanism of Action
EGFR is a protein that is a cell-surface receptor tyrosine kinase for epidermal growth factor. Activation of EGFR
can lead to a series of downstream signaling activities that activate tumor cell growth, survival, invasion, metastasis and
inhibition of apoptosis. Tumor cell division can happen uncontrollably when the pathway is abnormally activated through
EGFRm+, gene amplification of wild-type EGFR or over-expression of wild-type EGFR. Treatment strategies for certain
cancers involve inhibiting EGFRs with small molecule tyrosine kinase inhibitors. Once the tyrosine kinase is disabled, it
cannot activate the EGFR pathway and trigger downstream signaling activities, thereby suppressing cancer cell growth.
Outside of non-small cell lung cancer, EGFRm+ also occurs in glioblastoma, a common type of malignant
primary brain tumor.
Epitinib Pre-clinical Evidence
Pre-clinical studies and orthotopic brain tumor models have shown that epitinib demonstrated brain penetration
and efficacy superior to that of current globally marketed EGFRm+ inhibitors such as Iressa and Tarceva. In orthotopic
brain tumor models, epitinib demonstrated good brain penetration, efficacy and pharmacokinetic properties as well as a
favorable safety profile.
If the pre-clinical findings on drug exposure of epitinib in the brain are confirmed in humans in our clinical trials,
we believe epitinib has the potential to qualify for U.S. Breakthrough Therapy designation for patients with EGFRm+ non-
small cell lung cancer with tumors metastasized to the brain.
Epitinib Early Clinical Development
As discussed below, we have completed two clinical trials of epitinib in China.
Phase I epitinib monotherapy in non-small cell lung cancer—China
This first-in-human study was conducted to assess the maximum tolerated dose and dose-limiting toxicity, safety
and tolerability, pharmacokinetics, and preliminary anti-tumor activity of epitinib. As of December 2014, 36 patients were
enrolled in seven cohorts (20 mg, 40 mg, 80 mg, 120 mg, 160 mg, 200 mg and 240 mg). This study found that the safety
and tolerability of epitinib was acceptable. No dose-limiting toxicity was observed, and the maximum tolerated dose was
not reached. The recommended dose from this study was 160 mg once daily based on pharmacokinetics data and
safety data.
Phase Ib epitinib monotherapy in non-small cell lung cancer (first-line), EGFRm+ with brain metastasis, (160 mg
daily)—China
In this Phase Ib study, a total of 34 non-small cell lung cancer patients, of which 13 had previously received
EGFR tyrosine kinase inhibitor treatment and 21 were EGFR tyrosine kinase inhibitor treatment naïve, were efficacy
evaluable with an objective response rate of 38%, including three unconfirmed responses. All responses occurred in EGFR
tyrosine kinase inhibitor treatment naïve patients resulting in an objective response rate of 62% and in the 11 EGFR
tyrosine kinase inhibitor naïve patients who also had measurable brain metastasis (lesion diameter>10 mm per Response
Evaluation Criteria In Solid Tumors 1.1) with a 64% objective response rate. Furthermore, when patients with c-Met gene
amplification were excluded, epitinib’s objective response rate increased to 68% in the EGFR tyrosine kinase inhibitor
treatment naïve patients and 70% of those patients who also had measurable brain metastasis. Epitinib was well tolerated
with treatment related adverse events in the dose expansion stage greater than or equal to CTC grade 3 with more than 5%
incidence were elevations in alanine transaminase (18.9(cid:8)(cid:12)(cid:15)(cid:3) (cid:1845)-GGT (10.8%), aspartate transaminase (10.8%),
hyperuricemia (5.4%) and skin rash (5.4%).
79
Figure 12:Phase Ib study in China of epitinib monotherapy in EGFRm+ non-small lung cancer patients with brain
metastasis. Phase III initiation made on the basis of this encouraging efficacy data
A. Overall tumor response
B. Intracranial tumor response
Objective Response Rate
Disease Control Rate
EGFR TKI naïve
(N=21)
61.9% (13/21) #
90.5% (19/21) #
EGFR TKI naïve
excl. c-MET +ve (N=19)
68.4% (13/19) #
100.0% (19/19) #
Intracranial ORR
Intracranial DCR
EGFR TKI naïve
(N=11)
63.6% (7/11) #
90.9% (10/11) #
EGFR TKI naïve
excl. c-MET +ve (N=10)
70.0% (7/10) #
100.0% (10/10) #
)
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Baseline
Week 4 Week 8
Week 16
Week 24
Week 32
Note: The two EGFR TKI naïve patients that progressed were c-MET +ve
Time after study entry
Dose expansion stage – data cut-off 20 Sept, 2016; * Unconfirmed PR, due to no further assessment at cut-off
date; # Includes both confirmed and unconfirmed PRs; ^ c-MET amplification/high expression identified
Source: Chi-Med
Epitinib Current Clinical Development and Near-Term Plans
As discussed below, we currently plan to initiate two clinical studies of epitinib in China in 2017, including one
Phase III trial.
Phase III epitinib monotherapy in non-small cell lung cancer, EGFRm+ with brain metastasis—China (Study 25
in pipeline chart; Status: planned for 2017)
Based on the encouraging data from our Phase Ib study discussed above, we plan to initiate a Phase III study of
epitinib in EGFRm+ non-small cell lung cancer patients with brain metastasis China in 2017.
Phase II epitinib monotherapy in glioblastoma—China (Study 26 in pipeline chart; Status: planned for 2017)
We further plan to initiate a Phase II study in patients with glioblastoma a primary cancer that harbors high levels
of EGFR gene amplification in China in 2017.
Theliatinib EGFR Inhibitor
Like epitinib, theliatinib (also known as HMPL-309) is a novel molecule EGFR inhibitor being investigated for
the treatment of esophageal and other solid tumors. Tumors with wild-type EGFR activation, for instance, through gene
amplification or protein over-expression, are less sensitive to EGFR tyrosine kinase inhibitors such as Iressa and Tarceva
due to sub-optimal binding affinity. Theliatinib was designed with strong affinity to the wild-type EGFR kinase and has
demonstrated five to ten times the potency than Tarceva in pre-clinical trials. As a result, we believe that theliatinib could
potentially be more effective than existing EGFR tyrosine kinase inhibitor products and benefit patients with esophageal
and head and neck cancer, or other tumor types with a high incidence of wile-type EGFR activation. We currently retain
all rights to theliatinib worldwide.
80
Mechanism of Action
Unlike c-Met, where targeted therapies have yet to be approved in the patient population with c-Met over-
expression, there are successful examples of clinical efficacy among patients with EGFR over-expression in tumor types
such as colorectal cancer and head and neck cancer. The most successful targeted therapy in the patient population with
EGFR over-expression is the monoclonal antibody Erbitux (cetuximab) (from Bristol Myers Squibb/Merck Serono), which
is indicated for head and neck cancer and colorectal cancer. Importantly, there remain many tumor types with high levels
of EGFR over-expression for which no targeted therapies have been approved. In addition, in patients with EGFR gene
amplification, there are no approved targeted therapies despite high levels of EGFR gene amplification occurring in many
of the above EGFR over-expressed tumor types.
Theliatinib Pre-clinical Evidence
EGFR is over-expressed in a significant proportion of epithelium-derived carcinomas, which are cancers that
begin in a tissue that lines the inner or outer surfaces of the body. Theliatinib inhibits the epidermal growth factor-
dependent proliferation of cells at nanomolar concentrations. Of most interest is the strong binding affinity to wild-type
EGFR enzyme demonstrated by theliatinib. The data indicated that upon withdrawal of the drug, the EGFR
phosphorylation rapidly returns to higher levels for Iressa and Tarceva, while EGFR phosphorylation remained low for
theliatinib after drug withdrawal, suggesting theliatinib may demonstrate a sustained target occupancy or “slow-off”
characteristic due to strong binding, as shown in Figure 13 below.
Figure 13: Comparison of binding affinity to wild-type EGFR enzyme
Source: Chi-Med
Note: When adenosine triphosphate (ATP) binds to an EGFR enzyme, the enzyme phosphorylates its peptide
substrate to produce phosphorylated peptide, or phospho-peptide. Hence, low phosopho-peptide levels are
correlated with a high level of EGFR inhibition.
81
Theliatinib Current Clinical Development and Near-Term Plans
As discussed below, we currently have two clinical trials of theliatinib ongoing in China.
Phase I study of theliatinib monotherapy in wild-type EGFR non-small cell lung cancer (first-line) – China
(Study 27 in pipeline chart; Status: enrolling)
In November 2012, we initiated the first-in-human Phase I, open-label, dose escalation study in China of
theliatinib administered orally to patients with wild-type EGFR gene amplification or EGFR over-expression non-small
cell lung cancer who have failed at least two lines of chemotherapy. The primary objectives of the study were to evaluate
its safety and tolerability in patients with advanced solid tumors and to determine the maximum tolerated dose. The study
is also evaluating efficacy against non-small cell lung cancer, determining the pharmacokinetics of theliatinib under single
dose and repeat doses and exploring the relationship between the theliatinib’s activity and certain biomarkers.
Theliatinib has completed eight dose cohorts. While the maximum tolerated dose has not yet been reached and
dose escalation is ongoing.
Upon completion of the dose escalation and determination of the Phase II dose, we intend to initiate multiple
Phase Ib expansion studies, including for esophageal and head and neck cancers.
Phase Ib study of theliatinib monotherapy in esophageal cancer (first-line)–China (Study 28 in pipeline chart;
Status: enrolling)
We initiated a Phase Ib proof-of-concept expansion study at 300 mg of theliatinib once daily in esophageal cancer
patients with EGFR protein overexpression or gene amplification in January 2017.
HMPL-523 Syk Inhibitor
The result of our over six year program of discovery and pre-clinical work against Syk is HMPL-523, a highly
selective Syk inhibitor with a unique pharmacokinetic profile which provides for higher drug exposure in the tissue than
on a whole blood level. We designed HMPL-523 intentionally to have high tissue distribution because it is in the tissue
that the B-cell activation associated with rheumatoid arthritis and lupus occurs most often. Furthermore, and somewhat
counter intuitively, in hematological cancer the vast majority of cancer cells nest in tissue, with a small proportion of
cancer cells releasing and circulating in the blood where they cannot survive for long. In both rheumatoid arthritis and
hematological cancer, we assessed that an effective small molecule Syk inhibitor would need to have superior tissue
distribution.
However, many pharmaceutical and biotechnology companies had experienced difficulties in developing a safe
and efficacious Syk-targeted drug. For example, the development of the Syk inhibitor fostamatinib for rheumatoid arthritis
was one such failed program, although clear efficacy was observed in Phase II and Phase III trials. The main problem was
off-target toxicities associated with poor kinase selectivity, such as hypertension and severe diarrhea. Therefore, we believe
that kinase selectivity is critical to a successful Syk inhibitor. In addition, fostamatinib was designed as a prodrug in order
to improve solubility and oral absorption. A prodrug is medication administered in a pharmacologically inactive form
which is converted to an active form once absorbed into circulation. The rate of the metabolism required to release the
active form can vary from patient to patient, resulting in large variation in active drug exposures that can impact efficacy.
We believe HMPL-523 offers important advantages over intravenous monoclonal antibody immune modulators in
rheumatoid arthritis in that small molecule compounds clear the system faster, thereby reducing the risk of infections from
sustained suppression of the immune system.
Mechanism of Action
Targeting the B-cell signaling pathway is emerging as a potential means to treat both hematological cancer and
immunology. Both PI3K(cid:71) and BTK (both kinases) along the B-cell signaling pathway have proven clinical efficacy in
hematological cancers, and consequently the FDA has approved drugs targeting these kinases in the past few years. Syk
is a key kinase upstream of the PI3K(cid:71) and BTK, and we believe should therefore be an important target for modulating B-
cell signaling.
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Figure 14: The B-cell signaling pathway and the approved drugs / drug candidates which target its component kinases
Source: Chi-Med
Note: This graphic is a highly simplified representation of the B-cell signaling pathways, which are each
composed of a signaling cascade of the multiple kinases indicated in the graphic. Signaling from the B-cell
receptor (BCR) through the cascade, in simple terms, triggers an immune response, including tumor cell
activation, proliferation, survival and migration.
Syk, a target for autoimmune diseases
The central role of Syk in signaling processes is not only in cells of immune responses but also in cell types
known to be involved in the expression of tissue pathology in autoimmune, inflammatory and allergic diseases. Therefore,
interfering with Syk could represent a possible therapeutic approach for treating these disorders. Indeed, several studies
have highlighted Syk as a key player in the pathogenesis of a multitude of diseases, including rheumatoid arthritis, systemic
lupus erythematosus and multiple sclerosis.
Syk, a target for oncology
In hematological cancer, we believe Syk is a high potential target. In hematopoietic cells, Syk is recruited to the
intracellular membrane by activated membrane receptors like B-cell receptors or another receptor called Fc and then binds
to the intracellular domain of the receptors. Syk is activated after being phosphorylated by Src family kinases and then
further induces downstream intracellular signals including B-cell linker, PI3K(cid:71), BTK and Phospholipase C (cid:74)2 to regulate
B-cell proliferation, growth, differentiation, homing, survival, maturation, and immune responses. Syk not only involves
the regulation of lymphatic cells but also signal transduction of non-lymphatic cells such as mast cells, macrophages, and
basophils, resulting in different immunological functions such as degranulation to release immune active substances,
83
leading to immunological reaction and disease. Therefore, regulating B-cell signal pathways through Syk is expected to
be effective for treating lymphoma.
The high efficacy and successful approvals of both Imbruvica (ibrutinib) (developed by AbbVie Inc.), a BTK
inhibitor, and Zydelig (idelalisib) (developed by Gilead), a PI3K(cid:71) inhibitor, are evidence that modulation of the B-cell
signaling pathway is critical for the effective treatment of B-cell malignancies. Syk is upstream of both BTK and PI3K(cid:71),
and we believe it could deliver the same outcome as Imbruvica and Zydelig, assuming no unintentional toxicities are
derived from Syk inhibition. Entospletinib (GS-9973), a Syk inhibitor developed by Gilead, reported promising Phase II
study results in late 2015 with a nodal response rate of 65% observed in chronic lymphocytic leukemia and small
lymphocytic lymphoma. Nodal response is defined as a greater than 50% decrease from baseline in the sum of lymph node
diameters. Gilead has also reported that entospletinib demonstrated a nodal response rate of 44.4% in an exploratory
clinical study in chronic lymphocytic leukemia patients previously treated with Imbruvica and Zydelig, thereby indicating
that Syk inhibition has the potential to overcome resistance to Imbruvica and Zydelig. Takeda reported similarly strong
signs of efficacy for their TAK-659 Phase I dose escalation study in lymphoma, which was also published in late 2015.
HMPL-523 Research Background
The threshold of safety for a Syk inhibitor in chronic disease is extremely high, with no room for material toxicity.
The failure of fostamatinib in a global Phase III registration study in rheumatoid arthritis provided important insights for
us in the area of toxicity. While fostamatinib clearly showed patient benefit in rheumatoid arthritis, a critical proof-of-
concept for Syk modulation, it also caused high levels of hypertension which is widely believed to be due to the high levels
of off target KDR inhibition. In addition, fostamatinib has also been shown to strongly inhibit the Ret kinase, and in pre-
clinical studies it was demonstrated that inhibition of the Ret kinase was associated with developmental and reproductive
toxicities.
The requirement for Syk kinase activity in inflammatory responses was first evaluated with fostamatinib, which
was co-developed by AstraZeneca/Rigel Pharmaceuticals, Inc. (also called R788, a prodrug of an active Syk inhibitor
R406). In June 2013, AstraZeneca announced results from pivotal Phase III clinical trials that fostamatinib statistically
significantly improved ACR20 (a 20% improvement from baseline based on the study criteria) response rates of patients
inadequately responding to conventional disease-modifying anti-rheumatic drugs and a single anti-TNF-(cid:3)(cid:68) (a key pro-
inflammatory cytokine involved in rheumatoid arthritis pathogenesis) antagonist at 24 weeks, but failed to demonstrate
statistical significance in comparison to placebo at 24 weeks. As a result, AstraZeneca decided not to proceed.
Fostamatinib was also in trials for B-cell lymphoma and T-cell lymphoma. It demonstrated some clinical efficacy
in diffused large B-cell lymphoma patients with an objective response rate of 22%. Entospletinib, a Syk inhibitor
developed by Gilead, has features of high potency and good selectivity toward kinases. However, while the Phase II study
discussed above showed that it had significant efficacy in patients with chronic lymphocytic leukemia and small
lymphocytic lymphoma, its poor solubility and permeability into intestinal epithelial cells resulted in unsatisfactory oral
absorption and a great variation of individual drug exposure. In addition, entospletinib shows some inhibition of the
CYP3A4, CYP2D6, and CYP1A2 enzymes involved in the metabolism of certain drugs, and therefore their inhibition
could increase the risk of drug-to-drug interaction when used in combined therapy.
HMPL-523 Pre-clinical Evidence
The safety profile of HMPL-523 was evaluated in multiple in vitro and in vivo pre-clinical studies under good
laboratory practice, or GLP, guidelines and found to be well tolerated following single dose oral administration. Toxic
findings were seen in repeat dose animal safety evaluations in rats and dogs at higher doses and found to be reversible.
These findings can be readily monitored in the clinical studies and fully recoverable upon drug withdrawal. The starting
dose in humans was suggested to be 5 mg. This dose level is approximately 5% of the human equivalent dose extrapolated
from the pre-clinical “no observed adverse event levels”, which is below the 10% threshold recommended by
FDA guidelines.
In vitro Pharmacology
HMPL-523 is a highly selective Syk inhibitor with an IC50 of 24 ± 4 nM (n=7) in a Syk kinase enzymatic assay.
HMPL-523 has been evaluated in a kinase selectivity panel of 287 kinases and a broad pharmacological panel of 79 targets.
We believe, as shown in the chart below, HMPL-523’s lack of KDR inhibition will mean a much lower risk of
hypertension, which is a major off-target toxicity of R406 in clinical trials.
84
Figure 15: HMPL-523 kinase selectivity in comparison to R406 (the Syk inhibitor metabolite of fostamatinib). R406 is
shown below to be as potent in inhibiting KDR as it is in inhibiting Syk, and significantly more potent in inhibiting FLT3
and Ret.
Sources: [a]: Chi-Med, Eun-ho Lee et al, 2011 American College of Rheumatology; [b]: S. P. McAdoo and
F. W. Tam, Drugs Future, 2011, 36(4), PP273-283
In vivo Pharmacology
HMPL-523 blocked B-cell activation in mouse whole blood and rat whole blood ex vivo challenge with an
EC50 of 1301 ng/mL (ED50 of 2.9 mg/kg) and 332.8~471.7 ng/mL (ED50 of 4.1~5.2 mg/kg) at 2 hours after dosing,
respectively. The maximum inhibition was observed at 2 hours after oral dosing, while the significant inhibition was
maintained for up to 4 hours.
HMPL-523 was further evaluated in collagen-induced rheumatoid arthritis in mice and rats. HMPL-523 treatment
significantly reduced disease severity in a dose dependent manner with an estimated ED50 of 4.0 - 6.8 mg/kg once daily in
mouse collagen-induced arthritis, and suppressed paw swelling with an ED50 of 1.4 - 2.0 mg/kg once daily in the rat
collagen-induced arthritis model (AUC0-24h was 1408 h*ng/mL) and with the minimum efficacious dose (EDmin) of 0.7 -
1.0 mg/kg once daily (AUC0-24h was 413 h*ng/mL).
HMPL-523 not only halted disease progression, but also reversed aspects of the disease such as paw swelling and
bone resorption to normal levels at higher doses in rat collagen-induced arthritis therapeutic models. Figure 16 below
shows that HMPL-523 significantly reduced bone resorption at 3 mg/kg once daily dose. The 3 mg/kg once daily HMPL-
523 dose delivered similar efficacy to both fostamatinib, at a significantly higher dosage of 10 mg/kg twice daily, and
Enbrel (etanercept) (an approved monoclonal antibody from Amgen/Pfizer/Takeda), at the higher dosage of 10 mg/kg
once every other day.
However, at the 10 mg/kg once daily dose, HMPL-523 reached maximum efficacy, which correlated with
significant reduction of pro-inflammatory cytokines and chemokines in the joint lavage fluid of rats with collagen-induced
arthritis, resulting in an almost total reversal of symptoms in the induced rheumatoid arthritis rat model.
In vivo efficacy of the orally active HMPL-523 was evaluated in lupus-prone (MRL/lpr) mice. HMPL-523, at
20 mg/kg, significantly blocked skin lesions, delayed the onset of proteinuria (the presence of abnormal quantities of
proteins in urine which may indicate kidney damage) and reduced the immune organs to body weight ratios and suppressed
production of anti-dsDNA antibodies (a group of anti-nuclear antibodies that act against certain DNA).
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Anti-tumor activity and combination synergy with other therapies
In in vitro B-cell lymphoma cell lines with Syk/BCR dysregulation, HMPL-523 was found to block
phosphorylation of B-cell linker protein as well as inhibit cell viability by inhibiting cell survival and increasing apoptotic
rate. HMPL-523 also showed synergistic anti-tumor activity on human diffused large B-cell lymphoma cells, in
combination with other drugs such as Phosphoinositide-3-(cid:46)(cid:76)(cid:81)(cid:68)(cid:86)(cid:72)(cid:3)(cid:303)(cid:3)(cid:76)(cid:81)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:82)(cid:85)(cid:86)(cid:15)(cid:3)(cid:37)-cell lymphoma 2 family inhibitors, or
chemotherapies. Potent anti-tumor activity was also demonstrated in nude mice bearing B-cell lymphoma xenograft tumors
with Syk/B-cell receptor dysregulation.
Figure 16: HMPL-523 in hematological malignancies. Pre-clinical superiority vs. both BTK/PI3K(cid:303)(cid:3)TKIs as well as
entospletinib (GS-9973)
A. Syk inhibitors all showed a dose dependent increase in apoptotic rate (cell death) in REC-1 cells with HMPL-523
efficacy stand-out.
B. HMPL-523 inhibited cells survival in panel of human lymphoma & leukemia cells – standout efficacy vs. ibrutinib
(BTK) & idelalisib (PI3K(cid:303)(cid:12)(cid:3)inhibitors.
C. Combination of HMPL-523 with other drugs (PI3K(cid:303)(cid:3)TKI; ABT-199; Lenalidomide) promote cell killing in DLBCL
through inducing apoptosis.
HMPL-523 Current Clinical Development and Near-Term Plans
As discussed below, we currently have various clinical trials of HMPL-523 ongoing or expected to begin in the
near term in Australia, the United States and China.
We have been in a Phase I clinical trial in Australia with HMPL-523 since mid-2014 and have completed
10 cohorts of a single ascending dose program in healthy volunteers. In mid-2015, we began a multiple ascending dose
86
study in healthy volunteers, and we successfully completed the multiple dose section of this Phase I study in October 2015.
In parallel with this study, we initiated a second Phase I clinical study in Australia in patients with hematological
malignancies in January 2016.
Phase I study of HMPL-523 in rheumatoid arthritis (healthy volunteers) in Australia (Study 29 in pipeline chart;
Status: complete—IND application submitted for Phase II study)
In November 2016, we reported results of this Phase I dose-escalation study on HMPL-523 in healthy volunteers,
in which a total of 118 adult male healthy subjects were enrolled at baseline and 114 (96.6%) subjects completed the study.
A total of 83 treatment emergent adverse events were reported, with 38.9% in the HMPL-523 groups and 32.1% in the
placebo groups, respectively. Two serious adverse events were reported in the Phase I study and when HMPL-523 was
discontinued in those subjects the series adverse events were resolved. Off-target toxicities such as diarrhea and
hypertension, which led to the failure of first-generation Syk inhibitor fostamatinib, were not observed.
In an ex-vivo human whole blood pharmacodynamic assay, HMPL-523 inhibited anti-IgE-induced basophil
activation (CD63+) in a concentration-dependent manner with an estimated half maximal effective concentration of
47.70mg/mL. Systemic exposure of HMPL-523 was increased up to 1.5 fold when administered in a fed condition
compared to a fasted condition, indicating that food consumption increases the relative bioavailability of HMPL-523.
Human pharmacokinetic exposures at 200 mg once daily and above can be expected to provide the target coverage required
for clinical efficacy based on the preclinical human pharmacokinetic/pharmacodynamics analysis and as a result, a
multiple-dose regimen of 300 mg or less of HMPL-523, administered once daily, is the recommended Phase II dose for
clinical trials in autoimmune diseases. HMPL-523 demonstrated a dose dependent suppression of B-cell activation. This
data was presented at the annual meeting of the American College of Rheumatology/Association of Rheumatology Health
Professionals in 2016. We have submitted our U.S. immunology IND application, engaged with the FDA regarding our
plan for a global Phase II study in rheumatoid arthritis, and are now preparing for submission of additional data to the
FDA after which we plan to start the U.S. development later on in 2017.
Phase I study of HMPL-523 in rheumatoid arthritis (healthy volunteers) in China (Study 30 in pipeline chart;
Status: planned for 2017)
Based on the results of our Phase I dose escalation study in Australia, we plan to began a Phase I study dose
escalation study among healthy individuals to ascertain the maximum tolerated dose of HMPL-523 as a bridging study in
China.
Phase I study of HMPL-523 in hematological cancer (lymphoma/leukemia, second/third-line)—Australia/China
(Studies 31 and 32 in pipeline chart; Status: enrolling)
In early 2016, we initiated a Phase I dose escalation study of HMPL-523 in Australia in patients with relapsed
and/or refractory B-cell non-Hodgkin’s lymphoma or chronic lymphocytic leukemia for whom there is no standard
therapy. We have completed the 100 mg, 200 mg, 400 mg, 600 mg once-daily dose cohorts and are now in the 800 mg
dose cohort in Australia. In mid-2016, we received clearance from the CFDA on our hematological cancer IND application,
and as a result, in January 2017, we started Phase I dose escalation in B-cell non-Hodgkin's lymphoma or chronic
lymphocytic leukemia patients in China. Once the maximum tolerated dose or the recommended dose have been reached,
we intend to initiate a proof-of-concept Phase Ib/II study with several cohorts of tumor sub-types as either a monotherapy
or in combination with other therapies hoping in both cases to produce preliminary proof-of-concept data on HMPL-523
in hematological cancer during 2017. We base our hope to reach this objective in 2017 on the strong efficacy (albeit
suboptimal safety) reported on Gilead’s Syk inhibitor entospletinib in 2016.
HMPL-689 PI3K(cid:71) Inhibitor
In February 2017, we announced the initiation of a first-in-human Phase I dose escalation study in Australia to
evaluate safety, tolerability, pharmacokinetic properties and preliminary anti-tumor activity in patients with advanced or
metastatic solid tumors who had failed or could not tolerate standard therapies or for whom no standard therapies existed.
We are also preparing to initiate a Phase I dose escalation study in solid tumor patients in China and expect the first patient
dosage in the second quarter of 2017.
87
Mechanism of Action
Class I phosphatidylinositide-3-kinases, or PI3Ks, are lipid kinases that, through a series of intermediate
processes, control the activation of several important signaling proteins including the serine/threonine kinase AKT. In
most cells, AKT is a key PI3K effector that regulates cell proliferation, carbohydrate metabolism, cell motility and
apoptosis, and other cellular processes. Please refer to Figure 14 (“The B-cell signaling pathway”).
There are multiple sub-families of PI3K kinases, PI3K(cid:71) plays important roles in B-cell activation, development,
survival and migration. PI3K(cid:71) is mainly expressed in circulating leukocytes and lymphoid tissues and plays critical roles
in B-cell activation and proliferation. PI3K(cid:71) is the central signaling enzyme that mediates the effects of multiple receptors
on B-cells. Upon an antigen binding to B-cell receptors, PI3K(cid:71) can be activated through the Lyn and Syk signaling cascade.
Aberrant B-cell function has been observed in multiple autoimmune diseases and B-cell mediated malignancies.
Therefore, PI3K(cid:71) is considered to be a promising target for drugs that aim to prevent or treat hematologic cancer,
autoimmunity and transplant organ rejection and other related inflammation diseases.
HMPL-689 Research Background
We have designed HMPL-689 with superior PI3K isoform selectivity, in particular to not inhibit PI3K(cid:74), another
isoform of PI3K, to minimize the risk of serious infection which has been observed with existing therapies, such as
duvelisib, due to their strong immune suppression. HMPL-689’s strong potency, particularly at the whole blood level, also
allows for reduced daily doses to minimize compound related toxicity, such as the high level of liver toxicity observed
(cid:90)(cid:76)(cid:87)(cid:75)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:73)(cid:76)(cid:85)(cid:86)(cid:87)(cid:3) (cid:74)(cid:72)(cid:81)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3) (cid:51)(cid:44)(cid:22)(cid:46)(cid:303)(cid:3) (cid:76)(cid:81)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:82)(cid:85)(cid:3) (cid:61)(cid:92)(cid:71)(cid:72)(cid:79)(cid:76)(cid:74)(cid:17)(cid:3) (cid:43)(cid:48)(cid:51)(cid:47)-689’s pharmacokinetic properties have been found to be
favorable with expected good oral absorption, moderate tissue distribution and low clearance, suitable for once daily
dosing. We also expect that HMPL-689 will have low risk of drug accumulation and drug-to-drug interaction.
Given the above, combined with its high potency and good kinase selectivity, we believe that HMPL-689 has the
potential to be a global best-in-class PI3K(cid:71) agent.
HMPL-689 Pre-clinical Evidence
Compared to other PI3K(cid:71) inhibitors, HPML-689 shows higher potency and selectivity.
Figure 17: Enzyme selectivity (IC50, in nM) of HMPL-689 vs. competing PI3K(cid:71) inhibitors; this shows HMPL-689 is
approximately five fold more potent than Zydelig (idelalisib) on whole blood level and, unlike duvelisib, does not inhibit
PI3K(cid:74).
Source: Chi-Med
88
HMPL-689 Clinical Development
Phase I study of HMPL-689 in hematological cancers (second/third-line)—Australia and China (Studies 33
and 34 in pipeline chart; Status: complete)
In 2016, we completed a Phase I dose escalation study in healthy adult volunteers to evaluate HMPL-689’s
pharmacokinetic and safety profile following single oral dosing. Results were as expected with linear pharmacokinetic
properties and good safety profile. Detailed Phase I data will be published at a scientific conference in 2017. We have
now received IND clearance in China and plan to initiate a Phase I dose escalation and expansion study in patients with
hematologic malignancies in 2017.
HMPL-453 FGFR Inhibitor
Mechanism of Action
Fibroblast growth factor receptors, or FGFRs, belong to a subfamily of receptor tyrosine kinases, or RTKs. Four
different FGFRs (FGFR1-4) and at least 18 ligand FGFs constitute the FGF/FGFR signaling system. Activation of the
FGFR pathway through the phosphorylation of various downstream molecules ultimately leads to increased cell
proliferation, migration and survival. FGF/FGFR signaling regulates a wide range of basic biological processes, including
tissue development, angiogenesis, and tissue regeneration. Given the inherent complexity and critical roles in physiological
processes, dysfunction in the FGF/FGFR signaling leads to a number of developmental disorders and is consistently found
to be a driving force in cancer. Deregulation of the FGFR can take many forms, including receptor amplification, activating
mutations, gene fusions, and receptor isoform switching, and the molecular alterations are found at relatively low
frequencies in most tumors. The incidence of FGFR aberrance in various cancer types is listed in Figure 18 below.
Figure 18: Common genetic alterations in FGFRs related to cancer
Source: M. Touat et al, “Targeting FGFR Signaling in Cancer,” Clinical Cancer Research (2015); 21(12); 2684-
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HMPL-453 Research Background
We noted a growing body of evidence has demonstrated the oncogenic potential of FGFR aberrations in driving
tumor growth, promoting angiogenesis, and conferring resistance mechanisms to anti-cancer therapies. Targeting the
FGF/FGFR signaling pathway has therefore attracted a good deal of attention from biopharmaceutical companies and has
become an important exploratory target for new anti-tumor target therapies.
Currently, FGFR monoclonal antibodies, FGF ligand traps and small molecule FGFR tyrosine kinase inhibitors
are being evaluated in early clinical studies. BGJ-398 (Novartis), AZD4547 (AstraZeneca) and JNJ-42756493 (Johnson &
Johnson) are the leading FGFR selective tyrosine kinase inhibitors, and their early clinical trials provided substantial proof-
of-concept with regard to anti-tumor efficacy and pharmacodynamic markers of effective FGFR pathway inhibition.
The main FGFR on-target toxicities observed to date in these compounds are all mild and manageable, including
hyperphosphatemia, nail and mucosal disorder, and reversible retinal pigmented epithelial detachment. However, there are
still many challenges in the development of FGFR-directed therapies. Uncertainties include the screening and stratifying
of patients who are most likely to benefit from FGFR targeted therapy. Intra-tumor heterogeneity observed in FGFR
amplified cancer may compromise the anti-tumor activity. In addition, the low frequency of specific FGFR molecular
aberrance in each cancer type may hinder clinical trial enrollment. As a result, there have been no approved therapies
specifically targeting the FGFR signaling pathway to date.
HMPL-453 Pre-clinical Evidence
HMPL-453 is a potential first-in-class novel, highly selective and potent, small molecule that targets FGFR
1/2/3 with an IC50 in the low nanomolar range. Its good selectivity was revealed in the screening against 292 kinases.
HMPL-453 exhibited strong anti-tumor activity that correlated with target inhibition in tumor models with abnormal FGFR
activation.
HMPL-453 has good pharmacokinetic properties characterized by rapid absorption following oral dosing, good
bioavailability, moderate tissue distribution and moderate clearance in all pre-clinical animal species. HMPL-453 was
found to have little inhibitory effect on major cytochrome P450 enzymes, indicating low likelihood of drug-to-drug
interaction issues.
Phase I enabling GLP toxicity studies are ongoing, and preliminary data indicated a good safety profile and a
reasonable safety margin.
HMPL-453 Clinical Development
Phase I study of HMPL-453—Australia and China (Studies 35 and 36 in pipeline chart; Status: enrolling)
In late 2016 we received clinical trial clearance for HMPL-453 in both Australia and China. In February 2017,
we announced the initiation of a first-in-human Phase I dose escalation study in Australia to evaluate safety, tolerability,
pharmacokinetic properties and preliminary anti-tumor activity in patients with advanced or metastatic solid tumors, who
had failed or could not tolerate standard therapies or for whom no standard therapies existed. We are also preparing to
initiate a Phase I dose escalation study in solid tumor patients in China and expect the first patient dosage in the second
quarter of 2017.
HMPL-004/HM004-6599 Botanical NF-kB Modulator
In November 2012, we established Nutrition Science Partners, a joint venture with Nestlé Health Science. The
purpose of Nutrition Science Partners is to develop, manufacture and commercialize HMPL-004 for ulcerative colitis and
Crohn’s Disease and to identify, develop, manufacture and commercialize products in gastrointestinal indications.
For more information regarding our partnership with Nestlé Health Science, see “—Overview of Our
Collaborations.”
HMPL-004/HM004-6599 Research Background
HMPL-004, and the newer, enriched version HM004-6599 discussed below, is a proprietary botanical drug for
the treatment of inflammatory bowel diseases, namely ulcerative colitis and Crohn’s disease.
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The current standard of care for inflammatory bowel disease starts with 5-aminosalicyclic acids, or 5-ASA, which
can induce and maintain clinical response and remission in an average of approximately 50% of inflammatory bowel
disease patients. For the 5-ASA non-responding patients with moderate-to-severe active diseases, various forms of
corticosteroids and immunosuppressant drugs and anti-tumor necrosis factor agents such as biologics are prescribed. These
agents, though effective, are associated with many side effects, sometimes serious, and are not often suitable for prolonged
usage.
Accordingly, there remain clear unmet medical needs for new therapies which can induce and maintain remission
among 5-ASA non-responding or intolerant patients, and the need for safer agents without the side effects of
corticosteroids and immune suppressors.
HMPL-004 Pre-clinical Evidence
Extensive pre-clinical studies indicated that HMPL-004 exhibits its anti-inflammatory effects through the
inhibition of multiple cytokines (proteins), such as NF-kB (a protein complex that controls transcription of DNA, cytokine
production and cell survival), both systemically and locally, which are involved in causing digestive tract inflammation.
HMPL-004’s efficacy, when combined with 5-ASAs, in induction of clinical response, remission and healing of the
mucosa (a mucous membrane lining the intestine), as well as a favorable safety profile has been established in multiple
clinical trials, including a successful global Phase IIb study in mild-to-moderate ulcerative colitis patients.
HMPL-004 Early and Completed Clinical Development
As discussed below, we have completed various clinical trials of HMPL-004 in the United States, Canada, Europe
and Ukraine.
Phase IIb ulcerative colitis trial
The Phase IIb ulcerative colitis trial was a multi-center, double-blind, randomized and placebo-controlled study
conducted in 223 ulcerative colitis patients in the United States, Canada and Europe. Results were reported in
November 2009. The three-arm clinical trial included eight week treatment with HMPL-004 at two dose levels, 1,200 mg
per day or 1,800 mg per day, as compared to placebo. Completed data analysis demonstrated that all primary and key
secondary endpoints were achieved. There were no treatment-related serious adverse events in either of the HMPL-
004 arms reported by the investigators. Importantly, clinical efficacy, including response, remission, and mucosal healing,
improved markedly as dose increased among the intent-to-treat patient population, with the higher 1,800 mg dose
outperforming the 1,200 mg dose and placebo in all areas. The clinical response of the 1,800 mg arm was 71% (p = 0.0003)
compared to 48% (p = 0.17) for the 1,200 mg arm and 35% for placebo. Remission of the 1,800 mg arm was 39%
(p = 0.013) compared to 32% (p = 0.08) for the 1,200 mg arm and 17% for placebo. Mucosal healing of the 1,800 mg arm
was 53% (p = 0.007) compared to 38% (p = 0.23) for the 1,200 mg arm and 27% for placebo. This trial was recognized as
the Distinguished Abstract Plenary oral presentation at Digestive Disease Week in 2010, which is a distinguished honor
in the global gastrointestinal disease field.
Phase II Crohn’s disease trial
The Phase II Crohn’s disease trial was a multi-center, double-blind, randomized, and placebo-controlled study
conducted in 101 Crohn’s disease patients in the United States and Ukraine. Results were reported in July 2009. The two-
arm clinical trial demonstrated a clear trend of efficacy for HMPL-004 at the 1,200 mg per day dose level with no
treatment-related serious adverse events. Clinical response of the 1,200 mg arm was 37% (p = 0.087) versus 22% for
placebo. Remission of the 1,200 mg arm was 29% (p = 0.069) versus 14% for placebo.
NATRUL-3 global Phase III ulcerative colitis registration trial
In April 2013, Nestlé Health Science initiated the NATRUL-3 global Phase III registration trial in mild-to-
moderate ulcerative colitis patients on HMPL-004, in combination treatment with 5-ASAs, and conducted an interim
analysis in mid-August 2014. The interim analysis was intended to assess both futility, in terms of efficacy and safety on
approximately one-third of the 420 planned patients in NATRUL-3. The result of the interim analysis was that HMPL-
004 showed no overall material effect over the placebo-arm patients and consequently the NATRUL-3 study was
terminated and the data un-blinded.
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Subsequent post-hoc analysis of the un-blinded NATRUL-3 data, shown in the charts below, indicates an efficacy
signal among the 51% of NATRUL-3 patients who had been on 5-ASAs for more than one year prior to enrollment. These
patients at the time of their enrollment in NATRUL-3 were in ulcerative colitis flare condition and as such could be
considered as 5-ASA non-responders. The efficacy signal was further enhanced among these 5-ASA non-responders when
patients with difficult-to-treat concurrent medical conditions, that could have affected ulcerative colitis response, were
removed.
In summary, we believe the above clinical data demonstrates clinical efficacy for HMPL-004, with 5-ASA
resistant/non-responding patients benefiting the most. Furthermore, HMPL-004’s current formulation contains almost 80%
inactive substances, which leads to a heavy pill burden and patient compliance challenges. During 2015, we focused on
optimizing the HMPL-004 formulation by adding several steps to the extraction process and thereby increasing the
concentration of diterpinoids, the key bioactive ingredient of HMPL-004. The new enriched formulation of HMPL-004,
which we have named HM004-6599, is now over 70% diterpinoids as compared to the original formulation which
comprised approximately 15% diterpinoids. In extensive pre-clinical in-vitro models, HM004-6599 has demonstrated
superior inhibition of NF-kB activation, pro-inflammatory cytokine IL-1ß (an important mediator in the regulation of
immune and regulatory responses to infections) production and TNF-(cid:68) dependent chemokine production including the
CCL-20 cytokine. Given the enrichment, the predicted human dose of HM004-6599 could be as low as 400 mg to 500 mg
daily versus the 2,400 mg daily usage of HMPL-004.
Since early 2016, we have been working with Nestlé to prepare an IND application for HM004-6599, which we
expect to submit in China in 2017. We believe that the reformulation may effectively address the primary reasons for the
results of the prior HMPL-004 study.
Nutrition Science Partners has additional gastrointestinal drug candidates in research and preclinical
development.
Overview of Our Collaborations
Collaborations and joint ventures with corporate partners have provided us with significant funding and access
to our partners’ scientific, development, regulatory and commercial capabilities. Our current collaborations focus on
savolitinib (collaboration with AstraZeneca), fruquintinib (collaboration with Eli Lilly) and HMPL-004/HM004-6599
(collaboration with Nestlé Health Science). Our collaboration partners fund a significant portion of our research and
development costs for drug candidates developed in collaboration with them. In addition, we receive upfront payments
upon our entry into these collaboration arrangements and upon the achievement of certain development milestones for the
relevant drug candidate. We and Nutrition Science Partners, in the aggregate, have received upfront payments, equity
contributions and milestone payments totaling approximately $118.5 million from our collaborations with AstraZeneca,
Eli Lilly, Nestlé Health Science as of December 31, 2016. We and Nutrition Science Partners, in the aggregate, may
potentially receive up to $350.0 million in future development and approval milestones, $145.0 million in option payments
and $560.0 million in commercial milestones in the aggregate. In return, our collaboration partners are entitled to a
significant proportion of any future revenue from our drug candidates developed in collaboration with them, as well as a
degree of influence over the clinical development process for such drug candidates.
AstraZeneca
In December 2011, we entered into an agreement with AstraZeneca under which we granted to AstraZeneca co-
exclusive, worldwide rights to develop, and exclusive worldwide rights to manufacture and commercialize savolitinib for
all diagnostic, prophylactic and therapeutic uses. We refer to this agreement as the AstraZeneca Agreement. AstraZeneca
paid $20.0 million upon execution of the AstraZeneca Agreement and agreed to pay royalties and additional amounts upon
the achievement of development and sales milestones. Under the original terms of the AstraZeneca Agreement, we and
AstraZeneca agreed to share the development costs for savolitinib in China, with AstraZeneca being responsible for the
development costs for savolitinib in the rest of the world. Based on savolitinib showing early clinical benefit as a highly
selective c-Met inhibitor in a number of cancers, in August 2016 we and AstraZeneca amended our global licensing, co-
development, and commercialization agreement for savolitinib whereby we agreed to contribute up to $50 million, spread
primarily over three years, to the joint development costs of the global pivotal Phase III study in patients with c-Met driven
papillary renal cell carcinoma. As of December 31, 2016, we had received $19.9 million in milestone payments in addition
to approximately $16.3 million in reimbursements for certain development costs. We may potentially receive future
clinical development and first sales milestones payments of up to $100.0 million for clinical development and initial sales
of savolitinib, plus significant further milestone payments based on sales. AstraZeneca also reimburses us for certain
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development costs. Subject to approval of savolitinib in papillary renal cell carcinoma, under the amended AstraZeneca
Agreement, AstraZeneca is obligated to pay us increased tiered royalties from 14.0% to 18.0% annually on all sales made
of any product outside of China, which represents a five percentage point increase over the original terms. After total
aggregate sales of savolitinib have reached $5 billion, this royalty will step down over a two year period, to an ongoing
royalty rate of 10.5% to 14.5%. AstraZeneca is also obligated to pay us a fixed royalty of 30.0% on all sales made of any
product in China.
Development and collaboration under this agreement are overseen by a joint steering committee that is comprised
of three of our senior representatives as well as three senior representatives from AstraZeneca. AstraZeneca is responsible
for the development of savolitinib and all regulatory matters related to this agreement in all countries and territories other
than China, and we are responsible for the development of savolitinib and all regulatory matters related to this agreement
in China.
Subject to earlier termination, the AstraZeneca Agreement will continue in full force and effect on a country-by-
country basis as long as any collaboration product is being developed or commercialized. The AstraZeneca Agreement is
terminable by either party upon a breach that is uncured, upon the occurrence of bankruptcy or insolvency of either party,
or by mutual agreement of the parties. The AstraZeneca Agreement may also be terminated by AstraZeneca for
convenience with 180 days’ prior written notice. Termination for cause by us or AstraZeneca or for convenience by
AstraZeneca will have the effect of, among other things, terminating the applicable licenses granted by us. Termination
for convenience by AstraZeneca will have the effect of obligating AstraZeneca to grant to us all of its rights to regulatory
approvals and other rights necessary to commercialize savolitinib. Termination by AstraZeneca for convenience will not
have the effect of terminating any license granted by AstraZeneca to us.
Eli Lilly
Eli Lilly Agreement
In October 2013, we entered into an agreement with Eli Lilly whereby we grant Eli Lilly an exclusive license to
develop, manufacture and commercialize fruquintinib for all uses in China and Hong Kong. We refer to this agreement as
the Eli Lilly Agreement. Eli Lilly paid a $6.5 million upfront fee following execution of the Eli Lilly Agreement, and
agreed to pay royalties and additional amounts upon the achievement of development and regulatory approval milestones.
As of December 31, 2016, Eli Lilly had paid us $19.2 million in milestone payments in addition to approximately
$26.0 million in reimbursements for certain development costs. We may potentially receive future milestone payments of
up to $60.0 million for the achievement of development and regulatory approval milestones in China and additional
milestone payments of up to $300.0 million for the achievement of development, regulatory approval and commercial
milestones in other jurisdictions if Eli Lilly exercises its option to develop fruquintinib in such other jurisdictions. See “—
Eli Lilly Option Agreement” for further discussion of Eli Lilly’s option to develop fruquintinib globally. Additionally,
Eli Lilly is obligated to pay us tiered royalties from 15.0% to 20.0% annually on sales made of fruquintinib in China and
Hong Kong, the rate to be determined based upon the dollar amount of sales made for all products in that year.
Development, collaboration and manufacture of products under this agreement are overseen by a joint steering
committee comprised of equal numbers of representatives from each party. We are responsible for all development
activities for fruquintinib.
We are responsible for all development costs in relation to fruquintinib in the following indications: third-line
colorectal cancer, third-line non-small cell lung cancer and second-line advanced gastric cancer, until fruquintinib has
achieved proof-of-concept. After achieving proof-of-concept for any such indication, Eli Lilly will be responsible for a
majority of subsequent development costs.
Once development is complete, Eli Lilly is obligated to use commercially reasonable efforts to commercialize
products and bears all the costs and expenses incurred in such commercialization efforts.
We are responsible in consultation with Eli Lilly for the supply of, and have the right to supply, all clinical and
commercial supplies for fruquintinib pursuant to an agreed strategy for manufacturing. For the term of the Eli Lilly
Agreement, such supplies will be provided by us at a transfer price that accounts for our cost of goods sold.
The Eli Lilly Agreement is terminable by either party for breach that is uncured. The Eli Lilly Agreement is also
terminable by Eli Lilly for convenience with 120 days’ prior written notice or if there is a major unexpected safety issue
with respect to a product. Termination by either us or Eli Lilly for any reason will have the effect of, among other things,
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terminating the applicable licenses granted by us, and will obligate Eli Lilly to transfer to us all regulatory materials
necessary for us to continue development efforts for fruquintinib.
Eli Lilly Option Agreement
In addition, we have entered into an option agreement with Eli Lilly and Company, under which Eli Lilly and
Company can choose to include additional countries in the territory for development and commercialization of
fruquintinib. The amount payable by Eli Lilly and Company to exercise the option is variable and depends upon the stage
of development at which Eli Lilly and Company chooses to exercise its option. Additionally, we are eligible for milestone
and royalty payments based on the territory where the option is exercised and the annual dollar amount of sales of
a product.
Nestlé Health Science
Nutrition Science Partners Joint Venture Agreement
In November 2012, we entered into a joint venture agreement with Nestlé Health Science to form Nutrition
Science Partners, a joint venture whose shares are owned in equal portions by us and Nestlé Health Science. The objective
of Nutrition Science Partners is to develop, manufacture and commercialize HMPL-004/HM004-6599 for ulcerative colitis
and Crohn’s Disease and to identify, develop, manufacture and commercialize products in gastrointestinal indications.
Upon execution of the joint venture agreement, Nestlé Health Science paid $30.0 million in exchange for its 50% of the
equity in Nutrition Science Partners. We provided payment in-kind by contributing global development and commercial
rights to the HMPL-004/HM004-6599 compound and certain exclusive rights to our botanical library, among other things,
to the joint venture for our 50% of the equity. Nutrition Science Partners may potentially receive future milestones
payments of up to $150.0 million.
Neither we nor Nestlé Health Science was permitted to sell, transfer or otherwise dispose of our ownership in
Nutrition Science Partners until November 27, 2016 without the other’s prior written consent. After this lock-up period, if
either we or Nestlé Health Science wish to sell, transfer or otherwise dispose of our or its shares, the other has a right of
first refusal to purchase all, but not some, of the other’s shares. Each of us is entitled to receive dividends from Nutrition
Science Partners as approved by the board. To date, we have not received dividends from Nutrition Science Partners. We
and Nestlé Health Science are responsible for providing additional funding required by Nutrition Science Partners in
proportion to each of our ownership percentages. During 2016, we and Nestlé Health Science agreed to waive $7.0 million
in loans to Nutrition Science Partners, and each party capitalized the outstanding amount as share capital. Additionally, in
2016 we provided $5.0 million in share capital to Nutrition Science Partners, with Nestlé Health Science providing the
same amount. In February 2017, we and Nestlé Health Science each contributed an additional $7.0 million share capital
funding to Nutrition Science Partners.
The operations of Nutrition Science Partners are overseen by its shareholders and board of directors. The board
of directors consists of eight directors, with four directors nominated by each of Nestlé Health Science and ourselves.
Nutrition Science Partners Services Agreement
In March 2013, we also entered into a services agreement with Nutrition Science Partners to provide research and
development services to Nutrition Science Partners, including: (i) collection, monitoring, processing and distribution of
adverse event reports and safety and medical information including side-effects; (ii) development of manufacturing and
analytical technologies for HMPL-004 raw materials; (iii) quality control and assurance of product manufacturing
the development of
management; and
HMPL-004/HM004-6599.
research and non-clinical
(iv) ongoing discovery
support
for
This services agreement is terminable by either party upon an uncured material breach or immediately upon the
other party’s bankruptcy and by Nutrition Science Partners for convenience with 90 days’ prior written notice. If Nutrition
Science Partners terminates for convenience, it will be required to pay all of our non-cancellable costs.
Nutrition Science Partners Research and Collaboration Agreement
In March 2013, we also entered into a research and collaboration agreement with Nestlé Health Science and
Nutrition Science Partners to develop new products with impact on gastrointestinal disorders and diseases of the
gastrointestinal tract to the proof-of-concept stage. We are obligated, as is Nestlé Health Science, to use commercially
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reasonable efforts to conduct the activities designated to us and Nestlé Health Science respectively to achieve these
research and development goals. We are entitled to compensation for performance under this agreement on the basis of
the number of our full-time employees who perform research and development activities. For the years ended
December 31, 2014, 2015 and 2016, we received approximately $4.2 million, $5.1 million and $8.1 million, respectively,
for the provision of these research and development services to Nutrition Science Partners under this agreement and the
services agreement discussed above.
Under this research and collaboration agreement, we have granted to Nutrition Science Partners an initial
exclusivity period lasting until December 31, 2022. The exclusivity period will be automatically extended for further one-
year periods provided Nutrition Science Partners meets certain budgetary and expenditure criteria. During the exclusivity
period, we are obligated not to perform research for ourselves or third parties, or grant to any third parties the right to
research or develop products from, or derived from, our botanical library that could be developed for treating
gastrointestinal disorders and/or disease of the gastrointestinal tract. Research and collaboration under this agreement will
be overseen by a research collaboration subcommittee of the board of directors of Nutrition Science Partners, comprised
of equal numbers of representatives from us and Nestlé Health Science.
This research and collaboration agreement is terminable by any party for an uncured material breach of any other
party or immediately upon any other party’s bankruptcy. It is also terminable by Nutrition Science Partners for convenience
with 90 days’ prior written notice. If Nutrition Science Partners terminates for convenience, it will be required to pay all
of our and Nestlé Health Science’s non-cancellable costs.
Nutrition Science Partners Option Agreement
In March 2013, Nestec Ltd., which is an affiliate of Nestlé Health Science, and Nutrition Science Partners entered
into an option agreement under which Nestec Ltd. is eligible to obtain exclusive licenses to commercialize HMPL-
004/HM004-6599 products in certain territories. Nestec Ltd. could potentially pay Nutrition Science Partners up to
$70 million in option exercise payments in the aggregate. The option exercise payments are made in one-time payments
per territory and the individual amounts vary depending upon the territory for which the option is exercised. Each of these
options is terminable by Nestec Ltd. at its convenience.
Our Commercial Platform
Since 2001, we have also developed a profitable Commercial Platform in China, which encompasses two core
areas: Prescription Drugs and Consumer Health businesses. The continuing operations of our Commercial Platform
generated $70.3 million in net income attributable to our company in 2016, which has contributed to the funding of our
Innovation Platform’s drug development programs.
Our Commercial Platform has grown strongly since we began operations in 2001. Net income attributable to our
company from the continuing operations of our Commercial Platform grew by 10.1% from $22.8 million in 2014 to
$25.2 million in 2015 and further grew by 179.6% to $70.3 million in 2016. Net income attributable to our company from
the continuing operations of our Commercial Platform in the year ended December 31, 2016 included a one-time gain of
$40.4 million, net of tax, from land compensation and other subsidies paid to Shanghai Hutchison Pharmaceuticals by the
Shanghai government.
The infrastructure of our Commercial Platform, particularly in commercial operations management,
manufacturing and distribution, regulatory and reimbursement coverage, is well established in our therapeutic specialty
areas such as cardiovascular health. In addition to this, in due course we intend to build a dedicated oncology and
immunology sales and marketing organization to broaden our therapeutic focus and to prepare for commercialization of
drug candidates from our Innovation Platform, if approved. Our Prescription Drugs business is now deploying its network
of medical sales representatives to market and sell drugs in China in new therapeutic areas such as for Seroquel which is
used to treat psychiatric disorders, which we believe demonstrates the adaptability of our Commercial Platform. As of
December 31, 2016, Shanghai Hutchison Pharmaceuticals had a dedicated medical sales team of over 140 people in this
new therapeutic area.
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Prescription Drugs Business
Prescription Drugs Market in China
The Chinese pharmaceutical market was the third largest in the world in 2015 and is expected to become the
second largest in 2016, according to Frost & Sullivan. Overall healthcare expenditure in China has been steadily
increasing, evidenced by the rapid growth of China’s gross domestic product, or GDP, and the increasing percentage of
China’s GDP spent on healthcare. The Chinese pharmaceutical market has grown at a 16.8% compound annual growth
rate from 2011 to 2015, driven by government healthcare reforms from approximately $105.4 billion in 2011 to
approximately $196.0 billion in 2015, according to Frost & Sullivan. According to World Health Organization Global
Health Expenditure database, in 2013 total health spending still accounted for just 5.6% of China’s GDP, well below the
approximately 17.1% of GDP in the United States. The market value of China’s prescription drug market is expected to
grow at a 15.4% compound annual growth rate from $125.9 billion in 2013 to 342.9 billion in 2020 according to Frost &
Sullivan.
In our view, the factor driving growth of the overall prescription drug industry in China is the expansion of
medical insurance. This is a strategic priority for the PRC government. In terms of funding, the main scheme is the medical
insurance scheme for urban employees and residents, which had about 48% of the China population enrolled in 2015
versus only 12% in 2006. The prescription drug products sold by our joint ventures have extensive representation on the
current Medicines Catalogue for the National Basic Medical Insurance, Labor Injury Insurance and Childbirth Insurance
Systems in China, or the National Medicines Catalogue, which determines eligibility for reimbursement, as well as the
current National Essential Medicines List, which mandates distribution of drugs in China. As of the end of 2016, over 92%
of all pharmaceutical products manufactured and sold by Shanghai Hutchison Pharmaceuticals were capable of being
reimbursed under the National Medicines Catalogue.
In addition, among these two joint ventures an aggregate of 45 drugs, of which 12 were in active production as
of December 31, 2016, have been included on the National Essential Medicines List. She Xiang Bao Xin pills, Shanghai
Hutchison Pharmaceuticals’ top-selling drug, is one of the drugs included on the National Essential Medicines List. The
National Medicines Catalogue and the National Essential Medicines List are subject to revision by the government from
time to time, and our results could be materially and adversely affected if any products sold by our Prescription Drugs
business or Hutchison Baiyunshan are removed from the National Medicines Catalogue or the National Essential
Medicines List. For more information, see Item 3.D. “Risk Factors—Risks Related to Our Commercial Platform—
Reimbursement may not be available for the products currently sold through our Commercial Platform or our drug
candidates in China, the United States or other countries, which could diminish our sales or affect our profitability.”
Other factors driving growth include the country’s population growth, aging population, longer life expectancy,
accelerating urbanization, rising disposable income, growing awareness of healthcare and available therapeutic options
and increasing government support for healthcare programs. See Item 5. “Management’s Discussion and Analysis of
Financial Condition and Results of Operations—Factors Affecting our Results of Operations—Commercial Platform” for
more details on market factors affecting our Prescription Drugs business.
Our Prescription Drugs Business
Our Prescription Drugs division is conducted through the following two joint ventures in which we nominate
management and run the day-to-day operations:
(cid:120) Shanghai Hutchison Pharmaceuticals, which primarily manufactures, markets and distributes
prescription drug products originally contributed by our joint venture partner, as well as third-party
prescription drugs. 50% of this joint venture is owned by us and 50% by Shanghai Pharmaceuticals, a
leading pharmaceutical company in China listed on the Shanghai Stock Exchange and the Hong Kong
Stock Exchange, and
(cid:120) Hutchison Sinopharm, which focuses on providing logistics services to, and distributing and marketing
prescription drugs manufactured by, third-party pharmaceutical companies in China. 51% of this joint
venture is owned by us and 49% is owned by Sinopharm, a leading distributor of pharmaceutical and
healthcare products and a leading supply chain service provider in China listed on the Hong Kong
Stock Exchange.
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Our Prescription Drugs business employs a physician-targeted marketing model that is focused on promoting its
products by providing physicians and hospitals with information on the benefits and differentiating clinical aspects of our
products. In collaboration with our partners, we have built our joint ventures’ extensive prescription drug sales and
distribution network across China, with approximately 2,200 medical sales representatives as of December 31, 2016. These
medical sales representatives covered over 18,700 hospitals and over 87,000 physicians in over 300 cities and towns in
China as of December 31, 2016. Approximately 67% of these medical sales representatives cover eastern and central-
southern China. Of the remaining medical sale representatives, approximately 23% cover northern China and
approximately 10% cover western and south-western China.
Shanghai Hutchison Pharmaceuticals—manufacturing, marketing and distributing proprietary and licensed
prescription drugs
Shanghai Hutchison Pharmaceuticals primarily engages in the manufacture and sale of prescription drug products
originally contributed by our joint venture partner, as well as third-party prescription drugs with a focus on cardiovascular
medicine. Shanghai Hutchison Pharmaceuticals’ proprietary products are sold under the “Shang Yao” brand, literally
meaning “Shanghai pharmaceuticals,” a trademark that has been used for over 40 years in the pharmaceutical retail market,
primarily in Eastern China. As of December 31, 2016, Shanghai Hutchison Pharmaceuticals held 74 registered drug
licenses in China, of which 31 are included in the National Medicines Catalogue. In addition, 17 of Shanghai Hutchison
Pharmaceuticals’ products, of which three are in active production, are represented on China’s National Essential
Medicines List.
Its key product is She Xiang Bao Xin pills, a vasodilator for the long-term treatment of coronary artery and heart
disease and for rapid control and prevention of acute angina pectoris, a form of chest pain, which is listed on the low price
drug list, or LPDL. She Xiang Bao Xin pills’ sales represented 88% of all Shanghai Hutchison Pharmaceuticals sales in
2016. She Xiang Bao Xin pills were first approved in 1983 and subsequently enjoyed 23 proprietary commercial
protections under the prevailing regulatory system in China. In 2005, Shanghai Hutchison Pharmaceuticals was able to
attain “Confidential State Secret Technology” status protection, as certified by China’s Ministry of Science and
Technology and State Secrecy Bureau, which extended proprietary protection in China until late 2016, and it is in the
process of renewing this protection. As of December 31, 2016, Shanghai Hutchison Pharmaceuticals held an invention
patent in China covering its formulation, which extends proprietary protection through 2029.
Prior to September 2016, Shanghai Hutchison Pharmaceuticals manufactured its products at its GMP-certified
production facility in Shanghai, which had a site area of approximately 58,000 square meters. In December 2015, it entered
into an agreement with the Shanghai government to surrender its land use rights of the property where this facility is
located for cash compensation, which has been paid in full. In September 2016, Shanghai Hutchison Pharmaceuticals fully
transitioned its 500-person production unit into and began production at its new facility located in Feng Pu district outside
the center of Shanghai. The site area of the new facility is approximately 78,000 square meters with three times the
production capacity as the old one. The new manufacturing facility cost approximately $102 million and was financed
over the past three years mainly with operating cash flow and limited bank debts. After repayment of bank debts and taxes
related to this new facility and the compensation for the land use rights where the old facility was located, approximately
$80 million of the compensation received by Shanghai Hutchison Pharmaceuticals was expected to be distributed equally
to us and Shanghai Pharmaceutical Holding Co., Limited.
Shanghai Hutchison Pharmaceuticals, through its GSP-certified subsidiary, also markets and sells third-party
prescription drugs in collaboration with Hutchison Sinopharm. As discussed below, in late 2014 and early 2015, Hutchison
Sinopharm signed agreements with Merck Serono and AstraZeneca to provide marketing services for Merck Serono’s
Concor (a cardiovascular drug) and AstraZeneca’s Seroquel (a drug for the treatment of various psychiatric disorders) to
market and distribute such drugs in China. In connection with Hutchison Sinopharm’s agreements with Merck Serono and
AstraZeneca, Hutchison Sinopharm entered into agreements with Shanghai Hutchison Pharmaceuticals to provide certain
promotion and marketing services within China for these drugs. Under these agreements, Shanghai Hutchison
Pharmaceuticals manages marketing and is paid a fee for its services provided. Hutchison Sinopharm manages distribution
and logistics for these products.
Shanghai Hutchison Pharmaceuticals, through its GSP-certified subsidiary, sells its products and its third-party
licensed prescription drugs directly to distributors who on-sell such products to hospitals and clinics, pharmacies and other
retail outlets in their respective areas, as well as to other local distributors. Its medical sales representatives promote its
products to doctors and purchasing managers in hospitals, clinics and pharmacies as part of its marketing efforts. As of
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December 31, 2016, Shanghai Hutchison Pharmaceuticals had approximately 2,200 medical sales representatives and over
500 manufacturing employees across China.
Hutchison Sinopharm—providing logistics services and marketing and distribution primarily for prescription
drugs manufactured by third parties
In April 2014, we commenced operating Hutchison Sinopharm, a consolidated joint venture in collaboration with
Sinopharm. Based in Shanghai, Hutchison Sinopharm is a GSP-certified company focused on providing logistics services
to, and distributing and marketing prescription drugs manufactured by, third-party pharmaceutical companies in China.
Hutchison Sinopharm also distributes certain products from Hutchison Healthcare’s Zhi Ling Tong infant nutrition brand.
Hutchison Sinopharm also continues to operate its legacy business which was primarily focused on providing logistics and
distribution services, primarily within Shanghai, to third-party pharmaceutical companies.
We intend to increasingly focus on expanding Hutchison Sinopharm to operate as a full-service, third-party
prescription drug commercialization company in China. To this end, in 2015 Hutchison Sinopharm entered into agreements
with multinational and Chinese pharmaceutical manufacturers seeking to market their products in China. Hutchison
Sinopharm now has agreements to market and distribute three prescription products. The two primary products are:
(cid:120) Seroquel—in the second quarter of 2015, we became the exclusive first-tier distributor to distribute and
market AstraZeneca’s quetiapine tablets, under the Seroquel trademark in China. Seroquel is a first-line
antipsychotic medicine for the treatment of schizophrenia and bipolar disorder, which was launched in
China in 2001.
(cid:120) Concor—in the first quarter of 2015, we began to exclusively co-promote Merck Serono’s bisoprolol
fumarate tablets, under the Concor trademark, in a few provinces in China. Concor is a major brand in
the beta-blocker sub-segment of the cardiovascular prescription drug market in China.
Seroquel in particular represents a new therapeutic area for our medical sales representatives, and we believe that
in the limited time since we commenced our services for these drugs, we have been successful in generating sales. In 2016,
Shanghai Hutchison Pharmaceuticals established a dedicated medical sales team of over 140 people to support the
commercialization of Seroquel.
In the longer term, the ability of our marketing network to adapt to effectively market such drugs to doctors and
hospitals, as well as other third-party drugs we may provide services for in the future and any oncology or immunology
drugs from our Innovation Platform, will impact our revenue and profitability. In addition, if we are unsuccessful in
marketing any third-party drugs, it may adversely affect our ability to enter into commercialization arrangements for
additional drugs or prevent us from expanding the geographic scope of existing arrangements. Furthermore, regulatory
reform in the China pharmaceutical industry, expected to be announced in 2017, appears that it might limit the number of
distributors allowed between a manufacturer and each hospital to one, which may limit the rate of sales growth of
Hutchison Sinopharm in future periods.
Consumer Health Business
Our Consumer Health business is a profitable business, focusing primarily on the manufacture, marketing and
distribution of over-the-counter pharmaceutical products and other natural and organic consumer products in China. Our
Consumer Health products business includes:
(cid:120) Hutchison Baiyunshan, a joint venture established in 2005 which focuses primarily on the manufacture,
marketing and distribution of proprietary over-the-counter pharmaceutical products. 50% of this joint
venture is owned by us and 50% by Guangzhou Baiyunshan, a leading China-based pharmaceutical
company listed on the Shanghai Stock Exchange and the Hong Kong Stock Exchange,
(cid:120) Hutchison Hain Organic, a joint venture which was established in 2009 and has rights to market and
distribute a broad range of natural and organic consumer products under brands owned by Hain Celestial
in nine Asian territories,
(cid:120) Hutchison Healthcare, a wholly owned subsidiary which was established in 2001 and manufactures and
sells health supplements and licenses its infant nutrition products to Hutchison Sinopharm for
distribution, and
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(cid:120) Hutchison Consumer Products, a wholly owned subsidiary which was established in 2007 that distributes
and markets certain third-party consumer products.
Hutchison Baiyunshan—manufacturing, marketing and distributing proprietary over-the-counter
pharmaceutical products
Hutchison Baiyunshan primarily engages in the manufacture, marketing and distribution of proprietary over-the-
counter pharmaceutical products. As of December 31, 2016, Hutchison Baiyunshan held 178 registered drug licenses in
China, of which 81 are included in the National Medicines Catalogue. In addition, 31 of Hutchison Baiyunshan’s products,
of which ten are in active production, are represented on China’s National Essential Medicines List. As of the end of 2016,
approximately 88% of all pharmaceutical products manufactured and sold by Hutchison Baiyunshan in 2016 were capable
of being reimbursed under the National Medicines Catalogue.
Hutchison Baiyunshan’s key products are two generic over-the-counter therapies which are each listed on
the LPDL:
(cid:120) Fu Fang Dan Shen tablets—for the treatment of chest congestion and angina pectoris to promote blood
circulation and relieve pain, which represented approximately 27.0% of the sales of Hutchison
Baiyunshan in 2016; and
(cid:120) Banlangen granules—for the treatment of viral flu, fever, and respiratory tract infections which
represented approximately 25.0% of the sales of Hutchison Baiyunshan in 2016.
Hutchison Baiyunshan’s products are manufactured in-house at its GMP-certified facility in Guangzhou,
Guangdong Province in Southern China or through third-party contract manufacturers. The Guangzhou facility has two
plots of land of approximately 90,000 square meters in total. The main factory is located on one approximately
60,000 square meter plot, which continues to operate; however, Hutchison Baiyunshan’s subsidiary is migrating a large
portion of its production to a new higher capacity facility with a 230,000 square meter site area in Anhui province. The
construction of this new facility was completed in December 2016. Hutchison Baiyunshan is also in the process of
negotiating the return of its land use rights for the approximately 30,000 square meter unused portion of its second plot in
Guangzhou, which is expected to be rezoned for residential development, and the related compensation to be received by
Hutchison Baiyunshan for the return of such land use rights.
Hutchison Baiyunshan also operates three Chinese GAP-certified cultivation sites through its subsidiaries for
growing the herbs used in its over-the-counter products in Heilongjiang, Henan and Shandong provinces in China. In
addition, Hutchison Baiyunshan generates revenue by supplying raw materials produced by its cultivation operations to
its collaboration partner, Guangzhou Pharmaceuticals.
Hutchison Baiyunshan sells its products directly to regional distributors across China who on-sell to local
distributors, hospitals and clinics, pharmacies and other retailers, and employs its own sales representatives at a local level
to market its products and promote over-the-counter sales to retailers. As of December 31, 2016, Hutchison Baiyunshan
had over 1,200 sales representatives and approximately 750 manufacturing employees across China.
Hutchison Hain Organic—marketing and distributing Hain Celestial-licensed natural and organic food and
personal care products
Hutchison Hain Organic is a joint venture with Hain Celestial, a Nasdaq-listed, natural and organic food and
personal care products company. Hutchison Hain Organic distributes a broad range of over 500 imported organic and
natural products.
Pursuant to its joint venture agreement, Hutchison Hain Organic has rights to market and distribute Hain
Celestial’s products within nine Asian territories. We believe the key strategic product for Hutchison Hain Organic is
Earth’s Best organic infant formula, a leading brand in the United States, which Hutchison Hain Organic began to sell in
China in mid-2015. Earth’s Best organic infant formula is imported from U.S. manufacturer Perrigo Company and is sold
in China through an online retailer and specialty retail outlets. Hutchison Hain Organic’s other products are distributed to
hypermarkets, specialty stores and other retail outlets in Hong Kong, China and across seven other territories in Asia
mainly through third-party local distributors, including retail chains owned by affiliates of CK Hutchison.
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Hutchison Healthcare—manufacturing, marketing and distributing health supplements
Hutchison Healthcare is our wholly owned subsidiary and is primarily engaged in the manufacture and sale of
health supplements. Hutchison Healthcare’s major product is Zhi Ling Tong DHA capsules, a health supplement, made
from algae DHA oil, for the promotion of brain and retinal development in babies and young children, which is distributed
by Hutchison Sinopharm.
The majority of Hutchison Healthcare’s products are contract manufactured at a dedicated GMP-certified
manufacturing facility operated by a third party and distributed to hospital pharmacies, specialty stores and drugstore
chains.
Hutchison Consumer Products—distribution of consumer products
Hutchison Consumer Products is our wholly owned subsidiary that is primarily engaged in the distribution of
third-party consumer products in Asia.
Innovation Platform Competition
Competition
The biotechnology and pharmaceutical industries are highly competitive. While we believe that our highly
selective drug candidates, experienced development team and chemistry-focused scientific approach provide us with
competitive advantages, we face potential competition from many different sources, including major pharmaceutical,
specialty pharmaceutical and biotechnology companies. Any drug candidates that we successfully develop and
commercialize will compete with existing drugs and/or new drugs that may become available in the future.
We compete in the segments of the pharmaceutical, biotechnology and other related markets that address
inhibition of kinases in cancer and immunological diseases. There are other companies working to develop targeted
therapies in the field of kinase inhibition for cancer and immunological diseases. These companies include divisions of
large pharmaceutical companies and biotechnology companies of various sizes. We also compete with pharmaceutical and
biotechnology companies that develop and market monoclonal antibodies as targeted therapies for the treatment of cancer
and immunological diseases.
Many of our competitors, either alone or with their strategic partners, have substantially greater financial,
technical and human resources than we do and significantly greater experience in the discovery and development of drug
candidates, obtaining regulatory approvals of products and the commercialization of those products. Accordingly, our
competitors may be more successful than we may be in obtaining approval for drugs and achieving widespread market
acceptance. Our competitors’ drugs may be more effective, or more effectively marketed and sold, than any drug we may
commercialize and may render our drug candidates obsolete or non-competitive before we can recover the expenses of
developing and commercializing any of our drug candidates. We anticipate that we will face intense and increasing
competition as new drugs enter the market and advanced technologies become available.
Below is a summary of existing therapies and therapies currently under development that may become available
in the future which may compete with each of our eight clinical-stage drug candidates.
Savolitinib
While there are currently no approved selective c-Met inhibitors on the market, there are several c-Met inhibitors
currently undergoing clinical trials for the treatment of renal cell carcinoma, non-small cell lung cancer and gastric cancer
such as capmatinib (c-Met inhibitor in development for renal cell carcinoma and non-small cell lung cancer), Cabometyx
(cabozantinib) (VEGFR/c-Met/Ret inhibitor approved for renal cell carcinoma and in development for non-small cell lung
cancer), tivantinib (c-Met inhibitor in development for non-small cell lung cancer and renal cell carcinoma), tepotinib (c-
Met inhibitor in development for non-small cell lung cancer), foretinib (VEGFR2/c-Met inhibitor in development for renal
cell carcinoma), glesatinib (c-Met and Axl tyrosine kinase inhibitor in development for non-small cell lung cancer) and
AMG 337 (c-Met kinase inhibitor in development for stomach cancer). Xalkori (ALK and c-Met inhibitor marketed for
non-small cell lung cancer) is a multi-kinase inhibitor that less selectively inhibits c-Met.
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Fruquintinib
Approved VEGF inhibitors on the market for the treatment of colorectal cancer include Avastin (anti-VEGF
monoclonal antibody), Cyramza (anti-VEGFR2 monoclonal antibody), Stivarga (VEGFR/TIE2 inhibitor) and Zaltrap
(ziv-aflibercept) (VEGF inhibitor). Cyramza is approved for the treatment of non-small cell lung cancer and gastric cancer,
and Avastin is also approved for non-small cell lung cancer. In addition, Inlyta and Caprelsa (vandetanib) use a similar
mechanism of action as the VEGF inhibitors on the market and are currently being studied for the treatment of colorectal
cancer. Other VEGFR inhibitors being developed for the treatment of non-small cell lung cancer include anlotinib,
apatinib, Cabometyx, lenvatinib, lucitanib, tesevatinib and vandetanib. VEGFR inhibitors being developed for the
treatment of gastric cancer include dovitinib, telatinib and regorafenib. In China, apatinib has been approved for the
treatment of third-line gastric cancer.
Sulfatinib
Sutent (VEGFR inhibitor) and Afinitor (mTOR inhibitor) have been approved for the treatment of pancreatic
neuroendocrine tumors. Somatuline Depot (Lanreotide) is a growth hormone release inhibitor that has been approved for
the treatment of gastroenteropancreatic neuroendocrine tumors. Sandostatin (octreotide) is a growth hormone and insulin-
like growth factor-1 inhibitor that has also been approved for neuroendocrine tumors. Lutathera (Lu-dotatate), a
somatostatin receptor targeting radiotherapy, recently filed an NDA with the FDA. Furthermore, both small molecules and
monoclonal antibodies are being developed for the treatment of neuroendocrine tumors. Compounds undergoing
development for neuroendocrine tumors include Vargatef (nintedanib, a tyrosine kinase inhibitor), milciclib (tyrosine
kinase inhibitor) and Zybrestat (fosbretabulin, a microtubule/tubulin inhibitor being studied for thyroid cancer). Cometriq
(an additional brand name for cabozantinib) has been marketed for thyroid cancer and is being studied for neuroendocrine
tumors. In addition, Avastin is an anti-VEGF monoclonal antibody being studied for neuroendocrine tumors.
Epitinib
Although no EGFR tyrosine kinase inhibitors have been specifically approved for non-small cell lung cancer with
brain metastasis or primary brain tumor, many have been approved for the treatment of non-small cell lung cancer with
EGFR activating mutations, including Gilotrif (EGFR/HER2 inhibitor), Iressa, Tarceva, Conmana and Tagrisso.
Moreover, Tagrisso, tesevatinib (EGFR/HER2/VEGFR inhibitor) and AZD3759 (EGFR inhibitor) are in development for
the treatment of non-small cell lung cancer with brain metastasis while Alecensa (alectinib, an ALK inhibitor) has already
been approved.
Theliatinib
Approved EGFR inhibitors on the market include Iressa and Tarceva, although these drugs reach insufficient drug
concentrations to suppress wild-type EGFR effectively. In addition, monoclonal antibodies, such as Erbitux, which are
approved for the treatment of certain EGFR over-expression tumor types, are less effective for EGFR gene amplified
patients. Other small molecule therapies currently being studied for the treatment of esophageal tumors include Gilotrif
and Conmana.
HMPL-523
There has been extensive research on oral small-molecule Syk inhibitors due to the major unmet medical need in
inflammation and oncology. No small molecule drug candidates targeting Syk specifically have been approved to date due
to the severe off-target toxicity as a result of poor kinase selectivity and possibly poor pharmacokinetic properties. GS-
9876 is a Syk inhibitor currently in clinical studies for rheumatoid arthritis. Syk inhibitors currently in clinical studies for
hematological cancers include entospletinib, cerdulatinib and TAK-659. In addition, Janus tyrosine kinase, or JAK,
inhibitors such as Xeljanz (tofacitinib JAK-3 inhibitor, marketed for rheumatoid arthritis and in development for ulcerative
colitis, Crohn’s disease and myelofibrosis), Jakafi (ruxolitinib, JAK-1/2 inhibitor, marketed for myelofibrosis and in
development for acute myelogenous leukemia), baricitinib (JAK-1/2 inhibitor in development for rheumatoid arthritis),
decernotinib (JAK-3 inhibitor in development for rheumatoid arthritis) and filgotinib (JAK-1 inhibitor in development for
rheumatoid arthritis) and TNF(cid:68) inhibitors marketed for rheumatoid arthritis, such as Enbrel, Remicade, Humira and
Cimzia, are also expected to be potential competitors of HMPL-523 if it is approved.
However, most anti-TNF(cid:68) monoclonal antibodies are applicable for severe disease only as these injectables
significantly suppress the entire immune system for a substantial period of time.
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HMPL-689
Zydelig is a PI3K(cid:71) inhibitor that has been approved for the treatment of refractory/relapsed follicular lymphoma,
small lymphocytic lymphoma as a monotherapy and chronic lymphatic leukemia in combination with Rituxan. In addition,
several drug candidates that inhibit PI3K(cid:71) are in clinical development, including duvelisib, copanlisib, gedatolisib,
INCB040093, GS-9901, TGR-1202 and AMG 319.
HMPL-453
To date, there are no approved therapies that specifically target the FGFR signaling pathway. Several small
molecule FGFR tyrosine kinase inhibitors are in early clinical trials for solid tumors, including AZD4547, BGJ398,
BAY1163877, BLU-554 and JNJ-42756493.
HM004-6599
The current standard of care for inflammatory bowel disease starts with mesalazine, while for the non-responding
patients, various forms of corticosteroids and immunosuppressant drugs and anti-tumor necrosis factor agents are
prescribed. Several anti-TNF(cid:68) monoclonal antibody injectables, such as Cimzia, Humira, Remicade and Simponi
(golimumab) (abandoned in Phase I for Crohn’s disease), have been approved for the treatment of ulcerative colitis and
Crohn’s disease. However, most anti-TNF(cid:68) monoclonal antibodies are applicable for severe disease only as these
injectables significantly suppress the entire immune system for a substantial period of time.
Commercial Platform Competition
Our Commercial Platform’s Prescription Drugs business competes in the pharmaceutical industry in China, which
is highly competitive and is characterized by a number of established, large pharmaceutical companies, as well as some
smaller emerging pharmaceutical companies. Our Prescription Drugs business faces competition from other
pharmaceutical companies in China engaged in the development, production, marketing or sales of prescription drugs, in
particular cardiovascular drugs. The barrier of entry for the PRC pharmaceutical industry primarily relates to regulatory
requirements in connection with the production of pharmaceutical products and new product launches.
The identities of the key competitors with respect to our Prescription Drugs business vary by product, and, in
certain cases, different competitors that have greater financial resources than us may elect to focus these resources on
developing, importing or in-licensing and marketing products in the PRC that are substitutes for our products and may
have broader sales and marketing infrastructure with which to do so.
We believe that we compete primarily on the basis of brand recognition, pricing, sales network, promotion
activities, product efficacy, safety and reliability. We believe our continued success will depend on our Prescription Drugs
business’s capability to: maintain profitability of its core product, She Xiang Bao Xin pills, successfully market and
distribute in-licensed products such as Seroquel and Concor, obtain and maintain regulatory approvals, develop drug
candidates with market potential, maintain an efficient operational model, apply technologies to production lines, attract
and retain talented personnel, maintain high quality standards, and effectively market and promote the products sold by
our Prescription Drugs business. Key competitors for She Xiang Bao Xin pills include Tasly Holding (Compound Danshen
Dropping Pill) and Shijiazhuang Yiling Pharmaceutical (Tong Xin Luo Capsule). In addition, Hunan Dongting Pharma
and Suzhou First Pharma are key competitors to our Prescription Drugs business in licensed drug Seroquel.
Our Commercial Platform’s Consumer Health business competes in a highly fragmented market in Asia,
particularly in our primary market in China. We believe that our Consumer Health business competes primarily on the
basis of brand recognition, pricing, sales network, promotion activities, product safety and reliability. We believe our
continued success will depend on our Consumer Health business’s capability to: maintain profitability of its core products,
Fu Fang Dan Shen tablets and Banlangen granules, differentiate its products vis-a-vis those of competitors, successfully
market and distribute in-licensed products such as Earth’s Best infant formula, maintain an efficient operational model,
attract and retain talented personnel, maintain high quality standards, and effectively market and promote the products
sold by our Consumer Health business. In China, Fu Fang Dan Shen tablets and Banlangen granules are generic over-the-
counter drugs marketed by several manufacturers. Key competitors include Shanghai LeiYunShang Pharmaceutical,
Yunnan Baiyao and Beijing Tongrentang in the Fu Fang Dan Shen market, and include Beijing Tongrentang and
Guangzhou Xiangxue Pharmaceutical for the Banlangen market.
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Patents and Other Intellectual Property
Our commercial success depends in part on our ability to obtain and maintain proprietary or intellectual property
protection for our Innovation Platform’s drug candidates, our Commercial Platform’s products and other know-how. Our
policy is to seek to protect our proprietary and intellectual property position by, among other methods, filing patent
applications in various jurisdictions related to our proprietary technology, inventions and improvements that are important
to the development and implementation of our business. We also rely on trade secrets, know-how and continuing
technological innovation to develop and maintain our proprietary and intellectual property position.
Patents
We and our joint ventures file patent applications directed to our Innovation Platform’s drug candidates and our
Commercial Platform’s products in an effort to establish intellectual property positions with regard to new small molecule
compounds and/or extracts of natural herbs, their compositions as well as their medical uses in the treatment of diseases.
In relation to our Innovation Platform, we also file patent applications directed to crystalline forms, formulations,
processes, key intermediates, and secondary uses as clinical trials for our drug candidates evolve. We file such patent
applications in major market jurisdictions, including the United States, Europe, Japan and China as well as Argentina,
Australia, Brazil, Canada, Chile, Indonesia, Israel, India, South Korea, Mexico, Malaysia, New Zealand, Peru, Philippines,
Singapore, Ukraine and South Africa. We do not currently in-license any patents except to the extent necessary to ensure
our drug candidate fruquintinib has freedom to operate as discussed below.
Our Innovation Platform Patents
As of December 31, 2016, we had 131 issued patents, including 25 Chinese patents, 20 U.S. patents and
seven European patents, 126 patent applications pending in the above major market jurisdictions, and five pending Patent
Cooperation Treaty, or PCT, patent applications relating to the drug candidates of our Innovation Platform. As of the same
date, our joint venture Nutrition Science Partners had 23 issued patents and 6 pending patent applications relating to
HMPL-004 and its reformulation HM004-6599. The intellectual property portfolios for our most advanced drug candidates
are summarized below. Some of these portfolios, such as HMPL-453 and HMPL-689, are in very early stages of
development. With respect to most of the pending patent applications covering our drug candidates, prosecution has yet
to commence. Prosecution is a lengthy process, during which the scope of the claims initially submitted for examination
by the relevant patent office is often significantly narrowed by the time when they issue, if they issue at all. We expect this
to be the case for our pending patent applications referred to below.
Savolitinib—The intellectual property portfolio for savolitinib contains issued patents and patent applications
directed to novel small molecule compounds as well as methods of treating cancers with such compounds. As of
December 31, 2016, we owned 13 patents in this family, including patents in the United States, Europe and Japan, and we
had 36 patent applications pending in various other jurisdictions, including China. Our European patent is also registered
in Hong Kong. Our issued patents will expire in 2030.
Fruquintinib—The intellectual property portfolio for fruquintinib contains three patent families.
The first patent family for fruquintinib is directed to novel small molecule compounds as well as methods of
treating tumor angiogenesis-related disorders with such compounds. As of December 31, 2016, we owned three
U.S. patents, one Chinese patent and one Taiwanese patent in this family, each of which will expire in 2028. We also
owned patents in Europe and 11 other jurisdictions expiring in 2029 and had five patent applications pending in various
other jurisdictions, including Japan.
The second patent family is directed to crystalline forms of fruquintinib as well as methods of treating tumor
angiogenesis-related disorders with such forms. As of December 31, 2016, we had one patent application pending in China
in this family, which, if issued, would have an expiration date in 2034. We have also filed PCT and Taiwanese patent
applications for this family which, if issued, will each have expiration dates in 2035.
The third patent family is directed to the method of preparing one of the critical intermediates used in the
manufacturing process of fruquintinib. With respect to this patent family, we have a patent application pending in China,
which, if issued, will have an expiration date in 2034.
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We also in-license certain freedom-to-operate rights from AstraZeneca, which grant us non-exclusive rights
within China and Hong Kong to develop and commercialize pharmaceutical compounds used in fruquintinib which are
covered by one of its patents.
Sulfatinib—The intellectual property portfolio for sulfatinib contains three patent families.
The first patent family for sulfatinib is directed to novel small molecule compounds as well as methods of treating
tumor angiogenesis-related disorders with such compounds. As of December 31, 2016, in this patent family we owned one
Chinese patent expiring in 2027 and 12 patents in various other jurisdictions, including the United States, Europe and
Japan, each expiring in 2031. As of December 31, 2016, we also had one patent application pending in various other
jurisdictions.
The second patent family is directed to the crystalline forms of sulfatinib as well as methods of treating tumor
angiogenesis-related disorders with such forms. As of December 31, 2016, in this patent family we owned two patents in
China expiring in 2029 and 2030, respectively, and we owned 11 patents in other countries, including the United States
and Europe, each of which will expire in 2031. As of December 31, 2016, we also had five patent applications pending in
other jurisdictions, including Japan. Our application in Japan has been allowed and is expected to be issued in due course.
The third patent family is directed to the formulation of a micronized active pharmaceutical ingredient used in
sulfatinib as well as methods of treating tumor angiogenesis-related disorders with such formulation. With respect to this
patent family, we have a PCT application pending.
HMPL-523 Syk Inhibitor—The intellectual property portfolio for HMPL-523 contains patent applications
directed to novel small molecule compounds as well as methods of treating cancers, inflammatory diseases, allergic
diseases, cell-proliferative diseases, and autoimmune diseases with such compounds. As of December 31, 2016, we owned
11 patents in this family in various jurisdictions, including the United States, China and South Korea, each of which will
expire in 2032. As of December 31, 2016, we also had 14 patent applications in this family pending in jurisdictions
including the United States, Europe, Japan and China.
Epitinib—The intellectual property portfolio for epitinib contains patents directed to novel small molecule
compounds as well as methods of treating cancers with such compounds. As of December 31, 2016, we owned patents in
China and Taiwan expiring in 2028, a patent in the United States expiring in 2031 and patents in 11 other jurisdictions,
including Europe, each expiring in 2029. As of December 31, 2016, we also had three patent applications in the epitinib
patent family pending in other jurisdictions.
Theliatinib—The intellectual property portfolio for theliatinib contains issued patents and patent applications
directed to novel small molecule compounds as well as methods of treating cancers with such compounds. As of
December 31, 2016, we owned 15 patents in this family in various jurisdictions, including China and Japan, each of which
will expire in 2031. As of December 31, 2016, we also had four patent applications in this family pending in various
jurisdictions, including the United States and Europe. Our Chinese patent was also registered in Hong Kong and Macau.
HMPL-689—The intellectual property portfolio for HMPL-689 contains patent applications directed to novel
small molecule compounds as well as uses of such compounds. As of December 31, 2016, we had filed Argentinean,
Chinese, Taiwanese and PCT applications, which, if issued, will each have expiration dates in 2035.
HMPL-004/HM004-6599—The intellectual property portfolio for HMPL-004/HM004-6599 is composed of
three patent families.
The first patent family is directed to methods of treating inflammatory bowel disease with the compounds related
to andrographolides, which are a type of organic plant extract used in drug formulation. As of December 31, 2016, we had
one U.S. patent in this family with an expiration date in 2026.
The second patent family is directed to certain andrographolides as well as the method of treating inflammatory
bowel diseases, such as Crohn’s disease and ulcerative colitis, with such andrographolides. As of December 31, 2016, with
respect to this family, we had one Chinese patent and 12 patents in various other jurisdictions, including the United States,
Europe and Japan. Our Chinese patent expires in 2024, and each of our other issued patents expires in 2025.
The third patent family is directed to certain andrographolides, a solid dosage form comprising certain
andrographolides, as well as the method of treating inflammatory bowel diseases, such as Crohn’s disease and ulcerative
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colitis, with such andrographolides. As of December 31, 2016, we owned one Chinese patent expiring in 2027, two
U.S. patents expiring in 2027 and 2029, respectively, and six patents in various other jurisdictions, each expiring in 2028.
As of December 31, 2016, we also had 6 patent applications pending in various jurisdictions including, the United States
and India.
We had also taken steps to seek patent protection for a sustainable release formulation of andrographolides, but
that was abandoned as of December 31, 2016.
HMPL-453—The intellectual property portfolio for HMPL-453 contains patent applications directed to novel
small molecule compounds as well as methods of treating cancers with the compounds. As of December 31, 2016, we had
24 patent applications pending in various jurisdictions, including the United States, China and Japan. Any patents issued
from the foregoing patent applications will have an expiration date of 2034.
Our Commercial Platform Patents
Prescription Drugs Patents
As of December 31, 2016, our Prescription Drugs joint venture Shanghai Hutchison Pharmaceuticals had
41 issued patents and seven pending patent applications in China, including patents for its key prescription products
described below.
She Xiang Bao Xin Pills. As of December 31, 2016, Shanghai Hutchison Pharmaceuticals held an invention patent
in China directed to the formulation of the She Xiang Bao Xin pill. Under PRC law, invention patents are granted for new
technical innovations with respect to products or processes. Invention patents in China have a maximum term of 20 years.
This patent will expire in 2029. The “Confidential State Secret Technology” status protection on the She Xiang Bao Xin
pill technology held by Shanghai Hutchison Pharmaceuticals, as certified by China’s Ministry of Science and Technology
and State Secrecy Bureau, expired recently, and as of December 31, 2016, Shanghai Hutchison Pharmaceuticals was in
the process of renewing such protection status.
Danning Tablets. As of December 31, 2016, Shanghai Hutchison Pharmaceuticals also held an invention patent
in China directed to the formulation of the Danning tablet. This patent will expire in 2027.
Consumer Health Patents
Many of the products sold by our Consumer Health Products joint venture Hutchison Baiyunshan, including its
Banlangen granules and Fu Fang Dan Shen tablets, are generic, over-the-counter products for which Hutchison Baiyunshan
does not hold patents. As of December 31, 2016, Hutchison Baiyunshan had 82 issued patents and eight pending patent
applications in China.
Patent Term
The term of a patent depends upon the laws of the country in which it is issued. In most jurisdictions, a patent
term is 20 years from the earliest filing date of a non-provisional patent application. In the United States, a patent’s term
may be lengthened by patent term adjustment, which compensates a patentee for administrative delays by the USPTO in
examining and granting a patent, or may be shortened if a patent is terminally disclaimed over an earlier filed patent. The
term of a patent that covers a drug or biological product may also be eligible for patent term extension when FDA approval
is granted, provided statutory and regulatory requirements are met. In the future, if and when our drug candidates receive
approval by the FDA or other regulatory authorities, we expect to apply for patent term extensions on issued patents
covering those drugs, depending upon the length of the clinical trials for each drug and other factors. There can be no
assurance that any of our pending patent applications will be issued or that we will benefit from any patent term extension.
As with other pharmaceutical companies, our or our joint ventures’ ability to maintain and solidify our proprietary
and intellectual property position for our drug candidates or our or their Commercial Platform products and technologies
will depend on our or our joint ventures’ success in obtaining effective patent claims and enforcing those claims if granted.
However, our or our joint ventures’ pending patent applications and any patent applications that we or they may in the
future file or license from third parties may not result in the issuance of patents. We also cannot predict the breadth of
claims that may be allowed or enforced in our or our joint ventures’ patents. Any issued patents that we may receive in the
future may be challenged, invalidated or circumvented. For example, we cannot be certain of the priority of filing covered
by pending third-party patent applications. If third parties prepare and file patent applications in the United States, China
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or other markets that also claim technology or therapeutics to which we or our joint ventures have rights, we or our joint
ventures may have to participate in interference proceedings, which could result in substantial costs to us, even if the
eventual outcome is favorable to us, which is highly unpredictable. In addition, because of the extensive time required for
clinical development and regulatory review of a drug candidate we may develop, it is possible that, before any of our drug
candidates can be commercialized, any related patent may expire or remain in force for only a short period following
commercialization, thereby limiting protection such patent would afford the respective product and any competitive
advantage such patent may provide.
Trade Secrets
In addition to patents, we and our joint ventures rely upon unpatented trade secrets and know-how and continuing
technological innovation to develop and maintain our or their competitive position. We and our joint ventures seek to
protect our proprietary information, in part, by executing confidentiality agreements with our collaborators and scientific
advisors, and non-competition, non-solicitation, confidentiality, and invention assignment agreements with our employees
and consultants. We and our joint ventures have also executed agreements requiring assignment of inventions with selected
scientific advisors and collaborators. The confidentiality agreements we and our joint ventures enter into are designed to
protect our or our joint ventures’ proprietary information and the agreements or clauses requiring assignment of inventions
to us or our joint ventures, as applicable, are designed to grant us or our joint ventures, as applicable, ownership of
technologies that are developed through our or their relationship with the respective counterpart. We cannot guarantee,
however, that these agreements will afford us or our joint ventures adequate protection of our or their intellectual property
and proprietary information rights.
Trademarks and Domain Names
We conduct our business using trademarks with various forms of the “Hutchison,” “Chi-Med” and “China-
MediTech” brands, as well as domain names incorporating some or all of these trademarks. In April 2006, we entered into
a brand license agreement with Hutchison Whampoa Enterprises Limited, an indirect wholly owned subsidiary of CK
Hutchison, pursuant to which we have been granted a non-exclusive, non-transferrable, royalty-free right to use such
trademarks, domain names and other intellectual property rights owned by the CK Hutchison group in connection with the
operation of our business worldwide. See Item 7.B. “Related Party Transactions—Relationship with CK Hutchison—
Intellectual property licensed by the CK Hutchison group” for more details.
In addition, our joint ventures seek trademark protection in China for their Commercial Platform products. As of
December 31, 2016 our joint ventures Shanghai Hutchison Pharmaceuticals and Hutchison Baiyunshan owned a total of
99 trademarks in the aggregate related to products sold by them. For example, the name “Shang Yao” is a registered
trademark of Shanghai Hutchison Pharmaceuticals in China for certain uses including pharmaceutical preparations. In
addition, our joint venture Hutchison Baiyunshan has been granted a royal-free license to use the registered trademark
“Bai Yun Shan” for a term equal to its operational period of the joint venture by Guangzhou Baiyunshan.
Raw Materials and Supplies
Raw materials and supplies are ordered based on our or our joint ventures’ respective sales plans and reasonable
order forecasts and are generally available from our or our joint ventures’ own GAP-certified cultivation operations and
various third-party suppliers in quantities adequate to meet our needs. While we do experience price fluctuations associated
with our raw materials, we have not experienced any material disruptions in the supply of these raw materials in the past.
See Item 3.D. “Risk Factors—Our Commercial Platform’s principal products involve the cultivation or sourcing of key
raw materials including botanical products, and any supply failure or price fluctuations could adversely affect our
Commercial Platform’s ability to manufacture our products.”
If any one of these supply arrangements or agreements were to be terminated or the ability of any one of these
suppliers to perform under the applicable agreements were to be materially and adversely affected, we believe that we will
be able to locate, qualify and enter into an agreement with a new supplier on a timely basis. We expect that our and our
joint ventures’ existing manufacturing facilities, including the new manufacturing facilities which are currently under
construction by Shanghai Hutchison Pharmaceuticals and a subsidiary of Hutchison Baiyunshan, and outside sources will
allow us to meet near-term manufacturing needs for our commercial products and other drug candidate products that are
in clinical trials.
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Quality Control and Assurance
We have our own independent quality control system and devote significant attention to quality control for the
designing, manufacturing and testing of our products. We have established a strict quality control system in accordance
with CFDA regulations. Our laboratories fully comply with the Chinese GMP guidelines and are staffed with highly
educated and skilled technicians to ensure quality of all batches of product release. We monitor in real time our operations
throughout the entire production process, from inspection of raw and auxiliary materials, manufacture, delivery of finished
products, clinical testing at hospitals, to ethical sales tactics. Our quality assurance team is also responsible for ensuring
that we are in compliance with all applicable regulations, standards and internal policies. Our senior management team is
actively involved in setting quality policies and managing internal and external quality performance of our company and
our joint ventures, Shanghai Hutchison Pharmaceuticals and Hutchison Baiyunshan.
Certificates and Permits
Hutchison MediPharma (Suzhou) Limited holds a pharmaceutical manufacturing license issued by its local
regulatory authority expiring on December 31, 2020.
Hutchison Sinopharm holds a GSP certificate issued by its local regulatory authority expiring on
October 22, 2019. It also holds a pharmaceutical trading license issued by its local regulatory authority expiring on
August 24, 2019.
Shanghai Hutchison Pharmaceuticals holds a pharmaceutical manufacturing license from its local regulatory
authorities expiring on December 31, 2020. Shanghai Hutchison Pharmaceuticals also holds two GMP certificates issued
by its local regulatory authority and the CFDA, respectively. The two GMP certificates will expire on November 16, 2021
and August 14, 2021, respectively.
Shanghai Shangyao Hutchison Whampoa GSP Company Limited, a subsidiary of Shanghai Hutchison
Pharmaceuticals, holds a pharmaceutical trading license from its local regulatory authority expiring on December 29, 2019.
It also holds a GSP certificate issued by its local regulatory authority expiring on April 21, 2020.
Hutchison Baiyunshan holds a pharmaceutical manufacturing license issued by its local regulatory authority
expiring on December 31, 2020. Hutchison Baiyunshan holds three GMP certificates issued by its local regulatory
authority expiring on December 10, 2018, December 21, 2020 and March 18, 2020, respectively.
Hutchison Whampoa Guangzhou Baiyunshan Pharmaceuticals Limited, a subsidiary of Hutchison Baiyunshan,
holds a GSP certificate issued by its local regulatory authority expiring on January 15, 2020. It also holds a pharmaceutical
trading license issued by its local regulatory authority expiring on November 12, 2019.
Nanyang Baiyunshan Hutchison Whampoa Guanbao Pharmaceutical Company Limited holds a pharmaceutical
trading license from its local regulatory authority expiring on June 4, 2019. It also holds a GSP certificate issued by its
local regulatory authority expiring on June 5, 2019.
Hutchison Healthcare holds a sanitary license for healthcare food production enterprises issued by its local
regulatory authority that expired on March 7, 2016. Under the CFDA’s current regulatory requirements, Hutchison
Healthcare is not required, and does not intend, to renew this license.
Regulation
This section sets forth a summary of the most significant rules and regulations affecting our business activities in
China and the United States.
Government Regulation of Pharmaceutical Product Development and Approval
PRC Regulation of Pharmaceutical Product Development and Approval
Since China’s entry to the World Trade Organization in 2001, the PRC government has made significant efforts
to standardize regulations, develop its pharmaceutical regulatory system and strengthen intellectual property protection.
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Regulatory Authorities
In the PRC, the CFDA is the authority that monitors and supervises the administration of pharmaceutical products
and medical appliances and equipment as well as food, health food and cosmetics. The CFDA’s predecessor, the State
Food and Drug Administration, or the SFDA, was established on August 19, 1998 as an organization under the State
Council to assume the responsibilities previously handled by the Ministry of Health of the PRC, or the MOH, the State
Pharmaceutical Administration Bureau of the PRC and the State Administration of Traditional Chinese Medicine of the
PRC. The CFDA was founded in March 2003 to replace the SFDA.
The primary responsibilities of the CFDA include:
(cid:120) monitoring and supervising the administration of pharmaceutical products, medical appliances and
equipment as well as food, health food and cosmetics in the PRC;
(cid:120)
(cid:120)
(cid:120)
formulating administrative rules and policies concerning the supervision and administration of food,
health food, cosmetics and the pharmaceutical industry; evaluating, registering and approving of new
drugs, generic drugs, imported drugs and traditional Chinese medicine;
approving and issuing permits for the manufacture and export/import of pharmaceutical products and
medical appliances and equipment and approving the establishment of enterprises to be engaged in the
manufacture and distribution of pharmaceutical products; and
examining and evaluating the safety of food, health food and cosmetics and handling significant
accidents involving these products.
The MOH is an authority at the ministerial level under the State Council and is primarily responsible for national
public health. Following the establishment of the CFDA in 2003, the MOH was put in charge of the overall administration
of the national health in the PRC excluding the pharmaceutical industry. In March 2008, the State Council placed the
CFDA under the management and supervision of the MOH. The MOH performs a variety of tasks in relation to the health
industry such as establishing social medical institutes and producing professional codes of ethics for public medical
personnel. The MOH is also responsible for overseas affairs, such as dealings with overseas companies and governments.
In 2013, the MOH and the National Population and Family Planning Commission were integrated into the National Health
and Family Planning Commission of the PRC, or the NHFPC. The responsibilities of the NHFPC include organizing the
formulation of national drug policies, the national essential medicine system and the National Essential Medicines List
and drafting the administrative rules for the procurement, distribution and use of national essential medicines.
Healthcare System Reform
The PRC government recently promulgated several healthcare reform policies and regulations to reform the
healthcare system. On March 17, 2009, the Central Committee of the PRC Communist Party and the State Council jointly
issued the Guidelines on Strengthening the Reform of Healthcare System. On March 18, 2009, the State Council issued
the Implementation Plan for the Recent Priorities of the Healthcare System Reform (2009-2011). On July 22, 2009, the
General Office of the State Council issued the Five Main Tasks of Healthcare System Reform in 2009.
Highlights of these healthcare reform policies and regulations include the following:
(cid:120) The overall objective of the reform is to establish a basic healthcare system to cover both urban and rural
residents and provide the Chinese people with safe, effective, convenient and affordable healthcare
services. The PRC government aims to extend basic medical insurance coverage to at least 90% of the
country’s population by 2011 and increase the amount of subsidies on basic medical insurance for urban
residents and rural cooperative medical insurance to RMB120 per person per year by 2010. By 2020, a
basic healthcare system covering both urban and rural residents should be established.
(cid:120) The reforms aim to promote orderly market competition and improve the efficiency and quality of the
healthcare system to meet the various medical needs of the Chinese population. From 2009, basic public
healthcare services such as preventive healthcare, maternal and child healthcare and health education
will be provided to urban and rural residents. In the meantime, the reforms also encourage innovations
by pharmaceutical companies to eliminate low-quality and duplicative products.
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(cid:120) The five key tasks of the reform from 2009 to 2011 are as follows: (1) to accelerate the formation of a
basic medical insurance system, (2) to establish a national essential drug system, (3) to establish a basic
healthcare service system, (4) to promote equal access to basic public healthcare services, and (5) to
promote the reform of public hospitals.
Drug Administration Laws and Regulations
The PRC Drug Administration Law as promulgated by the Standing Committee of the National People’s Congress
in 1984 and the Implementing Measures of the PRC Drug Administration Law as promulgated by the MOH in 1989 have
laid down the legal framework for the establishment of pharmaceutical manufacturing enterprises, pharmaceutical trading
enterprises and for the administration of pharmaceutical products including the development and manufacturing of new
drugs and medicinal preparations by medical institutions. The PRC Drug Administration Law also regulates the packaging,
trademarks and the advertisements of pharmaceutical products in the PRC.
Certain revisions to the PRC Drug Administration Law took effect on December 1, 2001. They were formulated
to strengthen the supervision and administration of pharmaceutical products, and to ensure the quality of pharmaceutical
products and the safety of pharmaceutical products for human use. The revised PRC Drug Administration Law applies to
entities and individuals engaged in the development, production, trade, application, supervision and administration of
pharmaceutical products. It regulates and prescribes a framework for the administration of pharmaceutical manufacturers,
pharmaceutical trading companies, and medicinal preparations of medical institutions and the development, research,
manufacturing, distribution, packaging, pricing and advertisements of pharmaceutical products.
The PRC Drug Administration Law was later amended on December 28, 2013 and April 24, 2015 by the Standing
Committee of the National People’s Congress. It provides the basic legal framework for the administration of the
production and sale of pharmaceutical products in China and covers the manufacturing, distributing, packaging, pricing
and advertising of pharmaceutical products.
According to the PRC Drug Administration Law, no pharmaceutical products may be produced without a
pharmaceutical production license. A manufacturer of pharmaceutical products must obtain a pharmaceutical production
license from one of CFDA’s provincial level branches in order to commence production of pharmaceuticals. Prior to
granting such license, the relevant government authority will inspect the manufacturer’s production facilities, and decide
whether the sanitary conditions, quality assurance system, management structure and equipment within the facilities have
met the required standards.
The PRC Drug Administration Implementation Regulations promulgated by the State Council took effect on
September 15, 2002 to provide detailed implementation regulations for the revised PRC Drug Administration Law.
Examination and Approval of New Medicines
On July 10, 2007, the CFDA promulgated the Administrative Measures on the Registration of Pharmaceutical
Products, or the Registration Measures, which became effective on October 1, 2007. Under the Registration Measures,
new medicines generally refer to those medicines that have not yet been marketed in the PRC. In addition, certain marketed
medicines may also be treated as new medicines if the type or application method of such medicines has been changed or
new therapeutic functions have been added to such medicines. According to the Registration Measures, the approval of
new medicines requires the following steps:
(cid:120)
(cid:120)
upon completion of the pre-clinical research of the new medicine, application for registration of the new
medicine will be submitted to the drug regulatory authorities at the provincial level for review in
formalities. If all the formality requirements are met, the drug regulatory authorities at the provincial
level will issue a notice of acceptance and conduct site inspections on the research and original data of
the new medicine. The drug regulatory authorities at the provincial level will subsequently issue a
preliminary opinion and notify a medical examination institute to conduct a sample examination on the
new medicine (if the new medicine is a biological product);
the drug regulatory authorities at the provincial level will then submit their preliminary opinion,
inspection report and application materials to the Drug Review Center of the CFDA and notify the
applicant of the progress;
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(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
after receiving the application materials, the Drug Review Center of the CFDA will arrange for
pharmaceutical, medical or other professionals to conduct a technical review on the application materials
and request for supplemental materials and explanations, if necessary. After completion of the technical
review, the Drug Review Center of the CFDA will issue an opinion and submit such opinion to the
CFDA, along with the application materials;
after receiving the technical opinion from the Drug Review Center, the CFDA will assess whether or not
to grant the approval for conducting the clinical research on the new medicine;
after obtaining the CFDA’s approval for conducting the clinical research, the applicant may proceed
with the relevant clinical research (which is generally conducted in three phases for a new medicine
under the Registration Measures) at institutions with appropriate qualification:
(cid:120) Phase I refers to the preliminary clinical trial for clinical pharmacology and body safety. It is
conducted to observe the human body tolerance for new medicine and pharmacokinetics, so as to
provide a basis for determining the prescription plan.
(cid:120) Phase II refers to the stage of preliminary evaluation of clinical effectiveness. The purpose is to
preliminarily evaluate the clinical effectiveness and safety of the medicine used on patients with
targeted indication, as well as to provide a basis for determining the Phase III clinical trial research
plan and the volume under the prescription plan.
(cid:120) Phase III is a clinical trial stage to verify the clinical effectiveness. The purpose is to test and
determine the clinical effectiveness and safety of the medicine used on patients with targeted
indication, to evaluate the benefits and risks thereof and, eventually, to provide sufficient basis for
review of the medicine registration application.
(cid:120) Phase IV refers the stage of surveillance and research after the new medicines is launched. The
purpose is to observe the clinical effectiveness and adverse effects of the medicine over a much
larger patient population and longer time period than in Phase I to III clinical trials, and evaluate the
benefits and risks when it is administered to general or special patient population in larger
prescription volume.
after completion of the relevant clinical research, the applicant shall submit its clinical research report
together with the relevant supporting documents to the drug regulatory authorities at the provincial level
and shall provide raw materials of the standard products and research result on relevant standard products
to the PRC National Institute for the Control of Pharmaceutical and Biological Products;
the drug regulatory authorities at the provincial level will then review the relevant documents in
formalities. If all the formality requirements are met, the drug regulatory authorities at the provincial
level will issue a notice of acceptance and within five days of notice and start conducting site inspections.
The drug regulatory authorities at the provincial level will issue a preliminary opinion and then collect
three samples of the new medicine (if the new medicine is not a biological product) and notify the
relevant medicine examination institute to review the medicine standards;
the drug regulatory authorities at the provincial level will then submit their preliminary opinion,
inspection report and application materials to the Drug Review Center of the CFDA and notify the
applicant of the progress;
the medical examination institute will review the medicine standards and report its opinion to the Drug
Review Center of the CFDA and send a copy of the opinion to the drug regulatory authorities at the
provincial level and the applicant;
after receiving the application materials, the Drug Review Center of the CFDA will arrange for
pharmaceutical, medical or other professionals to conduct a technical review on the application materials
and request for supplemental materials and explanations, if necessary. After completion of the technical
review and if all the requirements are complied with, the Drug Review Center of the CFDA will report
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so to the Certification Center of the CFDA and notify the applicant that it may apply to the Certification
Center of the CFDA for a site inspection;
the applicant will apply to the Certification Center of the CFDA for a site inspection within six months
after receiving the notice from the Drug Review Center of the CFDA;
the Certification Center of the CFDA will arrange a site inspection on the process of manufacturing
samples within thirty days after the application from the applicant to ensure the feasibility of the
manufacturing process. The Certification Center of the CFDA will collect a sample (three samples if the
new medicine is a biological product) for the medicine examination institute to examine. The
Certification Center of the CFDA will prepare an inspection report within 10 days after the site
inspection and submit the report to the Drug Review Center of the CFDA;
the sample(s) shall be manufactured at a GMP-certified workshop. The medicine examination institute
will examine the sample(s) under the reviewed medicine standards and prepare a report after completion
the examination and submit the report to the Drug Review Center of the CFDA. A copy of the report
will be available to the drug regulatory authorities at the provincial level and the applicant;
the Drug Review Center of the CFDA will form a comprehensive opinion based on the technical opinion
previously received, the report on site inspection and the result of sample examination and submit the
comprehensive opinion and the application materials to the CFDA; and
if all the regulatory requirements are satisfied, the CFDA will grant a new drug certificate and a
pharmaceutical approval number (assuming the applicant has a valid Pharmaceutical Manufacturing
Permit and the requisite production conditions for the new medicine have been met).
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
Any applicant who is not satisfied with the CFDA’s decision to deny the application can appeal within 60 days
of its receipt of the CFDA’s decision. If the applicant is dissatisfied with the result of the appeal, it may apply for an
administrative review with a special committee consisting of senior officials of the CFDA or file an administrative lawsuit
with a people’s court in China.
Pursuant to the Registration Measures, chemical drugs are categorized into six different registration classes.
Class I New Chemical Drug is a new chemical drug that has never been marketed in China or abroad, including (1) crude
drugs made by synthesis or semi-synthesis and the preparations thereof; (2) new effective monomer extracted from natural
substances or by fermentation and the preparations thereof; (3) optical isomer obtained from existing drugs by chiral
separation or synthesis and the preparations thereof; (4) drug with fewer components derived from marketed multi-
component drugs; (5) new combination products; and (6) a preparation already marketed in China but with a newly added
indication not yet approved in any country. Different application materials are required for each registration category.
In accordance with the Provisions on the Administration of Special Examination and Approval of Registration of
New Drugs promulgated by the CFDA, issued and effective on January 7, 2009, an NDA that meets certain requirements
as specified below will be handled with priority in the review and approval process, so-called “green-channel” approval.
In addition, the applicant is entitled to provide additional materials during the review period besides those requested by
the CFDA, and will have access to enhanced communication channels with the CFDA.
Applicants for the registration of the following new drugs are entitled to request priority treatment in review and
approval: (i) active ingredients and their preparations extracted from plants, animals and minerals, and newly discovered
medical materials and their preparations that have not been sold in the China market, (ii) chemical drugs and their
preparations and biological products that have not been approved for sale at its origin country or abroad, (iii) new drugs
with obvious clinical treatment advantages for such diseases as AIDS, therioma, and rare diseases, and (iv) new drugs for
diseases that have not been treated effectively. Under category (i) or (ii) above, the applicant for drug registration may
apply for special examination and approval when applying for the clinical trial of new drugs; under category (iii) or (iv)
above, the applicant may only apply for special examination and approval when applying for manufacturing.
Drug Technology Transfer Regulations
On August 19, 2009, the CFDA promulgated the Administrative Regulations for Technology Transfer
Registration of Drugs to standardize the registration process of drug technology transfer, which includes application for,
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and evaluation, examination, approval and monitoring of, drug technology transfer. Drug technology transfer refers to the
transfer of drug production technology by the owner to a drug manufacturer and the application for drug registration by
the transferee according to the provisions in the new regulations. Drug technology transfer includes new drug technology
transfer and drug production technology transfer.
Conditions for the application for new drug technology transfer
Applications for new drug technology transfer may be submitted prior to the expiration date of the monitoring
period of the new drugs with respect to:
(cid:120)
(cid:120)
drugs with new drug certificates only; or
drugs with new drug certificates and drug approval numbers.
For drugs with new drug certificates only and not yet in the monitoring period, or drug substances with new drug
certificates, applications for new drug technology transfer should be submitted prior to the respective expiration date of
the monitoring periods for each drug registration category set forth in the new regulations and after the issue date of the
new drug certificates.
Conditions for the application of drug production technology transfer
Applications for drug production technology transfer may be submitted if:
(cid:120)
the transferor holds new drug certificates or both new drug certificates and drug approval numbers, and
the monitoring period has expired or there is no monitoring period;
(cid:120) with respect to drugs without new drug certificates, both the transferor and the transferee are legally
qualified drug manufacturing enterprises, one of which holds over 50% of the equity interests in the
other, or both of which are majority-owned subsidiaries of the same drug manufacturing enterprise;
(cid:120) with respect to imported drugs with imported drug licenses, the original applicants for the imported drug
registration may transfer these drugs to local drug manufacturing enterprises.
Application for, and examination and approval of, drug technology transfer
Applications for drug technology transfer should be submitted to the provincial food and drug administration. If
the transferor and the transferee are located in different provinces, the provincial food and drug administration where the
transferee is located should provide examination opinions. The provincial food and drug administration where the
transferee is located is responsible for examining application materials for technology transfer and organizing inspections
on the production facilities of the transferee. Food and drug control institutes are responsible for testing three batches of
drug samples.
The Center for Drug Evaluation of the CFDA should further review the application materials, provide technical
evaluation opinions and form a comprehensive evaluation opinion based on the site inspection reports and the testing
results of the samples. The CFDA should determine whether to approve the application according to the comprehensive
evaluation opinion of the Center for Drug Evaluation of the CFDA. An approval letter of supplementary application and
a drug approval number will be issued to qualified applications. An approval letter of clinical trials will be issued when
necessary. For rejected applications, a notification letter of the examination opinions will be issued with the reasons
for rejection.
Permits and Licenses for Manufacturing and Registration of Drugs
Production Licenses
To manufacture pharmaceutical products in the PRC, a pharmaceutical manufacturing enterprise must first obtain
a Pharmaceutical Manufacturing Permit issued by the relevant pharmaceutical administrative authorities at the provincial
level where the enterprise is located. Among other things, such a permit must set forth the permit number, the name, legal
representative and registered address of the enterprise, the site and scope of production, issuing institution, date of issuance
and effective period.
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Each Pharmaceutical Manufacturing Permit issued to a pharmaceutical manufacturing enterprise is effective for
a period of five years. The enterprise is required to apply for renewal of such permit within six months prior to its expiry
and will be subject to reassessment by the issuing authorities in accordance with then prevailing legal and regulatory
requirements for the purposes of such renewal.
Business Licenses
In addition to a Pharmaceutical Manufacturing permit, the manufacturing enterprise must also obtain a business
license from the administrative bureau of industry and commerce at the local level. The name, legal representative and
registered address of the enterprise specified in the business license must be identical to that set forth in the Pharmaceutical
Manufacturing Permit.
Registration of Pharmaceutical Products
All pharmaceutical products that are produced in the PRC must bear a registered number issued by the CFDA,
with the exception of Chinese herbs and Chinese herbal medicines in soluble form. The medicine manufacturing
enterprises must obtain the medicine registration number before manufacturing any medicine.
GMP Certificates
The World Health Organization encourages the adoption of GMP standards in pharmaceutical production in order
to minimize the risks involved in any pharmaceutical production that cannot be eliminated through testing the
final products.
The Guidelines on Good Manufacturing Practices, as amended in 1998 and 2010, or the Guidelines, took effect
on August 1, 1999 and set the basic standards for the manufacture of pharmaceuticals. These Guidelines cover issues such
as the production facilities, the qualification of the personnel at the management level, production plant and facilities,
documentation, material packaging and labeling, inspection, production management, sales and return of products and
customers’ complaints. On October 23, 2003, the CFDA issued the Notice on the Overall Implementation and Supervision
of Accreditation of Good Manufacturing Practice Certificates for Pharmaceuticals, which required all pharmaceutical
manufacturers to apply for the GMP certificates by June 30, 2004. Those enterprises that failed to obtain the GMP
certificates by December 31, 2004 would have their Pharmaceutical Manufacturing Permit revoked by the drug
administrative authorities at the provincial level. On October 24, 2007, the CFDA issued Evaluation Standard on Good
Manufacturing Practices which became effective on January 1, 2008. The GMP certificate is valid for a term of five years
and application for renewal must be submitted six months prior to its expiration date.
Administrative Protection and Monitoring Periods for New Drugs
According to the Registration Measures, with a view to protecting public health, the CFDA may provide for
administrative monitoring periods of up to five years for new drugs approved to be manufactured, to continually monitor
the safety of those new drugs.
During the monitoring period of a new drug, the CFDA will not approve any other enterprise’s application to
manufacture, change the dosage of or import a similar new drug. The only exception is that the CFDA will continue to
handle any application if, prior to the commencement of the monitoring period, the CFDA has already approved the
applicant’s clinical trial for a similar new drug. If such application conforms to the relevant provisions, the CFDA may
approve such applicant to manufacture or import the similar new drug during the remainder of the monitoring period.
The Administrative Measures Governing the Production Quality of Pharmaceutical Products, or the
Administrative Measures for Production, provides detailed guidelines on practices governing the production of
pharmaceutical products. A GMP certification certifies that a manufacturer’s factory has met certain criteria in the
Administrative Measures for Production, which include: institution and staff qualifications, production premises and
facilities, equipment, hygiene conditions, production management, quality controls, product operation, maintenance of
sales records and manner of handling customer complaints and adverse reaction reports.
According to the Administrative Measures for Certification of the Good Manufacturing Practices, effective on
August 2, 2011, a manufacturer of pharmaceutical products shall reapply for a new GMP certification six months prior to
its expiration date.
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Distribution of Pharmaceutical Products
According to the PRC Drug Administration Law and its implementing regulations and the Measures for the
Supervision and Administration of Circulation of Pharmaceuticals, a manufacturer of pharmaceutical products in the PRC
can only engage in the trading of the pharmaceutical products that the manufacturer has produced itself. In addition, such
manufacturer can only sell its products to:
(cid:120) wholesalers and distributors holding Pharmaceutical Distribution Permits;
(cid:120)
other holders of Pharmaceutical Manufacturing Permits; or
(cid:120) medical practitioners holding Medical Practice Permits.
A pharmaceutical manufacturer in the PRC is prohibited from selling its products to end-users, or individuals or
entities other than holders of Pharmaceutical Distribution Permits, the Pharmaceutical Manufacturing Permits or the
Medical Practice Permits.
The granting of a Pharmaceutical Distribution Permit to wholesalers shall be subject to approval of the provincial
level drug regulatory authorities, while the granting of a retailer permit shall be subject to the approval of the drug
regulatory authorities above the county level. Unless otherwise expressly approved, no pharmaceutical wholesaler may
engage in the retail of pharmaceutical products, and neither may pharmaceutical retailers engage in wholesale.
A pharmaceutical distributor shall satisfy the following requirements:
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personnel with pharmaceutical expertise as qualified according to law;
business site, facilities, warehousing and sanitary environment compatible to the distributed
pharmaceutical products;
quality management system and personnel compatible to the distributed pharmaceutical products; and
rules and regulations to ensure the quality of the distributed pharmaceutical products.
Operations of pharmaceutical distributors shall be conducted in accordance with the Pharmaceutical Operation
Quality Management Rules and shall be granted a GSP certificate under such rules by the CFDA. A GSP certificate is
valid for five years and may be renewed three months prior to its expiration date upon a reexamination by the relevant
authority.
Pharmaceutical distributors must keep true and complete records of any pharmaceutical products purchased,
distributed or sold with the generic name of such products, specification, approval code, term, manufacturer, purchasing
or selling party, price and date of purchase or sale. A pharmaceutical distributor must keep such record at least until one
year after the expiry date of such products and in any case, such record must be kept for no less than three years. Penalties
may be imposed for any violation of record-keeping.
Pharmaceutical distributors can only distribute pharmaceutical products obtained from those with a
Pharmaceutical Manufacturing Permit and a Pharmaceutical Distribution Permit.
Changes to the PRC pharmaceutical distribution laws are expected to be announced in 2017 which may limit the
number of distributors allowed between a manufacturer and each hospital to one.
Foreign Investment and “State Secret” Technology
The interpretation of certain PRC laws and regulations governing foreign investment and “state secret”
technology is uncertain. Depending on the industry sectors, foreign investments are classified as “encouraged”, “restricted”
or “prohibited” under the Guidance Catalogue of Industries for Foreign Investment, or the Catalogue, published by the
MOFCOM and the NDRC. Under the Catalogue, “manufacturing of modern Chinese medicines with confidential
proprietary formula” has been deemed prohibited for any foreign investment. The technology and know-how of the She
Xiang Bao Xin pill is classified as “state secret” technology by China’s Ministry of Science and Technology, or the MOST,
and the National Administration for the Protection of State Secrets, or NAPSS.
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There are currently no PRC laws or regulations or official interpretations, and therefore there can be no assurance,
as to whether the use of “state secret” technology constitutes the “manufacturing of Chinese medicines with confidential
proprietary formula” under the Catalogue. However, under the Rules on Confidentiality of Science and Technology
promulgated by the State Science and Technology Commission (the predecessor of the MOST and the NAPSS) on
January 6, 1995, cooperation with foreign parties or establishing joint ventures with foreign parties in respect of state
secret technology is expressly allowed, provided that such cooperation has been duly approved by the relevant science and
technology authorities. The establishment of Shanghai Hutchison Pharmaceuticals as a sino-foreign joint venture,
including the re-registration of licenses for She Xiang Bao Xin pills in its name, was approved by the local counterpart of
the MOFCOM and the Shanghai Drug Administration in 2001. Subsequently, the “Confidential State Secret Technology”
status protection for She Xiang Bao Xin pills was also granted in 2005 to Shanghai Hutchison Pharmaceuticals as a sino-
foreign joint venture by the MOST and NAPSS. Consequently, we believe Shanghai Hutchison Pharmaceuticals is in
compliance with all applicable PRC laws and regulations governing foreign investment and “state secret” technology and
will continue to be so following our listing of our ADSs on the Nasdaq Global Select Market. Moreover, we believe that
our other joint ventures and wholly-foreign owned enterprises in the PRC are also in compliance with all applicable PRC
laws and regulations governing foreign investment and will continue to be so following our listing of our ADSs on the
Nasdaq Global Select Market.
U.S. Regulation of Pharmaceutical Product Development and Approval
In the United States, the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act, or FDCA, and
its implementing regulations. The process of obtaining approvals and the subsequent compliance with appropriate federal,
state and local rules and regulations requires the expenditure of substantial time and financial resources. Failure to comply
with the applicable U.S. regulatory requirements at any time during the product development process, approval process or
after approval may subject an applicant and/or sponsor to a variety of administrative or judicial sanctions, including refusal
by FDA to approve pending applications, withdrawal of an approval, imposition of a clinical hold, issuance of warning
letters and other types of letters, product recalls, product seizures, total or partial suspension of production or distribution,
injunctions, fines, refusals of government contracts, restitution, disgorgement of profits, or civil or criminal investigations
and penalties brought by FDA and the U.S. Department of Justice, or DOJ, or other governmental entities. Drugs are also
subject to other federal, state and local statutes and regulations.
Our drug candidates must be approved by the FDA through the NDA process before they may be legally marketed
in the United States. The process required by the FDA before a drug may be marketed in the United States generally
involves the following:
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completion of extensive pre-clinical studies, sometimes referred to as pre-clinical laboratory tests, pre-
clinical animal studies and formulation studies all performed in compliance with applicable regulations,
including the FDA’s GLP regulations;
submission to the FDA of an IND which must become effective before human clinical trials may begin
and must be updated annually;
IRB approval before each clinical trial may be initiated;
performance of adequate and well-controlled human clinical trials in accordance with applicable GCPs
and other clinical trial-related regulations, to establish the safety and efficacy of the proposed drug
product for its proposed indication;
preparation and submission to the FDA of an NDA;
a determination by the FDA within 60 days of its receipt of an NDA to file the NDA for review and
review by an FDA advisory committee, where appropriate or if applicable;
satisfactory completion of an FDA pre-approval inspection of the manufacturing facility or facilities at
which the API and finished drug product are produced to assess compliance with the FDA’s current
good manufacturing practice requirements, or cGMP;
potential FDA audit of the pre-clinical and/or clinical trial sites that generated the data in support of
the NDA;
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payment of user fees and FDA review and approval of the NDA prior to any commercial marketing or
sale of the drug in the United States; and
compliance with any post-approval requirements, including REMS and post-approval studies required
by FDA.
Pre-clinical Studies
The data required to support an NDA is generated in two distinct development stages: pre-clinical and clinical.
For new chemical entities, or NCEs, the pre-clinical development stage generally involves synthesizing the active
component, developing the formulation and determining the manufacturing process, evaluating purity and stability, as well
as carrying out non-human toxicology, pharmacology and drug metabolism studies in the laboratory, which support
subsequent clinical testing. The conduct of the pre-clinical tests must comply with federal regulations, including GLPs.
The sponsor must submit the results of the pre-clinical tests, together with manufacturing information, analytical data, any
available clinical data or literature and a proposed clinical protocol, to the FDA as part of the IND. An IND is a request
for authorization from the FDA to administer an investigational drug product to humans. The central focus of an IND
submission is on the general investigational plan and the protocol(s) for human trials. The IND automatically becomes
effective 30 days after receipt by the FDA, unless the FDA raises concerns or questions regarding the proposed clinical
trials and places the IND on clinical hold within that 30-day time period. In such a case, the IND sponsor must resolve
with the FDA any outstanding concerns or questions before the clinical trial can begin. Some long-term pre-clinical testing,
such as animal tests of reproductive adverse events and carcinogenicity, may continue after the IND is submitted. The
FDA may also impose clinical holds on a drug candidate at any time before or during clinical trials due to safety concerns
or non-compliance. Accordingly, submission of an IND does not guarantee the FDA will allow clinical trials to begin, or
that, once begun, issues will not arise that could cause the trial to be suspended or terminated.
Clinical Studies
The clinical stage of development involves the administration of the drug product to human subjects or patients
under the supervision of qualified investigators, generally physicians not employed by or under the trial sponsor’s control,
in accordance with GCPs, which include the requirement that, in general, all research subjects provide their informed
consent in writing for their participation in any clinical trial. Clinical trials are conducted under written study protocols
detailing, among other things, the objectives of the clinical trial, dosing procedures, subject selection and exclusion criteria,
and the parameters to be used to monitor subject safety and assess efficacy. Each protocol, and any subsequent amendments
to the protocol, must be submitted to the FDA as part of the IND. Further, each clinical trial must be reviewed and approved
by each institution at which the clinical trial will be conducted. An IRB is charged with protecting the welfare and rights
of trial participants and considers such items as whether the risks to individuals participating in the clinical trials are
minimized and are reasonable in relation to anticipated benefits. The IRB also reviews and approves the informed consent
form that must be provided to each clinical trial subject or his or her legal representative and must monitor the clinical trial
until completed. There are also requirements governing the reporting of ongoing clinical trials and completed clinical trial
results to public registries. For example, information about certain clinical trials must be submitted within specific
timeframes to the National Institutes of Health for public dissemination on their ClinicalTrials.gov website.
Clinical trials are generally conducted in three sequential phases that may overlap or be combined, known as
Phase I, Phase II and Phase III clinical trials.
(cid:120) Phase I: In a standard Phase I clinical trial, the drug is initially introduced into a small number of subjects
who are initially exposed to a range of doses of the drug candidate. The primary purpose of these clinical
trials is to assess the metabolism, pharmacologic action, appropriate dosing, side effect tolerability and
safety of the drug.
(cid:120) Phase Ib: Although Phase I clinical trials are not intended to treat disease or illness, a Phase Ib trial
conducted in patient populations who have been diagnosed with the disease for which the study
drug is intended. The patient population typically demonstrates a biomarker, surrogate, or other
clinical outcome that can be assessed to show “proof-of-concept.” In a Phase Ib study, proof-of-
concept typically confirms a hypothesis that the current prediction of a biomarker, surrogate or other
outcome benefit is compatible with the mechanism of action of the study drug.
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(cid:120) Phase I/2: A Phase I and Phase II trial for the same treatment is combined into a single study
protocol. The drug is administered first to determine a maximum tolerable dose, and then additional
patients are treated in the Phase II portion of the study to further assess safety and/or efficacy.
(cid:120) Phase II: The drug is administered to a limited patient population to determine dose tolerance and
optimal dosage required to produce the desired benefits. At the same time, safety and further
pharmacokinetic and pharmacodynamic information is collected, as well as identification of possible
adverse effects and safety risks and preliminary evaluation of efficacy.
(cid:120) Phase III: The drug is administered to an expanded number of patients, generally at multiple sites that
are geographically dispersed, in well-controlled clinical trials to generate enough data to demonstrate
the efficacy of the drug for its intended use, its safety profile, and to establish the overall benefit/risk
profile of the drug and provide an adequate basis for drug approval and labeling of the drug product.
Phase III clinical trials may include comparisons with placebo and/or other comparator treatments. The
duration of treatment is often extended to mimic the actual use of a drug during marketing. Generally,
two adequate and well-controlled Phase III clinical trials are required by the FDA for approval of an
NDA. A pivotal study is a clinical study that adequately meets regulatory agency requirements for the
evaluation of a drug candidate’s efficacy and safety such that it can be used to justify the approval of the
drug. Generally, pivotal studies are also Phase III studies but may be Phase II studies if the trial design
provides a well-controlled and reliable assessment of clinical benefit, particularly in situations where
there is an unmet medical need. Post-approval trials, sometimes referred to as Phase 4 clinical trials, may
be conducted after initial regulatory approval. These trials are used to gain additional experience from
the treatment of patients in the intended therapeutic indication. In certain instances, FDA may mandate
the performance of Phase 4 clinical trials.
Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA, and
more frequently if serious adverse events occur. Written IND safety reports must be submitted to the FDA and the
investigators for serious and unexpected adverse events or any finding from tests in laboratory animals that suggests a
significant risk to human subjects. The FDA, the IRB, or the clinical trial sponsor may suspend or terminate a clinical trial
at any time on various grounds, including a finding that the research subjects or patients are being exposed to an
unacceptable health risk. The FDA will typically inspect one or more clinical sites to assure compliance with GCPs and
the integrity of the clinical data submitted. Similarly, an IRB can suspend or terminate approval of a clinical trial at its
institution, or an institution it represents, if the clinical trial is not being conducted in accordance with the IRB’s
requirements or if the drug has been associated with unexpected serious harm to patients. Additionally, some clinical trials
are overseen by an independent group of qualified experts organized by the clinical trial sponsor, known as a data safety
monitoring board or committee. This group provides authorization for whether or not a trial may move forward at
designated check points based on access to certain data from the trial. Concurrent with clinical trials, companies usually
complete additional animal studies and must also develop additional information about the chemistry and physical
characteristics of the drug as well as finalize a process for manufacturing the drug in commercial quantities in accordance
with cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the
drug candidate and, among other things, cGMPs impose extensive procedural, substantive and recordkeeping requirements
to ensure and preserve the long-term stability and quality of the final drug product. Additionally, appropriate packaging
must be selected and tested and stability studies must be conducted to demonstrate that the drug candidate does not undergo
unacceptable deterioration over its shelf life.
NDA Submission and FDA Review Process
Following trial completion, trial results and data are analyzed to assess safety and efficacy. The results of pre-
clinical studies and clinical trials are then submitted to the FDA as part of an NDA, along with proposed labeling for the
drug, information about the manufacturing process and facilities that will be used to ensure drug quality, results of
analytical testing conducted on the chemistry of the drug, and other relevant information. The NDA is a request for
approval to market the drug and must contain adequate evidence of safety and efficacy, which is demonstrated by extensive
pre-clinical and clinical testing. The application includes both negative or ambiguous results of pre-clinical and clinical
trials as well as positive findings. Data may come from company-sponsored clinical trials intended to test the safety and
efficacy of a use of a drug, or from a number of alternative sources, including studies initiated by investigators. To support
regulatory approval, the data submitted must be sufficient in quality and quantity to establish the safety and efficacy of the
investigational drug product to the satisfaction of the FDA. Under federal law, the submission of most NDAs is subject to
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the payment of an application user fees; a waiver of such fees may be obtained under certain limited circumstances. FDA
approval of an NDA must be obtained before a drug may be offered for sale in the United States.
In addition, under the Pediatric Research Equity Act an NDA or supplement to an NDA must contain data to
assess the safety and efficacy of the drug for the claimed indications in all relevant pediatric subpopulations and to support
dosing and administration for each pediatric subpopulation for which the drug is safe and effective. The FDA may grant
deferrals for submission of data or full or partial waivers.
Under the Prescription Drug User Fee Act, or PDUFA, as amended, each NDA must be accompanied by an
application user fee. The FDA adjusts the PDUFA user fees on an annual basis. According to the FDA’s fee schedule,
effective through September 30, 2017, the user fee for an application requiring clinical data, such as an NDA, is
$2,038,100. PDUFA also imposes an annual product fee for human drugs ($97,750) and an annual establishment fee
($512,200) on facilities used to manufacture prescription drugs. Fee waivers or reductions are available in certain
circumstances, including a waiver of the application fee for the first application filed by a small business. Additionally, no
user fees are assessed on NDAs for products designated as orphan drugs, unless the product also includes a non-orphan
indication.
The FDA reviews all NDAs submitted before it accepts them for filing and may request additional information
rather than accepting an NDA for filing. The FDA conducts a preliminary review of an NDA within 60 days of receipt and
informs the sponsor by the 74th day after FDA’s receipt of the submission to determine whether the application is
sufficiently complete to permit substantive review. Once the submission is accepted for filing, the FDA begins an in-depth
review of the NDA. Under the goals and policies agreed to by the FDA under PDUFA, the FDA has 10 months from the
filing date in which to complete its initial review of a standard NDA and respond to the applicant, and six months from
the filing date for a “priority review” NDA. The FDA does not always meet its PDUFA goal dates for standard and priority
review NDAs, and the review process is often significantly extended by FDA requests for additional information or
clarification.
After the NDA submission is accepted for filing, the FDA reviews the NDA to determine, among other things,
whether the proposed drug is safe and effective for its intended use, and whether the drug is being manufactured in
accordance with cGMP to assure and preserve the drug’s identity, strength, quality and purity. The FDA may refer
applications for drugs or drug candidates that present difficult questions of safety or efficacy to an advisory committee,
typically a panel that includes clinicians and other experts, for review, evaluation and a recommendation as to whether the
application should be approved and under what conditions. The FDA is not bound by the recommendations of an advisory
committee, but it considers such recommendations carefully when making decisions. The FDA may re-analyze the clinical
trial data, which can result in extensive discussions between the FDA and us during the review process.
Before approving an NDA, the FDA will conduct a pre-approval inspection of the manufacturing facilities for
the new drug to determine whether they comply with cGMPs. The FDA will not approve the drug unless it determines that
the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent
production of the drug within required specifications. In addition, before approving an NDA, the FDA may also audit data
from clinical trials to ensure compliance with GCP requirements. After the FDA evaluates the application, manufacturing
process and manufacturing facilities where the drug product and/or its API will be produced, it may issue an approval
letter or a Complete Response Letter. An approval letter authorizes commercial marketing of the drug with specific
prescribing information for specific indications. A Complete Response Letter indicates that the review cycle of the
application is complete and the application is not ready for approval. A Complete Response Letter usually describes all of
the specific deficiencies in the NDA identified by the FDA. The Complete Response Letter may require additional clinical
data and/or an additional pivotal clinical trial(s), and/or other significant, expensive and time-consuming requirements
related to clinical trials, pre-clinical studies or manufacturing. If a Complete Response Letter is issued, the applicant may
either resubmit the NDA, addressing all of the deficiencies identified in the letter, or withdraw the application. Even if
such data and information is submitted, the FDA may ultimately decide that the NDA does not satisfy the criteria for
approval. Data obtained from clinical trials are not always conclusive and the FDA may interpret data differently than we
interpret the same data.
If a drug receives regulatory approval, the approval may be limited to specific diseases and dosages or the
indications for use may otherwise be limited. Further, the FDA may require that certain contraindications, warnings or
precautions be included in the drug labeling or may condition the approval of the NDA on other changes to the proposed
labeling, development of adequate controls and specifications, or a commitment to conduct post-market testing or clinical
trials and surveillance to monitor the effects of approved drugs. For example, the FDA may require Phase 4 testing which
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involves clinical trials designed to further assess a drug’s safety and effectiveness and may require testing and surveillance
programs to monitor the safety of approved drugs that have been commercialized. The FDA may also place other
conditions on approvals including the requirement for a REMS to ensure that the benefits of a drug or biological product
outweigh its risks. If the FDA concludes a REMS is needed, the sponsor of the NDA must submit a proposed REMS. The
FDA will not approve the NDA without an approved REMS, if required. A REMS could include medication guides,
physician communication plans, or elements to assure safe use, such as restricted distribution methods, patient registries
and other risk minimization tools. Any of these limitations on approval or marketing could restrict the commercial
promotion, distribution, prescription or dispensing of drugs. Drug approvals may be withdrawn for non-compliance with
regulatory standards or if problems occur following initial marketing.
Section 505(b)(2) NDAs
NDAs for most new drug products are based on two full clinical studies which must contain substantial evidence
of the safety and efficacy of the proposed new product. These applications are submitted under Section 505(b)(1) of the
FDCA. The FDA is, however, authorized to approve an alternative type of NDA under Section 505(b)(2) of the FDCA.
This type of application allows the applicant to rely, in part, on the FDA’s previous findings of safety and efficacy for a
similar product, or published literature. Specifically, Section 505(b)(2) applies to NDAs for a drug for which the
investigations made to show whether or not the drug is safe for use and effective in use and relied upon by the applicant
for approval of the application “were not conducted by or for the applicant and for which the applicant has not obtained a
right of reference or use from the person by or for whom the investigations were conducted.”
Section 505(b)(2) authorizes the FDA to approve an NDA based on safety and effectiveness data that were not
developed by the applicant. NDAs filed under Section 505(b)(2) may provide an alternate and potentially more expeditious
pathway to FDA approval for new or improved formulations or new uses of previously approved products. If the 505(b)(2)
applicant can establish that reliance on the FDA’s previous approval is scientifically appropriate, the applicant may
eliminate the need to conduct certain pre-clinical or clinical studies of the new product. The FDA may also require
companies to perform additional studies or measurements to support the change from the approved product. The FDA may
then approve the new drug candidate for all or some of the label indications for which the referenced product has been
approved, as well as for any new indication sought by the Section 505(b)(2) applicant.
Abbreviated New Drug Applications for Generic Drugs
In 1984, with passage of the Drug Price Competition and Patent Term Restoration Act of 1984, commonly
referred to as the Hatch-Waxman Act, Congress authorized the FDA to approve generic drugs that are the same as drugs
previously approved by the FDA under the NDA provisions of the statute. To obtain approval of a generic drug, an
applicant must submit an abbreviated new drug application, or ANDA, to the agency. In support of such applications, a
generic manufacturer may rely on the pre-clinical and clinical testing previously conducted for a drug product previously
approved under an NDA, known as the reference listed drug, or RLD.
Specifically, in order for an ANDA to be approved, the FDA must find that the generic version is identical to the
RLD with respect to the active ingredients, the route of administration, the dosage form, and the strength of the drug. At
the same time, the FDA must also determine that the generic drug is “bioequivalent” to the innovator drug. Under the
statute, a generic drug is bioequivalent to a RLD if “the rate and extent of absorption of the drug do not show a significant
difference from the rate and extent of absorption of the listed drug.”
Upon approval of an ANDA, the FDA indicates that the generic product is “therapeutically equivalent” to the
RLD and it assigns a therapeutic equivalence rating to the approved generic drug in its publication “Approved Drug
Products with Therapeutic Equivalence Evaluations,” also referred to as the “Orange Book.” Physicians and pharmacists
consider an “AB” therapeutic equivalence rating to mean that a generic drug is fully substitutable for the RLD. In addition,
by operation of certain state laws and numerous health insurance programs, FDA’s designation of an “AB” rating often
results in substitution of the generic drug without the knowledge or consent of either the prescribing physician or patient.
Special FDA Expedited Review and Approval Programs
The FDA has various programs, including Fast Track Designation, accelerated approval, priority review and
Breakthrough Therapy Designation, that are intended to expedite or simplify the process for the development and FDA
review of drugs that are intended for the treatment of serious or life threatening diseases or conditions and demonstrate the
potential to address unmet medical needs. The purpose of these programs is to provide important new drugs to patients
earlier than under standard FDA review procedures.
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Fast Track Designation
To be eligible for a Fast Track Designation, the FDA must determine, based on the request of a sponsor, that a
drug is intended to treat a serious or life threatening disease or condition for which there is no effective treatment and
demonstrates the potential to address an unmet medical need for the disease or condition. Under the fast track program,
the sponsor of a drug candidate may request FDA to designate the product for a specific indication as a fast track product
concurrent with or after the filing of the IND for the drug candidate. The FDA must make a fast track designation
determination within 60 days after receipt of the sponsor’s request.
In addition to other benefits, such as the ability to use surrogate endpoints and have greater interactions with
FDA, FDA may initiate review of sections of a fast track product’s NDA before the application is complete. This rolling
review is available if the applicant provides, and FDA approves, a schedule for the submission of the remaining information
and the applicant pays applicable user fees. However, FDA’s time period goal for reviewing a fast track application does
not begin until the last section of the NDA is submitted. In addition, the fast track designation may be withdrawn by FDA
if FDA believes that the designation is no longer supported by data emerging in the clinical trial process.
Priority Review
The FDA may give a priority review designation to drugs that offer major advances in treatment, or provide a
treatment where no adequate therapy exists. A priority review means that the goal for the FDA to review an application is
six months, rather than the standard review of 10 months under current PDUFA guidelines. These 6- and 10-month review
periods are measured from the “filing” date rather than the receipt date for NDAs for new molecular entities, which
typically adds approximately two months to the timeline for review and decision from the date of submission. Most
products that are eligible for Fast Track Designation are also likely to be considered appropriate to receive a priority
review.
Breakthrough Therapy Designation
Under the provisions of the new Food and Drug Administration Safety and Innovation Act, or FDASIA, enacted
by Congress in 2012, a sponsor can request designation of a drug candidate as a “breakthrough therapy.” A breakthrough
therapy is defined as a drug that is intended, alone or in combination with one or more other drugs, to treat a serious or
life-threatening disease or condition, and preliminary clinical evidence indicates that the drug may demonstrate substantial
improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects
observed early in clinical development. Drugs designated as breakthrough therapies are also eligible for accelerated
approval. The FDA may take certain actions, such as holding timely meetings and providing advice, intended to expedite
the development and review of an application for approval of a breakthrough therapy.
Accelerated Approval
FDASIA also codified and expanded on FDA’s accelerated approval regulations, under which FDA may approve
a drug for a serious or life-threatening illness that provides meaningful therapeutic benefit over existing treatments based
on a surrogate endpoint that is reasonably likely to predict clinical benefit, or on a clinical endpoint that can be measured
earlier than irreversible morbidity or mortality, that is reasonably likely to predict an effect on irreversible morbidity or
mortality or other clinical benefit. This determination takes into account the severity, rarity or prevalence of the disease or
condition and the availability or lack of alternative treatments. As a condition of approval, the FDA may require a sponsor
of a drug receiving accelerated approval to perform Phase 4 or post-marketing studies to verify and describe the predicted
effect on irreversible morbidity or mortality or other clinical endpoint, and the drug may be subject to accelerated
withdrawal procedures. All promotional materials for drug candidates approved under accelerated regulations are subject
to prior review by the FDA.
Even if a product qualifies for one or more of these programs, the FDA may later decide that the product no
longer meets the conditions for qualification or decide that the time period for FDA review or approval will not be
shortened. Furthermore, Fast Track Designation, priority review, accelerated approval and Breakthrough Therapy
Designation, do not change the standards for approval and may not ultimately expedite the development or approval
process.
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Pediatric Trials
Under the Pediatric Research Equity Act of 2003, an NDA or supplement thereto must contain data that are
adequate to assess the safety and effectiveness of the drug product for the claimed indications in all relevant pediatric
subpopulations, and to support dosing and administration for each pediatric subpopulation for which the product is safe
and effective. With the enactment of FDASIA, a sponsor who is planning to submit a marketing application for a drug that
includes a new active ingredient, new indication, new dosage form, new dosing regimen or new route of administration
must also submit an initial Pediatric Study Plan, or PSP, within sixty days of an end-of-Phase II meeting or as may be
agreed between the sponsor and FDA. The initial PSP must include an outline of the pediatric study or studies that the
sponsor plans to conduct, including study objectives and design, age groups, relevant endpoints and statistical approach,
or a justification for not including such detailed information, and any request for a deferral of pediatric assessments or a
full or partial waiver of the requirement to provide data from pediatric studies along with supporting information. FDA
and the sponsor must reach agreement on the PSP. A sponsor can submit amendments to an agreed-upon initial PSP at any
time if changes to the pediatric plan need to be considered based on data collected from pre-clinical studies, early phase
clinical trials, and/or other clinical development programs.
Orphan Drug Designation and Exclusivity
Under the Orphan Drug Act, FDA may designate a drug product as an “orphan drug” if it is intended to treat a
rare disease or condition (generally meaning that it affects fewer than 200,000 individuals in the United States, or more in
cases in which there is no reasonable expectation that the cost of developing and making a drug product available in the
United States for treatment of the disease or condition will be recovered from sales of the product). A company must
request orphan product designation before submitting an NDA. If the request is granted, FDA will disclose the identity of
the therapeutic agent and its potential use. Orphan product designation does not convey any advantage in or shorten the
duration of the regulatory review and approval process, but the product will be entitled to orphan product exclusivity,
meaning that FDA may not approve any other applications for the same product for the same indication for seven years,
except in certain limited circumstances. Competitors may receive approval of different products for the indication for
which the orphan product has exclusivity and may obtain approval for the same product but for a different indication. If a
drug or drug product designated as an orphan product ultimately receives regulatory approval for an indication broader
than what was designated in its orphan product application, it may not be entitled to exclusivity.
Post-Marketing Requirements
Following approval of a new drug, a pharmaceutical company and the approved drug are subject to continuing
regulation by the FDA, including, among other things, monitoring and recordkeeping activities, reporting to the applicable
regulatory authorities of adverse experiences with the drug, providing the regulatory authorities with updated safety and
efficacy information, drug sampling and distribution requirements, and complying with applicable promotion and
advertising requirements, which include, among others, standards for direct-to-consumer advertising, restrictions on
promoting drugs for uses or in patient populations that are not described in the drug’s approved labeling (known as “off-
label use”), limitations on industry-sponsored scientific and educational activities, and requirements for promotional
activities involving the internet. Although physicians may legally prescribe drugs for off-label uses, manufacturers may
not market or promote such off-label uses. Modifications or enhancements to the drug or its labeling or changes of the site
of manufacture are often subject to the approval of the FDA and other regulators, which may or may not be received or
may result in a lengthy review process.
Prescription drug advertising is subject to federal, state and foreign regulations. In the United States, the FDA
regulates prescription drug promotion, including direct-to-consumer advertising. Prescription drug promotional materials
must be submitted to the FDA in conjunction with their first use. Any distribution of prescription drugs and pharmaceutical
samples must comply with the U.S. Prescription Drug Marketing Act a part of the FDCA.
In the United States, once a drug is approved, its manufacture is subject to comprehensive and continuing
regulation by the FDA. The FDA regulations require that drugs be manufactured in specific approved facilities and in
accordance with cGMP. Applicants may also rely on third parties for the production of clinical and commercial quantities
of drugs, and these third parties must operate in accordance with cGMP regulations. cGMP regulations require among
other things, quality control and quality assurance as well as the corresponding maintenance of records and documentation
and the obligation to investigate and correct any deviations from cGMP. Drug manufacturers and other entities involved
in the manufacture and distribution of approved drugs are required to register their establishments with the FDA and certain
state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance
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with cGMP and other laws. Accordingly, manufacturers must continue to expend time, money, and effort in the area of
production and quality control to maintain cGMP compliance. These regulations also impose certain organizational,
procedural and documentation requirements with respect to manufacturing and quality assurance activities. NDA holders
using third-party contract manufacturers, laboratories or packagers are responsible for the selection and monitoring of
qualified firms, and, in certain circumstances, qualified suppliers to these firms. These firms and, where applicable, their
suppliers are subject to inspections by the FDA at any time, and the discovery of violative conditions, including failure to
conform to cGMP, could result in enforcement actions that interrupt the operation of any such facilities or the ability to
distribute drugs manufactured, processed or tested by them. Discovery of problems with a drug after approval may result
in restrictions on a drug, manufacturer, or holder of an approved NDA, including, among other things, recall or withdrawal
of the drug from the market, and may require substantial resources to correct.
The FDA also may require post-approval testing, sometimes referred to as Phase 4 testing, risk minimization
action plans and post-marketing surveillance to monitor the effects of an approved drug or place conditions on an approval
that could restrict the distribution or use of the drug. Discovery of previously unknown problems with a drug or the failure
to comply with applicable FDA requirements can have negative consequences, including adverse publicity, judicial or
administrative enforcement, warning letters from the FDA, mandated corrective advertising or communications with
doctors, and civil or criminal penalties, among others. Newly discovered or developed safety or effectiveness data may
require changes to a drug’s approved labeling, including the addition of new warnings and contraindications, and also may
require the implementation of other risk management measures. Also, new government requirements, including those
resulting from new legislation, may be established, or the FDA’s policies may change, which could delay or prevent
regulatory approval of our drugs under development.
Other U.S. Regulatory Matters
Manufacturing, sales, promotion and other activities following drug approval are also subject to regulation by
numerous regulatory authorities in addition to the FDA, including, in the United States, the Centers for Medicare &
Medicaid Services, other divisions of the Department of Health and Human Services, the Drug Enforcement
Administration for controlled substances, the Consumer Product Safety Commission, the Federal Trade Commission, the
Occupational Safety & Health Administration, the Environmental Protection Agency and state and local governments. In
the United States, sales, marketing and scientific/educational programs must also comply with state and federal fraud and
abuse laws. Pricing and rebate programs must comply with the Medicaid rebate requirements of the U.S. Omnibus Budget
Reconciliation Act of 1990 and more recent requirements in the Affordable Care Act. If drugs are made available to
authorized users of the Federal Supply Schedule of the General Services Administration, additional laws and requirements
apply. The handling of any controlled substances must comply with the U.S. Controlled Substances Act and Controlled
Substances Import and Export Act. Drugs must meet applicable child-resistant packaging requirements under the
U.S. Poison Prevention Packaging Act. Manufacturing, sales, promotion and other activities are also potentially subject to
federal and state consumer protection and unfair competition laws.
The distribution of pharmaceutical drugs is subject to additional requirements and regulations, including
extensive record-keeping, licensing, storage and security requirements intended to prevent the unauthorized sale of
pharmaceutical drugs.
The failure to comply with regulatory requirements subjects firms to possible legal or regulatory action.
Depending on the circumstances, failure to meet applicable regulatory requirements can result in criminal prosecution,
fines or other penalties, injunctions, recall or seizure of drugs, total or partial suspension of production, denial or
withdrawal of product approvals, or refusal to allow a firm to enter into supply contracts, including government contracts.
In addition, even if a firm complies with FDA and other requirements, new information regarding the safety or efficacy of
a product could lead the FDA to modify or withdraw product approval. Prohibitions or restrictions on sales or withdrawal
of future products marketed by us could materially affect our business in an adverse way.
Changes in regulations, statutes or the interpretation of existing regulations could impact our business in the future by
requiring, for example: (i) changes to our manufacturing arrangements; (ii) additions or modifications to product labeling;
(iii) the recall or discontinuation of our products; or (iv) additional record-keeping requirements. If any such changes were
to be imposed, they could adversely affect the operation of our business.
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U.S. Patent Term Restoration and Marketing Exclusivity
Depending upon the timing, duration and specifics of the FDA approval of our drug candidates, some of our
U.S. patents may be eligible for limited patent term extension under the Hatch-Waxman Act. The Hatch-Waxman Act
permits a patent restoration term of up to five years as compensation for patent term lost during product development and
the FDA regulatory review process. However, patent term restoration cannot extend the remaining term of a patent beyond
a total of 14 years from the product’s approval date. The patent term restoration period is generally one-half the time
between the effective date of an IND and the submission date of an NDA plus the time between the submission date of an
NDA and the approval of that application. Only one patent applicable to an approved drug is eligible for the extension and
the application for the extension must be submitted prior to the expiration of the patent. The USPTO, in consultation with
the FDA, reviews and approves the application for any patent term extension or restoration.
Marketing exclusivity provisions under the FDCA can also delay the submission or the approval of certain
marketing applications. The FDCA provides a five-year period of non-patent marketing exclusivity within the
United States to the first applicant to obtain approval of an NDA for a NCE. A drug is a NCE if the FDA has not previously
approved any other new drug containing the same active moiety, which is the molecule or ion responsible for the action
of the drug substance. During the exclusivity period, the FDA may not accept for review an ANDA, or a 505(b)(2) NDA
submitted by another company for another drug based on the same active moiety, regardless of whether the drug is intended
for the same indication as the original innovator drug or for another indication, where the applicant does not own or have
a legal right of reference to all the data required for approval. However, an application may be submitted after four years
if it contains a certification of patent invalidity or non-infringement to one of the patents listed with the FDA by the
innovator NDA holder. Specifically, the applicant must certify with respect to each relevant patent that: the required patent
information has not been filed; the listed patent has expired; the listed patent has not expired, but will expire on a particular
date and approval is sought after patent expiration, or the listed patent is invalid, unenforceable or will not be infringed by
the new product. A certification that the new product will not infringe the already approved product’s listed patents or that
such patents are invalid or unenforceable is called a Paragraph IV certification. If the applicant does not challenge the
listed patents or indicate that it is not seeking approval of a patented method of use, the ANDA application will not be
approved until all the listed patents claiming the referenced product have expired. If the ANDA applicant has provided a
Paragraph IV certification to the FDA, the applicant must also send notice of the Paragraph IV certification to the NDA
and patent holders once the ANDA has been accepted for filing by the FDA. The NDA and patent holders may then initiate
a patent infringement lawsuit in response to the notice of the Paragraph IV certification. The filing of a patent infringement
lawsuit within 45 days after the receipt of a Paragraph IV certification automatically prevents the FDA from approving the
ANDA until the earlier of 30 months after the receipt of the Paragraph IV notice, expiration of the patent, or a decision in
the infringement case that is favorable to the ANDA applicant.
The FDCA also provides three years of marketing exclusivity for an NDA, or supplement to an existing NDA if
new clinical investigations, other than bioavailability studies, that were conducted or sponsored by the applicant are
deemed by the FDA to be essential to the approval of the application, for example new indications, dosages or strengths
of an existing drug. This three-year exclusivity covers only the modification for which the drug received approval on the
basis of the new clinical investigations and does not prohibit the FDA from approving ANDAs for drugs containing the
active agent for the original indication or condition of use. Five-year and three-year exclusivity will not delay the
submission or approval of a full NDA. However, an applicant submitting a full NDA would be required to conduct or
obtain a right of reference to all of the pre-clinical studies and adequate and well-controlled clinical trials necessary to
demonstrate safety and effectiveness. Orphan drug exclusivity, as described above, may offer a seven-year period of
marketing exclusivity, except in certain circumstances. Pediatric exclusivity is another type of regulatory market
exclusivity in the United States. Pediatric exclusivity, if granted, adds six months to existing exclusivity periods and patent
terms. This six-month exclusivity, which runs from the end of other exclusivity protection or patent term, may be granted
based on the voluntary completion of a pediatric trial in accordance with an FDA-issued “Written Request” for such a trial.
Rest of the World Regulation of Pharmaceutical Product Development and Approval
For other countries outside of China and the United States, such as countries in Europe, Latin America or other
parts of Asia, the requirements governing the conduct of clinical trials, drug licensing, pricing and reimbursement vary
from country to country. In all cases the clinical trials must be conducted in accordance with GCP requirements and the
applicable regulatory requirements and ethical principles.
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If we fail to comply with applicable foreign regulatory requirements, we may be subject to, among other things,
fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and
criminal prosecution.
PRC Coverage and Reimbursement
Coverage and Reimbursement
Historically, most of Chinese healthcare costs have been borne by patients out-of-pocket, which has limited the
growth of more expensive pharmaceutical products. However, in recent years the number of people covered by government
and private insurance has increased. According to the PRC National Bureau of Statistics, as of December 31, 2015,
666 million urban employees and residents in China were enrolled in the national medical insurance program, representing
an increase of 11.4% from December 31, 2014. The PRC government has announced a plan to give every person in China
access to basic healthcare by year 2020.
Reimbursement under the National Medical Insurance Program
The national medical insurance program was adopted pursuant to the Decision of the State Council on the
Establishment of the Urban Employee Basic Medical Insurance Program issued by the State Council on December 14,
1998, under which all employers in urban cities are required to enroll their employees in the basic medical insurance
program and the insurance premium is jointly contributed by the employers and employees. The State Council promulgated
Guiding Opinions of the State Council about the Pilot Urban Resident Basic Medical Insurance on July 10, 2007, under
which urban residents of the pilot district, rather than urban employees, may voluntarily join Urban Resident Basic Medical
Insurance. The State Council expects the pilot Urban Resident Basic Medical Insurance to cover the whole nation by 2010.
Participants of the national medical insurance program and their employers, if any, are required to contribute to
the payment of insurance premiums on a monthly basis. Program participants are eligible for full or partial reimbursement
of the cost of medicines included in the National Medicines Catalogue. The Notice Regarding the Tentative Measures for
the Administration of the Scope of Medical Insurance Coverage for Pharmaceutical Products for Urban Employees, jointly
issued by several authorities including the Ministry of Labor and Social Security and the Ministry of Finance, or MOF,
among others, on May 12, 1999, provides that a pharmaceutical product listed in the National Medicines Catalogue must
be clinically needed, safe, effective, reasonably priced, easy to use, available in sufficient quantity, and must meet the
following requirements:
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(cid:120)
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it is set forth in the Pharmacopoeia of the PRC;
it meets the standards promulgated by the CFDA; and
if imported, it is approved by the CFDA for import.
Factors that affect the inclusion of a pharmaceutical product in the National Medicines Catalogue include whether
the product is consumed in large volumes and commonly prescribed for clinical use in the PRC and whether it is considered
to be important in meeting the basic healthcare needs of the general public.
The PRC Ministry of Labor and Social Security, together with other government authorities, has the power to
determine the medicines included in the National Medicines Catalogue, which is divided into two parts, Part A and Part B.
Provincial governments are required to include all Part A medicines listed on the National Medicines Catalogue in their
provincial National Medicines Catalogue, but have the discretion to adjust upwards or downwards by no more than 15%
from the number of Part B medicines listed in the National Medicines Catalogue. As a result, the contents of Part B of the
provincial National Medicines Catalogues may differ from region to region in the PRC.
Patients purchasing medicines included in Part A of the National Medicines Catalogue are entitled to
reimbursement of the entire amount of the purchase price. Patients purchasing medicines included in Part B of the National
Medicines Catalogue are required to pay a certain percentage of the purchase price and obtain reimbursement for the
remainder of the purchase price. The percentage of reimbursement for Part B medicines differs from region to region in
the PRC.
The total amount of reimbursement for the cost of medicines, in addition to other medical expenses, for an
individual participant under the national medical insurance program in a calendar year is capped at the amounts in such
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participant’s individual account under such program. The amount in a participant’s account varies, depending on the
amount of contributions from the participant and his or her employer.
National Essential Medicines List
On August 18, 2009, MOH and eight other ministries and commissions in the PRC issued the Provisional
Measures on the Administration of the National Essential Medicines List, which was later amended in 2015, and the
Guidelines on the Implementation of the Establishment of the National Essential Medicines System, which aim to promote
essential medicines sold to consumers at fair prices in the PRC and ensure that the general public in the PRC has equal
access to the drugs contained in the National Essential Medicines List. MOH promulgated the National Essential Medicines
List (Catalog for the Basic Healthcare Institutions) on August 18, 2009, and promulgated the revised National Essential
Medicines List on March 13, 2013. According to these regulations, basic healthcare institutions funded by government,
which primarily include county-level hospitals, county-level Chinese medicine hospitals, rural clinics and community
clinics, shall store up and use drugs listed in the National Essential Medicines List. The drugs listed in National Essential
Medicines List shall be purchased by centralized tender process and shall be subject to the price control by the NDRC.
Remedial drugs in the National Essential Medicines List are all listed in the National Medicines Catalogue and the entire
amount of the purchase price of such drugs is entitled to reimbursement.
Price Controls
According to the Pharmaceutical Administration Law and the Regulations of Implementation of the Law of the
People’s Republic of China on the Administration of Pharmaceuticals, the pharmaceutical products are subject to fixed or
directive pricing system or to be adjusted by the market. Those pharmaceutical products included in the National Medicines
Catalogues and the National Essential Medicines List and those drugs the production or trading of which are deemed to
constitute monopolies, are subject to price controls by the PRC government in the form of fixed retail prices or maximum
retail prices. Manufacturers and distributors cannot set the actual retail price for any given price controlled product above
the maximum retail price or deviate from the fixed retail price set by the government. The retail prices of pharmaceutical
products that are subject to price controls are administered by the NDRC and provincial and regional price control
authorities. From time to time, the NDRC publishes and updates a list of pharmaceutical products that are subject to price
controls. According to the Notice Regarding Measures on Government Pricing of Pharmaceutical Products issued by
NDRC effective on December 25, 2000, maximum retail prices for pharmaceutical products shall be determined based on
a variety of factors, including production costs, the profit margins that the relevant government authorities deem
reasonable, the product’s type, and quality, as well as the prices of substitute pharmaceutical products.
Further, pursuant to the Notice Regarding Further Improvement of the Order of Market Price of Pharmaceutical
Products and Medical Services jointly promulgated by the NDRC, the State Council Legislative Affairs Office and the
State Council Office for Rectifying, the MOH, the CFDA, the MOFCOM, the MOF and Ministry of Labor and Social
Security on May 19, 2006, the PRC government exercises price control over pharmaceutical products included in the
National Medicines Catalogues and made an overall adjustment of their prices by reducing the retail price of certain
overpriced pharmaceutical products and increasing the retail price of certain underpriced pharmaceutical products in
demand for clinical use but that have not been produced in large quantities by manufacturers due to their low retail price
level. In particular, the retail price charged by hospitals at the county level or above may not exceed 115% of the
procurement cost of the relevant pharmaceutical products or 125% for Chinese herbal pieces.
On February 9, 2015, the General Office of the State Council issued the Guiding Opinion on Enhancing
Consolidated Procurement of Pharmaceutical Products by Public Hospitals. The opinion encourages public hospitals to
consolidate their demands and to play a more active role in the procurement of pharmaceutical products. Hospitals are
encouraged to directly settle the prices of pharmaceutical products with manufacturers. Consolidated procurement of
pharmaceutical products should facilitate hospital reform, reduce patient costs, prevent corrupt conducts, promote fair
competition and induce the healthy growth of the pharmaceutical industry. According to the opinion, provincial tendering
processes will continue to be used for the pricing of essential drugs and generic drugs with significant demands, and
transparent multi-party price negotiation will be used for some patented drugs and exclusive drugs.
On April 26, 2014, the NDRC issued the Notice on Issues concerning Improving the Price Control of Low Price
Drugs, or the Low Price Drugs Notice, together with the LPDL. According to the Low Price Drugs Notice, for drugs with
relatively low average daily costs within the current government-guided pricing scope (low price drugs), the maximum
retail prices set by the government were cancelled. Within the standards of average daily costs, the specific purchase and
sale prices are be fixed by the producers and operators based on the drug production costs, market supply and demand and
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market competition. The standards of average daily costs of low price drugs are determined by the NDRC in consideration
of the drug production costs, market supply and demand and other factors and based on the current maximum retail prices
set by the government (or the national average bid-winning retail prices where the government does not set the maximum
retail prices) and the average daily dose calculated according to the package insert. The current standards for the daily cost
of low price chemical pharmaceuticals and of low price traditional Chinese medicine pharmaceuticals are less than
RMB3.0 per day and RMB5.0 per day respectively.
On May 4, 2015, the NDRC, the National Health and Family Planning Commission, the CFDA, MOFCOM and
three other departments issued Opinions on Promoting Drug Pricing Reform. Under these opinions, beginning on June 1,
2015, the restrictions on the prices of the drugs that were subject to government pricing were cancelled except for narcotic
drugs and Class I psychotropic drugs which are still subject to maximum factory prices and maximum retail prices set by
the NDRC. The medical insurance regulatory authority now has the power to prescribe the standards, procedures, basis
and methods of the payment for drugs paid by medical insurance funds. The prices of patented drugs are set through
transparent and public negotiation among multiple parties. The prices for blood products not listed in the National
Medicines Catalogue, immunity and prevention drugs that are purchased by the Chinese government in a centralized
manner, and AIDS antiviral drugs and contraceptives provided by the Chinese government for free, are set through a
tendering process. Except as otherwise mentioned above, the prices for other drugs may be determined by the
manufacturers and the operators on their own on the basis of production or operation costs and market supply and demand.
Centralized Procurement and Tenders
The Guiding Opinions concerning the Urban Medical and Health System Reform, promulgated on February 21,
2000, aim to provide medical services with reasonable price and quality to the public through the establishment of an urban
medical and health system. One of the measures used to realize this aim is the regulation of the purchasing process of
pharmaceutical products by medical institution. Accordingly, the MOH and other relevant government authorities have
promulgated a series of regulations and releases in order to implement the tender requirements.
According to the Notice on Issuing Certain Regulations on the Trial Implementation of Centralised Tender
Procurement of Drugs by Medical Institutions promulgated on July 7, 2000 and the Notice on Further Improvement on the
Implementation of Centralised Tender Procurement of Drugs by Medical Institutions promulgated on August 8, 2001,
medical institutions established by county or higher level government are required to implement centralised tender
procurement of drugs.
The MOH promulgated the Working Regulations of Medical Institutions for Procurement of Drugs by Centralised
Tender and Price Negotiations (for Trial Implementation), or the Centralised Procurement Regulations, on March 13,
2002, and promulgated Sample Document for Medical Institutions for Procurement of Drugs by Centralised Tender and
Price Negotiations (for Trial Implementation), or the Centralised Tender Sample Document in November 2001, as
amended in 2010, to implement the tender process requirements and ensure the requirements are followed uniformly
throughout the country. The Centralised Tender Regulations and the Centralised Tender Sample Document provide rules
for the tender process and negotiations of the prices of drugs, operational procedures, a code of conduct and standards or
measures of evaluating bids and negotiating prices. On January 17, 2009, the MOH, the CFDA and other four national
departments jointly promulgated the Opinions on Further Regulating Centralised Procurement of Drugs by Medical
Institutions. According to the notice, public medical institutions owned by the government at the county level or higher or
owned by state-owned enterprises (including state-controlled enterprises) shall purchase pharmaceutical products through
centralised procurement. Each provincial government shall formulate its catalogue of drugs subject to centralised
procurement. Specifically, the procurement could be achieved through public tendering, online bidding, centralized price
negotiations and online competition platform. Except for drugs in the National Essential Medicines List (the procurement
of which shall comply with the relevant rules on National Essential Medicines List, certain pharmaceutical products which
are under the national government’s special control and traditional Chinese medicines, in principle, all drugs used by
public medical institutions shall be covered by the catalogue of drugs subject to centralised procurement. On July 7, 2010,
the MOH and six other ministries and commissions jointly promulgated the Working Regulations of Medical Institutions
for Centralised Procurement of Drugs to further regulate the centralised procurement of drugs and clarify the code of
conduct of the parties in centralised drug procurement.
The centralized tender process takes the form of public tender operated and organized by provincial or municipal
government agencies. The centralised tender process is in principle conducted once every year in all provinces and cities
in China. Drug manufacturing enterprises, in principle, shall bid directly for the centralized tender process. Certain related
parties, however, may be engaged to act as bidding agencies for the centralised tender process. Such intermediaries are
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not permitted to engage in the distribution of drugs and must have no conflict of interest with the organizing government
agencies. The bids are assessed by a committee composed of pharmaceutical experts who will be randomly selected from
a database of experts approved by the relevant government authorities. The committee members assess the bids based on
a number of factors, including but not limited to, bid price, product quality, clinical effectiveness, qualifications and
reputation of the manufacturer, and after-sale services. Only pharmaceuticals that have won in the centralised tender
process may be purchased by public medical institutions funded by government in the relevant region.
U.S. Coverage and Reimbursement
Successful sales of our products or drug candidates in the U.S. market, if approved, will depend, in part, on the
extent to which our drugs will be covered by third-party payors, such as government health programs, commercial
insurance and managed healthcare organizations. Patients who are provided with prescriptions as part of their medical
treatment generally rely on such third-party payors to reimburse all or part of the costs associated with their prescriptions
and therefore adequate coverage and reimbursement from such third-party payors are critical to new product acceptance.
These third-party payors are increasingly reducing reimbursements for medical drugs and services. Additionally, the
containment of healthcare costs has become a priority of federal and state governments, and the prices of drugs have been
a focus in this effort. The U.S. government, state legislatures and foreign governments have shown significant interest in
implementing cost-containment programs, including price controls, restrictions on reimbursement and requirements for
substitution of generic drugs. Adoption of price controls and cost-containment measures, and adoption of more restrictive
policies in jurisdictions with existing controls and measures, could further limit our net revenue and results. Decreases in
third-party reimbursement for our drug candidates, if approved, or a decision by a third-party payor to not cover our drug
candidates could reduce physician usage of such drugs and have a material adverse effect on our sales, results of operations
and financial condition.
The Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or the MMA, established the
Medicare Part D program to provide a voluntary prescription drug benefit to Medicare beneficiaries. Under Part D,
Medicare beneficiaries may enroll in prescription drug plans offered by private entities that provide coverage of outpatient
prescription drugs. Unlike Medicare Part A and B, Part D coverage is not standardized. Part D prescription drug plan
sponsors are not required to pay for all covered Part D drugs, and each drug plan can develop its own drug formulary that
identifies which drugs it will cover and at what tier or level. However, Part D prescription drug formularies must include
drugs within each therapeutic category and class of covered Part D drugs, though not necessarily all the drugs in each
category or class. Any formulary used by a Part D prescription drug plan must be developed and reviewed by a pharmacy
and therapeutic committee. Medicare payment for some of the costs of prescription drugs may increase demand for drugs
for which we receive regulatory approval. However, any negotiated prices for our drugs covered by a Part D prescription
drug plan will likely be lower than the prices we might otherwise obtain. Moreover, while the MMA applies only to drug
benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in
setting their own payment rates. Any reduction in payment that results from the MMA may result in a similar reduction in
payments from non-governmental payors.
The American Recovery and Reinvestment Act of 2009 provides funding for the federal government to compare
the effectiveness of different treatments for the same illness. The plan for the research was published in 2012 by the
U.S. Department of Health and Human Services, the Agency for Healthcare Research and Quality and the National
Institutes for Health, and periodic reports on the status of the research and related expenditures will be made to Congress.
Although the results of the comparative effectiveness studies are not intended to mandate coverage policies for public or
private payors, if third-party payors do not consider a drug to be cost-effective compared to other available therapies, they
may not cover such drugs as a benefit under their plans or, if they do, the level of payment may not be sufficient.
The Affordable Care Act, enacted in March 2010, has had a significant impact on the health care industry. The
Affordable Care Act expanded coverage for the uninsured while at the same time containing overall healthcare costs. With
regard to pharmaceutical products, the Affordable Care Act, among other things, addressed a new methodology by which
rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that are inhaled, infused,
instilled, implanted or injected, increased the minimum Medicaid rebates owed by manufacturers under the Medicaid Drug
Rebate Program and extended the rebate program to individuals enrolled in Medicaid managed care organizations,
established annual fees and taxes on manufacturers of certain branded prescription drugs, and a new Medicare Part D
coverage gap discount program, in which manufacturers must agree to offer 50% point-of-sale discounts off negotiated
prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the
manufacturer’s outpatient drugs to be covered under Medicare Part D.
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In addition, other legislative changes have been proposed and adopted in the United States since the Affordable
Care Act was enacted. On August 2, 2011, the Budget Control Act of 2011 among other things, created measures for
spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted
deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby
triggering the legislation’s automatic reduction to several government programs. This includes aggregate reductions to
Medicare payments to providers of up to 2% per fiscal year, started in April 2013, and, due to subsequent legislative
amendments, will stay in effect through 2025 unless additional Congressional action is taken. On January 2, 2013,
President Obama signed into law the American Taxpayer Relief Act of 2012, which among other things, also reduced
Medicare payments to several providers, including hospitals, imaging centers and cancer treatment centers, and increased
the statute of limitations period for the government to recover overpayments to providers from three to five years.
Rest of the World Coverage and Reimbursement
In some foreign countries, the proposed pricing for a drug must be approved before it may be lawfully marketed. The
requirements governing drug pricing vary widely from country to country. For example, the European Union provides
options for its member states to restrict the range of medicinal drugs for which their national health insurance systems
provide reimbursement and to control the prices of medicinal drugs for human use. A member state may approve a specific
price for the medicinal drug or it may instead adopt a system of direct or indirect controls on the profitability of our
company placing the medicinal drug on the market. Historically, drugs launched in the European Union do not follow
price structures of the United States and generally tend to be significantly lower.
Other Healthcare Laws
Other PRC Healthcare Laws
Advertising of Pharmaceutical Products
Pursuant to the Provisions for Drug Advertisement Examination, which were promulgated on March 13, 2007
and came into effect on 1 May 2007, an enterprise seeking to advertise its drugs must apply for an advertising approval
code. The validity term of an advertisement approval number for pharmaceutical drugs is one year. The content of an
approved advertisement may not be altered without prior approval. Where any alteration to the advertisement is needed, a
new advertisement approval number shall be obtained.
Packaging of Pharmaceutical Products
According to the Measures for The Administration of Pharmaceutical Packaging) effective on September 1, 1988,
pharmaceutical packaging must comply with the provisions of the national standard and professional standard. If there are
no standards above, the enterprise can formulate its own standard after obtaining the approval of the provincial level food
and drug administration or bureau of standards. The enterprise shall reapply for the relevant authorities if it needs to change
the packaging standard. Drugs without packing must not be sold in PRC (except for drugs needed by the army).
Labor Protection
Under the Labor Law of the PRC, effective on January 1, 1995 and subsequently amended on August 27, 2009,
the PRC Employment Contract Law, effective on January 1, 2008 and subsequently amended on December 28, 2012 and
the Implementing Regulations of the Employment Contract Law, effective on September 18, 2008, employers must
establish a comprehensive management system to protect the rights of their employees, including a system governing
occupational health and safety to provide employees with occupational training to prevent occupational injury, and
employers are required to truthfully inform prospective employees of the job description, working conditions, location,
occupational hazards and status of safe production as well as remuneration and other conditions as requested by the Labor
Contract Law of the PRC.
Pursuant to the Law of Manufacturing Safety of the People’s Republic of China effective on November 1, 2002
and subsequently amended on December 1, 2014, manufacturers must establish a comprehensive management system to
ensure manufacturing safety in accordance with applicable laws and regulations. Manufacturers not meeting relevant legal
requirements are not permitted to commence their manufacturing activities.
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Pursuant to the Administrative Measures Governing the Production Quality of Pharmaceutical Products effective
on March 1, 2011, manufacturers of pharmaceutical products are required to establish production safety and labor
protection measures in connection with the operation of their manufacturing equipment and manufacturing process.
Pursuant to applicable PRC laws, rules and regulations, including the Social Insurance Law which became
effective on July 1, 2011, the Interim Regulations on the Collection and Payment of Social Security Funds which became
effective on January 22, 1999, the Interim Measures concerning the Maternity Insurance and the Regulations on Work-
related Injury Insurance which became effective on January 1, 2004 and were subsequently amended on December 20,
2010, employers are required to contribute, on behalf of their employees, to a number of social security funds, including
funds for basic pension insurance, unemployment insurance, basic medical insurance work-related injury insurance, and
maternity insurance. If an employer fails to make social insurance contributions timely and in full, the social insurance
collecting authority will order the employer to make up outstanding contributions within the prescribed time period and
impose a late payment fee at the rate of 0.05% per day from the date on which the contribution becomes due. If such
employer fails to make social insurance registration, the social insurance collecting authority will order the employer to
correct within the prescribed time period. The relevant administrative department may impose a fine equivalent to three
times the overdue amount and management personnel who are directly responsible can be fined RMB500 to RMB3,000 if
the employer fails to correct within the prescribed time period.
Commercial Bribery
Medical production and operation enterprises involved in criminal, investigation or administrative procedure for
commercial bribery will be listed in the Adverse Records of Commercial Briberies by provincial health and family
planning administrative department. Pursuant to the Provisions on the Establishment of Adverse Records of Commercial
Briberies in the Medicine Purchase and Sales Industry enforced on March 1, 2014 by the National Health and Family
Planning Commission, if medical production and operation enterprises be listed into the Adverse Records of Commercial
Briberies for the first time, their production shall not be purchased by public medical institutions, and medical and health
institutions receiving financial subsidies in local province in two years from public of the record, and public medical
institution, and medical and health institutions receiving financial subsidies in other province shall lower their rating in
bidding or purchasing process. If medical production and operation enterprises be listed into the Adverse Records of
Commercial Briberies twice or more times in five years, their production may not be purchased by public medical
institutions, and medical and health institutions receiving financial subsidies nationwide in two years from public of
the record.
As advised by our PRC legal advisor, from a PRC law perspective, a pharmaceutical company will not be
penalized by the relevant PRC government authorities merely by virtue of having contractual relationships with distributors
or third-party promoters who are engaged in bribery activities, so long as such pharmaceutical company and its employees
are not utilizing the distributors or third-party promoters for the implementation of, or acting in conjunction with them in,
the prohibited bribery activities. In addition, a pharmaceutical company is under no legal obligation to monitor the
operating activities of its distributors and third-party promoters, and will not be subject to penalties or sanctions by relevant
PRC government authorities as a result of failure to monitor their operating activities.
Product Liability
In addition to the strict new drug approval process, certain PRC laws have been promulgated to protect the rights
of consumers and to strengthen the control of medical products in the PRC. Under current PRC law, manufacturers and
vendors of defective products in the PRC may incur liability for loss and injury caused by such products. Pursuant to the
General Principles of the Civil Law of the PRC, or the PRC Civil Law, promulgated on April 12, 1986 and amended on
August 27, 2009, a defective product which causes property damage or physical injury to any person may subject the
manufacturer or vendor of such product to civil liability for such damage or injury.
On February 22, 1993 the Product Quality Law of the PRC, or the Product Quality Law, was promulgated to
supplement the PRC Civil Law aiming to define responsibilities for product quality, to protect the legitimate rights and
interests of the end-users and consumers and to strengthen the supervision and control of the quality of products. The
Product Quality Law was amended by the Ninth National People’s Congress on July 8, 2000. Pursuant to the amended
Product Quality Law, manufacturers who produce defective products may be subject to civil or criminal liability and have
their business licenses revoked.
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The Law of the PRC on the Protection of the Rights and Interests of Consumers was promulgated on October 13,
1993 and was amended on October 25, 2013 to protect consumers’ rights when they purchase or use goods and accept
services. All business operators must comply with this law when they manufacture or sell goods and/or provide services
to customers. Under the amendment on October 25, 2013, all business operators shall pay high attention to protect the
customers’ privacy which they obtain during the business operation. In addition, in extreme situations, pharmaceutical
product manufacturers and operators may be subject to criminal liabilities under applicable laws of the PRC if their goods
or services lead to the death or injuries of customers or other third parties.
PRC Tort Law
Under the Tort Law of the PRC which became effecting on July 1, 2010, if damages to other persons are caused
by defective products that are resulted from the fault of a third party such as the parties providing transportation or
warehousing, the producers and the sellers of the products have the right to recover their respective losses from such third
parties. If defective products are identified after they have been put into circulation, the producers or the sellers shall take
remedial measures such as issuance of warning, recall of products, etc. in a timely manner. The producers or the sellers
shall be liable under tort if they cause damages due to their failure to take remedial measures in a timely manner or have
not make efforts to take remedial measures, thus causing damages. If the products are produced and sold with known
defects, causing deaths or severe damage to the health of others, the infringed party shall have the right to claim respective
punitive damages in addition to compensatory damages.
Other PRC National- and Provincial-Level Laws and Regulations
We are subject to changing regulations under many other laws and regulations administered by governmental
authorities at the national, provincial and municipal levels, some of which are or may become applicable to our business.
Our hospital customers are also subject to a wide variety of laws and regulations that could affect the nature and scope of
their relationships with us.
For example, regulations control the confidentiality of patients’ medical information and the circumstances under
which patient medical information may be released for inclusion in our databases, or released by us to third parties. These
laws and regulations governing both the disclosure and the use of confidential patient medical information may become
more restrictive in the future.
We also comply with numerous additional state and local laws relating to matters such as safe working conditions,
manufacturing practices, environmental protection and fire hazard control. We believe that we are currently in compliance
with these laws and regulations; however, we may be required to incur significant costs to comply with these laws and
regulations in the future. Unanticipated changes in existing regulatory requirements or adoption of new requirements could
therefore have a material adverse effect on our business, results of operations and financial condition.
Other U.S. Healthcare Laws
We may also be subject to healthcare regulation and enforcement by the U.S. federal government and the states
where we may market our drug candidates, if approved. These laws include, without limitation, state and federal anti-
kickback, fraud and abuse, false claims, privacy and security and physician sunshine laws and regulations.
Anti-Kickback Statute
The federal Anti-Kickback Statute prohibits, among other things, any person from knowingly and willfully
offering, soliciting, receiving or providing remuneration, directly or indirectly, to induce either the referral of an individual,
for an item or service or the purchasing or ordering of a good or service, for which payment may be made under federal
healthcare programs such as the Medicare and Medicaid programs. The majority of states also have anti-kickback laws,
which establish similar prohibitions and in some cases may apply to items or services reimbursed by any third-party payor,
including commercial insurers. The Anti-Kickback Statute is subject to evolving interpretations. In the past, the
government has enforced the Anti-Kickback Statute to reach large settlements with healthcare companies based on sham
consulting and other financial arrangements with physicians. A person or entity does not need to have actual knowledge
of the statute or specific intent to violate it in order to have committed a violation. In addition, the government may assert
that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false
or fraudulent claim for purposes of the federal False Claims Act.
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False Claims
Additionally, the civil False Claims Act prohibits knowingly presenting or causing the presentation of a false,
fictitious or fraudulent claim for payment to the U.S. government. Actions under the False Claims Act may be brought by
the Attorney General or as a qui tam action by a private individual in the name of the government. Analogous state law
equivalents may apply and may be broader in scope than the federal requirements. Violations of the False Claims Act can
result in very significant monetary penalties and treble damages. The federal government is using the False Claims Act,
and the accompanying threat of significant liability, in its investigation and prosecution of pharmaceutical and
biotechnology companies throughout the U.S., for example, in connection with the promotion of products for unapproved
uses and other sales and marketing practices. The government has obtained multi-million and multi-billion dollar
settlements under the False Claims Act in addition to individual criminal convictions under applicable criminal statutes.
Given the significant size of actual and potential settlements, it is expected that the government will continue to devote
substantial resources to investigating healthcare providers’ and manufacturers’ compliance with applicable fraud and
abuse laws.
The federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, also created new federal
criminal statutes that prohibit among other actions, knowingly and willfully executing, or attempting to execute, a scheme
to defraud any healthcare benefit program, including private third-party payors, knowingly and willfully embezzling or
stealing from a healthcare benefit program, willfully obstructing a criminal investigation of a healthcare offense, and
knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or
fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. Similar to
the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific
intent to violate it in order to have committed a violation.
Payments to Physicians
There has also been a recent trend of increased federal and state regulation of payments made to physicians and
other healthcare providers. The Affordable Care Act, among other things, imposes new reporting requirements on drug
manufacturers for payments made by them to physicians and teaching hospitals, as well as ownership and investment
interests held by physicians and their immediate family members. Failure to submit required information may result in
civil monetary penalties of up to an aggregate of $150,000 per year (or up to an aggregate of $1 million per year for
“knowing failures”), for all payments, transfers of value or ownership or investment interests that are not timely, accurately
and completely reported in an annual submission. Drug manufacturers were required to begin collecting data on August 1,
2013 and submit reports to the government by March 31, 2014 and June 30, 2014, and the 90th day of each subsequent
calendar year. Certain states also mandate implementation of compliance programs, impose restrictions on drug
manufacturer marketing practices and/or require the tracking and reporting of gifts, compensation and other remuneration
to physicians.
Data Privacy and Security
We may also be subject to data privacy and security regulation by both the federal government and the states in
which we conduct our business. HIPAA, as amended by the Health Information Technology and Clinical Health Act, or
HITECH, and their respective implementing regulations, including the final omnibus rule published on January 25, 2013,
imposes specified requirements relating to the privacy, security and transmission of individually identifiable health
information. Among other things, HITECH makes HIPAA’s privacy and security standards directly applicable to “business
associates,” defined as independent contractors or agents of covered entities that create, receive, maintain or transmit
protected health information in connection with providing a service for or on behalf of a covered entity. HITECH also
increased the civil and criminal penalties that may be imposed against covered entities, business associates and possibly
other persons, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal
courts to enforce the federal HIPAA laws and seek attorney’s fees and costs associated with pursuing federal civil actions.
In addition, state laws govern the privacy and security of health information in certain circumstances, many of which differ
from each other in significant ways, thus complicating compliance efforts.
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PRC Regulation of Foreign Currency Exchange, Offshore Investment and State-Owned Assets
PRC Foreign Currency Exchange
Foreign currency exchange regulation in China is primarily governed by the following rules:
(cid:120) Foreign Currency Administration Rules (1996), as last amended on August 5, 2008, or the Exchange
Rules; and
(cid:120) Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), or the
Administration Rules.
Under the Exchange Rules, the renminbi is convertible for current account items, including the distribution of
dividends, interest payments, trade and service-related foreign exchange transactions. Conversion of renminbi for capital
account items, such as direct investment, loan, security investment and repatriation of investment, however, is still subject
to the SAFE.
Under the Administration Rules, foreign-invested enterprises may only buy, sell and/or remit foreign currencies
at those banks authorized to conduct foreign exchange business after providing valid commercial documents and, in the
case of capital account item transactions, obtaining approval from the SAFE. Capital investments by foreign-invested
enterprises outside of China are also subject to limitations, which include approvals by the Ministry of Commerce, the
SAFE and the NDRC.
Pursuant to the Circular on Further Improving and Adjusting the Direct Investment Foreign Exchange
Administration Policies, or Circular 59, promulgated by SAFE on November 19, 2012 and became effective on
December 17, 2012, approval is not required for the opening of and payment into foreign exchange accounts under direct
investment, for domestic reinvestment with legal income of foreign investors in China. Circular 59 also simplified the
capital verification and confirmation formalities for Chinese foreign invested enterprises and the foreign capital and foreign
exchange registration formalities required for the foreign investors to acquire the equities and foreign exchange registration
formalities required for the foreign investors to acquire the equities of Chinese party and other items. Circular 59 further
improved the administration on exchange settlement of foreign exchange capital of Chinese foreign invested enterprises.
Foreign Exchange Registration of Offshore Investment by PRC Residents
In July 2014, SAFE issued the Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC
Residents to Engage in Offshore Investment and Financing and Round Trip Investment via Special Purpose Vehicles, or
Circular 37, and its implementation guidelines, which abolishes and supersedes the SAFE’s Circular on Relevant Issues
Concerning Foreign Exchange Administration for PRC Residents to Engage in Financing and Round Trip Investment via
Overseas Special Purpose Vehicles, or Circular 75. Pursuant to Circular 37 and its implementation guidelines, PRC
residents (including PRC institutions and individuals) must register with local branches of SAFE in connection with their
direct or indirect offshore investment in an overseas special purpose vehicle, or SPV, directly established or indirectly
controlled by PRC residents for the purposes of offshore investment and financing with their legally owned assets or
interests in domestic enterprises, or their legally owned offshore assets or interests. Such PRC residents are also required
to amend their registrations with SAFE when there is a significant change to the SPV, such as changes of the PRC
individual resident’s increase or decrease of its capital contribution in the SPV, or any share transfer or exchange, merger,
division of the SPV. Failure to comply with the registration procedures set forth in Circular 37 may result in restrictions
being imposed on the foreign exchange activities of the relevant onshore company, including the payment of dividends
and other distributions to its offshore parent or affiliate, the capital inflow from the offshore entities and settlement of
foreign exchange capital, and may also subject relevant onshore company or PRC residents to penalties under PRC foreign
exchange administration regulations.
In February 2012, the SAFE promulgated the Notices on Issues Concerning the Foreign Exchange Administration
for Domestic Individuals Participating in Stock Incentive Plans of Overseas Publicly Listed Companies. Based on this
regulation, directors, supervisors, senior management and other employees of domestic subsidiaries or branches of a
company listed on an overseas stock market who are PRC citizens or who are non-PRC citizens residing in China for a
continuous period of not less than one year, subject to a few exceptions, are required to register with the SAFE or its local
counterparts by following certain procedures if they participate in any stock incentive plan of the company listed on an
overseas stock market. Foreign exchange income received from the sale of shares or dividends distributed by the overseas
listed company may be remitted into a foreign currency account of such PRC citizen or be exchanged into renminbi. Our
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PRC citizen employees who have been granted share options have been subject to these rules due to our listing on the AIM
market of the London Stock Exchange and will continue to be upon the listing of our ADSs on the Nasdaq Global Select
Market.
Regulation on Investment in Foreign-invested Enterprises
Pursuant to PRC law, the registered capital of a limited liability company is the total capital contributions
subscribed for by all the shareholders as registered with the company registration authority. A foreign-invested enterprise
also has a total investment limit that is approved by the MOFCOM or its local counterpart by reference to both its registered
capital and expected investment scale. The difference between the total investment limit and the registered capital of a
foreign-invested enterprise represents the foreign debt financing quota to which it is entitled (i.e., the maximum amount
of debt which the company may borrow from a foreign lender). A foreign-invested enterprise is required to obtain approval
from the government authority that approved its total investment limit for any increases to such limit. In accordance with
these regulations, we and our joint venture partners have contributed financing to our PRC subsidiaries and joint ventures
either in the form of capital contributions up to the registered capital amount or in the form of shareholder loans up to the
foreign debt quota. According to the financing needs of our PRC subsidiaries and joint ventures, we and our joint venture
partners have requested and received approvals from the government authorities for increases to the total investment limit
for certain of our PRC subsidiaries and joint ventures from time to time. As a result, these regulations have not had a
material impact to date on our ability to finance such entities.
Regulation on Dividend Distribution
The principal regulations governing distribution of dividends paid by wholly foreign-owned enterprises include:
(cid:120) Company Law of the PRC (1993), as amended in 1999, 2004, 2005 and 2013;
(cid:120) Foreign Investment Enterprise Law of the PRC (1986), as amended in 2000 and 2016; and
(cid:120)
Implementation Rules for the Foreign Investment Enterprise Law (1990), as amended in 2001 and 2014.
Under these laws and regulations, foreign-invested enterprises in China may pay dividends only out of their
accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, a
wholly foreign-owned enterprise in China is required to set aside at least 10.0% of its after-tax profit based on PRC
accounting standards each year to its general reserves until the accumulative amount of such reserves reach 50.0% of its
registered capital. These reserves are not distributable as cash dividends. The board of directors of a foreign-invested
enterprise has the discretion to allocate a portion of its after-tax profits to staff welfare and bonus funds, which may not be
distributed to equity owners except in the event of liquidation.
Filings and Approvals Relating to State-Owned Assets
Pursuant to applicable PRC state-owned assets administration laws and regulations, incorporating a joint venture
that will have investments of assets that are both state-owned and non-state-owned and investing in an entity that was
previously owned by a state-owned enterprise require the performance of an assessment of the relevant state-owned assets
and the filing of the assessment results with the competent state-owned assets administration, finance authorities or other
regulatory authorities and, if applicable, the receipt of approvals from such authorities.
Our joint venture partners were required to perform a state-owned asset assessment when Shanghai Hutchison
Pharmaceuticals and Hutchison Baiyunshan were incorporated and our joint venture partners contributed state-owned
assets, and when we invested in Hutchison Sinopharm, which was previously wholly-owned by Sinopharm, a state-owned
enterprise. In all three instances, our joint venture partners have informed us that they have duly filed the relevant state-
owned asset assessment results with, and obtained the requisite approvals from, the relevant governmental authorities as
required by the foregoing laws and regulations. Accordingly, we believe that such joint ventures are in full compliance
with all applicable laws and regulations governing the administration of state-owned assets, although we are currently
unable to obtain copies of certain filing and approval documents of our joint venture partners due to their internal
confidentiality constraints. We have not received any notice of warning or been subject to any penalty or other disciplinary
action from the relevant governmental authorities with respect to the applicable laws and regulations governing the
administration of state-owned assets.
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C.
Organizational Structure
Our organizational structure is set forth above under “—A. History and Development of the Company—Our
Organizational Structure.”
D.
Property, Plants and Equipment
We are headquartered in Hong Kong where we have our main administrative offices. Our joint ventures, Shanghai
Hutchison Pharmaceuticals and Hutchison Baiyunshan, operate two large-scale research and development and
manufacturing facilities for which they have obtained land use rights and property ownership certificates.
Shanghai Hutchison Pharmaceuticals relocated to its current facility outside of Shanghai in September 2016, and
it has an aggregate site area of approximately 78,000 square meters (compared to approximately 58,000 square meters for
its old facility located in Shanghai). Shanghai Hutchison Pharmaceuticals agreed to surrender its land use rights for the
property where its old production facility was located to the Shanghai government for cash consideration. The total cash
and subsidies paid by the Shanghai government to Shanghai Hutchison Pharmaceuticals was approximately $113 million,
including approximately $101 million for land compensation and $12 million in government subsidies related to research
and development projects.
Hutchison Baiyunshan’s facility is in Guangzhou and has an aggregate site area of approximately 90,000 square
meters. Hutchison Baiyunshan plans to sell its land use rights for an unused portion of its Guangzhou property to the local
government for cash consideration. Hutchison Baiyunshan also operates three Chinese GAP-certified cultivation sites
through its subsidiaries in Heilongjiang, Henan and Shandong provinces in China. In December 2016, its subsidiary
completed construction of new production facilities in Anhui province and plans to make use of the expanded production
capacity of these new facilities beginning in 2017.
Our and our joint ventures’ manufacturing operations consist of bulk manufacturing and formulation, fill, and
finish activities that produce products and drug candidates for both clinical and commercial purposes. Our manufacturing
capabilities have a large operation scale for our own-brand products. We and our joint ventures manufacture and sell about
6.0 billion doses of medicines a year, in the aggregate, through our well-established GMP manufacturing base. See “—
Our Commercial Platform—Prescription Drugs Business—Shanghai Hutchison Pharmaceuticals” and “—Our
Commercial Platform—Consumer Health Business—Hutchison Baiyunshan” for more details on our manufacturing
operations.
Please also see “—Our Commercial Platform—Our Prescription Drugs Business—Shanghai Hutchison
Pharmaceuticals” and “—Our Commercial Platform—Our Consumer Health Business—Hutchison Baiyunshan” for more
details on the new facilities of Shanghai Hutchison Pharmaceuticals and Hutchison Baiyunshan mentioned above.
Additionally, we rent and operate a 2,107 square meter manufacturing facility for fruquintinib in Suzhou, Jiangsu
Province in Eastern China, and own a 5,024 square meter facility in Shanghai which houses research and development
operations. We also lease 907 square meters of office space in Shanghai which houses Hutchison MediPharma’s
management and staff.
ITEM 4A. UNRESOLVED STAFF COMMENTS
None
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
You should read the following discussion and analysis of our financial condition and results of operations
together with Item 3.A. “Selected Financial Data,” our consolidated financial statements and the related notes and our
non-consolidated joint ventures’ consolidated financial statements and the related notes appearing elsewhere in this
annual report. This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended, or the Securities Act, and Section 21E of the Exchange Act, including, without limitation, statements
regarding our expectations, beliefs, intentions or future strategies that are signified by the words “expect,” “anticipate,”
“intend,” “believe,” or similar language. All forward-looking statements included in this annual report are based on
information available to us on the date hereof, and we assume no obligation to update any such forward-looking
statements. In evaluating our business, you should carefully consider the information provided under Item 3.D. “Risk
Factors.” Actual results could differ materially from those projected in the forward-looking statements. The terms
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“company,” “Chi-Med,” “we,” “our” or “us” as used herein refer to Hutchison China MediTech Limited and its
consolidated subsidiaries and joint ventures unless otherwise stated or indicated by context.
A. Operating Results.
Overview
We are an innovative biopharmaceutical company based in China aiming to become a global leader in the
discovery, development and commercialization of targeted therapies for oncology and immunological diseases.
Through our Innovation Platform, we have created a broad pipeline including eight clinical-stage drug candidates
that are being developed to cover a wide spectrum of solid tumors, hematological malignancies and immunology
applications which address significant unmet medical needs and large commercial opportunities. Our success in research
and development has led to partnerships with leading global pharmaceutical companies, AstraZeneca, Eli Lilly and Nestlé
Health Science, for three of our eight clinical drug candidates. We have taken a multi-source approach to funding in order
to continuously support our Innovation Platform. As of December 31, 2016, we and our collaboration partners have
invested over $400 million in our Innovation Platform.
We have also established a profitable commercial infrastructure in China to market and distribute prescription
drugs (under our Prescription Drugs business) and consumer health products (under our Consumer Health business) which
together form our Commercial Platform. Net income attributable to our company generated from the continuing operations
of our Commercial Platform was $22.8 million, $25.2 million and $70.3 million for the years ended December 31, 2014,
2015 and 2016, respectively, most of which was used to fund our Innovation Platform’s drug development programs. Net
income attributable to our company generated from the continuing operations of our Commercial Platform for the year
ended December 31, 2016 included a one-time gain of $40.4 million, net of tax, from land compensation and other
subsidies paid to Shanghai Hutchison Pharmaceuticals by the Shanghai government. In addition to helping to fund our
Innovation Platform, we anticipate that we will be able to utilize Shanghai Hutchison Pharmaceuticals and Hutchison
Sinopharm, our Commercial Platform’s two Prescription Drugs business joint ventures in which we nominate the
management and run the day-to-day operations, to support the launch of products from our Innovation Platform if they are
approved by the CFDA for use in China. Our Commercial Platform also includes our Consumer Health business, which is
a profitable and cash flow generating business selling primarily over-the-counter pharmaceutical products (through our
non-consolidated joint venture Hutchison Baiyunshan) and a range of health-focused consumer products.
Our consolidated revenue was $87.3 million, $178.2 million and $216.1 million for the years ended December 31,
2014, 2015 and 2016, respectively. Net income attributable to our company was $8.0 million for the year ended
December 31, 2015 and $11.7 million for the year ended December 31, 2016, compared to a net loss attributable to our
company of $7.3 million for the year ended December 31, 2014.
Basis of Presentation
Our consolidated statements of operations data presented herein for the years ended December 31, 2016, 2015
and 2014 and our consolidated balance sheet data presented herein as of December 31, 2016 and 2015 have been derived
from our audited consolidated financial statements, which were prepared in accordance with U.S. GAAP, and should be
read in conjunction with those statements which are included elsewhere in this annual report.
Our Shanghai Hutchison Pharmaceuticals and Hutchison Baiyunshan joint ventures under our Commercial
Platform and our Nutrition Science Partners joint venture under our Innovation Platform are accounted for under the equity
accounting method as non-consolidated entities in our consolidated financial statements, and their consolidated financial
statements are presented separately pursuant to IFRS (as issued by the IASB) elsewhere in this annual report.
We have two strategic business units, our Innovation Platform and our Commercial Platform, that offer different
products and services. Our Commercial Platform is further segregated into the two core business areas of Prescription
Drugs and Consumer Health. The presentation of financial data for our business units excludes certain unallocated costs
attributed to expenses incurred by our corporate head office. For more information on our corporate structure, see Item
4.A. “History and Development of the Company—Our Corporate Structure.”
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Factors Affecting our Results of Operations
Innovation Platform
Research and Development Expenses
We believe our ability to successfully develop innovative drug candidates through our Innovation Platform will
be the primary factor affecting our long-term competitiveness, as well as our future growth and development. Creating
high quality global first-in-class or best-in-class drug candidates requires a significant investment of resources over a
prolonged period of time, and a core part of our strategy is to continue making sustained investments in this area. As a
result of this commitment, our pipeline of drug candidates has been steadily advancing and expanding, with eight
clinical-stage drug candidates being investigated in a total of 30 clinical studies in various countries and further clinical
studies targeted to start in 2017, including four Phase III studies. For more information on the nature of the efforts and
steps necessary to develop our drug candidates, see Item 4.B. “Business Overview—Our Clinical Pipeline” and “Business
Overview—Regulation.”
All of the drug candidates of our Innovation Platform are still in development, and we have incurred and will
continue to incur significant research and development costs for pre-clinical studies and clinical trials. We expect that our
research and development expenses will significantly increase in future periods in line with the advance and expansion of
the development of our drug candidates.
We and our collaboration partners have invested over $400 million in our Innovation Platform as of December 31,
2016, with almost all of these funds used to pay for research and development expenses incurred for the development of
our drug candidates. These expenses include:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
employee compensation related expenses, including salaries, benefits and equity compensation expense;
expenses incurred for payments to contract research organizations, investigators and clinical trial sites
that conduct our clinical studies;
the cost of acquiring, developing, and manufacturing clinical study materials;
facilities, depreciation, and other expenses, which include office leases and other overhead
expenses; and
costs associated with pre-clinical activities and regulatory operations.
Research and development costs incurred by our Innovation Platform totaled $29.9 million, $47.4 million and
$66.9 million for the years ended December 31, 2014, 2015 and 2016, respectively, representing 34.3%, 26.6% and 31.0%
of our total consolidated revenue for the respective period. These figures do not include payments made by our
collaboration partners directly to third parties to help fund the research and development of our drug candidates.
We have historically been able to fund the research and development expenses for our Innovation Platform via a
range of sources, including financial support provided by our collaboration partners, cash flows generated from and
dividend payments from our Commercial Platform, the proceeds raised from our initial public offerings on the AIM market
of the London Stock Exchange and the Nasdaq Global Select Market, banks loans (some of which have been guaranteed
by Hutchison Whampoa Limited, a subsidiary of CK Hutchison) and investments from other third-parties such as Mitsui.
This diversified approach to funding allows us to not depend on any one method of funding for our Innovation
Platform, thereby reducing the risk that sufficient financing will be unavailable as we continue to accelerate the
development of our drug candidates.
For more information on the research and development expenses incurred for the development of our drug
candidates, see “—Key Components of Results of Operations—Research and Development Expenses.”
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Our Ability to Commercialize Our Drug Candidates
Our ability to generate revenue from our drug candidates depends on our ability to successfully complete clinical
trials for our drug candidates and obtain regulatory approvals for them in the United States, Europe, China and other
major markets.
We believe that our risk-balanced strategy of focusing on developing tyrosine kinase inhibitors for novel but
relatively well-characterized targets and for validated targets, in combination with our development of multiple drug
candidates concurrently and testing them for multiple indications, enhances the likelihood that our research and
development efforts will yield successful drug candidates. Nonetheless, we cannot be certain if any of our drug candidates
will receive regulatory approvals. Even if such approvals are granted, we will need to thereafter establish manufacturing
supply and engage in extensive marketing prior to generating any revenue from such drugs, and the ultimate commercial
success of our drugs will depend on their acceptance by patients, the medical community and third-party payors and their
ability to compete effectively with other therapies on the market.
As a first step towards commercialization, we have incurred a total of approximately $5.7 million in capital
expenditures between 2013 and 2016 to establish a GMP standard manufacturing (formulation) facility in Suzhou, China,
which now produces Phase III clinical supplies and will be used to produce fruquintinib, as well as our other drugs, for
commercial supply, if they receive regulatory approval.
The competitive environment is also an important factor with the commercial success of our potential global
first-in-class products, such as savolitinib and HMPL-523, depending on whether we are able to gain regulatory approvals
and quickly bring such products to market ahead of competing drug candidates being developed by other companies.
For those of our drug candidates to which we retain all rights worldwide, which currently include sulfatinib,
epitinib, theliatinib, HMPL-523, HMPL-689 and HMPL-453, if they remain unpartnered, we will be able to retain all the
profits if any of them is successfully commercialized, though we will need to bear all the costs associated with such drug
candidates. Conversely, as discussed below, for our drug candidates which are subject to collaboration partnerships, our
collaboration partners provide funding for development of the drug candidates but are entitled to retain a significant portion
of any revenue generated by such drug candidates.
Our Collaboration Partnerships
Our results of operations have been, and we expect them to continue to be, affected by our collaborations with
third parties for the development and commercialization of certain of our drug candidates. Currently, these mainly include
savolitinib (collaboration with AstraZeneca), fruquintinib (collaboration with Eli Lilly) and HM004-6599, a reformulation
of HMPL-004 (collaboration with Nestlé Health Science). In addition to providing us with invaluable technical expertise
and organizational resources, the financial support provided by these collaborations has been critical to our ability to
develop and quickly advance the pre-clinical and clinical studies of multiple drug candidates concurrently.
In particular, our partners cover a major portion of our research and development costs for drug candidates
developed in collaboration with them. For example, under our collaboration agreement with AstraZeneca, it is responsible
for a significant portion of the development costs for savolitinib. However, in August 2016 we and AstraZeneca amended
our collaboration agreement whereby we agreed to contribute additional funding for the research and development of
savolitinib in return for a larger share of the upside if and when savolitinib is approved. Under our collaboration agreement
with Eli Lilly, it is responsible for a significant portion of all fruquintinib development costs in an indication after we have
achieved proof-of-concept for such indication. We share the research and development costs for HMPL-004/HM004-
6599 with Nestlé Health Science through our non-consolidated joint venture Nutrition Science Partners.
In addition, under our licensing, co-development and commercialization agreements, we receive upfront
payments upon our entry into such agreements and milestone payments upon the achievement of certain development,
regulatory and commercial milestones as well as payments for our provision of research and development services for the
relevant drug candidate. Revenue recognized in our consolidated financial statements from such agreements with third
parties totaled $12.3 million, $44.1 million and $26.4 million for the years ended December 31, 2014, 2015 and 2016,
respectively. In addition, income from research and development services from both third parties and related parties totaled
$8.0 million, $8.0 million and $8.8 million for the years ended December 31, 2014, 2015 and 2016, respectively.
The achievement of milestones for our drug candidates, which is dependent on the outcome of clinical studies, is
subject to a high degree of uncertainty and, as a result, we cannot reasonably estimate when we can expect to receive future
137
milestone payments, or at all. For more information on our revenue recognition policies, see “—Critical Accounting
Policies and Estimates—Revenue recognition for research and development projects.” If we are unable to achieve
development milestones for our drug candidates or if our partners were to terminate their collaborative agreements with
us, payments for research and development services could also be affected.
Our collaboration partners are entitled to a significant proportion of any future revenue from commercialization
of our drug candidates developed in collaboration with them, as well as a degree of influence over the clinical development
process for such drug candidates. We may not be able to negotiate additional collaborations on a timely basis, on acceptable
terms, or at all, which would affect our ability to receive additional upfront, milestone or service payments in the future.
For more information regarding our collaboration agreements, see Item 4.B. “Business Overview—Overview of Our
Collaborations.”
Commercial Platform
China Government Healthcare Spending and Drug Pricing Policies
Revenue of our Prescription Drugs business and our non-consolidated joint venture Hutchison Baiyunshan, part
of our Consumer Health business, is directly affected by the sales volume and pricing of their own-brand prescription and
over-the-counter pharmaceutical products as well as third-party pharmaceutical products. The principal activities of our
Prescription Drugs business are described below under “—Ability of Prescription Drugs Business to Effectively Market
Own-Brand and Third-Party Drugs.” Hutchison Baiyunshan is a non-consolidated joint venture whose key products are
two generic over-the-counter therapies, Fu Fang Dan Shen tablets, a treatment for chest congestion and angina pectoris,
and Banlangen granules, an anti-viral treatment.
The sales volume of the products sold by these businesses is driven in part by the level of Chinese government
spending on healthcare and the coverage of Chinese government medical insurance schemes, which is correlated with
patient reimbursements for drug purchases, all of which have increased significantly in recent years as part of healthcare
reforms in China. For example, two of the main government medical insurance schemes in China are the Urban Employee
Basic Medical Insurance Program and the Urban Resident Basic Medical Insurance Program, which together had enrolled
approximately 48% of China’s population in 2015 compared to only 12% in 2006, according to the PRC National Bureau
of Statistics. The sales volume of pharmaceutical products in China is also influenced by their representation on the
Medicines Catalogue for the National Basic Medical Insurance, Labor Injury Insurance and Childbirth Insurance Systems
in China, or the National Medicines Catalogue, which determines eligibility for drug reimbursement, as well as their
representation on the National Essential Medicines List, which mandates distribution of drugs in China. Over 92% of all
pharmaceutical sales by Shanghai Hutchison Pharmaceuticals in 2016 and approximately 88% of pharmaceutical products
manufactured and sold by Hutchison Baiyunshan in 2016 were capable of being reimbursed under the National Medicines
Catalogue as of December 31, 2016.
In addition, among these two joint ventures an aggregate of 48 drugs, of which 13 were in active production as
of December 31, 2016, have been included on the National Essential Medicines List. She Xiang Bao Xin pills, Shanghai
Hutchison Pharmaceuticals’ top-selling drug, is one of the few proprietary drugs included on the National Essential
Medicines List. The National Medicines Catalogue and the National Essential Medicines List are subject to revision by
the government from time to time, and our results could be materially and adversely affected if any products sold by our
Prescription Drugs business or Hutchison Baiyunshan are removed from the National Medicines Catalogue or the National
Essential Medicines List. For more information, see Item 3.D. “Risk Factors—Risks Related to Our Commercial
Platform—Reimbursement may not be available for the products currently sold through our Commercial Platform or our
drug candidates in China, the United States or other countries, which could diminish our sales or affect our profitability.”
The sale prices of certain pharmaceutical products sold by our Commercial Platform joint ventures are also subject
to Chinese government’s price controls. In April 2014, the China National Development and Reform Commission, or the
NDRC, announced a new Low Price Drug List, or LPDL, aimed at making certain low-price pharmaceuticals more
profitable for manufacturers to produce. The LPDL established caps for the daily cost of chemical pharmaceuticals at less
than RMB3.0 per day and of traditional Chinese medicine pharmaceuticals at less than RMB5.0 per day. The LPDL gives
manufacturers flexibility to increase prices within the caps and exempts LPDL pharmaceuticals from hospital tenders. As
of the end of 2016, Hutchison Baiyunshan’s two top-selling products, Fu Fang Dan Shen tablets and Banlangen, cost
consumers RMB1.5 per day and RMB1.4 per day, respectively, and Shanghai Hutchison Pharmaceuticals’ two top-selling
products, She Xiang Bao Xin pills and Danning tablets, cost RMB3.5 and RMB3.3 per day, respectively, well below the
established caps for traditional Chinese medicine pharmaceuticals under the LPDL. As a result, we do not expect the LPDL
138
to exert downward pressure on the pricing of these products unless the government makes significant downward
adjustments to the LPDL price caps in the future.
Subject to customer demand, we have the ability to increase the prices for these products under the current LPDL
price caps. For example, during 2016 we began to phase in, on a province-by-province basis, a 30% price increase for She
Xiang Bao Xin pills from RMB2.7 per day to RMB3.5 per day. In addition, the pricing of Shanghai Hutchison
Pharmaceuticals’ prescription drugs are influenced by the outcomes of periodic provincial and municipal tender processes
organized by the various provincial or municipal government agencies in China. For more information, see Item 4.B.
“Business Overview—Coverage and Reimbursement—PRC Coverage and Reimbursement.”
Ability of Prescription Drugs Business to Effectively Market Own-Brand and Third-Party Drugs
A key component of our Commercial Platform is the extensive marketing network of our Prescription Drugs
business operated by our joint ventures Shanghai Hutchison Pharmaceuticals and Hutchison Sinopharm, which includes
approximately 2,200 medical sales staff covering approximately 18,700 hospitals in over 300 cities and towns in China.
Our results of operations are affected by the degree to which this marketing network is successful in not only marketing
its existing drugs but also new drugs either from third parties or developed by our Innovation Platform, if approved.
Historically, the substantial majority of revenue from our Prescription Drugs business was generated from sales of She
Xiang Bao Xin pills, a vasodilator, which represented approximately 90% of Shanghai Hutchison Pharmaceuticals’ total
revenue for the year ended December 31, 2014 and approximately 88% of its total revenue for the years ended
December 31, 2015 and 2016.
In addition, since our acquisition of a 51% equity interest in Hutchison Sinopharm in April 2014, we have been
in the process of migrating its operational focus from the legacy logistics and distribution business of a predecessor entity
previously operated by our joint venture partner toward providing a distribution and commercialization service for drugs
owned by third parties, which has a relatively higher profit margin.
In the second quarter of 2015, Hutchison Sinopharm became the exclusive first-tier distributor to distribute and
market AstraZeneca’s quetiapine tablets (under the Seroquel trademark), a medication to treat schizophrenia and bipolar
disorder, in all of China. In addition, Hutchison Sinopharm began to exclusively co-promote Merck Serono’s bisoprolol
fumarate tablets (under the Concor trademark), a beta-blocker to treat hypertension, in a few provinces in China in the first
quarter of 2015. Under these arrangements, Hutchison Sinopharm manages the distribution and logistics for these drugs
and Shanghai Hutchison Pharmaceuticals markets them. In January 2016, Hutchison Healthcare granted a license to
Hutchison Sinopharm to distribute Chi-Med-owned Zhi Ling Tong infant nutrition products, which had previously been
distributed by a third-party distributor.
Seroquel in particular represents a new therapeutic area for our medical sales representatives, and we believe that
in the limited time since we commenced our services for these drugs, we have been successful in generating sales. During
2016, Shanghai Hutchison Pharmaceuticals had a dedicated medical sales team of over 140 people to support the
commercialization of Seroquel.
In the longer term, the ability of our marketing network to adapt to effectively market such drugs to doctors and
hospitals, as well as other third-party drugs we may provide services for in the future and any oncology or immunology
drugs from our Innovation Platform, will impact our revenue and profitability. In addition, if we are unsuccessful in
marketing any third-party drugs, it may adversely affect our ability to enter into commercialization arrangements for
additional drugs or prevent us from expanding the geographic scope of existing arrangements.
Seasonality
The results of operations of our Commercial Platform are also affected by seasonal factors. Our Commercial
Platform typically experiences higher profits in the first half of the year due to the sale cycles of our distributors, whereby
they typically increase their inventories at the beginning of each year. In addition, in the second half of each year, our
Commercial Platform typically spends more on marketing activities to help reduce such inventory held by distributors.
We do not experience material seasonal variations in the results of our Innovation Platform.
Overall Economic Growth and Consumer Spending Patterns
The results of operations and growth of our Consumer Health business depend in part on continuing economic
growth and increasing income and health awareness of consumers in Asia. Although economic growth in China has slowed
139
in recent periods, it achieved a compound annual growth rate in real gross domestic product of approximately 7.7% from
2010 through 2016 according to the International Monetary Fund. As per capita disposable income has increased,
consumer spending has also increased, and consumers in China have tended to be more health conscious and to spend
more on organic and natural products for their families’ health and well-being. However, if customer demand for such
products does not achieve the levels we expect, whether due to slowing economic conditions, changing consumer tastes
or otherwise, the results of operations and growth of our Consumer Health business could be materially and adversely
affected.
Critical Accounting Policies and Significant Judgments and Estimates
Our discussion and analysis of operating results and financial condition are based upon our consolidated financial
statements. The preparation of consolidated financial statements requires us to estimate the effect of various matters that
are inherently uncertain as of the date of the consolidated financial statements. Each of these required estimates varies with
regard to the level of judgment involved and its potential impact on our reported financial results. Estimates are deemed
critical when a different estimate could have reasonably been used or where changes in the estimates are reasonably likely
to occur from period to period, and a different estimate would materially impact our financial position, changes in financial
position or results of operations. Our significant accounting policies are discussed under note 3 to our consolidated
financial statements included in this annual report. We believe the following critical accounting policies are affected by
significant judgments and estimates used in the preparation of our consolidated financial statements and that the judgments
and estimates are reasonable.
Revenue recognition for research and development projects
We recognize revenue for the performance of services when each of the following four criteria is met:
(i) persuasive evidence of an arrangement exists; (ii) services are rendered; (iii) the sales price is fixed or determinable;
and (iv) collectability is reasonably assured.
We have entered into research and developments agreements with collaborative partners for the research and
development of drug products. The terms of the agreements may include non-refundable upfront and licensing fees,
funding for research, development and manufacturing, milestone payments and royalties on any product sales derived from
collaborations. These multiple element arrangements are analyzed to determine whether the deliverables can be separated
or whether they must be accounted for as a single unit of accounting. This evaluation requires subjective determinations
and requires management to make judgments about the individual deliverables and whether such deliverables are separable
from the other aspects of the contractual relationship. In determining the units of accounting, management evaluates certain
criteria, including whether the deliverables have standalone value, based on the consideration of the relevant facts and
circumstances for each arrangement. We estimate the selling price for each unit of accounting and allocate the arrangement
consideration to each unit utilizing the relative selling price method.
We determine the estimated selling price for deliverables within each agreement using vendor-specific objective
evidence of selling price, if available, or third party evidence of selling price if vendor-specific objective evidence is not
available, or our best estimate of selling price if neither vendor-specific objective evidence nor third party evidence is
available. Determining the best estimate of selling price for a deliverable requires significant judgment. Our process for
determining the best estimate of selling price involves management’s judgment. Our process considers multiple factors
such as discounted cash flows, estimated expenses and other costs and available data, which may vary over time, depending
upon the circumstances, and relate to each deliverable. If the estimated obligation period of one or more deliverables
should change, the future amortization of the revenue would also change. Revenue allocated to an individual element is
recognized when all other revenue recognition criteria are met for that element.
These collaborative and other agreements may contain milestone payments. Revenues from milestones, if they
are considered substantive, are recognized upon successful accomplishment of the milestones. Determining whether a
milestone is substantive involves judgment, including an assessment of our involvement in achieving the milestones and
whether the amount of the payment is commensurate to our performance. If not considered substantive, milestones are
initially deferred and recognized over the remaining period of the performance obligation.
We recognize a contingent milestone payment as revenue in its entirety upon our achievement of the milestone.
A milestone is substantive if the consideration earned from the achievement of the milestone (i) is consistent with
performance required to achieve the milestone or the increase in value to the delivered item, (ii) relates solely to past
performance and (iii) is reasonable relative to all of the other deliverables and payments within the arrangement.
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Share-based Compensation
We account for share-based compensation by measuring and recognizing compensation expense for share options
made to employees and directors based on the estimated grant date fair values. We used the graded vesting method to
allocate compensation expense to reporting periods over each optionee’s requisite service period.
For share options granted to non-employees, we record such share options at fair value, periodically remeasure
awards to reflect the current fair value at each reporting period and recognize expense over the related service period.
We estimate the fair value of share options to employees, directors and non-employees using the Binominal
model. Determining the fair value of share options requires the use of highly subjective assumptions, including volatility,
risk free interest rate, dividend yield and the fair value of the underlying ordinary shares on the dates of grant or the dates
of modification, among other inputs. In addition, certain awards are share options underlying the ordinary shares of
Hutchison MediPharma Holdings, a subsidiary of the Company, which is a private company. In the absence of a public
trading market, the determination of the fair value of ordinary shares of Hutchison MediPharma Holdings involves
valuation of the business enterprise value, or BEV, and ordinary shares. The valuation was performed based on the
discounted cash flow method with significant assumptions including milestones payments and royalty income for various
drug products, as adjusted by probabilities for different milestones, the associated costs of development, and the discount
rate. The assumptions we use in the valuation model are based on future expectations combined with management
judgment, with inputs of numerous objective and subjective factors, to determine the fair value of Hutchison MediPharma
Holdings’ BEV and ordinary shares. The assumptions in determining the fair value of share options, Hutchison
MediPharma Holdings’ BEV and ordinary shares represent our best estimates, which involve inherent uncertainties and
the application of judgment. As a result, if factors change and different assumptions are used, our level of share-based
compensation could be materially different in the future.
We recognize compensation expense for only the portion of options that are expected to vest. Accordingly,
expected future forfeiture rates of share options have been estimated based on our historical forfeiture rate, as adjusted for
known trends. Forfeitures are estimated at the time of grant, with adjustments in future periods if actual forfeiture rates
vary from historical rates and estimates.
Impairment of long-lived property, plant and equipment and other definite life intangible assets
We assess property, plant and equipment and other definite life intangible assets for impairment when events or
changes in circumstances indicate that the carrying value of the assets or the asset grouping may not be recoverable. Factors
that we consider in deciding when to perform an impairment review include significant under-performance of a business
or product line in relation to expectations, significant negative industry or economic trends, and significant changes or
planned changes in our use of the assets. We measure the recoverability of assets that we will continue to use in our
operations by comparing the carrying value of the asset grouping to our estimate of the related total future undiscounted
net cash flows. If an asset grouping’s carrying value is not recoverable through the related undiscounted cash flows, the
asset grouping is considered to be impaired. We measure the impairment by comparing the difference between the asset
grouping’s carrying value and its fair value. Property, plant and equipment and other definite life intangible assets are
considered non-financial assets and are recorded at fair value only if an impairment charge is recognized.
Impairments are determined for groups of assets related to the lowest level of identifiable independent cash flows.
When we determine that the useful lives of assets are shorter than we had originally estimated, we accelerate the rate of
depreciation over the assets’ new, shorter useful lives.
Impairment of Goodwill
Goodwill is recorded when the purchase price of an acquisition exceeds the fair value of the net tangible and
identified intangible assets acquired. Goodwill is allocated to our reporting units based on the relative expected fair value
provided by the acquisition. Reporting units may be operating segments as a whole or an operation one level below an
operating segment, referred to as a component. The goodwill is attributable to the Prescription Drugs and Consumer
Health (PRC) business under the Commercial Platform.
We perform an annual impairment assessment in the fourth quarter of each year, or more frequently if indicators
of potential impairment exist, to determine whether it is more likely than not that the fair value of a reporting unit in which
goodwill resides is less than its carrying value. For reporting units in which this assessment concludes that it is more likely
than not that the fair value is more than its carrying value, goodwill is not considered impaired and we are not required to
141
perform the two-step goodwill impairment test. Qualitative factors considered in this assessment include industry and
market considerations, overall financial performance, and other relevant events and factors affecting the reporting unit.
Additionally, as part of this assessment, we may perform a quantitative analysis to support the qualitative factors above
by applying sensitivities to assumptions and inputs used in measuring a reporting unit’s fair value. For reporting units in
which the impairment assessment concludes that it is more likely than not that the fair value is less than its carrying value,
we perform the first step of the goodwill impairment test, which compares the fair value of the reporting unit to its carrying
value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that reporting unit,
goodwill is not considered impaired and we are not required to perform additional analysis. If the carrying value of the net
assets assigned to the reporting unit exceeds the fair value of the reporting unit, then we must perform the second step of
the goodwill impairment test to determine the implied fair value of the reporting unit’s goodwill. If we determine during
the second step that the carrying value of a reporting unit’s goodwill exceeds its implied fair value, we record an
impairment loss equal to the difference.
Our goodwill impairment test uses the income method to estimate a reporting unit’s fair value. The income
method is based on a discounted future cash flow approach that uses the following assumptions and inputs: revenue, based
on assumed market segment growth rates; estimated costs; and appropriate discount rates based on a reporting unit’s
weighted average cost of capital as determined by considering the observable weighted average cost of capital of
comparable companies. Our estimates of market segment growth, and costs are based on historical data, various internal
estimates, and a variety of external sources. These estimates are developed as part of our routine long-range planning
process. We test the reasonableness of the inputs and outcomes of our discounted cash flow analysis against available
comparable market data. A reporting unit’s carrying value represents the assignment of various assets and liabilities,
excluding certain corporate assets and liabilities, such as cash, investments, and debt. We performed the first step of the
goodwill impairment test and determined that the fair values of the reporting units exceeded their carrying values and
considered that impairment was not necessary for any reporting unit.
Impairment of equity method investments
Our equity method investments represent our investments in our non-consolidated joint ventures. All of these are
in non-marketable equity investments. Non-marketable equity investments are inherently risky, and their success depends
on their ability to generate revenues, remain profitable, operate efficiently and raise additional funds and other key business
factors. The companies could fail or not be able to raise additional funds when needed, or they may receive lower valuations
with less favorable investment terms. These events could cause our investments to become impaired. In addition, financial
market volatility could negatively affect our ability to realize value in our investments through liquidity events such as
initial public offerings, mergers, and private sales.
We consider if our equity method investments are impaired when events or circumstances suggest that their
carrying amounts may not be recoverable. An impairment charge would be recognized in earnings for a decline in value
that is determined to be other-than-temporary. This is based on our quantitative and qualitative analysis, which includes
assessing the severity and duration of the impairment and the likelihood of recovery before disposal. The investments are
recorded at fair value only if impairment is recognized. The recognition of impairment and measurement of fair value
requires significant judgment and includes a qualitative and quantitative analysis of events or circumstances that impact
the fair value of the investment. Qualitative analysis of our investments involves understanding our investee’s revenue and
earnings trends relative to pre-defined milestones and overall business prospects, the technological feasibility of our
investee’s products and technologies, the general market conditions in the investee’s industry or geographic area including
adverse regulatory or economic changes, and the management and governance structure of the investee.
For the years ended 2016, 2015 and 2014, we determined that events or circumstances did not suggest that the
carrying amount of each of our equity method investments may not be recoverable.
Revenue
Key Components of Results of Operations
We derive our consolidated revenue primarily from (i) licensing and collaboration projects conducted by our
Innovation Platform, which generates revenue in the form of upfront payments, milestone payments and the payments
received for providing research and development services for our collaboration projects and for other third parties and
related parties and (ii) the sales of goods by our Commercial Platform, which generates revenue from the distribution and
142
marketing of prescription pharmaceutical products by our Prescription Drugs business and consumer health products by
our Consumer Health business.
The following table sets forth the components of our consolidated revenue for the years indicated, which does
not include the revenue from our Commercial Platform’s non-consolidated joint ventures, Shanghai Hutchison
Pharmaceuticals and Hutchison Baiyunshan. Our revenue from sales of goods to related parties is attributable to sales of
goods by our Commercial Platform to indirect subsidiaries of CK Hutchison. Our revenue from research and development
projects for related parties is attributable to income for research and development services that we receive primarily from
Nutrition Science Partners, our non-consolidated joint venture with Nestlé Health Science.
Revenue
Innovation Platform:
Licensing and collaboration agreements—third parties
R&D services—third parties
R&D services—related parties
Total
Commercial Platform:
Sales of goods—third parties
Sales of goods—related parties
Total
Total
2016
Year Ended December 31,
2015
2014
$’000
%
$’000
%
$’000
%
26,444 12.2
0.2
355
3.9
8,429
35,228 16.3
44,060
2,573
5,383
52,016
24.7 12,336
3,696
1.5
4,312
3.0
29.2 20,344
14.1
4.2
5.0
23.3
9,794
67.7
171,058 79.2 118,113
9.0
8,074
76.7
180,852 83.7 126,187
216,080 100.0 178,203 100.0 87,329 100.0
66.3 59,162
7,823
70.8 66,985
4.5
4.5
Our Innovation Platform’s revenue primarily comprises revenue recognized in our consolidated financial
statements under licensing, co-development and commercialization agreements for upfront and milestone payments for
our drug candidates developed in collaboration with, among others, AstraZeneca and Eli Lilly, as well as income from
research and development services that we receive from certain of our partners, including, among others, AstraZeneca and
Eli Lilly as well as Nutrition Science Partners, our non-consolidated joint venture with Nestlé Health Science. Our
Innovation Platform revenue also includes income from research and development services provided to other third parties
and related parties, which are not related to our licensing and collaboration agreements.
The following table sets forth the components of our consolidated revenue contributed by the two core business
areas of our Commercial Platform, namely Prescription Drugs and Consumer Health, for the years indicated.
2016
Year Ended December 31,
2015
2014
$’000
%
$’000
%
$’000
%
Revenue from Commercial Platform
Prescription Drugs
Consumer Health
Total
149,861
30,991
74.9
25.1
180,852 100.0 126,187 100.0 66,985 100.0
83.6 50,202
16.4 16,783
82.9 105,478
20,709
17.1
Our Prescription Drugs business’s revenue primarily comprises revenue from the logistics and distribution
business of our consolidated Hutchison Sinopharm joint venture with Sinopharm, a leading distributor of pharmaceutical
and healthcare products and a leading supply chain service provider in China.
In April 2014, we invested approximately $9.6 million in cash for 51% of the equity interest in Hutchison
Sinopharm, which is a GSP-certified pharmaceutical and healthcare logistics, distribution and marketing company in
China. We intend to increasingly shift Hutchison Sinopharm’s business from the legacy logistics and distribution business
of a predecessor entity, which contributed substantially all of its revenue in 2014, approximately 80% of its revenue in
2015 and approximately 75% of its revenue in 2016, to focus on higher margin, full service, third-party drugs distribution
and commercialization services.
The revenue of our Prescription Drugs business’s non-consolidated joint venture, Shanghai Hutchison
Pharmaceuticals, the accounts of which are prepared in accordance with IFRS (as issued by the IASB) and whose revenue
143
is not included in our consolidated revenue, was $154.7 million, $181.1 million and $222.4 million for the years ended
December 31, 2014, 2015 and 2016, respectively. Shanghai Hutchison Pharmaceuticals is a joint venture with Shanghai
Pharmaceuticals, a leading pharmaceuticals company in China, and primarily focuses on the manufacture and sale of
prescription pharmaceutical products in China. We and Shanghai Pharmaceuticals each own 50% of this joint venture. We
have the right to nominate the general manager and other management of this joint venture and run its day-to-day
operations. The effect of Shanghai Hutchison Pharmaceuticals on our consolidated financial results is discussed below
under “—Equity in Earnings of Equity Investees.”
Our Consumer Health business’s revenue primarily comprises revenue from sales of organic and natural products
by Hutchison Hain Organic, our 50% consolidated joint venture with Hain Celestial, a Nasdaq-listed, natural and organic
food and personal care products company. We consolidate the results of this joint venture into our results of operations as
we own 50% of its equity and hold an additional casting vote in the event of a deadlock. To a lesser extent, our Consumer
Health business’s revenue was also contributed by Hutchison Healthcare, our wholly owned subsidiary which
manufactures and sells Zhi Ling Tong infant nutrition products, and Hutchison Consumer Products, a wholly owned
subsidiary that distributes and markets certain third-party consumer products.
The revenue of our Consumer Health business’s non-consolidated joint venture, Hutchison Baiyunshan, the
accounts of which are prepared in accordance with IFRS (as issued by the IASB) and which revenue is not included in our
consolidated revenue, was $243.7 million, $211.6 million and $224.1 million for the years ended December 31, 2014,
2015 and 2016, respectively. Hutchison Baiyunshan is a joint venture with Guangzhou Baiyunshan, a leading China-based
pharmaceutical company listed on the Hong Kong Stock Exchange and Shanghai Stock Exchange, and primarily focuses
on the manufacture and distribution of over-the-counter pharmaceutical products in China. Our interest in Hutchison
Baiyunshan is held through an 80%-owned subsidiary of ours, Hutchison BYS (Guangzhou) Holding Limited, which owns
50% of that joint venture, with the other 50% interest held by Guangzhou Baiyunshan. The effect of Hutchison Baiyunshan
on our consolidated financial results are discussed under “—Equity in Earnings of Equity Investees.”
Cost of Sales and Operating Expenses
Cost of Sales of Goods
Our cost of sales of goods are primarily attributable to the cost of sales of goods of our Prescription Drugs
business’s consolidated Hutchison Sinopharm joint venture as well as the cost of sales of goods of our Consumer Health
business. Our cost of sales of goods to related parties is attributable to sales of goods by our Consumer Health business to
indirect subsidiaries of CK Hutchison. The following table sets forth the components of our cost of sales of goods
attributable to third parties and related parties for the years indicated.
2016
Year Ended December 31,
2015
2014
$’000
%
$’000
%
$’000
%
Cost of Sales of Goods
Costs of sales of goods—third parties
Costs of sales of goods—related parties
Total
149,132 95.4 104,859
5,918
90.9
9.1
156,328 100.0 110,777 100.0 58,849 100.0
94.7 53,477
5,372
7,196
5.3
4.6
The following table sets forth the components of our cost of sales of goods attributable to the two core business
areas of our Commercial Platform, namely Prescription Drugs and Consumer Health, for the years indicated.
2016
Year Ended December 31,
2015
2014
$’000
%
$’000
%
$’000
%
Cost of Sales of Goods
Prescription Drugs
Consumer Health
Total
136,090
20,238
81.2
18.8
156,328 100.0 110,777 100.0 58,849 100.0
87.5 47,795
12.5 11,054
96,927
13,850
87.1
12.9
Our Prescription Drugs business’s cost of sales of goods primarily comprises the cost of goods sold and
transportation costs incurred by the legacy logistics and distribution activities of Hutchison Sinopharm, which commenced
144
operations in April 2014, as well as the third-party drugs distribution and commercialization business of Hutchison
Sinopharm beginning in the first quarter of 2015.
Our Consumer Health business’s cost of sales of goods primarily comprises the cost of goods sold by Hutchison
Hain Organic, which purchases its product inventory from Hain Celestial for distribution in Asian markets, as well as the
cost of goods sold, contract packing and transportation costs incurred by Hutchison Healthcare and Hutchison Consumer
Products.
Research and Development Expenses
Our research and development expenses are attributable to our Innovation Platform. These costs primarily
comprise the cost of research and development and clinical trials for our drug candidates, including personnel
compensation and related costs, clinical trial related costs such as payments to third-party contract research organizations,
and other research and development costs. The following table sets forth the components of our research and development
expenses for the years indicated.
2016
Year Ended December 31,
2015
2014
$’000
%
$’000
%
$’000
%
R&D Expenses
Innovation Platform:
Personnel compensation and related costs
Clinical trial related costs
Other costs
Total
21,698 32.4 17,339
38,589 57.7 24,690
5,339
45.3
41.6
13.1
66,871 100.0 47,368 100.0 29,914 100.0
36.6 13,554
52.1 12,440
3,920
11.3
6,584
9.9
The following table summarizes for the years indicated the research and development expenses incurred for the
development of our main drug candidates as well as the personnel compensation and other research and development
related costs incurred by our Innovation Platform.
2016
Year Ended December 31,
2015
2014
$’000
%
$’000
%
$’000
%
Savolitinib (targeting c-Met)
Fruquintinib (targeting VEGFR1/2/3)
Sulfatinib (targeting VEGFR/FGFR1/ CSF1-R)
Epitinib (targeting EGFRm+ with brain metastasis)
Theliatinib (targeting EGFR wild-type)
HMPL-523 (targeting Syk)
HMPL-689 (targeting (cid:51)(cid:44)(cid:22)(cid:46)(cid:303)(cid:12)
HMPL-453 (targeting FGFR)
Others & government grant
Total clinical trial related costs
Personnel compensation and related costs
Other costs
Total R&D expenses
7.4
4,945
1,994
699
4,112
2,084
1,231
(199)
2,419
12,908 19.3 12,951
6,105
10,815 16.2
629
3.0
397
1.0
2,880
6.2
1,587
3.1
1.8
593
(2,871)
(0.3)
38,589 57.7 24,690
21,698 32.4 17,339
5,339
18.1
23.8
3.4
2.0
0.5
4.4
0.2
0.9
(11.7)
41.6
45.3
13.1
66,871 100.0 47,368 100.0 29,914 100.0
5.1
5,400
27.3
7,128
12.9
1,010
1.3
585
0.8
152
6.1
1,311
3.4
72
1.3
268
(3,486)
(6.1)
52.1 12,440
36.6 13,554
3,920
11.3
6,584
9.9
In addition to the research and development costs shown above, the table below summarizes the research and
development costs incurred by our non-consolidated Nutrition Science Partners joint venture, primarily in relation to the
development of our drug candidate HMPL-004/HM004-6599. The losses incurred by this joint venture during the periods
indicated were reflected on our consolidated statements of operations in the equity in earnings of equity investees line
item. The consolidated financial statements of Nutrition Science Partners are prepared in accordance with IFRS (as issued
by the IASB) and are presented separately elsewhere in this annual report. For more information on this joint venture, see
“—Equity in Earnings of Equity Investees.”
145
Nutrition Science Partners
HMPL-004/HM004-6599 related development costs
Other research costs
Loss for the year
Equity in earnings of equity investee attributable to
Year Ended December 31,
2016
2015
2014
$’000 %
$’000
%
$’000
%
16.0
(1,180)
(7,302)
84.0
(8,482) 100.0
86.7
(3,512)
(4,040)
13.3
(7,552) 100.0 (16,812) 100.0
46.5 (14,572)
(2,240)
53.5
our company
(4,241)
50.0
(3,776)
50.0
(8,406)
50.0
We cannot determine with certainty the duration and completion costs of the current or future pre-clinical or
clinical studies of our drug candidates or if, when, or to what extent we will generate revenues from the commercialization
and sale of any of our drug candidates that obtain regulatory approval. We may never succeed in achieving regulatory
approval for any of our drug candidates. The duration, costs, and timing of clinical studies and development of our drug
candidates will depend on a variety of factors, including:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
the scope, rate of progress and expense of our ongoing as well as any additional clinical studies and other
research and development activities;
future clinical study results;
uncertainties in clinical study enrollment rate;
significant and changing government regulation; and
the timing and receipt of any regulatory approvals.
A change in the outcome of any of these variables with respect to the development of a drug candidate could
mean a significant change in the costs and timing associated with the development of that drug candidate. For more
information on the risks associated with the development of our drug candidates, see Item 3.D. “Risk Factors—Risks
Related to Our Innovation Platform—All of our drug candidates are still in development. If we are unable to obtain
regulatory approval and ultimately commercialize our drug candidates or experience significant delays in doing so, our
business will be materially harmed.”
Selling Expenses
The following table sets forth the components of our selling expenses for each of our business units for the years
indicated.
Selling Expenses
Commercial Platform:
Prescription Drugs
Consumer Health
Total
2016
Year Ended December 31,
2015
2014
$’000 %
$’000
%
$’000 %
38.0
9,592 53.3
8,406 46.7
62.0
17,998 100.0 10,209 100.0 4,112 100.0
65.0 1,561
35.0 2,551
6,635
3,574
Our selling expenses primarily comprise sales and marketing expenses and related personnel expenses incurred
by the Prescription Drugs and Consumer Health businesses of our Commercial Platform in their distribution and marketing
of pharmaceutical and consumer health products.
146
Administrative Expenses
The following table sets forth the components of our administrative expenses for each of our business units for
the years indicated. Administrative expenses are also incurred by our corporate head office, which are not allocated to our
business units.
Administrative Expenses
Innovation Platform
Commercial Platform:
Prescription Drugs
Consumer Health
Corporate Head Office
Total
2016
Year Ended December 31,
2015
2014
$’000
%
$’000
%
$’000
%
5,373 24.9
5,116
26.1
4,098
32.2
8.6
6.6
1,856
1,418
1,465
6.4
2,301
9.0
52.4
12,933 59.9 10,738
21,580 100.0 19,620 100.0 12,713 100.0
807
1,141
6,667
7.5
11.7
54.7
Our Innovation Platform’s administrative expenses primarily comprise the salaries and benefits of administrative
staff, office leases and other overhead expenses incurred by our Innovation Platform.
Our Prescription Drug business’s administrative expenses primarily comprise the salaries and benefits of
administrative staff, office leases and other overhead expenses incurred by Hutchison Sinopharm, in which we acquired a
majority interest in April 2014.
Our Consumer Health business’s administrative expenses primarily comprise the salaries and benefits of
administrative staff, office lease and other overhead expenses incurred by Hutchison Hain Organic and, to a lesser extent,
Hutchison Healthcare and Hutchison Consumer Products.
Our corporate head office administrative expenses, which are not allocated to our business units, primarily
comprises the salaries and benefits of our corporate head office employees and directors, office leases and other overhead
expenses.
Equity in Earnings of Equity Investees
We have historically derived a significant portion of our net income from continuing operations from our equity
in earnings of equity investees, which was primarily attributable to two of our Commercial Platform’s non-consolidated
joint ventures, Shanghai Hutchison Pharmaceuticals and Hutchison Baiyunshan, partially offset by losses at our Innovation
Platform’s non-consolidated joint venture, Nutrition Science Partners. Our equity in earnings of equity investees (net of
tax) contributed by the non-consolidated joint ventures from our Commercial Platform, Shanghai Hutchison
Pharmaceuticals and Hutchison Baiyunshan, was $23.6 million, $26.3 million and $70.5 million for the years ended
December 31, 2014, 2015 and 2016, respectively. Equity in earnings of Shanghai Hutchison Pharmaceuticals in 2016
included a one-time gain of $40.4 million, net of tax, relating to land compensation and other subsidies paid to Shanghai
Hutchison Pharmaceuticals by the Shanghai government.
Our equity in earnings of equity investees (net of tax) contributed by our Innovation Platform was losses of
$8.4 million, $3.8 million and $4.2 million for the years ended December 31, 2014, 2015 and 2016, respectively, which
were attributable to losses at Nutrition Science Partners, which has historically incurred significant losses attributable to
research and development expenses and the cost of clinical trials for the drug candidate HMPL-004/HM004-6599.
Revenue of Shanghai Hutchison Pharmaceuticals and Hutchison Baiyunshan are mainly affected by the sales
volume and pricing of their prescription and over-the-counter pharmaceutical products. For more information on the
factors affecting our Commercial Platform, see “—Factors Affecting Our Results of Operations—Commercial Platform.”
Nutrition Science Partners had no revenue for the years ended December 31, 2014, 2015 and 2016. The consolidated
financial statements of Shanghai Hutchison Pharmaceuticals, Hutchison Baiyunshan and Nutrition Science Partners are
presented separately elsewhere in this annual report.
147
The following table shows the revenue of these three non-consolidated joint ventures for the years indicated. The
consolidated financial statements of these joint ventures are prepared in accordance with IFRS (as issued by the IASB)
and are presented separately elsewhere in this annual report.
Revenue
Innovation Platform:
Nutrition Science Partners
Commercial Platform:
Shanghai Hutchison Pharmaceuticals
Hutchison Baiyunshan
Total
2016
Year Ended December 31,
2015
2014
$’000
%
$’000
%
$’000
%
— —
— —
— —
38.8
222,368
224,131
61.2
446,499 100.0 392,743 100.0 398,449 100.0
46.1 154,703
53.9 243,746
49.8 181,140
50.2 211,603
The following table shows the amount of equity in earnings of equity investees (net of tax), and as a percentage
of our total consolidated revenue, of our non-consolidated joint ventures for the years indicated.
Equity in earnings of equity investees, net of tax
Innovation Platform:
Nutrition Science Partners
Others
Commercial Platform:
Shanghai Hutchison Pharmaceuticals
Hutchison Baiyunshan
Total
Operating Profit/(Loss)
2016
Year Ended December 31,
2015
2014
$’000
%
$’000
%
$’000
%
(4,241)
47
(2.0)
—
(3,776)
6
(2.1)
—
(8,406)
(3)
(9.6)
—
60,250
27.9
4.7
10,188
66,244 30.6
15,654
10,688
22,572
8.8
6.0
12.7
13,201
10,388
15,180
15.1
11.9
17.4
Our operating profit/(loss) represents the sum of (i) losses or earnings of subsidiaries before interest income,
interest expenses and income tax expenses, (ii) interest income, (iii) our equity in earnings of equity investees, and (iv)
unallocated costs attributed to expenses incurred by our corporate head office. See note 28 to our consolidated financial
statements in this annual report for additional information.
Cayman Islands
Taxation
Hutchison China MediTech Limited is incorporated in the Cayman Islands. The Cayman Islands currently levies
no taxes on profits, income, gains or appreciation earned by individuals or corporations. In addition, our payment of
dividends, if any, is not subject to withholding tax in the Cayman Islands. For more information, see Item 10.E.
“Taxation—Overview of Tax Implications of Various Other Jurisdictions—Cayman Islands Taxation.”
People’s Republic of China
Our subsidiaries and joint ventures incorporated in the PRC are governed by the PRC Enterprise Income Tax
Law, or EIT Law, and regulations. Under the EIT Law, the standard Enterprise Income Tax, or EIT, rate is 25% on taxable
profits as reduced by available tax losses. Tax losses may be carried forward to offset any taxable profits for the following
five years. Our subsidiary, Hutchison MediPharma, was granted the Technological Advance Service Enterprise status from
January 1, 2010 to December 31, 2018, and the High and New Technology Enterprise status from January 1, 2014 to
December 31, 2016; whereas our non-consolidated joint ventures, Hutchison Baiyunshan and Shanghai Hutchison
Pharmaceuticals, were granted the High and New Technology Enterprise status from January 1, 2008 and 2005,
respectively, to December 31, 2016. Accordingly, these entities were subject to a preferential EIT rate of 15% for the years
ended December 31, 2014, 2015 and 2016.
148
For more information, see Item 10.E. “Taxation—Taxation in the PRC.”
Hong Kong
Hutchison China MediTech Limited and certain subsidiaries which have registered a branch in Hong Kong and
are Hong Kong tax residents, as well as our subsidiaries incorporated in Hong Kong, are governed by applicable Hong
Kong income tax laws and regulations. As such, they are subject to Hong Kong Profits Tax at the rate of 16.5% on their
assessable profits as reduced by available tax losses for the years ended December 31, 2014, 2015 and 2016.
According to the EIT Law, dividends declared after January 1, 2008 and paid by PRC foreign-invested enterprises
to their non-PRC parent companies will be subject to PRC withholding tax at 10% unless there is a tax treaty between the
PRC and the jurisdiction in which the overseas parent company is incorporated and which specifically exempts or reduces
such withholding tax, and such tax exemption or reduction is approved by the relevant PRC tax authorities. Pursuant to
the Arrangement between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of
Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income, or the Arrangement, signed on
Rider 4
August 21, 2006 and became effective on December 8, 2006, if the shareholder of the PRC enterprise is a Hong Kong tax
resident and directly holds a 25% or more equity interest in the PRC enterprise and is considered to be the beneficial owner
of dividends paid by the PRC enterprise, such withholding tax rate may be lowered to 5%, subject to approvals by the
relevant PRC tax authorities. For more information, see Item 10.E. “Taxation—Taxation in the PRC” and “Taxation—
Hong Kong Taxation.”
(US$’000) (US$’000)
2016
(US$’000)
2014
Cost
2015
As at January 1
Transfer to assets classified as held for sale (Note 20)
Exchange differences
As at December 31
Results of Operations
9,010
(172)
(601)
8,237
9,385
—
(375)
9,010
9,610
—
(225)
9,385
The following table sets forth a summary of our consolidated results of operations for the years indicated. This
information should be read together with our consolidated financial statements and related notes included elsewhere in
this annual report. Our operating results in any period are not necessarily indicative of the results that may be expected for
Rider 5
any future period.
Revenue
Revenue
Cost of sales of goods
Cost of sales of goods
Research and development expenses
Research and development expenses
Selling expenses
Selling expenses
Administrative expenses
Administrative expenses
Total other income/(expense)
Total other income/(expense)
Income tax expense
Income tax expense
Equity in earnings of equity investees, net of tax
Equity in earnings of equity investees, net of tax
Net income/(loss) from continuing operations
Net income/(loss) from continuing operations
Income from discontinued operations
Income from discontinued operations
Net income/(loss)
Net income/(loss)
Net income/(loss) attributable to our company
Net income/(loss) attributable to our company
2016
2016
Year Ended December 31,
Year Ended December 31,
2015
2015
2014
2014
%
%
%
%
$’000
$’000
%
$’000
$’000
%
$’000
$’000
87,329 100.0
178,203 100.0
216,080 100.0
100.0
87,329
100.0
178,203
216,080 100.0
(62.2) (58,849)
(67.4)
(156,328) (72.4) (110,777)
(67.4)
(62.2) (58,849)
(110,777)
(72.4)
(156,328)
(66,871) (31.0)
(34.3)
(26.6) (29,914)
(47,368)
(34.3)
(26.6) (29,914)
(47,368)
(31.0)
(66,871)
(4.7)
(5.7)
(10,209)
(17,998)
(4,112)
(8.3)
(4.7)
(4,112)
(5.7)
(10,209)
(8.3)
(17,998)
(14.6)
(11.0) (12,713)
(19,620)
(21,580) (10.0)
(14.6)
(11.0) (12,713)
(19,620)
(10.0)
(21,580)
(659)
(1.9)
(1,698)
(0.4)
(769)
(0.3)
(1.9)
(1,698)
(0.4)
(769)
(0.3)
(659)
(1.5)
(1,343)
(0.9)
(1,605)
(2.0)
(4,331)
(1.5)
(1,343)
(0.9)
(1,605)
(2.0)
(4,331)
17.4
15,180
12.7
22,572
30.7
66,244
17.4
15,180
12.7
22,572
30.7
66,244
(7.0)
(6,120)
5.9
10,427
6.7
14,557
(7.0)
(6,120)
5.9
10,427
6.7
14,557
2.3
2,034
— —
—
—
2.3
2,034
—
—
— —
10,427
(4.7)
(4,086)
5.9
6.7
14,557
(4.7)
(4,086)
5.9
10,427
6.7
14,557
(8.4)
(7,306)
4.5
7,993
5.4
11,698
(8.4)
(7,306)
4.5
7,993
5.4
11,698
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Rider 6
Revenue
Our revenue increased by 21.3% from $178.2 million for the year ended December 31, 2015 to $216.1 million
2015
2016
Year Ended December 31,
for the year ended December 31, 2016.
%
($’000)
211,603 100.0
Revenue
This increase was driven by a $54.7 million increase in revenue for the year ended December 31, 2016 from our
(120,142)
(56.8)
Cost of sales
Commercial Platform, representing a 43.3% increase from the revenue of $126.2 million for the year ended December 31,
(45,325)
(21.4)
Selling expenses
2015. The increase was partially offset by a 32.3% decrease in revenue from our Innovation Platform for the year ended
(23,722)
(11.2)
Administrative expenses
December 31, 2016 to $35.2 million from $52.0 million in the year ended December 31, 2015. The growth in revenue
(1.9)
(3,948)
Taxation charge
from our Commercial Platform was driven by the inclusion of a full 12-month period of Seroquel sales in China for the
10.1
21,376
Profit attributable to equity holders of Hutchison Baiyunshan
year ended December 31, 2016, which our consolidated joint venture Hutchison Sinopharm began marketing under an
5.1
10,688
Equity in earnings of equity investee attributable to our company
exclusive license from AstraZeneca in the second quarter of 2015. The decrease in the revenue from our Innovation
($’000)
224,131 100.0
(60.1)
(134,776)
(20.9)
(46,873)
(9.7)
(21,716)
(1.6)
(3,631)
9.1
20,376
4.5
10,188
%
149
Platform for the year ended December 31, 2016 was attributable to a lower level of milestone payments, services fees and
clinical cost reimbursements that we received from our collaboration partners including AstraZeneca, and Eli Lilly.
The consolidated revenue from our Consumer Health business also increased by $10.3 million from
$20.7 million for the year ended December 31, 2015 to $31.0 million for the year ended December 31, 2016. The increase
was primarily attributable to higher levels of infant nutrition products and personal care products sold in 2016.
Our Commercial Platform’s results of operations are affected by seasonality. For more information, see “—
Factors Affecting our Results of Operations—Commercial Platform—Seasonality.”
Cost of Sales of Goods
Our cost of sales of goods increased by 41.1% from $110.8 million for the year ended December 31, 2015 to
$156.3 million for the year ended December 31, 2016. This increase was primarily driven by a $39.2 million increase in
cost of sales of goods from Hutchison Sinopharm under our Prescription Drugs business, as well as a $4.0 million increase
in cost of sales of goods from Hutchison Hain Organic under our Consumer Health business. Cost of sales of goods as a
percentage of our revenue from our Commercial Platform decreased from 87.8% to 86.4% across these periods, primarily
due to increased sales of Seroquel, which has a relatively higher margin than the other products sold by our Commercial
Platform.
Research and Development Expenses
Our research and development expenses increased by 41.2% from $47.4 million for the year ended December 31,
2015 to $66.9 million for the year ended December 31, 2016, which was primarily attributable to a $15.1 million increase
in payments to contract research organizations and other clinical trial related costs and a $4.4 million increase in employee
compensation related costs. These increased costs incurred by our Innovation Platform was due to a significant expansion
of clinical activities and rapid organization growth to support these clinical activities. The number of ongoing clinical
studies for our drug candidates increased from 19 studies as of December 31, 2015 to 30 studies as of December 31, 2016.
In particular, this increase was attributable to our share of the cost of the savolitinib development program as well as the
increased cost associated with the expansion of the sulfatinib and HMPL-523 development programs. As a result, research
and development expenses as a percentage of our total revenue increased from 26.6% in the year ended December 31,
2015 to 31.0% in the year ended December 31, 2016.
Selling Expenses
Our selling expenses increased by 76.3% from $10.2 million for the year ended December 31, 2015 to
$18.0 million for the year ended December 31, 2016. This increase was primarily driven by a $4.8 million increase in
selling expenses under our Consumer Health business and a $3.0 million increase in selling expenses under our
Prescription Drugs business. Selling expenses as a percentage of our revenue from our Commercial Platform increased
from 8.1% to 10.0% across these periods, primarily due to increased selling expenses incurred by Hutchison Sinopharm
for expanding its third-party distribution and commercialization business as well as increased marketing expenses related
to the development of the Zhi Ling Tong infant nutrition business after Hutchison Sinopharm took over such business
from a third-party distributor.
Administrative Expenses
Our administrative expenses increased by 10.0% from $19.6 million for the year ended December 31, 2015 to
$21.6 million for the year ended December 31, 2016. This increase was primarily due to a $2.2 million increase in
administrative expenses incurred by our corporate head office, mainly related to the increased organization and third-party
advisor costs as a result of us becoming a U.S. public company in March 2016. Administrative expenses as a percentage
of our total revenue decreased from 11.0% to 10.0% across these periods, primarily due to the increase in revenue from
our Hutchison Sinopharm business, which has relatively lower administrative expenses in proportion to revenue compared
to our other businesses, partially offset by the increased administrative expenses at our corporate head office.
Other Expenses
Total other expenses decreased from $0.8 million for the year ended December 31, 2015 to $0.7 million for the
year ended December 31, 2016, primarily due to an increase in other income resulting from payments to us by the
depositary bank which administers our ADS program in 2016.
150
Our interest expense increased from $1.4 million for the year ended December 31, 2015 to $1.6 million for the
year ended December 31, 2016, while our interest income remained relatively stable at $0.5 million for the years ended
December 31, 2015 and 2016. These interest expenses primarily comprised interest and guarantee fee payments on
bank loans in 2015 and 2016.
Income Tax Expense
Our income tax expense increased by 169.8% from $1.6 million for the year ended December 31, 2015 to
$4.3 million for the year ended December 31, 2016 due to the increase in the net income of our Commercial Platform
businesses and the 5% withholding taxes accrued on the net income from our Commercial Platform businesses for the year
ended December 31, 2016.
Equity in Earnings of Equity Investees
Our equity in earnings of equity investees (net of tax) increased by 193.5% from $22.6 million for the year ended
December 31, 2015 to $66.2 million for the year ended December 31, 2016. This increase was primarily due to an increase
in net income at our Commercial Platform’s non-consolidated joint ventures, Shanghai Hutchison Pharmaceuticals and
Hutchison Baiyunshan, including a one-time gain of $40.4 million, net of tax, relating to land compensation and other
subsidies paid to Shanghai Hutchison Pharmaceuticals by the Shanghai government and an increase in net loss at Nutrition
Science Partners, our Innovation Platform’s non-consolidated joint venture.
Shanghai Hutchison Pharmaceuticals
The following table shows a summary of the results of operations of Shanghai Hutchison Pharmaceuticals for the
years indicated. The consolidated financial statements of Shanghai Hutchison Pharmaceuticals are prepared in accordance
with IFRS (as issued by the IASB) and are presented separately elsewhere in this annual report.
Year Ended December 31,
2015
2016
($’000)
%
($’000)
%
Revenue
Cost of sales
Selling expenses
Administrative expenses
Gain on disposal of assets held for sale
Taxation charge
Profit for the year
Equity in earnings of equity investee attributable to our company
222,368 100.0 181,140 100.0
(64,237) (28.9) (53,532) (29.6)
(92,487) (41.6) (78,429) (43.3)
(6.8)
(13,278)
— —
88,536
(3.4)
17.3
8.6
(6.0) (12,317)
39.8
(27,645) (12.4)
54.2
120,499
27.1
60,250
(6,094)
31,307
15,654
Shanghai Hutchison Pharmaceuticals’ revenue increased by 22.8% from $181.1 million for the year ended
December 31, 2015 to $222.4 million for the year ended December 31, 2016, which was primarily due to increased sales
of She Xiang Bao Xin pills, a vasodilator used in the treatment of heart conditions. Sales of She Xiang Bao Xin pills grew
by 22.6% from $159.3 million for the year ended December 31, 2015 to $195.4 million for the year ended December 31,
2016, primarily due to continued geographical expansion of sales coverage.
Cost of sales increased by 20.0% from $53.5 million for the year ended December 31, 2015 to $64.2 million for
the year ended December 31, 2016, primarily due to increased cost of goods sold as a result of increased sales of She
Xiang Bao Xin pills.
Selling expenses during these periods increased by 17.9% from $78.4 million for the year ended December 31,
2015 to $92.5 million for the year ended December 31, 2016 as a result of increased spending on marketing and
promotional activities to support the increase in sales.
Administrative expenses increased by 7.8% from $12.3 million for the year ended December 31, 2015 to
$13.3 million for the year ended December 31, 2016, primarily as a result of compensation expenses due to salary
increases.
151
Rider 4
Rider 5
Cost
As at January 1
Exchange differences
As at December 31
Transfer to assets classified as held for sale (Note 20)
2016
2015
2014
(US$’000)
(US$’000) (US$’000)
9,010
(172)
(601)
9,385
9,610
—
(375)
—
(225)
8,237
9,010
9,385
2016
$’000
%
Year Ended December 31,
2015
2014
%
$’000
%
216,080 100.0
Revenue
100.0
(67.4)
(72.4)
(156,328)
Cost of sales of goods
Taxation charge increased by 353.6% from $6.1 million for the year ended December 31, 2015 to $27.6 million
(31.0)
(66,871)
(34.3)
Research and development expenses
for the year ended December 31, 2016, which was primarily due to the increase in profit before taxation between
(8.3)
(4.7)
(17,998)
Selling expenses
these periods.
(10.0)
(21,580)
(14.6)
Administrative expenses
(1.9)
(0.3)
(659)
Total other income/(expense)
As a result of the foregoing and the one-time gain on disposal of assets held for sale of $88.5 million related to
(1.5)
(2.0)
(4,331)
Income tax expense
land compensation received from the Shanghai government, profit increased by 284.9% from $31.3 million for the year
ended December 31, 2015 to $120.5 million for the year ended December 31, 2016. Our equity in earnings of equity
30.7
66,244
17.4
Equity in earnings of equity investees, net of tax
investees contributed by this joint venture was $15.7 million and $60.3 million for the years ended December 31, 2015
(7.0)
6.7
14,557
Net income/(loss) from continuing operations
and 2016, respectively.
2.3
— —
Income from discontinued operations
(4.7)
6.7
Net income/(loss)
(8.4)
5.4
Net income/(loss) attributable to our company
100.0
87,329
(62.2) (58,849)
(26.6) (29,914)
(5.7)
(4,112)
(11.0) (12,713)
(1,698)
(1,343)
15,180
(6,120)
2,034
(4,086)
(7,306)
(0.4)
(0.9)
12.7
5.9
—
5.9
4.5
$’000
178,203
(110,777)
(47,368)
(10,209)
(19,620)
(769)
(1,605)
22,572
10,427
—
10,427
7,993
Hutchison Baiyunshan
14,557
11,698
The following table shows a summary of the results of operations of Hutchison Baiyunshan for the periods
indicated. The consolidated financial statements of Hutchison Baiyunshan are prepared in accordance with IFRS (as issued
Rider 6
by the IASB) and are presented separately elsewhere in this annual report.
Revenue
Revenue
Cost of sales
Cost of sales
Selling expenses
Selling expenses
Administrative expenses
Administrative expenses
Taxation charge
Taxation charge
Profit attributable to equity holders of Hutchison Baiyunshan
Profit attributable to equity holders of Hutchison Baiyunshan
Equity in earnings of equity investee attributable to our company
Equity in earnings of equity investee attributable to our company
Year Ended December 31,
Year Ended December 31,
2016
2016
2015
2015
%
%
($’000)
($’000)
224,131 100.0
100.0
224,131
(60.1)
(134,776)
(60.1)
(134,776)
(20.9)
(46,873)
(20.9)
(46,873)
(9.7)
(21,716)
(9.7)
(21,716)
(1.6)
(3,631)
(1.6)
(3,631)
9.1
20,376
9.1
20,376
4.5
10,188
4.5
10,188
%
%
($’000)
($’000)
211,603 100.0
211,603 100.0
(56.8)
(120,142)
(56.8)
(120,142)
(21.4)
(45,325)
(21.4)
(45,325)
(11.2)
(23,722)
(11.2)
(23,722)
(1.9)
(3,948)
(1.9)
(3,948)
10.1
21,376
10.1
21,376
5.1
10,688
5.1
10,688
Hutchison Baiyunshan’s revenue increased by 5.9% from $211.6 million for the year ended December 31, 2015
to $224.1 million for the year ended December 31, 2016, which was primarily due to increased sales of certain of its drug
products, for which revenue increased by 7.8% from $144.5 million for the year ended December 31, 2015 to $155.8
million for the year ended December 31, 2016.
Cost of sales increased by 12.2% from $120.1 million for the year ended December 31, 2015 to $134.8 million
for the year ended December 31, 2016, primarily due to increased sales. The increase in cost of sales was larger than the
increase in revenues due to a change in product mix resulting in a higher proportion of sales of lower margin products.
Selling expenses during these periods increased by 3.4% from $45.3 million for the year ended December 31,
2015 to $46.9 million for the year ended December 31, 2016 to support the growth in sales across these periods.
Administrative expenses decreased from $23.7 million for the year ended December 31, 2015 to $21.7 million
for the year ended December 31, 2016 due to a decrease in general overhead costs incurred.
Taxation charge decreased from $3.9 million for the year ended December 31, 2015 to $3.6 million for the year
ended December 31, 2016 due to decreased profit before taxation across these periods.
As a result of the foregoing, profit attributable to equity holders of Hutchison Baiyunshan decreased by 4.7%
from $21.4 million for the year ended December 31, 2015 to $20.4 million for the year ended December 31, 2016. Our
equity in earnings of equity investees contributed by this joint venture was $10.7 million and $10.2 million for the years
ended December 31, 2015 and 2016, respectively.
152
Nutrition Science Partners
The following table shows a summary of the results of operations of Nutrition Science Partners for the years
indicated. The consolidated financial statements of Nutrition Science Partners are prepared in accordance with IFRS
(as issued by the IASB) and are presented separately elsewhere in this annual report.
Revenue
Loss for the year
Equity in earnings of equity investee attributable to our company
Year Ended December 31,
2016
2015
($’000)
—
(8,482)
(4,241)
%
—
100.0
50.0
($’000)
—
(7,552)
(3,776)
%
—
100.0
50.0
Nutrition Science Partners had losses of $7.6 million and $8.5 million for the years ended December 31, 2015
and 2016, respectively. Nutrition Science Partners had no revenue during these periods. The increase in net loss across
these periods was primarily attributable to higher expenditures on personnel costs related to the development of drug
candidates from Nutrition Science Partners’ botanical library. Our equity in earnings of equity investees contributed by
this joint venture was losses of $3.8 million and $4.2 million for the years ended December 31, 2015 and 2016,
respectively.
For more information on the financial results of our non-consolidated joint ventures, see “—Key Components of
Results of Operations—Equity in Earnings of Equity Investees.”
Net Income
As a result of the foregoing, our net income improved from a net income of $10.4 million for the year ended
December 31, 2015 to a net income of $14.6 million for the year ended December 31, 2016. Net income attributable to
our company improved from a net income of $8.0 million for the year ended December 31, 2015 to a net income of
$11.7 million for the year ended December 31, 2016.
Operating Profit
Our operating profit increased by 52.7% from $13.4 million for the year ended December 31, 2015 to
$20.5 million for the year ended December 31, 2016 as a result of a significant increase in operating profit of our
Commercial Platform from $28.2 million for the year ended December 31, 2015 to $74.3 million for the year ended
December 31, 2016, partially offset by an increase in operating loss of our Innovative Platform from $3.8 million for the
year ended December 31, 2015 to $40.8 million for the year ended December 31, 2016. The increase in operating profit
of our Commercial Platform across these periods was attributable to an increase in equity in earnings of Shanghai
Hutchison Pharmaceuticals of $44.6 million from $15.7 million for the year ended December 31, 2015 to $60.3 million
for the year ended December 31, 2016. The increase in operating loss of our Innovation Platform was due to a significant
expansion of clinical activities, rapid organization growth to support these clinical activities and a decrease in revenue
from license and collaboration agreements due to timing of milestone achievements.
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Revenue
Our revenue increased by 104.1% from $87.3 million for the year ended December 31, 2014 to $178.2 million
for the year ended December 31, 2015. This increase was primarily driven by a $55.3 million increase in revenue from our
Hutchison Sinopharm joint venture under our Prescription Drugs business from $50.2 million for the year ended
December 31, 2014 to $105.5 million for the year ended December 31, 2015, which was due to revenues of $21.1 million
generated from the provision of third-party distribution and commercialization services for AstraZeneca’s quetiapine
tablets (under the Seroquel trademark), for which Hutchison Sinopharm became the exclusive first-tier distributor in all of
China in the second quarter of 2015. This increase also resulted from the effect of the inclusion of the results of such joint
venture for the full year ended December 31, 2015 compared to less than nine months for the year ended
December 31, 2014.
In addition, this increase was driven by a $31.7 million increase in revenue from our Innovation Platform from
$20.3 million for the year ended December 31, 2014 to $52.0 million for the year ended December 31, 2015, which was
153
due to a $15.4 million increase in revenue from milestone and upfront payments and a $16.3 million increase in revenue
from research and development service payments, primarily due to payments from Eli Lilly in relation to the successful
Phase II proof-of-concept results in third-line colorectal cancer and non-squamous non-small cell lung cancer for
fruquintinib. Consolidated revenue from our Consumer Health business also increased by $3.9 million from $16.8 million
for the year ended December 31, 2014 to $20.7 million for the year ended December 31, 2015.
Our Commercial Platform’s results of operations are affected by seasonality. For more information, see “—
Factors Affecting our Results of Operations—Commercial Platform—Seasonality.”
Cost of Sales of Goods
Our cost of sales of goods increased by 88.2% from $58.8 million for the year ended December 31, 2014 to
$110.8 million for the year ended December 31, 2015. This increase was primarily driven by a $49.1 million increase in
cost of sales of goods from Hutchison Sinopharm under our Prescription Drugs business, as well as a $3.7 million increase
in cost of sales of goods from Hutchison Hain Organic under our Consumer Health business. Cost of sales of goods as a
percentage of our revenue from our Commercial Platform decreased from 87.9% to 87.8% across these periods, primarily
due to the increased revenue contribution from our provision of third-party distribution and commercialization services
for AstraZeneca’s quetiapine tablets in 2015, which have lower cost of sales of goods than the relatively lower margin
legacy logistics and distribution business of a predecessor entity of Hutchison Sinopharm, in which we acquired a 51%
equity interest in April 2014.
Research and Development Expenses
Our research and development expenses increased by 58.3% from $29.9 million for the year ended December 31,
2014 to $47.4 million for the year ended December 31, 2015, which was primarily attributable to a $13.7 million increase
in payments to contract research organizations and other clinical trial related costs and a $3.8 million increase in employee
compensation related costs. These increased costs were incurred by our Innovation Platform in line with an increase in our
revenue from the provision of research and development services across these periods, as well as due to an increase in the
number of ongoing clinical studies for our drug candidates from 16 studies as of December 31, 2014 to 19 studies as of
December 31, 2015. In particular, this increase was attributable to our share of the cost of accelerating the development of
fruquintinib as well the full cost of the expanded HMPL-523 and sulfatinib development programs. Research and
development expenses as a percentage of our total revenue decreased from 34.3% to 26.6% across these periods, primarily
due to the significant increase in our consolidated revenue generated by Hutchison Sinopharm and by our Innovation
Platform.
Selling Expenses
Our selling expenses increased by 148.3% from $4.1 million for the year ended December 31, 2014 to
$10.2 million for the year ended December 31, 2015. This increase was primarily driven by a $5.1 million increase in
selling expenses incurred by Hutchison Sinopharm under our Prescription Drugs business and a $1.3 million increase in
selling expenses incurred by Hutchison Hain Organic under our Consumer Health business. Selling expenses as a
percentage of our revenue from our Commercial Platform increased from 6.1% to 8.1% across these periods, primarily
due to the increased selling expenses incurred by Hutchison Sinopharm for its new third-party distribution and
commercialization business.
Administrative Expenses
Our administrative expenses increased by 54.3% from $12.7 million for the year ended December 31, 2014 to
$19.6 million for the year ended December 31, 2015. This increase was primarily due to a $4.1 million increase in
administrative expenses incurred by our corporate head office, mainly related to expenses incurred in connection with
preparation for our initial public offering in the United States, a $1.8 million increase in administrative expenses incurred
by our Commercial Platform due to the inclusion of the results of Hutchison Sinopharm for the full year ended December
31, 2015 compared to less than nine months for the year ended December 31, 2014, and $1.3 million in costs incurred by
Hutchison Healthcare for the take-back of commercial rights of certain products from a former distributor, as well as a
$1.0 million increase in administrative expenses incurred by our Innovation Platform due to an increase in personnel
related costs and other office expenses. Administrative expenses as a percentage of our total revenue decreased from 14.6%
to 11.0% across these periods, primarily due to the increase in revenue from our Hutchison Sinopharm business, which
has relatively lower administrative expenses in proportion to revenue compared to our other businesses.
154
Other Expenses
Total other expenses decreased from $1.7 million for the year ended December 31, 2014 to $0.8 million for the
year ended December 31, 2015, primarily due to a $0.6 million increase in other income for our Commercial Platform as
well as a $0.5 million decrease in other expenses incurred by our Innovation Platform related to the impact of foreign
exchange fluctuations across these periods.
Our interest expense remained relatively unchanged at $1.5 million for the year ended December 31, 2014 and
$1.4 million for the year ended December 31, 2015. These interest expenses primarily comprised interest and guarantee
fee payments on bank loans.
Income Tax Expense
Our income tax expense increased by 19.5% from $1.3 million for the year ended December 31, 2014 to
$1.6 million for the year ended December 31, 2015 due to the increase in the net income of our Commercial Platform
businesses, as well as the fact that we made a provision in the year ended December 31, 2015 for withholding tax in China
on future potential dividends in connection with the net income of our Commercial Platform joint ventures.
Equity in Earnings of Equity Investees
Our equity in earnings of equity investees (net of tax) increased by 48.7% from $15.2 million for the year ended
December 31, 2014 to $22.6 million for the year ended December 31, 2015. This increase was primarily due to an increase
in net income at our Commercial Platform’s non-consolidated joint ventures, Shanghai Hutchison Pharmaceuticals and
Hutchison Baiyunshan, and a decrease in net loss at Nutrition Science Partners, our Innovation Platform’s non-
consolidated joint venture.
Shanghai Hutchison Pharmaceuticals
The following table shows a summary of the results of operations of Shanghai Hutchison Pharmaceuticals for the
years indicated. The consolidated financial statements of Shanghai Hutchison Pharmaceuticals are prepared in accordance
with IFRS (as issued by the IASB) and are presented separately elsewhere in this annual report.
Year Ended December 31,
2015
2014
($’000)
%
($’000)
%
Revenue
Cost of sales
Selling expenses
Administrative expenses
Taxation charge
Profit for the year
Equity in earnings of equity investee attributable to our company
181,140
(53,532)
(78,429)
(12,317)
(6,094)
31,307
15,654
100.0 154,703
(44,738)
(29.6)
(70,239)
(43.3)
(8,932)
(6.8)
(5,103)
(3.4)
26,402
17.3
13,201
8.6
100.0
(28.9)
(45.4)
(5.8)
(3.3)
17.1
8.5
Shanghai Hutchison Pharmaceuticals’ revenue increased by 17.1% from $154.7 million for the year ended
December 31, 2014 to $181.1 million for the year ended December 31, 2015, which was primarily due to increased sales
of She Xiang Bao Xin pills, a vasodilator used in the treatment of heart conditions. Sales of She Xiang Bao Xin pills grew
by 14.7% from $138.8 million for the year ended December 31, 2014 to $159.3 million for the year ended December 31,
2015, primarily due to increased market share in mature markets driven by increased spending on marketing activities.
Cost of sales increased by 19.7% from $44.7 million for the year ended December 31, 2014 to $53.5 million for
the year ended December 31, 2015, primarily due to increased cost of goods sold as a result of increased sales of She
Xiang Bao Xin pills.
Selling expenses during these periods increased by 11.7% from $70.2 million for the year ended December 31,
2014 to $78.4 million for the year ended December 31, 2015 as a result of increased spending on marketing and
promotional activities.
155
Administrative expenses increased by 37.9% from $8.9 million for the year ended December 31, 2014 to
$12.3 million for the year ended December 31, 2015, primarily as a result of increased research and development expenses.
Taxation charge increased by 19.4% from $5.1 million for the year ended December 31, 2014 to $6.1 million for
the year ended December 31, 2015, which was primarily due to the increase in profit before taxation between these periods.
As a result of the foregoing, profit increased by 18.6% from $26.4 million for the year ended December 31, 2014
to $31.3 million for the year ended December 31, 2015. Our equity in earnings of equity investees contributed by this joint
venture was $13.2 million and $15.7 million for the years ended December 31, 2014 and 2015, respectively.
Hutchison Baiyunshan
The following table shows a summary of the results of operations of Hutchison Baiyunshan for the years
indicated. The consolidated financial statements of Hutchison Baiyunshan are prepared in accordance with IFRS (as issued
by the IASB) and are presented separately elsewhere in this annual report.
Year Ended December 31,
2015
2014
Revenue
Cost of sales
Selling expenses
Administrative expenses
Taxation charge
Profit attributable to equity holders of Hutchison Baiyunshan
Equity in earnings of equity investee attributable to our company
%
($’000)
211,603
(120,142)
(45,325)
(23,722)
(3,948)
21,376
10,688
%
($’000)
100 243,746 100.0
(60.4)
(147,325)
(21.0)
(51,303)
(9.6)
(23,488)
(1.6)
(3,940)
8.5
20,775
4.3
10,388
(56.8)
(21.4)
(11.2)
(1.9)
10.1
5.1
Hutchison Baiyunshan’s revenue decreased by 13.2% from $243.7 million for the year ended December 31, 2014
to $211.6 million for the year ended December 31, 2015, which was primarily due to decreased sales of Fu Fang Dan Shen
tablets, for which revenue decreased by 21.2% from $76.3 million for the year ended December 31, 2014 to $60.2 million
for the year ended December 31, 2015, as well as decreased sales of Banlangen granules, for which revenue decreased by
1.4% from $55.6 million to $54.8 million across these periods. The decreases in sales of both Fu Fang Dan Shen tablets
and Banlangen granules were caused by price-cutting by certain smaller competitors while Hutchison Baiyunshan
maintained its pricing across all of its products as it managed capacity constraints related to the move to new production
facilities at Bozhou in Anhui province.
Cost of sales decreased by 18.5% from $147.3 million for the year ended December 31, 2014 to $120.1 million
for the year ended December 31, 2015, primarily due to lower cost of goods sold as a result of decreased sales of Fu Fang
Dan Shen tablets and Banlangen granules, as well as a decrease in the price of Sanqi, one of the main natural raw materials
in Fu Fang Dan Shen tablets, which contributed to a significant increase in the gross margin of Fu Fang Dan Shen tablets.
Selling expenses during these periods decreased by 11.7% from $51.3 million for the year ended December 31,
2014 to $45.3 million for the year ended December 31, 2015 in line with decreased revenue across these periods.
Administrative expenses remained relatively stable at $23.5 million for the year ended December 31, 2014 and
$23.7 million for the year ended December 31, 2015.
Taxation charge remained relatively stable at $3.9 million for the year ended December 31, 2014 and $3.9 million
for the year ended December 31, 2015 due to similar levels of profit before taxation across these periods.
As a result of the foregoing, profit attributable to equity holders of Hutchison Baiyunshan increased by 2.9% from
$20.8 million for the year ended December 31, 2014 to $21.4 million for the year ended December 31, 2015. Our equity
in earnings of equity investees contributed by this joint venture was $10.4 million and $10.7 million for the years ended
December 31, 2014 and 2015, respectively.
156
Nutrition Science Partners
The following table shows a summary of the results of operations of Nutrition Science Partners for the years
indicated. The consolidated financial statements of Nutrition Science Partners are prepared in accordance with IFRS
(as issued by the IASB) and are presented separately elsewhere in this annual report.
Revenue
Loss for the year
Equity in earnings of equity investee attributable to our company
Year Ended December 31,
2015
2014
($’000)
—
(7,552)
(3,776)
%
($’000)
%
100
50
(16,812)
(8,406)
100.0
50.0
Nutrition Science Partners had losses of $16.8 million and $7.6 million for the years ended December 31, 2014
and 2015, respectively. Nutrition Science Partners had no revenue during these periods. The decrease in net loss across
these periods was primarily attributable to lower expenditures on clinical trials for the drug candidate HMPL-004/HM004-
6599. Our equity in earnings of equity investees contributed by this joint venture was losses of $8.4 million and
$3.8 million for the years ended December 31, 2014 and 2015, respectively.
For more information on the financial results of our non-consolidated joint ventures, see “—Key Components of
Results of Operations—Equity in Earnings of Equity Investees.”
Discontinued Operations
In June 2013, we discontinued one of our operations in the PRC which was part of our Consumer Health business
as its results were below expectation in light of increased competitive activities in the consumer product markets. Our net
income from discontinued operations decreased from $2.0 million for the year ended December 31, 2014 to nil for the
year ended December 31, 2015. This decrease was primarily due to a $2.1 million gain from compensation proceeds
received during the year ended December 31, 2014 as a result of arbitration proceedings against a former supplier of our
Consumer Health business.
Net Income/(Loss)
As a result of the foregoing, our net income improved from a net loss of $4.1 million for the year ended
December 31, 2014 to a net income of $10.4 million for the year ended December 31, 2015. Net income attributable to
our company improved from a net loss of $7.3 million for the year ended December 31, 2014 to a net income of
$8.0 million for the year ended December 31, 2015.
Operating Profit
Our operating profit increased significantly from an operating loss of $3.3 million for the year ended
December 31, 2014 to an operating profit of $13.4 million for the year ended December 31, 2015, as a result of a substantial
decrease in operating loss of our Innovative Platform from $22.2 million for the year ended December 31, 2014 to $3.8
million for the year ended December 31, 2015 and an increase in operating profit of our Commercial Platform from $25.5
million for the year ended December 31, 2014 to $28.2 million for the year ended December 31, 2015. The decrease in
operating loss of our Innovative Platform across these periods was attributable to an increase in revenue from license and
collaboration agreements upon achievements of milestones, partially offset by an increase in research and development
expenses to support expansion of our clinical activities. The increase in operating profit of our Commercial Platform across
these periods was due to continued growth of our Prescription Drug business in 2015.
B. Liquidity and Capital Resources
To date, we have taken a multi-source approach to funding through cash flows generated from and dividend
payments from our Commercial Platform, service and milestone and upfront payments from our Innovation Platform’s
collaboration partners, and bank borrowings. We have also received various financial support from Hutchison Whampoa
Limited, an affiliate of our majority shareholder, in the form of guarantees for bank borrowings as well as investments
from other parties since our founding, proceeds from our listings on the AIM market of the London Stock Exchange
in 2006 and the Nasdaq Global Select Market in 2016.
157
Our Innovation Platform has historically not generated significant profits or has operated at a net loss, as creating
potential global first-in-class or best-in-class drug candidates requires a significant investment of resources over a
prolonged period of time. As a result, we anticipate that we may need additional financing for our Innovation Platform in
future periods. See Item 3.D. “Risk Factors—Risks Related to Our Innovation Platform—Historically, our Innovation
Platform has not generated significant profits or has operated at a net loss.”
As of December 31, 2016, we had cash and cash equivalents and short-term investments of $103.7 million and
unutilized bank facilities of $70.0 million. Substantially all of our bank deposits are at major financial institutions, which
we believe are of high credit quality. As of December 31, 2016, we had $46.9 million in bank loans, including (i) a
$20.0 million term loan from Bank of America N.A. and Deutsche Bank AG, Hong Kong Branch that will expire in
August 2017; and (ii) a $26.9 million four-year term loan from Scotiabank, which is guaranteed by Hutchison Whampoa
Limited, an affiliate of our majority shareholder, that will expire in June 2018. Our total weighted average cost of bank
borrowings, including all interest and guarantee fees, was 2.4% as of December 31, 2016. In February 2017, we entered
into new credit facility agreements with each of Bank of America N.A. and Deutsche Bank AG, Hong Kong Branch of
$45.0 million and $25.0 million, respectively, which replaced the previous combined $60.0 million credit facility
agreement we had entered into with these two banks in February 2016.
Certain of our subsidiaries, including those registered as wholly foreign-owned enterprises in China, are required
to set aside at least 10.0% of their after-tax profits to their general reserves until such reserves reach 50.0% of their
registered capital. There is no fixed percentage of after-tax profit required to set aside for the general reserves for our PRC
joint ventures. Profit appropriated to the reserve funds for our subsidiaries incorporated in the PRC was approximately
$25,000, $24,000 and $15,000 for the years ended December 31, 2014, 2015 and 2016, respectively. In addition, as a result
of PRC regulations restricting dividend distributions from such reserve funds and from a company’s registered capital, our
PRC subsidiaries are restricted in their ability to transfer a certain amount of their net assets to us as cash dividends, loans
or advances. This restricted portion amounted in aggregate to $100.8 million as of December 31, 2016. Although we do
not currently require any such dividends, loans or advances from our PRC subsidiaries to fund our operations, should we
require additional sources of liquidity in the future, such restrictions may have a material adverse effect on our liquidity
and capital resources. For more information, see Item 4.B. “Business Overview—Regulation—PRC Regulation of Foreign
Currency Exchange, Offshore Investment and State-Owned Assets—Regulation on Dividend Distribution.”
In addition, our non-consolidated joint ventures held an aggregate of $91.0 million in cash and cash equivalents
and bank deposits maturing over three months and no bank borrowings as of December 31, 2016. These cash and cash
equivalents are only accessible by us through dividend payments from these joint ventures. The level of dividends declared
by these joint ventures is subject to agreement each year between us and our joint venture partners based on the profitability
and working capital needs of the joint ventures. As a result, we cannot guarantee that these joint ventures will continue to
pay dividends to us in the future at the same rate we have enjoyed in the past, or at all, which may have a material adverse
effect on our liquidity and capital resources. As of December 31, 2016, our Innovation Platform joint venture, Nutrition
Science Partners, has not paid any dividends. For more information, see Item 3.D. “Risk Factors—Risks Related to Our
Commercial Platform—As a significant portion of our Commercial Platform business is conducted through joint ventures,
we are largely dependent on the success of our joint ventures and our receipt of dividends or other payments from our joint
ventures for cash to fund our operations.”
We believe that our current levels of cash and cash equivalents, short-term investments, along with cash flows
from operations, dividend payments and bank borrowings, will be sufficient to meet our anticipated cash needs for at least
the next 12 months. However, we may require additional financing in order to fund all of the clinical development efforts
at our Innovation Platform that we plan to undertake to accelerate the development of our clinical-stage drug candidates.
158
For more information, see Item 3.D. “Risk Factors—Risks Related to Our Financial Position and Need for Additional
Capital.”
2016
Year Ended December 31,
2015
($’000)
2014
Cash Flow Data:
Net cash (used in)/generated from operating activities
Net cash (used in)/generated from investing activities
Net cash generated from/(used in) financing activities
Net increase/(decrease) in cash and cash equivalents
Effect of exchange rate changes
Cash and cash equivalents at beginning of the year
Cash and cash equivalents at end of the year
Net Cash (used in)/generated from Operating Activities
(9,569)
(33,597)
92,435
49,269
(1,779)
31,941
79,431
(9,385)
8,359
8,855 (15,219)
(641)
(5,471)
(7,501)
(6,001)
(416)
(1,004)
46,863
38,946
38,946
31,941
Net cash used in operating activities was $9.4 million for the year ended December 31, 2015 compared to net
cash used in operating activities of $9.6 million for the year ended December 31, 2016. The net change was primarily
attributable to a $24.1 million increase in dividends received from our equity investees from $6.4 million for the year
ended December 31, 2015 to $30.5 million for the year ended December 31, 2016 resulting from increased revenue and
gain from land compensation paid to our equity investees and the effects of changes in working capital due to an increase
of $19.0 million in accounts payable and other payables, accruals and advance receipts due to delays in payments to
suppliers in the year ended December 31, 2016, as compared to an increase of $8.3 million in the year ended December 31,
2015, offset by increases in research and development spending in our Innovation Platform.
Net cash generated from operating activities was $8.4 million for the year ended December 31, 2014 compared
to net cash used in operating activities of $9.4 million for the year ended December 31, 2015. The decrease was primarily
attributable to a $9.5 million decrease across these periods in dividends received from our non-consolidated joint ventures
across these periods as a result of capital expenditure requirements at Shanghai Hutchison Pharmaceuticals and Hutchison
Baiyunshan related to the construction of new production facilities and the effects of changes in working capital of
respective periods as follows: for the year ended December 31, 2015, a $11.7 million increase in accounts receivable, a
$5.2 million increase in inventories, a $4.0 million increase in amounts due to related parties, a $3.7 million increase in
accounts payable, a $3.0 million increase in amounts due from related parties, and a $4.7 million increase in other payables,
accruals and advance receipts, primarily in relation to the inclusion of Hutchison Sinopharm in our consolidated financials
for the full period and its sales growth in 2015. Net cash generated from operating activities for the year ended December
31, 2014 was primarily attributable to a $10.0 million decrease in accounts receivable, which was mainly the result of
payments collected for amounts owed from our Innovation Platform collaboration partners and from our Commercial
Platform customers, a $5.0 million increase in amounts due from related parties, and a $2.2 million increase in accounts
payable.
Net Cash (used in)/generated from Investing Activities
Net cash generated from investing activities was $8.9 million for the year ended December 31, 2015, compared
to net cash used in investing activities of $33.6 million for the year ended December 31, 2016. This change was primarily
attributable to net deposits in short-term investments of $24.3 million for the year ended December 31, 2016 compared to
a net withdrawal of deposits in short-term investments of $12.2 million for the year ended December 31, 2015. This change
was also attributable to an additional $5.0 million share capital contribution to Nutrition Science Partners in 2016 by us.
Net cash used in investing activities was $15.2 million for the year ended December 31, 2014, compared to net
cash generated from investing activities of $8.9 million for the year ended December 31, 2015. This change was primarily
attributable to a $12.2 million withdrawal of deposit in short-term investments upon its maturity for the year ended
December 31, 2015.
Net Cash generated from/(used in) Financing Activities
Net cash used in financing activities was $5.5 million for the year ended December 31, 2015, compared to net
cash generated from financing activities of $92.4 million for the year ended December 31, 2016. This change was primarily
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attributable to gross proceeds of $110.2 million from the issuance of ordinary shares upon our initial public offering in the
United States in 2016, partially offset by cash paid on issuance costs of $12.9 million.
Net cash used in financing activities was $0.6 million for the year ended December 31, 2014, compared to
$5.5 million for the year ended December 31, 2015. This change was primarily attributable to $1.8 million which was used
to purchase shares that are held as treasury shares and will be used to settle awards granted under our long-term incentive
scheme for the year ended December 31, 2015, $1.3 million in payments for the deferred costs for our initial public offering
in the United States for the year ended December 31, 2015 and a $1.3 million decrease in proceeds from issuance of
ordinary shares across these periods, as well as a $3.1 million capital contribution from redeemable non-controlling
interests in the year ended December 31, 2014. These were partially offset by a $2.3 million repayment of loan to a
non-controlling shareholder of a subsidiary for the year ended December 31, 2014 and a $0.6 million decrease in dividends
paid to a non-controlling shareholder of a subsidiary across these periods.
Loan Facilities
In June 2014, we renewed our HK$210.0 million (equivalent to $26.9 million as of December 31, 2016) four-year
2014 Scotiabank Term Loan with an annual interest rate of 1.35% over the Hong Kong Inter-bank Offered Rate, or HIBOR.
This loan was guaranteed by Hutchison Whampoa Limited for an annual guarantee fee of 1.75% and will expire in
June 2018. The proceeds from this loan were used for working capital purposes and HK$210.0 million (equivalent to
$26.9 million as of December 31, 2016) of this loan was outstanding as of December 31, 2016. Interest expenses accrued
and paid for this loan were $0.4 million for each of the years ended December 31, 2014, 2015 and 2016, respectively.
Guarantee fees accrued and paid for this loan were $0.5 million for each of the years ended December 31, 2014, 2015 and
2016, respectively.
In November 2015, we renewed a three-year revolving loan facility with HSBC with an annual interest rate of
1.25% over HIBOR. This facility will expire in November 2018. The credit limit of this loan is HK$234.0 million
(equivalent to $30.0 million as of December 31, 2016). As of December 31, 2016, there were no amounts due under this
loan. The proceeds from previous drawdowns of this loan facility were used for working capital purposes prior to
repayment. Interest expenses accrued and paid for this loan were $0.4 million, $0.3 million and $0.2 million for the years
ended December 31, 2014, 2015 and 2016, respectively.
In February 2016, our Hong Kong subsidiary, Hutchison China MediTech (HK) Limited, entered into a facility
agreement with Bank of America N.A. and Deutsche Bank AG, Hong Kong Branch for the provision of unsecured credit
facilities in the aggregate amount of HK$468.0 million (equivalent to $60.0 million as of December 31, 2016). These
credit facilities included (i) a HK$156.0 million (equivalent to $20.0 million as of December 31, 2016) term loan facility
with a term of 18 months and an annual interest rate of 1.35% over HIBOR, and (ii) a HK$312.0 million (equivalent to
$40.0 million as of December 31, 2016) revolving loan facility with a term of 12 months and an annual interest rate of
1.30% over HIBOR. As of December 31, 2016, no amounts were drawn from the revolving loan facility and HK$156.0
million (equivalent to $20.0 million as of December 31, 2016) was outstanding on the term loan facility. On February 28,
2017, we entered into new credit facility agreements with each of Bank of America N.A. and Deutsche Bank AG, Hong
Kong Branch, of HK$351.0 million (equivalent to $45.0 million as of December 31, 2016) and HK$195.0 million
(equivalent to $25.0 million as of December 31, 2016), respectively, which replaced the previous credit facility agreement
with these two banks. These credit facilities are guaranteed by Chi-Med and include certain financial covenant
requirements.
In addition, our non-consolidated joint ventures Shanghai Hutchison Pharmaceuticals, Hutchison Baiyunshan and
Nutrition Science partners had no bank borrowings outstanding as of December 31, 2016.
Capital Expenditures
We had capital expenditures of $3.7 million, $3.3 million and $4.3 million for the years ended December 31,
2014, 2015 and 2016, respectively. Our capital expenditures during these periods were primarily used for the purchases of
property, plant and equipment to expand the Hutchison MediPharma research facilities and the new manufacturing facility
in Suzhou, China, which produces Phase III clinical supplies and will be used to produce fruquintinib and other drug
candidates. Our capital expenditures have been primarily funded by cash flows from operations and financing from bank
borrowings.
As of December 31, 2016, we had commitments for capital expenditures of approximately $2.5 million, primarily
for purchases of property, plant and equipment to expand the Hutchison MediPharma research facilities and the new
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Suzhou manufacturing facility. We expect to fund these capital expenditures through cash flows from operations and
financing from bank borrowings.
Our non-consolidated joint venture Shanghai Hutchison Pharmaceuticals had capital expenditures (net of
government subsidies) of $27.1 million, $42.1 million and $11.0 million for the years ended December 31, 2014, 2015
and 2016, respectively. These capital expenditures were primarily related to the construction of the new production
facilities in Feng Pu district in Shanghai. These capital expenditures were primarily funded through cash flows from
operations of Shanghai Hutchison Pharmaceuticals and bank borrowings.
Our non-consolidated joint venture Hutchison Baiyunshan had capital expenditures of $18.4 million,
$21.7 million and $13.2 million for the years ended December 31, 2014, 2015 and 2016, respectively. These capital
expenditures were primarily related to the acquisition of leasehold land in Guangzhou and Anhui provinces as well as the
construction of new production facilities at Bozhou in Anhui province. These capital expenditures were primarily funded
through cash flows from operations of Hutchison Baiyunshan.
C. Research and Development, Patents and Licenses, etc.
Full details of our research and development activities and expenditures are given in the “Business” and
“Operating and Financial Review and Prospects” sections of this annual report above.
D. Trend Information.
Other than as described elsewhere in this annual report, we are not aware of any trends, uncertainties, demands,
commitments or events that are reasonably likely to have a material adverse effect on our revenue, income from continuing
operations, profitability, liquidity or capital resources, or that would cause our reported financial information not
necessarily to be indicative of future operation results or financial condition.
E. Off-balance Sheet Arrangements.
Other than some of the operating lease obligations set forth in the table above, we did not have during the periods
presented, and we do not currently have, any off-balance sheet arrangements as defined under the rules of the SEC.
F. Tabular Disclosure of Contractual Obligations.
The following table sets forth our contractual obligations as of December 31, 2016. Our purchase obligations
relate to property, plant and equipment that are contracted for but not yet paid. Our operating lease obligations primarily
comprise future aggregate minimum lease payments in respect of various factories and offices under non-cancellable
operating lease agreements. The amounts due to immediate holding company relate to payments owed to Hutchison
Healthcare Holdings Limited for management fees, rental and utilities expenses and other payments in connection with
various services provided to us by the CK Hutchison group. See Item 7.B. “Related Party Transactions—Relationship with
CK Hutchison” for more details.
Payment Due by Period
Total
1-3 Years 3-5 Years 5 Years
Less Than
1 Year
More Than
Bank borrowings
Loan from a non-controlling shareholder of a subsidiary
Amounts due to immediate holding company
Interest on bank borrowings
Interest on loan from a non-controlling shareholder of a
subsidiary
Interest on amounts due to immediate holding company
Purchase obligations
Operating lease obligations
Total
46,923
1,550
8,086
1,211
20,000
—
2,086
987
($’000)
26,923
1,550
6,000
224
110
225
2,545
4,897
65,547
63
90
2,545
1,711
27,482
47
135
—
2,436
37,315
—
—
—
—
—
—
—
705
705
—
—
—
—
—
—
—
45
45
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Shanghai Hutchison Pharmaceuticals
The following table sets forth the contractual obligations of our non-consolidated joint venture Shanghai
Hutchison Pharmaceuticals as of December 31, 2016. Shanghai Hutchison Pharmaceuticals’ operating lease obligations
primarily comprise future aggregate minimum lease payments in respect of various factories and offices under
non-cancellable operating lease agreements.
Payment Due by Period
Total
1-3 Years 3-5 Years 5 Years
Less Than
1 Year
More Than
Operating lease obligations
Total
Hutchison Baiyunshan
509
509
405
405
($’000)
104
104
—
—
—
—
The following table sets forth the contractual obligations of our non-consolidated joint venture Hutchison
Baiyunshan as of December 31, 2016. Hutchison Baiyunshan’s purchase obligations comprise capital commitments for
property, plant and equipment contracted for but not yet paid, which mainly relate to the construction in progress of the
new production facilities at Bozhou in Anhui province. Hutchison Baiyunshan’s finance and operating lease obligations
primarily comprise future aggregate minimum lease payments in respect of various factories, warehouses and equipment
under non-cancellable lease agreements.
Purchase obligations
Finance lease obligations
Operating lease obligations
Total
*
subject to timing of project completion.
Payment Due by Period
Less Than
More Than
Total
1 Year
1-3 Years 3-5 Years 5 Years
6,162
618
2,186
8,966
6,162 *
118
1,106
7,386
($’000)
—
236
1,080
1,316
—
236
—
236
—
28
—
28
Quantitative and Qualitative Disclosures About Market Risk
Foreign Exchange Risk
Substantially all of our revenue and expenses are denominated in renminbi, and our financial statements are
presented in U.S. dollars. We do not believe that we currently have any significant direct foreign exchange risk and have
not used any derivative financial instruments to hedge our exposure to such risk. Although, in general, our exposure to
foreign exchange risks should be limited, the value of your investment in our ADSs will be affected by the exchange rate
between the U.S. dollar and the renminbi because the value of our business is effectively denominated in renminbi, while
the ADSs will be traded in U.S. dollars.
The value of the renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among
other things, changes in China’s political and economic conditions. The conversion of renminbi into foreign currencies,
including U.S. dollars, has been based on rates set by the PBOC. On July 21, 2005, the PRC government changed its
decade-old policy of pegging the value of the renminbi to the U.S. dollar. Under the revised policy, the renminbi is
permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in
policy resulted in a more than 20% appreciation of the renminbi against the U.S. dollar in the following three years.
Between July 2008 and June 2010, this appreciation halted, and the exchange rate between the renminbi and U.S. dollar
remained within a narrow band. In June 2010, the PBOC announced that the PRC government would increase the
flexibility of the exchange rate, and thereafter allowed the renminbi to appreciate slowly against the U.S. dollar within the
narrow band fixed by the PBOC. However, more recently, the PBOC has significantly devalued the renminbi against the
U.S. dollar. If we decide to convert renminbi into U.S. dollars for the purpose of making payments for dividends on our
ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar against the renminbi would have a
negative effect on the U.S. dollar amounts available to us.
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Credit Risk
Substantially all of our bank deposits are in major financial institutions, which we believe are of high credit
quality. We limit the amount of credit exposure to any financial institution. We make periodic assessments of the
recoverability of trade and other receivables and amounts due from related parties. Our historical experience in collection
of receivables falls within the recorded allowances, and we believe that we have made adequate provision for uncollectible
receivables.
Interest Rate Risk
We have no significant interest-bearing assets except for bank deposits. Our exposure to changes in interest rates
is mainly attributable to our bank borrowings, which bear interest at floating interest rates and expose us to cash flow
interest rate risk. We have not used any interest rate swaps to hedge our exposure to interest rate risk. We have performed
sensitivity analysis for the effects on our net income for the year as a result of changes in interest expense on floating 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 we operate, with other variables held constant. According to the analysis,
the impact on our net income of a 1.0% interest rate shift would be a maximum increase/decrease of $500,000 for the year
ended December 31, 2016.
Inflation
In recent years, China has not experienced significant inflation, and thus inflation has not had a material impact
on our results of operations. According to the National Bureau of Statistics of China, the Consumer Price Index in China
increased by 2.0%, 1.4% and 2.3% in 2014, 2015 and 2016, respectively. Although we have not been materially affected
by inflation in the past, we can provide no assurance that we will not be affected in the future by higher rates of inflation
in China.
Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board, or FASB, issued ASU 2014-09, Revenue from
Contracts with Customers (Topic 606), to clarify the principles of recognizing revenue and create common revenue
recognition guidance between U.S. GAAP and IFRS. In 2016, the FASB further issued ASU 2016-08 Principal versus
Agent Considerations, ASU 2016-10 Identifying Performance Obligations and Licensing and ASU 2016-12 Narrow-Scope
Improvements and Practical Expedients to amend the new revenue standard and address implementation issues of ASU
2014-09. An entity has the option to apply the provisions of ASU 2014-09 either retrospectively to each prior reporting
period presented or retrospectively with the cumulative effect of initially applying this standard recognized at the date of
initial application. ASU 2014-09 is effective for fiscal years and interim periods within those years beginning after
December 15, 2017, and early adoption is permitted but not earlier than the original effective date of December 15, 2016.
This new standard supersedes U.S. GAAP guidance on revenue recognition and requires the use of more estimates and
judgments and additional disclosures than the current standard.
While we are continuing to assess the potential impact of the new guidance, we currently expect the most material
impact will relate to the license and collaboration agreements in our Innovation Platform business. Based on our
preliminary analysis, the following are some of the key areas of potential difference between the new and current guidance:
(cid:120) We have identified the various deliverables in our license and collaboration agreements under existing
guidance (ASC 605). The new guidance introduces the term “distinct” to describe separate deliverables. One
of the key considerations under the new guidance is to assess whether the services are considered “distinct”
in the context of the contract. We are in the process of assessing how the new guidance would impact the
identification of separate deliverables.
(cid:120) An agreement contains an option to expand the license into other territories. We did not identify the option
as a separate deliverable under existing guidance. The new guidance contains specific guidance on options
that treat them as a material right if the customer would not otherwise receive them without entering into the
arrangement. We are in the process of assessing how the new guidance would impact the accounting for the
option.
(cid:120) Royalty revenues are based on future sales. Under existing guidance, royalty revenue is recognized as the
future sales occur. However, under the new guidance royalties are considered variable consideration, which
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are required to be estimated unless the criteria for a different pattern of recognition are met. We are in the
process of assessing the timing and method of recognition of royalties.
(cid:120) We currently use the milestone method to recognize substantive milestones related to research and
development service deliverables. This results in more one-time recognition of revenue when such milestones
are achieved. This method may not be acceptable under the new guidance; therefore, research and
development services deliverables, which are transferred to the customer over time, will likely be recognized
using a measure of progress such as costs incurred. The objective when measuring progress is to depict our
performance in transferring control of research and development services promised to a customer (that is,
satisfaction of our performance obligation). Moreover, the milestone payments would be regarded as variable
consideration and included in the transaction price when considered highly probable that these would not
reverse in future. We are in the process of assessing how the new guidance shall be applied to milestone
payments.
(cid:120) The license and collaboration agreements allow certain costs incurred by us to be reimbursed. Our current
accounting policy is to concurrently recognize the revenue and related costs as they are incurred. We are in
the process of assessing how the new guidance would impact the accounting for costs reimbursements.
For sales of goods in the Commercial Platform, while we are continuing to evaluate the impact, we expect there
will not be a material impact to the timing of revenue recognition under the new guidance. We expect the timing of revenue
recognition will be at the point when the goods have transferred to the customer and the customer obtains control of the
goods as evidenced by delivery of the product, transfer of title and when no further obligations to the customer remain.
We are continuing to evaluate the impact in other areas and the method of adoption of ASU 2014-09 and related
amendments and disclosures. While we are in the process of assessing the transition method, we expect to adopt the new
standard using the modified retrospective method in our consolidated financial statements for the year ended December 31,
2018.
In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of
Deferred Taxes. ASU 2015-17 simplifies the presentation of deferred income taxes, which require the deferred tax
liabilities and assets be classified as noncurrent in a classified balance sheet. ASU 2015-17 is effective for fiscal years and
interim periods within those years beginning after December 15, 2016. We adopted ASU 2015-17 on January 1, 2017 and
all current deferred tax liabilities and assets are reclassified to noncurrent. This guidance impacts the presentation of our
consolidated balance sheets only, and prior periods will not be retrospectively adjusted.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10) - Recognition
and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 makes a number of changes to the
accounting for equity investments and financial liabilities under the fair value option, and the presentation and disclosure
requirements for financial instruments. It also simplifies the impairment assessment of equity investments without readily
determinable fair values by requiring assessment for impairment qualitatively at each reporting period. ASU 2016-01 is
effective for fiscal years and interim periods within those years beginning after December 15, 2017. Early adoption of this
particular guidance from ASU 2016-01 is not permitted. We do not expect this updated standard to have a material impact
on our consolidated financial statements and associated disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The core principle of Topic 842 is that a
lessee should recognize the assets and liabilities that arise from leases. A lessee should recognize in the balance sheet a
liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying
asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy
election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it
should recognize lease expense for such leases generally on a straight-line basis over the lease term. ASU 2016-02 is
effective for fiscal years and interim periods within those years beginning after December 15, 2018. Early adoption is
permitted. We are currently evaluating the method of adoption and the impact ASU 2016-02 will have on our consolidated
financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements
to Employee Share-Based Payment Accounting. ASU 2016-09 involves several aspects of the accounting for share-based
payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and
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classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years and interim periods within those
years beginning after December 15, 2016. We do not expect ASU 2016-09 to have a material impact on our consolidated
financial statements.
In October 2016, the FASB issued ASU 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other Than
Inventory (Topic 740). This standard will require entities to recognize the income tax consequences of intra-entity transfers
of assets other than inventory at the time of transfer. This standard requires a modified retrospective approach to adoption.
ASU 2016-16 is effective for fiscal years and interim periods within those years beginning after December 31, 2018. We
do not expect ASU 2016-16 to have a material impact on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition
of a Business, which revises the definition of a business. To be considered a business, an acquisition would have to include
an input and a substantive process that together significantly contribute to the ability to create outputs. To be a business
without outputs, there will now need to be an organized workforce. ASU 2017-01 is effective for fiscal years and interim
periods within those years beginning after December 15, 2018. We currently do not expect ASU 2017-01 to have a material
impact on our consolidated financial statements, but will apply the guidance upon adoption to business acquisitions,
disposals and segment changes, if any.
In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350), to simplify the
accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a
hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying
value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will
remain largely unchanged. ASU 2017-04 is effective for fiscal years and interim periods within those years beginning after
December 15, 2019. We will apply the guidance upon adoption to our annual goodwill impairment assessments.
Other amendments that have been issued by the FASB or other standards-setting bodies that do not require
adoption until a future date are not expected to have a material impact on our consolidated financial statements
upon adoption.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management.
Below is a list of the names and ages of our directors and officers as of March 1, 2017, and a brief account of the
business experience of each of them. The business address for our directors and officers is c/o Hutchison China MediTech
Limited, Room 2108, 21/F, Hutchison House, 10 Harcourt Road, Hong Kong.
Name
Simon To
Christian Hogg
Johnny Cheng
Dan Eldar
Edith Shih
Paul Carter
Karen Ferrante, M.D.
Graeme Jack
Weiguo Su, Ph.D.
Ye Hua, M.D.
May Wang, Ph.D.
Zhenping Wu, Ph.D.
Mark Lee
Age Position
65 Executive Director and Chairman
51 Executive Director and Chief Executive Officer
50 Executive Director and Chief Financial Officer
63 Non-executive Director
65 Non-executive Director and Company Secretary
56 Senior Independent Non-executive Director
59 Independent Non-executive Director
66 Independent Non-executive Director
59 Executive Vice President and Chief Scientific Officer
49 Senior Vice President, Head of Clinical Development & Regulatory Affairs
53 Senior Vice President, Business Development & Strategic Alliances
57 Senior Vice President, Pharmaceutical Sciences
39 Senior Vice President, Corporate Finance & Development
Simon To has been a director since 2000 and an executive director and chairman since 2006. He is also chairman
of our remuneration committee and a member of our technical committee. He is managing director of Hutchison Whampoa
(China) Limited and has been with Hutchison Whampoa (China) Limited for over 36 years, building its business from a
small trading company to a multi-billion dollar investment group. He has negotiated major transactions with multinationals
such as Procter & Gamble, or P&G, Lockheed, Pirelli, Beiersdorf, United Airlines, and British Airways. Mr. To’s career
165
in China spans more than 36 years. He is the original founder of Hutchison Whampoa Limited’s (currently a subsidiary of
CK Hutchison) traditional Chinese medicine business and has been instrumental in its 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 (graduated top 5% of his class).
Christian Hogg has been an executive director and chief executive officer since 2006. He is also a member of our
technical committee. He joined Hutchison Whampoa (China) Limited in 2000 and has since led all aspects of the creation,
implementation and management of our strategy, business and listing. This includes the creation of our start-up businesses
and the acquisition and operational integration of assets that led to the formation of our China joint ventures. Prior to
joining Hutchison Whampoa (China) Limited, Mr. Hogg spent ten years with P&G, starting in the United States 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.
Johnny Cheng has been an executive director since 2011 and chief financial officer since 2008. He is also a
director of Hutchison MediPharma (Hong Kong) Limited, Sen Medicine Company Limited, Hutchison MediPharma,
Hutchison MediPharma (Suzhou) Limited, and Hutchison MediPharma (Yulin) Limited. He was a director of Hutchison
Healthcare during 2009. Prior to joining our 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 (currently PricewaterhouseCoopers) in Australia and then KPMG in Beijing before spending eight years with
Nestlé in China where he was in charge of a number of finance 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.
Dan Eldar has been a non-executive director since 2016. He has more than 30 years of experience as a senior
executive, leading global operations in telecommunications, water, biotech and healthcare. He is an executive director of
Hutchison Water Israel Ltd, a subsidiary of CK Hutchison group, which focuses on large scale projects including
desalination, wastewater treatment and water reuse. He was formerly an independent non-executive director of Leumi
Card, a subsidiary of Bank Leumi Le-Israel B.M., one of Israel’s leading credit card companies. Dr. Eldar holds a Doctor
of Philosophy degree in Government from Harvard University, Master of Arts degree in Government from Harvard
University, Master of Arts degree in Political Science and Public Administration from the Hebrew University of Jerusalem
and a Bachelor of Arts degree in Political Science from the Hebrew University of Jerusalem.
Edith Shih has been a non-executive director and company secretary since 2006 and company secretary of our
subsidiaries since 2000. She is also an executive director, head group general counsel and company secretary of CK
Hutchison and a non-executive director of Hutchison Telecommunications Hong Kong Holdings Limited and Hutchison
Port Holdings Management Pte. Limited, the trustee-manager of Hutchison Port Holdings Trust, as well as director and
company secretary of various subsidiaries and associated companies under the CK Hutchison group. She has over 34 years
of experience in legal, regulatory, corporate finance, compliance and corporate governance fields. She is at present the
senior vice president and an executive committee member of the Institute of Chartered Secretaries and Administrators in
the United Kingdom and a past president and current council member and chairperson of various committees and panels
of The Hong Kong Institute of Chartered Secretaries. She is also the chairman of the remuneration committee and vice-
chairman of the governance committee of the Hong Kong Institute of Certified Public Accountants. She was a member of
the listing committee and corporate governance sub-committee of the Stock Exchange of Hong Kong Limited, the standing
committee on Companies Law Reform as well as the Hong Kong Institute of Certified Public Accountants 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 qualified 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.
Paul Carter has been a senior independent non-executive director since February 1, 2017. He is also a member
of our audit committee, remuneration committee and technical committee. He has more than 25 years of experience in the
pharmaceutical industry. From 2006 to 2016, Mr. Carter served in various senior executive roles at Gilead, a research-
based biopharmaceutical company, with the last position as executive vice president, commercial operations. In this role,
Mr. Carter headed the worldwide commercial organization responsible for the launch and commercialization of all of
Gilead’s products. Prior to joining Gilead, he spent 14 years with GlaxoSmithKline PLC and its group companies, with
the last position as a regional head of the international business in Asia. He is currently a director of Alder
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Biopharmaceuticals, Inc. Mr. Carter holds a degree in Business Studies from the Ealing School of Business and
Management (now merged into University of West London) and is a Fellow of the Chartered Institute of Management
Accountants in the United Kingdom.
Karen Ferrante has been an independent non-executive director since February 1, 2017. She is also the chairman
of our technical committee and a member of the audit committee. She has more than 20 years of experience in the
pharmaceutical industry. She was the former chief medical officer and head of research and development of Tokai
Pharmaceuticals, Inc., a biopharmaceutical company focused on developing and commercializing innovative therapies for
prostate cancer and other hormonally driven diseases. From September 2007 to July 2013, Dr. Ferrante held senior
positions at Millennium Pharmaceuticals, Inc. and its parent company, Takeda Pharmaceutical Company Limited,
including chief medical officer and most recently as oncology therapeutic area and Cambridge site head. From 1999 to
2007, she held positions of increasing responsibility at Pfizer Inc., with the last position as vice president, oncology
development. Dr. Ferrante is currently a member of the board of directors of Progenics Pharmaceuticals, Inc., and
MacroGenics, Inc. She was previously a director of Baxalta Incorporated until it was acquired by Shire plc in 2016. Dr.
Ferrante has been an author of a number of papers in the field of oncology, an active participant in academic and
professional associations and symposia and holder of several patents. Dr. Ferrante holds a Bachelor of Science Degree in
Chemistry and Biology from Providence College and a Doctor of Medicine from Georgetown University.
Graeme Jack has been an independent non-executive director since March 1, 2017. He is also chairman of our
audit committee and member of our remuneration committee. He has more than 40 years of experience in finance and
audit. He retired as partner of PricewaterhouseCoopers in 2006 after a distinguished career with the firm for over 33 years.
He is currently an independent non-executive director of The Greenbrier Companies, Inc. (an international supplier of
equipment and services to the freight rail transportation markets), Hutchison Port Holdings Management Pte. Limited, the
trustee-manager of Hutchison Port Holdings Trust (a developer and operator of deep water container terminals) and of
COSCO SHIPPING Development Co., Ltd., formerly known as “China Shipping Container Lines Company Limited” (an
integrated financial services platform principally engaged in vessel and container leasing). He holds a Bachelor of
Commerce degree and is a Fellow of the Hong Kong Institute of Certified Public Accountants and an Associate of
Chartered Accountants Australia and New Zealand.
Weiguo Su has been our executive vice president and chief scientific officer since 2012. Prior to joining our
company in 2005, Dr. Su spent 15 years with Pfizer’s U.S. research and development organization where he became a
director in their medicinal chemistry department. Dr. Su received a bachelor’s degree in chemistry from Fudan University
in Shanghai and completed a Ph.D. and post-doctoral fellowship in chemistry at Harvard University under the guidance of
Nobel Laureate Professor E. J. Corey.
Ye Hua has been our senior vice president and head of our clinical development & regulatory affairs group since
2014. He has 18 years’ drug development and global new drug registration experience in the pharmaceutical industry, and
six years’ experience in cancer epidemiology. Prior to joining our company, Dr. Hua was a senior director of clinical
development at Celgene Corporation, a U.S.-based global biopharmaceutical company, from 2011 to 2014. Before joining
Celgene, Dr. Hua worked as a medical director at Novartis Pharmaceuticals Corporation for eight years. Dr. Hua received
his M.D. from Fudan University Shanghai medical college. He also worked as a cancer epidemiologist at the Shanghai
Cancer Institute for four years before attending McGill University where he received a master’s degree in cancer
epidemiology.
May Wang is our senior vice president of business development & strategic alliances. Prior to joining our
company in 2010, Dr. Wang spent 16 years with Eli Lilly where she was the head of Eli Lilly’s Asian biology research
and responsible for establishing and managing research collaborations in China and across Asia. Dr. Wang holds numerous
patents, has published more than 50 peer-reviewed articles and has given dozens of seminars and plenary lectures.
Dr. Wang received a Ph.D. in biochemistry from Purdue University.
Zhenping Wu joined our company in 2008 and has been our senior vice president of pharmaceutical sciences
since 2012. Dr. Wu has over 21 years of experience in drug discovery and development. His past positions include senior
director of pharmaceutical sciences at Phenomix Corporation, a U.S.-based biotechnology company, director of
pharmaceutical development at Pfizer Global Research & Development in California (formerly Agouron Pharmaceuticals)
and a group leader at Roche at its Palo Alto site. He is a past chairman and president of the board of the Sino-American
Biotechnology and Pharmaceutical Association. Dr. Wu received a Ph.D. from the University of Hong Kong and a master
in business administration from the University of California at Irvine.
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Mark Lee is our senior vice president of corporate finance and development. Prior to joining our company in
2009, he worked in healthcare investment banking in the United States and Europe since 1998. Based in the New York
and London offices of Credit Suisse, Mr. Lee was involved in the execution and origination of mergers, acquisitions,
public and private financings and corporate strategy for life science companies such as AstraZeneca, Bristol-Myers Squibb
and Genzyme, as well as other medical product and service companies. Mr. Lee received his bachelor’s degree in
biochemical engineering with first class honors from University College London, where he was awarded a Dean’s
Commendation. He also received a master of business administration from the Massachusetts Institute of Technology’s
Sloan School of Management.
B. Compensation.
Summary Compensation Table
Executive Officer Compensation
The following table sets forth the compensation paid or accrued during the fiscal year ended December 31, 2016
to our chief executive officer, our chief financial officer and our other executive officers on an aggregate basis.
Name and
Principal Position
Christian Hogg
Chief Executive Officer and Executive Director
Johnny Cheng
Chief Financial Officer and Executive Director
Other Executive Officers in the Aggregate
Salary
and fees
($)
Bonus
($)
409,261 (1)
710,769
Taxable
benefits
($)
14,864
Pension
contributions
($)
25,969 1,160,863
Total
($)
323,064 (2)
263,718
—
23,385
610,167
1,170,074
2,150,642 (3) 25,387
84,029 3,430,132
(1)
(2)
(3)
Amount includes director’s fees of $60,184 paid by our company but excludes director’s fees received from our
subsidiaries during the period he served as director that were paid to a subsidiary of our company.
Amount includes director’s fees of $56,434.
In December 2013 and March 2014, we awarded cash retention bonuses to certain of our executive officers in an
aggregate amount of $2,977,751. Each such executive officer receives portions of his or her retention bonus upon
certain dates in the future depending on when the bonus was granted and, in each case, assuming he or she remains
employed by our company on such future dates. An aggregate amount of $848,477 of such retention bonuses
was paid in 2015 and another aggregate amount of $620,076 was paid in 2016, and such paid amount in 2016 is
included in the bonus amount stated in the table above.
During the fiscal year ended December 31, 2016, we also granted share option awards representing an aggregate
of 693,686 ordinary shares to our executive officers collectively. The options had an exercise price of £19.70 ($24.03) per
share and expire on December 19, 2023 or June 27, 2024. Of such options, options to purchase an aggregate of 593,686
ordinary shares were granted in exchange for options held by such executive officers at our subsidiary, Hutchison
MediPharma Holdings. See “—2013 and 2016 Hutchison MediPharma Holdings Shares Exchanges.” In connection with
the share options granted in the year ended December 31, 2016, we awarded cash retention bonuses to certain of our
executive officers in an aggregate amount of approximately £8,618,199 ($10,514,203) which is payable when and if such
executive officers exercise their options.
Employment Arrangements with our Executive Officers
Offer Letters for Executive Officers at Hutchison China MediTech Limited
We have entered into employment offer letters with each of our executive officers who is employed by our Hong
Kong subsidiary, Hutchison China MediTech (HK) Limited, namely Mr. Christian Hogg and Mr. Johnny Cheng. Under
these offer letters, our executives receive compensation in the form of salaries, discretionary bonuses, participation in the
Hutchison Provident Fund retirement scheme, medical coverage under the Hutchison Group Medical Scheme, personal
accident insurance and annual leave. None of the employment arrangements provide benefits to our executive officers
upon termination. We may terminate employment by giving the executive three months’ prior written notice. The executive
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officer may also voluntarily terminate his or her employment with us upon not less than three months’ prior written notice
to us.
Each executive officer has agreed, for the term of employment with us and thereafter, not to disclose or use for
his or her own purposes any of our and our associated companies’ confidential information that the executive officer may
develop or learn in the course of employment with us. Moreover, each of our executive officers has agreed, for the term
of employment with us and for a period of twelve months thereafter, (i) not to undertake or be employed or interested
directly or indirectly anywhere in Hong Kong in any activity which is similar to and competitive with our company or
associated companies in which the executive officer had been involved in the period of 12 months prior to such termination
and (ii) not to solicit for any employees of our company or our joint ventures or orders from any person, firm or company
which was at any time during the 12 months prior to termination of such employment a customer or supplier of our
company or associated companies.
Employment Agreements with Executive Officers at Hutchison MediPharma
We have also entered into employment agreements with each of our executive officers who are employed directly
by Hutchison MediPharma, namely Dr. Weiguo Su, Dr. Ye Hua, Dr. May Wang, Dr. Zhenping Wu and Mr. Mark Lee.
Under these employment agreements, we engage the executive officer on either an open-ended or a fixed term. Our
executive officers receive compensation in the form of salaries, discretionary bonuses, annual leave, statutory maternity
leave and nursing leave.
Under the terms of these agreements, we provide labor protection and work conditions that comply with the safety
and sanitation requirements stipulated by the relevant PRC laws. The employment agreements prohibit the executive
officers from engaging in any conduct and business activities which may compete with the business or interests of
Hutchison MediPharma during the term of the executive officer’s employment. These executive officers also enjoy the
Hutchison Provident Fund retirement scheme, medical coverage under the Hutchison Group Medical Scheme and personal
accident insurance.
We may terminate an executive officer’s employment for cause at any time without notice. Termination for cause
may include a serious breach of our internal rules and policies, serious negligence in the executive officer’s performance
of his or her duties, an accusation or conviction of a criminal offence, acquisition of another job which materially affects
the executive officer’s ability to perform his or her duties for our company and other circumstances stipulated by applicable
PRC laws. We may terminate an executive officer’s employment with three months’ prior notice if the executive officer
is unable to perform his or her duties (after the expiration of the prescribed medical treatment period) because of an illness
or non-work-related injury or the executive officer is incompetent and remains incompetent after training or adjustment of
his or her position. The executive officer may voluntarily terminate his or her contract without cause with three months’
prior notice. The executive officer may also terminate the employment agreement immediately for cause, which includes
a failure by us to provide labor protection and the work conditions as specified under the employment agreement. In case
of termination for any reason, we agree to make any mandatory severance payments required by the relevant PRC
labor laws.
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Equity Compensation
The following table sets forth information concerning the outstanding equity awards held by our chief executive
officer, our chief financial officer and our other executive officers on an aggregate basis as of December 31, 2016.
Number of
securities
underlying
unexercised
options which are
exercisable
(#)
—
—
Number of
securities
underlying
unexercised
Option
options which are exercise
unexercisable
(#)
price
(£/share)
—
—
Option
expiration
date
—
—
—
—
495,266
198,420
19.7
December 19, 2023
or June 27, 2024
Name and Principal Position
Christian Hogg
Chief Executive Officer and Executive Director
Johnny Cheng
Chief Financial Officer and Executive Director
Other Executive Officers in the Aggregate
Long-Term Incentive Compensation
The following table sets forth information concerning the outstanding LTIP grants held by our chief executive
officer, chief financial officer and other executive officers on an aggregate basis as of December 31, 2016.
Name and Principal
Position
Christian Hogg
Chief Executive Officer and Executive Director
Johnny Cheng
Chief Financial Officer and Executive Director
Other Executive Officers in the Aggregate
Maximum Value of
LTIP award(1)
$
$
$
329,385
101,619
397,500
(1)
Certain of the LTIP awards are conditional upon the achievement of annual performance targets. The amounts
reflected in the table above assume the maximum amount that may be paid under these LTIP awards. The LTIP
awards will be settled in a variable number of shares based on a fixed monetary amount awarded upon
achievement of performance targets or upon vesting, as applicable. An independent third party trustee who
administers the LTIP purchased shares of Chi-Med on the AIM market which will be used to settle the LTIP
awards.
Director Compensation
The following table sets forth a summary of the compensation we paid to our directors other than Christian Hogg
and Johnny Cheng during 2016. Other than as set forth in the table below, we did not pay any compensation, make any
equity awards or non-equity awards to, or pay any other compensation to such directors.
Name of Director
Simon To
Shigeru Endo
Christian Salbaing
Edith Shih
Michael Howell
Christopher Huang
Christopher Nash
Dan Eldar
Fees Earned or
Paid in Cash
($)
67,684 (1)
56,434 (2)(3)
27,267 (2)(4)
56,434 (5)
78,750 (6)
76,875 (3)
73,125 (3)
29,167 (7)
Share option All other
benefits
($)
compensation Total
($)
($)
—
—
—
—
—
—
—
—
— 67,684
— 56,434
— 27,267
— 56,434
— 78,750
— 76,875
— 73,125
29,167
—
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(1)
(2)
(3)
(4)
(5)
(6)
(7)
Such director’s fees were paid to Hutchison Whampoa (China) Limited. Director’s fees received from our
subsidiaries during the period he served as director that were paid to a subsidiary or an intermediate holding
company of our company are not included in the amounts above.
Such director’s fees were paid to Hutchison International Limited, a wholly owned subsidiary of CK Hutchison.
Ceased to be a director as of February 1, 2017.
Ceased to be a director as of August 1, 2016.
Such director’s fees were paid to CK Hutchison Global Investments Limited. Director’s fees received from our
subsidiaries during the period she served as director that were paid to a subsidiary or an intermediate holding
company of our company are not included in the amounts above.
Ceased to be a director as of March 1, 2017.
Appointed as a director as of August 1, 2016.
Equity Compensation Schemes and Other Benefit Plans
We have two share option schemes. We refer to these collectively as the Chi-Med Option Schemes. Our
shareholder adopted the first Chi-Med Option Scheme, or the 2005 Chi-Med Option Scheme, in June 2005, and it was
subsequently approved by the shareholders of Hutchison Whampoa Limited, our then majority shareholder, in May 2006
and later amended by our board of directors in March 2007. This share option scheme expired in 2016. In April 2015, our
shareholders adopted the second Chi-Med Option Scheme, or the 2015 Chi-Med Option Scheme, which was later approved
by the shareholders of CK Hutchison, the ultimate parent of our majority shareholder in May 2016.
We also have a long-term incentive scheme which was adopted by our shareholders in April 2015. We refer to
this as our LTIP.
In addition, our subsidiary Hutchison MediPharma Holdings has two share option schemes. We refer to these
collectively as the Hutchison MediPharma Option Schemes. The first Hutchison MediPharma Option Scheme, or the 2008
Hutchison MediPharma Option Scheme, was adopted in August 2008 upon approval by its shareholder. The 2008
Hutchison MediPharma Option Scheme was thereafter amended by the board of directors of Hutchison MediPharma
Holdings in April 2011 and expired in 2014. The second Hutchison MediPharma Option Scheme, or the 2014 Hutchison
MediPharma Option Scheme, was adopted in December 2014 upon approval by its shareholders.
Our Chi-Med Option Schemes, our LTIP and the 2014 Hutchison MediPharma Option Scheme each terminate
on the tenth anniversary of their adoption. Each may also be terminated by its board of directors at any time. Any
termination of the scheme is without prejudice to the awards outstanding at such time. Options are no longer being granted
under the 2005 Chi-Med Option Scheme or the 2008 Hutchison MediPharma Option Scheme, but outstanding awards
under the 2005 Chi-Med Option Scheme continue to be governed by the terms thereof.
The following describes the material terms of our Chi-Med Option Schemes, our LTIP and the Hutchison
MediPharma Option Schemes, or collectively the Schemes.
Awards and Eligible Grantees. The Schemes provide for the award of share options exercisable for ordinary
shares of our company (in the case of the Chi-Med Option Schemes) or ordinary shares of Hutchison MediPharma
Holdings (in the case of the Hutchison MediPharma Option Schemes) to employees or non-executive directors (excluding
any independent non-executive directors under the Chi-Med Option Schemes).
Under our LTIP, awards in the form of contingent rights to receive either shares or cash payments may be granted
to the directors of our company, directors of our subsidiaries and employees of our company, subsidiaries, affiliates or
such other companies as determined by our board of directors in its absolute discretion.
Scheme Administration. Our board of directors has delegated its authority for administering our Chi-Med Option
Schemes and our LTIP to our remuneration committee. The board of directors of Hutchison MediPharma Holdings is
responsible for administering the Hutchison MediPharma Option Schemes. Each such plan administrator has the authority
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to, among other things, select participants and determine the amount and terms and conditions of the awards under the
applicable Schemes as it deems necessary and proper, subject to the restrictions described in “—Restrictions on
Grants” below.
Restrictions on Grants. Under the Chi-Med Option Schemes, grants may not be made to independent
non-executive directors. Furthermore, those grants may not be made to any of our employees or directors if such person
is also a director, chief executive or substantial shareholder of any of our direct or indirect parent companies which is listed
on a stock exchange, including CK Hutchison, or any of its associates without approval by the independent non-executive
directors of such parent company (excluding any independent non-executive director who is a proposed grantee). In
addition, approval by our shareholders and the shareholders of such listed parent company is required if an option grant
under the Chi-Med Option Schemes is to be made to a substantial shareholder or independent non-executive director of a
listed parent company or any of its associates and, upon exercise of such grant and any other grants made during the prior
12-month period to that shareholder, that individual would receive an amount of our ordinary shares equal or greater than
0.1% of our total outstanding shares or with an aggregate value in excess of HK$5 million (equivalent to $0.6 million as
of December 31, 2016). The Hutchison MediPharma Option Schemes do not contain these restrictions.
In addition, options under our Chi-Med Option Schemes and the Hutchison MediPharma Option Schemes may
not be granted to any individual if, upon the exercise of such options, the individual would receive an amount of shares
when aggregated with all other options granted to such individual under the applicable Scheme in the 12-month period up
to and including the grant date, that exceeds 1% of the total shares outstanding of the company granting the award on such
date. In the event a grant of share options would exceed 1% of the total number of issued shares of Hutchison MediPharma
Holdings, our company must also approve the grant. There are no individual limits under the LTIP.
Under our LTIP, no grant to any director, chief executive or substantial shareholder of our company may be made
without the prior approval of our independent non-executive directors (excluding an independent non-executive director
who is a proposed grantee).
Vesting. Vesting conditions of options granted under the Schemes are determined by the respective board of
directors at the time of grant. Any options granted are normally exercisable to the extent vested within the period specified
by the applicable Scheme, which ranges from six to ten years after the date of grant.
Under the Chi-Med Share Option Schemes and the Hutchison MediPharma Option Schemes, if a participant has
committed any misconduct or any conduct making such participant’s service terminable for cause, all options (whether
vested or unvested) lapse unless the respective board of directors otherwise determines in its absolute discretion. Options
may be exercised to the extent vested where a participant’s service ceases due to the participant’s death, serious illness,
injury, disability, retirement at the applicable retirement age, or earlier if determined by the participant’s employer, or if a
participant’s service ceases for any other reason other than for cause.
Under the LTIP, if a participant’s employment or service with our company or its subsidiaries is terminated for
cause or if the participant breaches certain provisions in the LTIP restricting the transfer of awards by grantees and
imposing non-competition obligations on grantees, all unvested awards are automatically cancelled. Where a participant’s
employment or service ceases for any reason other the reasons listed above (including due to the participant’s resignation,
retirement, death or disability or upon the non-renewal of such participant’s employment or service agreement other than
for cause), our board of directors may determine at its discretion whether unvested awards shall be deemed vested.
Exercise Price. The exercise price for each share pursuant to the initial options granted under the 2005 Chi-Med
Option Scheme was a price determined by our board of directors at the date of grant, and for grants made thereafter, the
exercise price was the market value of a share at the date of grant, as derived from any stock exchange where such shares
are admitted for trading or, if not traded, as may be determined by our board of directors. The exercise price for each share
pursuant to options granted under our 2008 Hutchison MediPharma Option Scheme was a price determined by the board
of directors of Hutchison MediPharma Holdings.
The exercise price for each share pursuant to the options granted under the 2015 Chi-Med Option Scheme must
be the market value of a share at the date of grant, as derived from any stock exchange where such shares are admitted for
trading or, if not traded, as may be determined by our board of directors. The exercise price for each share pursuant to
options granted under the 2014 Hutchison MediPharma Option Scheme will be determined by the boards of directors of
Hutchison MediPharma Holdings at the date of grant.
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Non-transferability of Awards. Awards may not be transferred except in the case of a participant’s death by the
terms of each Scheme.
Takeover or Scheme of Arrangement. In the event of a general or partial offer for the shares of our company
(under the Chi-Med Option Schemes) or Hutchison MediPharma Holdings (under the Hutchison MediPharma Option
Schemes), whether by way of takeover, offer, share repurchase offer, or scheme of arrangement, the affected company is
required to use all reasonable endeavors to procure that such offer is extended to all holders of options granted by such
company on the same terms as those applying to shareholders. Both vested and unvested options may be exercised up until
(i) the closing date of any such offer, (ii) the record date for entitlements under a scheme of arrangement, or (iii) two
business days prior to any general meeting of members convened to consider such offer (under the 2014 Hutchison
MediPharma Option Scheme), and will lapse thereafter. Certain options may also be exercised on a voluntary winding up
of our company or Hutchison MediPharma Holdings, as the case may be.
Under our LTIP, in the event of a general offer for all the shares of our company, whether by way of takeover or
scheme of arrangement, or if our company is to be voluntarily wound up, our board of directors shall determine in its
discretion whether outstanding unvested awards will vest and the period within which such awards will vest.
Amendment. The Chi-Med Option Schemes require that amendments of a material nature only be made with the
approval of our shareholders and approval of any of our direct or indirect parent companies which is listed on a stock
exchange, including CK Hutchison. The Hutchison MediPharma Option Schemes may be altered by the board of directors
of our company or Hutchison MediPharma Holdings, as the case may be, but any amendments which provide a material
advantage to grantees cannot take effect without shareholders’ approval.
Our board of directors may alter the LTIP, but amendments which are of a material nature cannot take effect
without shareholders’ approval, unless the changes take effect automatically under the terms of the LTIP.
Authorized Shares. Subject to certain adjustments for share splits, share consolidations and other changes in
capitalization, the maximum number of shares that may be issued upon exercise of all options granted may not in the
aggregate exceed: (i) 4% of our shares outstanding on the date of adoption of the 2015 Chi-Med Option Scheme or (ii) 5%
of the shares of Hutchison MediPharma Holdings outstanding on the date of adoption under the 2014 Hutchison
MediPharma Option Scheme. In addition, under our 2015 Chi-Med Option Scheme, our board of directors may, with the
approval of the shareholders of any of our direct or indirect parent companies which is listed on a stock exchange, including
CK Hutchison, “refresh” the 4% scheme limit provided that the total number of shares which may be issued upon exercise
of all options to be granted under the Chi-Med Option Schemes shall not exceed 10% of our total shares outstanding on
such date. Further, the maximum number of shares that may be issued upon exercise of all options granted and not yet
exercised under the 2015 Chi-Med Option Scheme, when combined with options granted and not yet exercised under any
other schemes of our company or our subsidiaries must not exceed 10% of our shares outstanding on such date.
Share awards under our LTIP may not exceed 5% of our shares outstanding on the adoption date of the LTIP.
2013 and 2016 Hutchison MediPharma Holdings Share Exchanges
From December 2013 to August 2014, we offered all holders of Hutchison MediPharma Holdings share options
granted under the 2008 Hutchison MediPharma Option Scheme an opportunity to exchange their options for new options
granted under the 2005 Chi-Med Option Scheme and/or a cash retention bonus. As a result, we issued new options under
the 2005 Chi-Med Option Scheme exercisable for an aggregate of 636,517 of our ordinary shares and paid cash retention
bonuses in an aggregate amount of $3,584,136 in exchange for options of Hutchison MediPharma Holdings which were
exercisable for an aggregate of 2,518,841 of its shares. Of the options exercisable for our ordinary shares, options to
purchase 593,686 ordinary shares were canceled in exchange for options to purchase Hutchison MediPharma Holdings
shares on December 17, 2014.
In June 2016, with the option holders’ consent, we cancelled the 1,187,372 share options outstanding under the
2014 Hutchison MediPharma Option Scheme and issued 593,686 new shares options under the 2015 Chi-Med Option
Scheme to such holders in exchange for the cancellation of their options under the 2014 Hutchison MediPharma Option
Scheme.
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Outstanding Awards
As of December 31, 2016, the following options were outstanding:
(cid:120)
(cid:120)
options to purchase an aggregate of 345,910 ordinary shares, representing approximately 0.6% of our
outstanding share capital, at a weighted average exercise price of £5.58 per share under the 2005
Chi-Med Option Scheme, and
options to purchase an aggregate of 693,686 ordinary shares, representing approximately 1.1% of the
outstanding share capital, at a weighted average exercise price of £19.70 per share under the 2015
Chi-Med Option Scheme.
In October 2015, we granted awards under our LTIP to 43 senior managers, executives and directors, giving each
a conditional right to receive ordinary shares to be purchased by an independent third-party trustee up to a certain maximum
cash amount depending upon the achievement of annual performance targets from 2014 to 2016. Any ordinary shares
purchased on behalf of an LTIP grantee are to be held by the trustee until they are vested. Vesting will occur one business
day after the publication date of our annual report for the financial year falling two years after the financial year to which
the LTIP award relates. Vesting will also depend upon the continued employment of the award holder and will otherwise
be at the discretion of our board of directors.
In March 2016, we granted additional LTIP awards to certain senior managers, giving them a conditional right to
receive ordinary shares to be purchased by the third-party trustee up to an aggregate maximum cash amount of $312,500.
Unlike the LTIP awards granted in October 2015, these awards are not related to the achievement of performance targets.
These LTIP awards vest annually over a four-year period, subject to the continued employment of the LTIP holder.
No awards, other than the 593,686 share options granted in exchange for options held under the 2014 Hutchison
MediPharma Option Scheme in June 2016 as described above and 100,000 share options granted to one of our executive
officers, have been granted under our 2015 Chi-Med Option Scheme.
C. Board Practices.
Our board of directors consists of eight directors including two executive directors, three non-executive directors
and three independent non-executive directors. Pursuant to a relationship agreement dated April 21, 2006 by and between
our company and Hutchison Whampoa (China) Limited, a parent company of Hutchison Healthcare Holdings Limited, or
the Relationship Agreement, our board of directors must consist of at least one director who is independent of the
Hutchison Whampoa Limited group so long as Hutchison Whampoa (China) Limited is entitled to cast at least 50% votes
eligible to be cast on a poll vote at a general meeting of our company. The Relationship Agreement will continue in effect
until our ordinary shares cease to be traded on the AIM market or the CK Hutchison group individually or collectively
ceases to hold at least 30% of our shares.
Our directors are subject to a three-year term of office and hold office until such time as they wish to retire and
not offer themselves up for re-election, are not re-elected by the shareholders, or are removed from office by special
resolution at an annual general meeting of the shareholders. Under our articles of association, a director will be removed
from office automatically if, among other things, the director (i) becomes bankrupt or makes any arrangement or
composition with his creditors; or (ii) is found to be or becomes of unsound mind. For information regarding the period
during which our officers and directors have served in their respective positions, please see Item 6.A. “Directors and Senior
Management.”
Our board of directors has established an audit committee, a remuneration committee and a technical committee.
Board Committees
Audit Committee
Our audit committee consists of Graeme Jack, Paul Carter and Karen Ferrante, with Graeme Jack serving as
chairman of the committee. Michael Howell, Christopher Huang and Christopher Nash previously served on our audit
committee until they resigned from our board of directors on March 1, 2017, February 1, 2017 and February 1, 2017,
respectively. Graeme Jack, Paul Carter and Karen Ferrante each meet the independence requirements under the rules of
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the Nasdaq Stock Market and under Rule 10A-3 under the Exchange Act. We have determined that Graeme Jack is an
“audit committee financial expert” within the meaning of Item 407 of Regulation S-K. All members of our audit committee
meet the requirements for financial literacy under the applicable rules and regulations of the SEC and the Nasdaq Stock
Market.
Although we are a foreign private issuer, we are required to comply with Rule 10A-3 of the Exchange Act,
relating to audit committee composition and responsibilities. Rule 10A-3 provides that the audit committee must have
direct responsibility for the nomination, compensation and choice of our auditor, as well as control over the performance
of their duties, management of complaints made, and selection of consultants. Under Rule 10A-3, if the governing law or
documents, of a listed issuer require that any such matter be approved by the board of directors or the shareholders of the
company, the audit committee’s responsibilities or powers with respect to such matter may instead be advisory. Our articles
of association provide that the audit committee may only have an advisory role and appointment of our auditor must be
decided by our shareholders at our annual general meeting or at a subsequent extraordinary general meeting in each year.
The audit committee formally meets at least twice a year and otherwise as required. The audit committee’s
purpose is to oversee our accounting and financial reporting process and the audit of our financial statements. Our audit
committee’s primary duties and responsibilities are to:
(cid:120) monitor the integrity of our financial statements, our annual and half-year reports and accounts and our
announcements of interim or final results;
(cid:120)
(cid:120)
(cid:120)
review significant financial reporting issues and the judgments which they contain;
review, whenever practicable without being inconsistent with any requirement for prompt reporting under
applicable listing rules, other statements containing financial information such as significant financial returns
to regulators and release of price sensitive information first where board of director approval is required; and
review and challenge where necessary:
o
o
the consistency of, and any changes to, accounting policies both on a year-on-year basis and
across our company;
the methods used to account for significant or unusual transactions where different approaches
are possible;
o whether our company has followed appropriate accounting standards and made appropriate
estimates and judgments, taking into account the views of the external auditor;
o
o
the clarity of the disclosure in our financial reports and the context in which statements are
made; and
all material information presented with the financial statements, such as any operating and
financial review and any corporate governance statements (insofar as it relates to the audit and
risk management).
In relation to our internal controls and risk management systems, our audit committee, among other things:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
reviews the effectiveness of our internal control and risk management systems;
reviews the policies and procedures for the identification, assessment and reporting of financial and non-
financial risks and our management of those risks in accordance with the requirements of the Sarbanes-Oxley
Act and other applicable laws, rules and regulations and the applicable requirements of any stock exchange;
approves the appointment and removal of the head of the internal audit function;
ensures our internal audit function has adequate standing and resources and is free from management or other
restrictions;
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(cid:120)
(cid:120)
reviews and monitors our executive management’s responsiveness to the findings and recommendations of
the internal audit function; and
reviews with management and our independent auditors the adequacy and effectiveness of our internal
control over financial reporting and disclosure controls and procedures.
In relation to our external auditor, our audit committee, among other things:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
recommends the appointment, reappointment or removal of the external auditor and considers any issues
relating to their resignation, dismissal, remuneration or terms of engagement, subject to approval by the
shareholders;
considers and monitors the external auditor’s independence, objectivity and effectiveness;
reviews and monitors the effectiveness of the audit process, considering relevant ethical or professional
requirements;
develops and implements policy on the engagement of the external auditor to provide non-audit services,
taking into any relevant ethical guidance; and
pre-approves the external auditors’ annual audit fees and the nature and scope of proposed audit coverage,
subject to approval by our shareholders.
The audit committee is authorized to obtain, at our company’s expense, reasonable outside legal or other
professional advice on any matters within the scope of its responsibilities.
Remuneration Committee
Our remuneration committee consists of Simon To, Graeme Jack and Paul Carter, with Simon To serving as
chairman of the committee. Michael Howell and Christopher Nash previously served on our remuneration committee until
they resigned from our board of directors on February 1, 2017 and March 1, 2017, respectively. The remuneration
committee is responsible for considering all material elements of remuneration policy and remuneration and incentives of
our executive directors and key employees with reference to independent remuneration research and professional advice.
The remuneration committee meets formally at least once each year and otherwise as required and make recommendations
to our board of directors on the framework for executive remuneration and on proposals for the granting of share options
and other equity incentives. Our board of directors is responsible for implementing these recommendations and agreeing
the remuneration packages of individual directors. No director is permitted to participate in discussions or decisions
concerning his or her own remuneration.
Technical Committee
Our technical committee consists of Karen Ferrante, Paul Carter, Simon To and Christian Hogg, with
Karen Ferrante serving as chairman of the committee. Christopher Huang previously served as chairman and member of
our technical committee until he resigned from our board of directors on February 1, 2017. The technical committee’s
responsibility is to consider, from time to time, matters relating to the technical aspects of the research and development
activities of our Innovation Platform. It invites such executives as it deems appropriate to participate in meetings from
time to time.
U.K. Corporate Governance Code
We have voluntarily applied, and plan to continue to apply for the foreseeable future, the principles of the
U.K. Corporate Governance Code published by the U.K. Financial Reporting Council. The U.K. Corporate Governance
Code is the primary source of corporate governance standards for companies in the United Kingdom, and it is recognized
as a best practice for companies whose shares are admitted to trading on the AIM market of the London Stock Exchange.
The U.K. Corporate Governance Code is comprised of main and supporting principles of good governance
addressing the following areas: director practices, directors’ remuneration, accountability and audit and relations with
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shareholders and institutional investors. It also includes detailed recommendations derived from these principles, such as:
the roles of board chairman and chief executive officer should not be exercised by the same individual and the chairman
of the board should ensure that new directors receive a full, formal and tailored induction on joining the board.
Except for general fiduciary duties and duties of care, Cayman Islands law has no specific corporate governance
regime which prescribes specific corporate governance standards on our directors. See Item 16G. “Corporate Governance”
for a discussion of such Cayman Islands law requirements applicable to our company.
Code of Ethics
Our board of directors has adopted a code of ethics to set standards for our directors, officers and employees as
are reasonably necessary to promote (i) honest and ethical conduct, including the ethical handling of actual or apparent
conflicts of interest between personal and professional relationships; (ii) full, fair, accurate, timely and understandable
disclosure in the reports and documents that we file or submit to the applicable stock exchanges, and in any other public
communications; (iii) compliance with applicable governmental and regulatory laws, rules, codes and regulations;
(iv) prompt internal reporting of any violations of the code of ethics; and (v) accountability for adherence to the code
of ethics.
Complaints Procedures
Our board of directors has adopted procedures for the confidential receipt, retention, and treatment of complaints
from, or concerns raised by, employees regarding accounting, internal accounting controls and auditing matters as well as
illegal or unethical matters. The complaint procedures are reviewed by the audit committee from time to time as warranted
to ensure their continuing compliance with applicable laws and listing standards as well as their effectiveness.
Information Security Policy
Our board of directors has adopted an information security policy to define and help communicate the common
policies for information confidentiality, integrity and availability to be applied to us and our joint ventures. The purpose
of the information security policy is to ensure business continuity by preventing and minimizing the impact of security
risks within our company and our joint ventures. Our information security policy applies to all of our and our joint ventures’
business entities across all countries. It applies to the creation, communication, storage, transmission and destruction of
all different types of information. It applies to all forms of information, including but not limited to electronic copies,
hardcopy, and verbal disclosures whether in person, over the telephone, or by other means.
Policy on Handling of Confidential and Price-sensitive Inside Information
and Securities Dealing
Our board of directors has adopted a policy on handling of confidential and price-sensitive inside information
and securities dealing. This policy, among other things, prohibits any employees dealing in our securities or their
derivatives while in possession of price-sensitive insider information or confidential information. The policy also outlines
the stringent legal requirements for any employees in possession of non-public, price-sensitive information about our
company. Certain members of our senior management or staff are subject to such specific additional compliance
requirements as are communicated to them individually from time to time (including but not limited to obtaining written
pre-clearance from designated members of management prior to any dealing in any such securities is allowed).
Board Diversity Policy
Our board of directors has established a board diversity policy as our board of directors recognizes the benefits
of a board of directors that possesses a balance of skills, experience, expertise, independence and knowledge and diversity
of perspectives appropriate to the requirements of our businesses.
We maintain that appointment to our board of directors should be based on merit that complements and expands
the skills, experience, expertise, independence and knowledge of the board of directors as a whole, taking into account
gender, age, professional experience and qualifications, cultural and educational background, and any other factors that
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our board of directors might consider relevant and applicable from time to time towards achieving a diverse board
of directors.
D. Employees.
As of December 31, 2014, 2015 and 2016, we had 349, 451, and 563 full-time employees, respectively. None of
our employees are represented by labor unions or covered by collective bargaining agreements. The number of
employees by function as of the end of the period for our fiscal years ended December 31, 2016, 2015 and 2014 was as
follows:
By Function:
Innovation Platform
Commercial Platform
Corporate Head Office
Total
2016
2015
2014
329
209
25
563
281
149
21
451
238
96
15
349
As of December 31, 2016, a total of 75 employees on our Innovation Platform’s research and development team
have M.D. or Ph.D. degrees. Additionally, our Commercial Platform joint venture Shanghai Hutchison Pharmaceuticals
employed a total of 2,771 full-time employees, and Hutchison Baiyunshan employed a total of 1,808 full-time employees
and 1,740 outsourced contract staff, who are mostly sales representatives and manufacturing employees as of December
31, 2016. Their employees are represented by labor unions and covered by collective bargaining agreements. To date,
neither Shanghai Hutchison Pharmaceuticals nor Hutchison Baiyunshan has experienced any strikes, labor disputes or
industrial actions which had a material effect on their business, and consider their relations with the union and our
employees to be good.
E. Share Ownership.
See Item 7 “Major Shareholders and Related Party Transactions.”
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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders.
We had 60,705,823 ordinary shares outstanding as of December 31, 2016. The following table and accompanying
footnotes set forth information relating to the beneficial ownership of our ordinary shares as of December 31, 2016 by:
(cid:120)
(cid:120)
(cid:120)
each person, or group of affiliated persons, known by us to beneficially own more than 5% of our
outstanding ordinary shares;
each of our directors; and
each of our named executive officers.
Our major shareholders do not have voting rights that are different from our shareholders in general. Beneficial
ownership is determined in accordance with the rules and regulations of the SEC.
Name of beneficial owner
Executive Officers and Directors:**
Simon To
Christian Hogg
Johnny Cheng
Shigeru Endo(3)
Edith Shih
Michael Howell(5)
Christopher Huang(6)
Christopher Nash(7)
Dan Eldar
Weiguo Su
Ye Hua
May Wang
Zhenping Wu
Mark Lee
All Executive Officers and Directors as a Group
Principal Shareholders:
Hutchison Healthcare Holdings Limited(9)
Mitsui(10)
Ordinary Shares
Beneficially Owned
Number
Percent††
215,000 (1)
1,106,482 (2)
256,146
—
80,371 (4)
118,600
2,475
39,596
—
*
*
*
*
*
2,344,471 (8)
*
1.8 %
*
—
*
*
*
*
—
*
*
*
*
*
3.8 %
36,666,667
3,214,404
60.4 %
5.3 %
* Less than 1% of our total outstanding ordinary shares.
** The business address of all the directors and officers is Room 2108, 21/F, Hutchison House, 10 Harcourt Road,
Hong Kong.
† Percentage of beneficial ownership of each listed person or group is based on 60,705,823 ordinary shares outstanding
as of December 31, 2016.
(1) Amount includes 180,000 ordinary shares and 70,000 ADSs held by Mr. To.
(2) Amount includes 1,088,182 ordinary shares and 36,600 ADSs held by Mr. Hogg.
(3) Mr. Endo ceased to be a director as of February 1, 2017.
(4) Amount includes 60,000 ordinary shares and 40,741 ADSs held by Ms. Shih.
(5) Amount includes 49,800 ordinary shares held in Mr. Howell’s pension plan in the name of James Hay Pension
Trustees Limited. Mr. Howell ceased to be a director as of March 1, 2017.
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(6) Mr. Huang ceased to be a director as of February 1, 2017.
(7) Amount includes 7,130 ordinary shares held jointly with Mr. Nash’s spouse and 5,445 ordinary shares held by Mr.
Nash’s spouse. Mr. Nash ceased to be a director as of February 1, 2017.
(8) Amount includes ordinary shares and ordinary shares issuable upon vesting of options held by our executive officers
and directors as group.
(9) Hutchison Healthcare Holdings Limited, a British Virgin Islands company, is an indirect wholly owned subsidiary of
CK Hutchison, a company incorporated in the Cayman Islands and listed on the Hong Kong Stock Exchange. The
registered address of Hutchison Healthcare Holdings Limited is Vistra Corporate Services Centre, Wickham Cay II,
Road Town, Tortola, British Virgin Islands.
(10) The registered address of Mitsui is 1-3, Marunouchi 1-chome, Chiyoda-ku, Tokyo, Japan 100-8631.
As of December 31, 2016, based on public filings with the SEC and on AIM, there are no major shareholders
holding 5% or more of our ordinary shares or ADSs representing ordinary shares, except as described above. As of
December 31, 2016, there were four ordinary shareholders of record with an address in the United States, including
Deutsche Bank Trust Company Americas, depositary of our ADS program, which held 5,309,381 ordinary shares as of
that date.
To our knowledge, except as disclosed above, we are not owned or controlled, directly or indirectly, by another
corporation, by any foreign government or by any other natural or legal person or persons, severally or jointly. To our
knowledge, there are no arrangements the operation of which may at a subsequent date result in us undergoing a change
in control. Our major shareholders do not have different voting rights than any of our other shareholders.
B. Related Party Transactions.
Guarantee of our Scotiabank Term Loan
Relationship with CK Hutchison
Hutchison Whampoa Limited, a wholly owned subsidiary of CK Hutchison, has guaranteed our 2014 Scotiabank
Term Loan. Prior to entering into the 2014 Scotiabank Term Loan, we were party to a prior loan from Scotiabank in the
same principal amount, which has now been fully repaid and which was also guaranteed by Hutchison Whampoa Limited.
In connection with Hutchison Whampoa Limited’s guarantee of the 2014 Scotiabank Term Loan and our prior loan, we
entered into guarantee fee agreements with Hutchison Whampoa Limited dated June 24, 2014 and December 9, 2011,
respectively, pursuant to which we agreed to pay Hutchison Whampoa Limited a guarantee fee for the issuance of the
guarantee. Hutchison Whampoa Limited’s guarantee remains in effect until the 2014 Scotiabank Term Loan is fully repaid.
For the year ended December 31, 2016, we paid a guarantee fee of $471,000 to Hutchison Whampoa Limited.
We have also entered into a counter-indemnity agreement dated June 24, 2014 with Hutchison Whampoa Limited,
under which we agree to indemnify Hutchison Whampoa Limited against any liability incurred by it under the guarantee
in connection with the 2014 Scotiabank Term Loan.
See Item 3.D. “Risk Factors—Risks Related to Our Financial Position and Need for Additional Capital—If the
CK Hutchison group does not renew our existing loan guarantee or does not enter into new guarantees with us, we may
incur significantly higher borrowing costs.”
Relationship Agreement with the CK Hutchison group
We entered into a relationship agreement dated April 21, 2006 with Hutchison Whampoa (China) Limited, which
recently became an indirect wholly owned subsidiary of CK Hutchison, with a view to ensuring that our company is
capable of carrying on its business independently of the CK Hutchison group. We refer to this agreement as the
Relationship Agreement. The Relationship Agreement provides, among other things, that all transactions between any of
us or our joint ventures, on the one hand, and the CK Hutchison group, on the other hand, will be on an arm’s length basis,
on normal commercial terms and in a manner consistent with the AIM Rules. Hutchison Whampoa (China) Limited has
agreed that, so long as it holds shares (either directly or indirectly) which in aggregate entitle Hutchison Whampoa (China)
Limited to cast at least 50% of the votes eligible to be cast on a poll vote at a general meeting of our company, it shall
180
procure (so far as it is able to use its power as a shareholder) that at least one member of our board of directors is
independent of the CK Hutchison group. The Relationship Agreement further provides that the approval of our board of
directors shall be required for any transaction between any of us or our joint ventures, on one hand, and the CK Hutchison
group, on the other hand, and that in approving any such transaction, our board of directors must consist of at least one
director who is independent of CK Hutchison. Hutchison Whampoa (China) Limited has also agreed to procure that each
member of the Hutchison Whampoa (China) Limited group will not exercise its voting rights and powers so as to amend
our memorandum or articles of association in a manner which is inconsistent with the Relationship Agreement. The
Relationship Agreement will continue until the first to occur of: (i) our shares ceasing to be traded on the AIM market or
(ii) the CK Hutchison group individually or collectively cease to hold or control the exercise of at least 30% or more of
the rights to vote at our general meetings.
Products sold to group companies of CK Hutchison
We have entered into agreements with members of the CK Hutchison group, including the retail grocery and
pharmacy chains PARKnSHOP and Watsons which are owned and operated by the A.S. Watson Group, an indirect
subsidiary of CK Hutchison, in respect of the distribution of certain of our Commercial Platform products. For the year
ended December 31, 2016, sales of our products to members of the CK Hutchison group amounted to $9.8 million. In
addition, for the year ended December 31, 2016, we paid approximately $741,000 to members of the CK Hutchison group
for the provision of marketing services associated with these products. Our sales to CK Hutchison group companies are
made pursuant to purchase orders issued by each purchaser periodically, the terms of which are on an arm’s length basis
on normal commercial terms.
See Item 3.D. “Risk Factors—Risks Related to our Dependence on Third Parties—There is no assurance that the
benefits currently enjoyed by virtue of our association with CK Hutchison will continue to be available” for more
information on the risks associated with our relationship with CK Hutchison’s group companies.
Intellectual property licensed by the CK Hutchison group
We conduct our business using trademarks with various forms of the “Hutchison,” “Chi-Med” and
“China-MediTech” brands, as well as domain names incorporating some or all of these trademarks. We have entered into
a brand license agreement dated April 21, 2006 with Hutchison Whampoa Enterprises Limited, which is an indirect wholly
owned subsidiary of CK Hutchison, pursuant to which we have been granted a non-exclusive, non-transferrable,
royalty-free right to use such trademarks, domain names and other intellectual property rights owned by the CK Hutchison
group in connection with the operation of our business worldwide. We refer to this agreement as the Brand License
Agreement. We are also permitted to sub-license such intellectual property rights to our affiliates.
The Brand License Agreement contains provisions on quality control pursuant to which we are obliged to use the
brands and related materials in compliance with the brand guidelines, industry best practice and other quality directives
issued by Hutchison Whampoa Enterprises Limited from time to time. Under this agreement, we assign all intellectual
property rights, including future copyrights in any works incorporating brand-related material or translations thereof, to
Hutchison Whampoa Enterprises Limited (subject to any third-party rights).
Hutchison Whampoa Enterprises Limited may terminate the Brand License Agreement (or any sub-license) if,
among other things, we commit a material breach of the agreement, or within any twelve-month period aggregate direct
or indirect shareholding in our company held by Hutchison Whampoa Limited, our indirect shareholder, is reduced to less
than 50%, 40%, 30% or 20%. On termination of the Brand License Agreement, we (and any sub-licensees) must
immediately cease using the brands and are obliged to withdraw from sale any products bearing the brands; provided that
if the agreement is terminated following a change in Hutchison Whampoa Limited’s aggregate direct or indirect
shareholding in our company, we will have a six-month transitional period during which we can continue to use the
licensed rights. Hutchison Whampoa Limited’s interest in our company is less than 20%, but we do not anticipate that
Hutchison Whampoa Enterprises Limited will terminate such license in the foreseeable future.
Hutchison Whampoa Enterprises Limited has also granted a royalty-free license to use the Hutchison name and
associated trademarks to Hutchison Baiyunshan. The license has a term equal to the operational period of the joint venture
but may be terminated by the licensor if, among other things, Hutchison Baiyunshan is in breach of the terms of the license
and fails to remedy that breach after an arbitration award is issued against Hutchison Baiyunshan, the joint venture
agreement terminates, or our company’s interest in Hutchison Baiyunshan falls below 50%.
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Sharing of services with the CK Hutchison group
Pursuant to an amended and restated services agreement dated January 1, 2016 between us and Hutchison
Whampoa (China) Limited, which recently became an indirect wholly owned subsidiary of CK Hutchison, we share certain
services with and receive operational support from the CK Hutchison group including, among others, legal and regulatory
services, company secretarial support services, tax and internal audit services, shared use of accounting software system
and related services, participation in the CK Hutchison group’s pension, medical and insurance plans, participation in the
CK Hutchison group’s procurement projects with third-party vendors/suppliers, other staff benefits and staff training
services, company functions and activities and operation advisory and support services. This amended and restated services
agreement replaces our prior services agreement with Hutchison Whampoa (China) Limited, dated April 21, 2006, which
had substantially similar terms. We refer to this amended and restated agreement as the Services Agreement. We pay a
management fee to Hutchison Whampoa (China) Limited for the provision of such services. In addition, we make
payments under the Services Agreement to Hutchison Whampoa (China) Limited for our executive offices in Hong Kong.
Furthermore, pursuant to the terms of the Services Agreement, Hutchison Whampoa (China) Limited charges us
management fees and other costs through Hutchison Healthcare Holdings Limited, its wholly owned subsidiary.
The Services Agreement may be terminated by either party by giving three months’ written notice. Hutchison
Whampoa (China) Limited may also immediately terminate if its shareholding in our company falls below 30%. The
services provided under the Services Agreement are provided on an arm’s length basis, on normal commercial terms.
Any amount unpaid after 30 days accrues interest at the rate of 1.5% per annum. In the year ended December 31,
2016, we paid a management fee of approximately $874,000 under the prior services agreement. As of December 31,
2016, we had $8.1 million and $0.2 million in unpaid fees outstanding to Hutchison Healthcare Holdings Limited and
Hutchison Whampoa (China) Limited respectively. In the year ended December 31, 2016, we paid interest in respect of
unpaid fees amounting to $152,000.
Nutrition Science Partners
Relationships with our Joint Ventures
Research and development services provided to Nutrition Science Partners. On March 25, 2013, we entered
into a research and development collaboration agreement with Nestlé Health Science under which we provide certain
research and development services to Nutrition Science Partners. On the same date, in connection with that agreement, we
entered into a services agreement with our non-consolidated joint venture Nutrition Science Partners to provide it with the
research and development services in relation to the HMPL-004 project, including: (i) collection, monitoring, processing
and distribution of adverse event reports and safety and medical information including side-effects; (ii) development of
manufacturing and analytical technologies for raw materials for the drug candidate being developed by such joint venture,
HMPL-004; (iii) quality control and assurance of product manufacturing management; and (iv) ongoing discovery
research and non-clinical support for the development of HMPL-004 and its reformulations such as HM004-6599. We
provide these services on a fee-for-service basis. See Item 4.B. “Business Overview—Overview of Our Collaborations”
for more information. For the year ended December 31, 2016, we received approximately $8.1 million for the provision
of these research and development services to Nutrition Science Partners.
Intellectual property rights provided to Nutrition Science Partners. Under the terms of an assignment
agreement dated November 26, 2013, we have assigned full title to intellectual property rights in connection with the
HMPL-004/HM004-6599 compound on a worldwide basis to Nutrition Science Partners in exchange for $30 million paid
by Nutrition Science Partners to us.
Loans provided to Nutrition Science Partners. We and Nestlé Health Science, our joint venture partner in
Nutrition Science Partners, had each provided a loan in the principal amount of $5.0 million to Nutrition Science Partners
under loan agreements each dated June 10, 2014, which were amended on August 24, 2015. After such amendments, each
of the loans has a two-year renewable term with a maturity date of June 9, 2015. In addition, we and Nestlé Health Science
have each provided a loan in the principal amount of $2.0 million to Nutrition Science Partners under loan agreements
each dated August 24, 2015. During 2016, we and Nestlé Health Science agreed to waive the $7.0 million in loans to
Nutrition Science Partners, and each party capitalized the outstanding amount as share capital. Additionally, in 2016 we
provided $5.0 million in share capital to Nutrition Science Partners, with Nestlé Health Science providing the same amount.
In February 2017, we and Nestlé Health Science each contributed an additional $7.0 million share capital funding to
Nutrition Science Partners.
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Hutchison Sinopharm
Shanghai Hutchison Pharmaceuticals’ provision of promotion and marketing services to Hutchison
Sinopharm. On September 29, 2014 and January 29, 2015, our consolidated joint venture Hutchison Sinopharm entered
into agreements with multinational pharmaceutical manufacturers Merck Serono and AstraZeneca, respectively, to market
and distribute in China certain of their drugs, primarily Concor and Seroquel. In connection with Hutchison Sinopharm’s
agreements with Merck Serono and AstraZeneca, Hutchison Sinopharm entered into agreements with our non-consolidated
joint venture Shanghai Hutchison Pharmaceuticals to provide certain promotion and marketing services within China for
these drugs. Under these agreements, Shanghai Hutchison Pharmaceuticals manages marketing and is paid a service fee
for medical sales services, and Hutchison Sinopharm manages distribution and logistics for these products. In the year
ended December 31, 2016, Hutchison Sinopharm paid Shanghai Hutchison Pharmaceuticals $8.4 million in connection
with the provision of such services.
Hutchison Sinopharm’s purchase of products from Hutchison Baiyunshan. On April 22, 2014, Hutchison
Sinopharm entered into distribution agreements to purchase certain products manufactured by our non-consolidated joint
venture Hutchison Baiyunshan. Under the terms of these agreements, Hutchison Sinopharm manages the distribution and
delivery logistics of such products.
Hutchison Sinopharm’s distribution agreement with Hutchison Baiyunshan has a one-year term. Hutchison
Baiyunshan may terminate the agreement prior to that if Hutchison Sinopharm fails to purchase products from Hutchison
Baiyunshan for three consecutive months, fails to achieve sales target, engages in sales outside of Shanghai, engages in
unfair competition practices or distributes the products through channels other than hospitals without Hutchison
Baiyunshan’s consent. Hutchison Sinopharm and Hutchison Baiyunshan are in the process of renewing their agreement
for the distribution of products.
In the year ended December 31, 2016, Hutchison Sinopharm purchased products from Hutchison Baiyunshan for
an amount totaling $0.3 million in the aggregate.
Hutchison Healthcare’s grant of license to distribute Zhi Ling Tong products to Hutchison Sinopharm. In
January 2016, Hutchison Healthcare granted a license to Hutchison Sinopharm to distribute Chi-Med-owned Zhi Ling
Tong infant nutrition products, which had previously been distributed by a third-party distributor. Under such license,
Hutchison Sinopharm obtains exclusive distribution rights for Zhi Ling Tong infant nutrition products from Hutchison
Healthcare within China which are subject to annual renewal reviews. The distribution rights were renewed for 2017.
Hutchison Hain Organic
Loans to Hutchison Hain Organic (Hong Kong) Limited. We and Hain Celestial have each provided a loan in
the principal amount of $2.55 million to Hutchison Hain Organic (Hong Kong) Limited, a wholly owned subsidiary of our
joint venture Hutchison Hain Organic, under loan agreements dated December 24, 2014. On July 15, 2016, Hutchison
Hain Organic (Hong Kong) Limited repaid $1.0 million to each of us and Hain Celetial, after which $1.55 million remain
outstanding under each loan agreement. Each of the loans has a four-year renewable term with a maturity date of October 8,
2018. Each loan bears an interest rate equal to the 3-month LIBOR plus 3% per annum, payable at maturity. As of
December 31, 2016, we are eligible to receive interest payments totaling $14,000, and all such principal amounts remained
outstanding to us and Hain Celestial.
Agreements with Our Directors and Executive Officers
Director and Executive Officer Compensation
See
Item 6.B. “Compensation—Executive Officer Compensation” and “Compensation—Director
Compensation” for a discussion of our compensation of directors and executive officers.
Equity Compensation
See Item 6.B. “Compensation—Equity Compensation Schemes and Other Benefit Plans.”
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Employment Agreements
We have entered into employment agreements with our executive officers. For more information regarding these
agreements, see Item 6.B. “Compensation—Employment Arrangements with our Executive Officers.”
Indemnification Agreements
We have entered into indemnification agreements with each of our directors and executive officers. We also
maintain a general liability insurance policy which covers certain liabilities of our directors and executive officers arising
out of claims based on acts or omissions in their capabilities as directors or officers.
C. Interests of Experts and Counsel
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A. Consolidated Financial Statements and Other Financial Information.
See Item 18 “Financial Statements.”
A.7 Legal Proceedings
We are, from time to time, subject to claims and suits arising in the ordinary course of business. In August 2015,
a notice of opposition was filed against our European patent No. 2504331 for sulfatinib by Generic (UK) Ltd on the
grounds that the patent allegedly lacks sufficient novelty/inventiveness. We believed the allegations to be unfounded and
filed a response to the allegations in late 2015, and in February 2017, we received notice from the European Patent Office
that this proceeding was terminated and the related claim has been withdrawn. Although the outcome of any future claims
cannot be predicted with certainty, management does not believe that the ultimate resolution of these matters will have a
material adverse effect on our financial position or on our results of operations.
A.8 Dividend Policy
We have never declared or paid dividends on our ordinary shares. We currently expect to retain all future earnings
for use in the operation and expansion of our business and do not have any present plan to pay any dividends. The
declaration and payment of any dividends in the future will be determined by our board of directors in its discretion, and
will depend on a number of factors, including our earnings, capital requirements, overall financial condition, and
contractual restrictions.
B. Significant Changes
We have not experienced any significant changes since the date of our audited consolidated financial statements
included in this annual report.
184
ITEM 9. THE OFFER AND LISTING
Not applicable except for Item 9.A.4 and Item 9.C.
Our ADSs have been listed on the Nasdaq Global Select Market since March 17, 2016 under the symbol “HCM.”
The following table sets forth, for the periods indicated, the reported high and low closing sale prices of our ADSs on the
Nasdaq Global Select Market in U.S. dollars.
Annual:
2016 (since March 17, 2016)
2017 (through March 10, 2017)
Quarterly:
First Quarter 2016 (since March 17, 2016)
Second Quarter 2016
Third Quarter 2016
Fourth Quarter 2016
First Quarter 2017 (through March 10, 2017)
Most Recent Six Months:
September 2016
October 2016
November 2016
December 2016
January 2017
February 2017
March 2017 (through March 10, 2017)
Price Per ADS
High
Low
14.94
14.95
$
$
13.50
14.18
13.76
14.94
14.95
12.54
12.17
13.84
14.94
14.95
13.97
14.85
$
$
$
$
$
$
$
$
$
$
$
$
11.26
12.74
13.20
12.32
11.90
11.26
12.74
11.90
11.26
11.78
13.57
13.20
12.74
12.85
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Our ordinary shares have been listed on the AIM market of the London Stock Exchange since May 19, 2006. The
following table sets forth, for the periods indicated, the reported high and low closing sale prices of our ordinary shares on
the AIM in pounds sterling and U.S. dollars. U.S. dollar per ordinary share amounts have been translated into U.S. dollars
185
at £1.00 =$1.22 the noon buying rate on March 3, 2017 as set forth in the H.10 statistical release of the U.S. Federal
Reserve Board dated March 6, 2017.
Price Per Ordinary Share Price Per Ordinary Share
High
Low
High
Low
£
£
£
£
£
£
£
£
£
£
£
£
£
£
£
£
£
£
£
£
£
£
4.60
6.39
15.30
28.35
27.90
24.20
14.70
19.93
19.28
28.35
27.90
24.08
19.58
23.70
24.20
18.50
19.04
21.98
23.70
23.10
21.95
24.20
£
£
£
£
£
£
£
£
£
£
£
£
£
£
£
£
£
£
£
£
£
£
3.25 $
4.15 $
6.21 $
11.80 $
16.85 $
20.88 $
11.80 $
13.70 $
15.83 $
18.00 $
18.50 $
16.80 $
17.88 $
17.85 $
20.88 $
18.05 $
17.85 $
18.50 $
21.93 $
$
21.80
$
20.82
$
20.88
5.61 $
7.80 $
18.67 $
34.59 $
34.04 $
29.52 $
17.93 $
24.31 $
23.52 $
34.59 $
34.04 $
29.38 $
23.89 $
28.91 $
29.52 $
22.57 $
23.23 $
26.82 $
28.91 $
$
28.18
$
26.78
$
29.52
3.97
5.06
7.58
14.40
20.56
25.47
14.40
16.71
19.31
21.96
22.57
20.50
21.81
21.78
25.47
22.02
21.78
22.57
26.75
26.60
25.40
25.47
Annual:
2012
2013
2014
2015
2016
2017 (through March 10, 2017)
Quarterly:
First Quarter 2015
Second Quarter 2015
Third Quarter 2015
Fourth Quarter 2015
First Quarter 2016
Second Quarter 2016
Third Quarter 2016
Fourth Quarter 2016
First Quarter 2017 (through March 10, 2017)
Most Recent Six Months:
September 2016
October 2016
November 2016
December 2016
January 2017
February 2017
March 2017 (through March 10, 2017)
ITEM 10. ADDITIONAL INFORMATION
A. Share Capital.
Not applicable.
B. Memorandum and Articles of Association.
The information contained under the caption of “Our Memorandum and Articles of Association” in the
Company’s Registration Statement on Form F-1 filed March 4, 2016 (file number 333-207447) is incorporated herein by
reference.
C. Material Contracts.
Except as otherwise disclosed in this annual report (including the exhibits hereto), we are not currently, and have
not been in the last two years, party to any material contract, other than contracts entered into in the ordinary course of our
business.
D. Exchange Controls.
Foreign currency exchange in the PRC is primarily governed by the Foreign Exchange Administration
Rules issued by the State Council on January 29, 1996 and effective as of April 1, 1996 (and amended on January 14, 1997
and August 1, 2008) and the Regulations of Settlement, Sale and Payment of Foreign Exchange which came into effect on
July 1, 1996.
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Under the Foreign Exchange Administration Rules, renminbi is freely convertible for current account items,
including the distribution of dividends payments, interest payments, trade and service-related foreign exchange
transactions. Conversion of renminbi for capital account items, such as direct investment, loans, securities investment and
repatriation of investment, however, is still generally subject to the approval or verification of SAFE.
Under the Regulations of Settlement, Sale and Payment of Foreign Exchange, foreign invested enterprises
including wholly foreign owned enterprises, may buy, sell or remit foreign currencies only at those banks that are
authorized to conduct foreign exchange business after providing such banks with valid commercial supporting documents
and, in the case of capital account item transactions, after obtaining approvals from SAFE. Capital investments by foreign
invested enterprises outside the PRC are also subject to limitations, which include approvals by the Ministry of Commerce,
SAFE and the National Development and Reform Commission.
In March 2015, SAFE released the Circular on Reforming the Management Approach regarding the Foreign
Exchange Capital Settlement of Foreign-invested Enterprises, or FIEs, or the Foreign Exchange Capital Settlement
Circular, which became effective from June 1, 2015. This circular replaced SAFE’s previous related circulars, including
the Circular on Issues Relating to the Improvement of Business Operation with Respect to the Administration of Foreign
Exchange Capital Payment and Settlement of Foreign Invested Enterprises. The Foreign Exchange Capital Settlement
Circular clarifies that FIEs may settle a specified proportion of their foreign exchange capital in banks at their discretion,
and may choose the timing for such settlement. The proportion of foreign exchange capital to be settled at FIEs’ discretion
for the time being is 100% and the SAFE may adjust the proportion in due time based on the situation of international
balance of payments. The circular also stipulates that FIEs’ usage of capital and settled foreign exchange capital shall
comply with relevant provisions concerning foreign exchange control and be subject to the management of a negative list.
The FIEs’ capital and Renminbi capital gained from the settlement of foreign exchange capital may not be directly or
indirectly used for expenditure beyond the business scope of the FIEs or as prohibited by laws and regulations of the PRC.
Such capital also may not be directly or indirectly used for issuing renminbi entrusted loans except as permitted by the
business scope of the FIE, for repaying inter-enterprise borrowings including any third party advance, or for repaying the
bank loans denominated in renminbi that have been sub-lent to a third party.
In addition, the payment of dividends by entities established in the PRC is subject to limitations. Regulations in
the PRC currently permit payment of dividends only out of accumulated profits as determined in accordance with
accounting standards and regulations in the PRC. Each of our PRC subsidiaries and joint ventures that is a domestic
company is also required to set aside at least 10.0% of its after-tax profit based on PRC accounting standards each year to
its general reserves or statutory capital reserve fund until the accumulative amount of such reserves reach 50.0% of its
respective registered capital. These restricted reserves are not distributable as cash dividends. In addition, if any of our
PRC subsidiaries or joint ventures incurs debt on its own behalf in the future, the instruments governing the debt may
restrict its ability to pay dividends or make other distributions to us.
For more information about foreign exchange control, see Item 3.D. “Risk Factors—Risks Related to Doing
Business in China—Restrictions on currency exchange may limit our ability to utilize our revenues effectively.”
E. Taxation
The following is a general summary of certain PRC, Hong Kong, Cayman Islands and U.S. federal income tax
consequences relevant to the acquisition, ownership and disposition of our ADSs. The discussion is not intended to be, nor
should it be construed as, legal or tax advice to any particular individual. The discussion is based on laws and relevant
interpretations thereof in effect as of February 28, 2017, all of which are subject to change or different interpretations,
possibly with retroactive effect. The discussion does not address U.S. state or local tax laws, or tax laws of jurisdictions
other than the PRC, Hong Kong, the Cayman Islands, the United Kingdom and the United States. You should consult your
own tax advisors with respect to the consequences of acquisition, ownership and disposition of our ADSs and ordinary
shares.
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PRC Enterprise Income Tax
Taxation in the PRC
Under the EIT Law and its implementation rules which became effective on January 1, 2008, the standard tax
rate of 25% applies to all enterprises (including foreign-invested enterprises) with exceptions in special situations if
relevant criteria are met and subject to the approval of the PRC tax authorities.
An enterprise incorporated outside of the PRC whose “de facto management bodies” are located in the PRC is
considered a “resident enterprise” and will be subject to a uniform EIT rate of 25% on its global income. In April 2009,
the SAT, in Circular 82 specified certain criteria for the determination of what constitutes “de facto management bodies.”
If all of these criteria are met, the relevant foreign enterprise will be deemed to have its “de facto management bodies”
located in the PRC and therefore be considered a resident enterprise in the PRC. These criteria include: (a) the enterprise’s
day-to-day operational management is primarily exercised in the PRC; (b) decisions relating to the enterprise’s financial
and human resource matters are made or subject to approval by organizations or personnel in the PRC; (c) the enterprise’s
primary assets, accounting books and records, company seals, and board and shareholders’ meeting minutes are located or
maintained in the PRC; and (d) 50% or more of voting board members or senior executives of the enterprise habitually
reside in the PRC. In addition, an enterprise established outside the PRC which meets all of the aforesaid requirements is
expected to make an application for the classification as a “resident enterprise” and this will ultimately be confirmed by
the province-level tax authority. Although Circular 82 only applies to foreign enterprises that are majority-owned and
controlled by PRC enterprises, not those owned and controlled by foreign enterprises or individuals, the determining
criteria set forth in Circular 82 may be adopted by the PRC tax authorities as the test for determining whether the
enterprises are PRC tax residents, regardless of whether they are majority-owned and controlled by PRC enterprises.
However, it is not entirely clear how the PRC tax authorities will determine whether a non-PRC entity (that has not already
been notified of its status for EIT purposes) will be classified as a “resident enterprise” in practice.
Except for our PRC subsidiaries and joint ventures incorporated in China, we believe that none of our entities
incorporated outside of China is a PRC resident enterprise for PRC tax purposes. However, the tax resident status of an
enterprise is subject to determination by the PRC tax authorities, and uncertainties remain with respect to the interpretation
of the term “de facto management body.”
If a non-PRC enterprise is classified as a “resident enterprise” for EIT purposes, any dividends to be distributed
by that enterprise to non-PRC resident shareholders or ADS holders or any gains realized by such investors from the
transfer of shares or ADSs may be subject to PRC tax. If the PRC tax authorities determine that we should be considered
a PRC resident enterprise for EIT purposes, any dividends payable by us to our non-PRC resident enterprise shareholders
or ADS holders, as well as gains realized by such investors from the transfer of our shares or ADSs may be subject to a
10% withholding tax, unless a reduced rate is available under an applicable tax treaty. Furthermore, if we are considered
a PRC resident enterprise for EIT purposes, it is unclear whether our non-PRC individual shareholders (including our ADS
holders) would be subject to any PRC tax on dividends or gains obtained by such non-PRC individual shareholders. If any
PRC tax were to apply to dividends realized by non-PRC individuals, it would generally apply at a rate of up to 20% unless
a reduced rate is available under an applicable tax treaty.
According to the EIT Law, dividends declared after January 1, 2008 and paid by PRC foreign-invested
enterprises to their non-PRC parent companies will be subject to PRC withholding tax at 10% unless there is a tax treaty
between the PRC and the jurisdiction in which the overseas parent company is incorporated and which specifically exempts
or reduces such withholding tax, and such tax exemption or reduction is approved by the relevant PRC tax authorities.
Pursuant to the Arrangement between the Mainland of China and the Hong Kong Special Administrative Region for the
Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income, or the Arrangement,
signed on August 21, 2006 and became effective on December 8, 2006, if the non-PRC immediate holding company is a
Hong Kong tax resident and directly holds a 25% or more equity interest in the PRC enterprise and is considered to be the
beneficial owner of dividends paid by the PRC enterprise, such withholding tax rate may be lowered to 5%, subject to
approval by the relevant PRC tax authorities in accordance with relevant tax regulations on the assessment of beneficial
ownership.
Business Tax
A business which provides certain services or sells immovable or transfers intangible property within the PRC
(including when either party of a transaction is within the PRC unless in specified situations) was liable to Business Tax
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at rates ranging from 3% to 20% of the charges for the services provided or immovable or intangible property sold or
transferred (as the case may be). The Business Tax rate of 3% was applicable on taxable services relating to construction,
culture and sports. All other services generally attracted a Business Tax rate of 5%, except that services relating to
entertainment are subject to a rate ranging from 5% to 20%.
In addition, Business Tax was payable on the gross amount of all billings unless specific rules stipulated the use
of a net amount.
A Municipal Maintenance Tax, together with an Education Surcharge and a Local Education Surcharge, were
payable at a rate, in aggregate, of 6% to 12% of the Business Tax.
The Business Tax regime has been replaced in full with effect from 1 May 2016, as described in the section below
on Value Added Tax.
Value Added Tax
The Interim Regulations of the PRC on Value Added Tax, or the VAT Regulations, came into effect on January 1,
2009. Pursuant to the VAT Regulations, VAT is imposed on the goods sold in or imported into the PRC and on processing,
repair and replacement services provided within the PRC.
The pilot program of the PRC indirect tax reform was first implemented in Shanghai, the PRC, effective from
January 1, 2012 where certain industries are transformed from the Business Tax regime to the VAT regime. The program
was expanded in stages.
The Ministry of Finance and the State Administration of Taxation jointly promulgated the Circular on
Comprehensively Promoting the Pilot Program of the Collection of Value-Added Tax in Lieu of Business Tax, or the 2016
VAT Circular, on 23 March 2016, which came into effect on 1 May 2016. Pursuant to the 2016 VAT Circular, the sale of
services, intangible assets or real property within the PRC (including when either party of a transaction is within the PRC
unless in specified situations) is subject to VAT instead of Business Tax, with VAT rates being 6%, 11% or 17%, while
the VAT rate could be zero for certain specified cross-border taxable items/services, in accordance with the relevant
regulations.
A Municipal Maintenance Tax, together with Education Surcharge and a Local Education Surcharge, are payable
at a rate, in aggregate, of 6% to 12% of the VAT.
Land Appreciation Tax
Some of our PRC subsidiaries and joint ventures have obtained certain land use rights and ownership in buildings.
Under the Provisional Regulations of the PRC on Land Appreciation Tax, or LAT, promulgated by the State
Council on December 13, 1993 (which became effective on January 1, 1994) and amended on January 8, 2011, together
with its implementing rules which were promulgated by the MOF on January 27, 1995, LAT applies to both domestic and
foreign investors in real properties in the PRC, irrespective of corporate entities or individuals. The tax is payable by a
taxpayer on the capital gains from the transfer of land use right, buildings or other facilities on such land, after deducting
“deductible items” that include: (a) payments made to acquire land use right; (b) costs and charges incurred in connection
with land development; (c) construction costs and charges in the case of newly constructed buildings and facilities;
(d) assessed value in the case of old buildings and facilities; (f) taxes paid or payable in connection with the transfer of the
land use right, buildings or other facilities on such land; and (e) other items allowed by the MOF.
189
The tax rate is progressive and ranges from 30% to 60% of the appreciation value, as follows:
Appreciation Value
Portion not exceeding 50% of deductible items:
Portion over 50% but not more than 100% of deductible items:
Portion over 100% but not more than 200% of deductible items:
Portion over 200% of deductible items:
Exemption from LAT is available to the following cases:
LAT Rate
30%
40%
50%
60%
(i)
taxpayers constructing ordinary residential properties for sale, where the appreciation amount does not
exceed 20% of the sum of deductible items;
(ii)
real estate taken over or recovered according to laws due to the construction needs of the State;
(iii)
relocation due to the need of city planning and national construction; and
(iv)
due to redeployment of work or improvement of living standard, transfer by individuals of originally
self-occupied residential properties after five years or more of self-residence with the approval of the tax
authorities.
Deed Tax
Pursuant to the Provisional Regulations of the PRC on Deed Tax promulgated by the State Council on July 7,
1997 and implemented on October 1, 1997, the transferee of the land use right and/or property ownership in the PRC will
be the obliged taxpayer for Deed Tax. The rate of Deed Tax ranges from 3% to 5%, subject to determination by local
governments at the provincial level in light of local conditions.
Real Estate Tax
Properties owned by an enterprise will be subject to Real Estate Tax at variable rates depending on locality. In
certain localities, Real Estate Tax is applicable at a rate of 1.2% of the original value of the building less a standard
deduction which ranges from 10% to 30% of the original value or at a rate of 12% of the rental income.
Urban Land Use Tax
According to the Provisional Regulations on Urban Land Use Tax of the PRC promulgated by the State Council
in September 1988 and amended in December 2006 and December 2013, Urban Land Use Tax is levied according to the
area of relevant land, at between RMB0.6 and RMB30 per sq. m.
Stamp Duty
According to the Provisional Regulations of the PRC on Stamp Duty promulgated by the State Council in
August 1988 and amended on January 8, 2011, specified documents primarily business contracts are subject to stamp duty
at the specified rates on the amount stated therein, including but not limited to: purchase and sales agreements—0.03%;
loan agreements—0.005%; assets transfer agreements—0.05%. Such stamp duty is payable by every party to a contract.
Overview of Tax Implications of Various Other Jurisdictions
Cayman Islands Taxation
According to our Cayman Islands counsel, Conyers Dill & Pearman, the Cayman Islands currently levies no taxes
on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of
inheritance tax or estate duty. There are no other taxes likely to be material to us levied by the government of the Cayman
Islands except for stamp duties which may be applicable on instruments executed in, or brought within the jurisdiction of
190
the Cayman Islands. The Cayman Islands is a party to a double tax treaty entered into with the United Kingdom in 2010
but it is otherwise not a party to any double tax treaties that are applicable to any payments made to or by our company.
There are no exchange control regulations or currency restrictions in the Cayman Islands.
Pursuant to the Tax Concessions Law (1999 Revision) of the Cayman Islands, Hutchison China MediTech
Limited has obtained an undertaking from the Governor-in-Council: (a) that no law which is enacted in the Cayman Islands
imposing any tax to be levied on profits or income or gains or appreciations shall apply to us or our operations; and (b) that
the aforesaid tax or any tax in the nature of estate duty or inheritance tax shall not be payable on its shares, debentures or
other obligations.
The undertaking is for a period of twenty years from January 9, 2001.
Hong Kong Taxation
Profits Tax
Hong Kong tax residents are subject to Hong Kong Profits Tax in respect of profits arising in or derived from
Hong Kong at the current rate of 16.5%. Dividend income earned by a Hong Kong tax resident is not subject to Hong
Kong Profits Tax. Hutchison China MediTech Limited is a Hong Kong tax resident.
Hong Kong tax on shareholders and ADS holders
No tax is payable in Hong Kong in respect of dividends paid by a Hong Kong tax resident to their shareholders,
including our ADS holders.
Hong Kong Profits Tax will not be payable by our shareholders, including our ADS holders (other than
shareholders / ADS holders carrying on a trade, profession or business in Hong Kong and holding the shares / ADSs for
trading purposes), on any capital gains made on the sale or other disposal of the ADSs. Shareholders, including our ADS
holders, should take advice from their own professional advisors as to their particular tax position.
No Hong Kong Stamp Duty is payable by our shareholders, including our ADS holders.
Material United States Federal Income Tax Considerations
The following summary, subject to the limitations set forth below, describes the material U.S. federal income tax
consequences for a U.S. Holder (as defined below) of the acquisition, ownership and disposition of ADSs. This discussion
is limited to U.S. Holders who hold such ordinary shares or ADSs as capital assets (generally, property held for
investment). For purposes of this summary, a “U.S. Holder” is a beneficial owner of an ordinary share or ADS that is for
U.S. federal income tax purposes:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
a citizen or individual resident of the United States;
a corporation (or any other entity treated as a corporation for U.S. federal income tax purposes)
organized in or under the laws of the United States or any state thereof, or the District of Columbia;
an estate the income of which is subject to U.S. federal income taxation regardless of its source; or
a trust if (i) it has a valid election in effect to be treated as a U.S. person for U.S. federal income tax
purposes or (ii) a U.S. court can exercise primary supervision over its administration and one or more
U.S. persons have the authority to control all of its substantial decisions.
Except as explicitly set forth below, this summary does not address aspects of U.S. federal income taxation that
may be applicable to U.S. Holders subject to special rules, including:
(cid:120)
(cid:120)
(cid:120)
banks or other financial institutions;
insurance companies;
real estate investment trusts;
191
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
regulated investment companies;
grantor trusts;
tax-exempt organizations;
persons holding our ordinary shares or ADSs through a partnership (including an entity or arrangement
treated as a partnership for U.S. federal income tax purposes) or S corporation;
dealers or traders in securities, commodities or currencies;
persons whose functional currency is not the U.S. dollar;
certain former citizens and former long-term residents of the United States;
persons holding our ordinary shares or ADSs as part of a position in a straddle or as part of a hedging,
conversion or integrated transaction for U.S. federal income tax purposes; or
direct, indirect or constructive owners of 10% or more of our total combined voting power.
In addition, this summary does not address the 3.8% Medicare contribution tax imposed on certain net investment
income, the U.S. federal estate and gift tax or the alternative minimum tax consequences of the acquisition, ownership,
and disposition of our ordinary shares or ADSs. We have not received nor do we expect to seek a ruling from the
U.S. Internal Revenue Service, or the IRS, regarding any matter discussed herein. No assurance can be given that the IRS
would not assert, or that a court would not sustain, a position contrary to any of those set forth below. Each prospective
investor should consult its own tax advisors with respect to the U.S. federal, state, local and non-U.S. tax consequences of
acquiring, owning and disposing of our ordinary shares and ADSs.
This discussion is based on the U.S. Internal Revenue Code of 1986, as amended, or the Code, U.S. Treasury
Regulations promulgated thereunder and administrative and judicial interpretations thereof, and the income tax treaty
between the PRC and the United States, or the U.S.-PRC Tax Treaty, each as available and in effect on the date hereof, all
of which are subject to change or differing interpretations, possibly with retroactive effect, which could affect the tax
consequences described herein. In addition, this summary is based, in part, upon representations made by the depositary
to us and assumes that the deposit agreement, and all other related agreements, will be performed in accordance with their
terms.
If an entity or arrangement treated as a partnership for U.S. federal income tax purposes holds our ordinary shares
or ADSs, the tax treatment of the partnership and a partner in such partnership generally will depend on the status of the
partner and the activities of the partnership. Such partner or partnership should consult its own tax advisors as to the
U.S. federal income tax consequences of acquiring, owning and disposing of our ordinary shares or ADSs.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH REGARD TO
THE PARTICULAR TAX CONSEQUENCES APPLICABLE TO THEIR SITUATIONS AS WELL AS THE
APPLICATION OF ANY U.S. FEDERAL, STATE, LOCAL, NON-U.S. OR OTHER TAX LAWS, INCLUDING GIFT
AND ESTATE TAX LAWS.
ADSs
A U.S. Holder of ADSs will generally be treated, for U.S. federal income tax purposes, as the owner of the
underlying ordinary shares that such ADSs represent. Accordingly, no gain or loss will be recognized if a U.S. Holder
exchanges ADSs for the underlying shares represented by those ADSs.
The U.S. Treasury has expressed concern that parties to whom ADSs are released before shares are delivered to
the depositary or intermediaries in the chain of ownership between holders and the issuer of the security underlying the
ADSs, may be taking actions that are inconsistent with the claiming of foreign tax credits by U.S. Holders of ADSs. These
actions would also be inconsistent with the claiming of the reduced rate of tax, described below, applicable to dividends
received by certain non-corporate U.S. Holders. Accordingly, the creditability non-U.S. withholding taxes (if any), and
the availability of the reduced tax rate for dividends received by certain non-corporate U.S. Holders, each described below,
could be affected by actions taken by such parties or intermediaries.
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Taxation of Dividends
As described in “Dividend Policy” above, we do not currently anticipate paying any distributions on our ordinary
shares or ADSs in the foreseeable future. However, to the extent there are any distributions made with respect to our
ordinary shares or ADSs, and subject to the discussion under “—Passive Foreign Investment Company Consideration”
below, the gross amount of any such distribution (including withheld taxes, if any) made out of our current or accumulated
earnings and profits (as determined for U.S. federal income tax purposes) will generally be taxable to a U.S. Holder as
ordinary dividend income on the date such distribution is actually or constructively received. Distributions in excess of
our current and accumulated earnings and profits will be treated as a non-taxable return of capital to the extent of the
U.S. Holder’s adjusted tax basis in the ordinary shares or ADSs, as applicable, and thereafter as capital gain. However,
because we do not maintain calculations of our earnings and profits in accordance with U.S. federal income tax accounting
principles, U.S. Holders should expect to treat distributions paid with respect to our ordinary shares and ADSs as
dividends. Dividends paid to corporate U.S. Holders generally will not qualify for the dividends received deduction that
may otherwise be allowed under the Code. This discussion assumes that distributions made by us, if any, will be paid in
U.S. dollars.
Dividends paid to a non-corporate U.S. Holder by a “qualified foreign corporation” may be subject to reduced
rates of U.S. federal income taxation if certain holding period and other requirements are met. A qualified foreign
corporation generally includes a foreign corporation (other than a PFIC) if (1) its ordinary shares (or ADSs backed by
ordinary shares) are readily tradable on an established securities market in the United States or (2) it is eligible for benefits
under a comprehensive U.S. income tax treaty that includes an exchange of information program and which the
U.S. Treasury Department has determined is satisfactory for these purposes.
IRS guidance indicates that our ADSs (which are listed on the Nasdaq Global Select Market) are readily tradable
for purposes of satisfying the conditions required for these reduced tax rates. We do not expect, however, that our ordinary
shares will be listed on an established securities market in the United States and therefore do not believe that any dividends
paid on our ordinary shares that are not represented by ADSs currently meet the conditions required for these reduced tax
rates. There can be no assurance that our ADSs will be considered readily tradable on an established securities market in
subsequent years.
The United States does not have a comprehensive income tax treaty with the Cayman Islands. However, in the
event that we were deemed to be a PRC resident enterprise under the EIT Law (see “—Taxation in the PRC” above),
although no assurance can be given, we might be considered eligible for the benefits of the U.S.-PRC Tax Treaty for
purposes of these rules. U.S. Holders should consult their own tax advisors regarding the availability of the reduced tax
rates on dividends paid with respect to our ordinary shares or ADSs in light of their particular circumstances.
Non-corporate U.S. Holders will not be eligible for reduced rates of U.S. federal income taxation on any
dividends received from us if we are a PFIC in the taxable year in which such dividends are paid or in the preceding
taxable year.
In the event that we were deemed to be a PRC resident enterprise under the EIT Law (see “—Taxation in the
PRC” above), U.S. Holders might be subject to PRC withholding taxes on dividends paid by us. In that case, subject to
certain conditions and limitations, such PRC withholding tax may be treated as a foreign tax eligible for credit against a
U.S. Holder’s U.S. federal income tax liability under the U.S. foreign tax credit rules. For purposes of calculating the
U.S. foreign tax credit, dividends paid on our ordinary shares or ADSs, will be treated as income from sources outside the
United States and will generally constitute passive category income. If a U.S. Holder is eligible for U.S.-PRC Tax Treaty
benefits, any PRC taxes on dividends will not be creditable against such U.S. Holder’s U.S. federal income tax liability to
the extent such tax is withheld at a rate exceeding the applicable U.S.-PRC Tax Treaty rate. An eligible U.S. Holder who
does not elect to claim a foreign tax credit for PRC tax withheld may instead be eligible to claim a deduction, for
U.S. federal income tax purposes, in respect of such withholding but only for the year in which such U.S. Holder elects to
do so for all creditable foreign income taxes. The U.S. foreign tax credit rules are complex. U.S. Holders should consult
their own tax advisors regarding the foreign tax credit rules in light of their particular circumstances.
Taxation of Capital Gains
Subject to the discussion below in “—Passive Foreign Investment Company Considerations,” upon the sale,
exchange, or other taxable disposition of our ordinary shares or ADSs, a U.S. Holder generally will recognize gain or loss
on the taxable sale or exchange in an amount equal to the difference between the amount realized on such sale or exchange
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(determined in the case of sales or exchanges in currencies other than U.S. dollars by reference to the spot exchange rate
in effect on the date of the sale or exchange or, if sold or exchanged on an established securities market and the U.S. Holder
is a cash basis taxpayer or an electing accrual basis taxpayer, the spot exchange rate in effect on the settlement date) and
the U.S. Holder’s adjusted tax basis in such ordinary shares or ADSs determined in U.S. dollars. A U.S. Holder’s initial
tax basis will be the U.S. Holder’s U.S. dollar purchase price for such ordinary shares or ADSs.
Assuming we are not a PFIC and have not been treated as a PFIC during the U.S. Holder’s holding period for its
ordinary shares or ADSs, such gain or loss will be capital gain or loss. Under current law, capital gains of non-corporate
U.S. Holders derived with respect to capital assets held for more than one year are generally eligible for reduced rates of
taxation. The deductibility of capital losses is subject to limitations. Capital gain or loss, if any, recognized by a U.S. Holder
generally will be treated as U.S. source income or loss for U.S. foreign tax credit purposes. U.S. Holders are encouraged
to consult their own tax advisors regarding the availability of the U.S. foreign tax credit in consideration of their particular
circumstances.
If we were treated as a PRC resident enterprise for EIT Law purposes and PRC tax were imposed on any gain
(see “—Taxation in the PRC” above), and if a U.S. Holder is eligible for the benefits of the U.S.-PRC Tax Treaty, the
holder may be able to treat such gain as PRC source gain under the treaty for U.S. foreign tax credit purposes. A
U.S. Holder will be eligible for U.S.-PRC Tax Treaty benefits if (for purposes of the treaty) such holder is a resident of
the United States and satisfies the other requirements specified in the U.S.-PRC Tax Treaty. Because the determination of
treaty benefit eligibility is fact-intensive and depends upon a holder’s particular circumstances, U.S. Holders should
consult their tax advisors regarding U.S.-PRC Tax Treaty benefit eligibility. U.S. Holders are also encouraged to consult
their own tax advisors regarding the tax consequences in the event PRC tax were to be imposed on a disposition of ordinary
shares or ADSs, including the availability of the U.S. foreign tax credit and the ability and whether to treat any gain as
PRC source gain for the purposes of the U.S. foreign tax credit in consideration of their particular circumstances.
Passive Foreign Investment Company Considerations
Status as a PFIC
The rules governing PFICs can have adverse tax effects on U.S. Holders. We generally will be classified as a
PFIC for U.S. federal income tax purposes if, for any taxable year, either: (1) 75% or more of our gross income consists
of certain types of passive income, or (2) the average value (determined on a quarterly basis), of our assets that produce,
or are held for the production of, passive income is 50% or more of the value of all of our assets.
Passive income generally includes dividends, interest, rents and royalties (other than certain rents and royalties
derived in the active conduct of a trade or business), annuities and gains from assets that produce passive income. If a non-
U.S. corporation owns at least 25% by value of the stock of another corporation, the non-U.S. corporation is treated for
purposes of the PFIC tests as owning its proportionate share of the assets of the other corporation and as receiving directly
its proportionate share of the other corporation’s income.
Additionally, if we are classified as a PFIC in any taxable year with respect to which a U.S. Holder owns ordinary
shares or ADSs, we generally will continue to be treated as a PFIC with respect to such U.S. Holder in all succeeding
taxable years, regardless of whether we continue to meet the tests described above, unless the U.S. Holder makes the
“deemed sale election” described below.
We do not believe that we are currently a PFIC. Notwithstanding the foregoing, the determination of whether we
are a PFIC is made annually and depends on particular facts and circumstances (such as the valuation of our assets,
including goodwill and other intangible assets) and also may be affected by the application of the PFIC rules, which are
subject to differing interpretations. The fair market value of our assets is expected to depend, in part, upon (a) the market
price of our ADSs, which is likely to fluctuate, and (b) the composition of our income and assets, which will be affected
by how, and how quickly, we spend any cash that is raised in any financing transaction. In light of the foregoing, no
assurance can be provided that we are not currently a PFIC or that we will not become a PFIC in any future taxable year.
Prospective investors should consult their own tax advisors regarding our PFIC status.
U.S. federal income tax treatment of a shareholder of a PFIC
If we are classified as a PFIC for any taxable year during which a U.S. Holder owns ordinary shares or ADSs, the
U.S. Holder, absent certain elections (including the mark-to-market and QEF elections described below), generally will
be subject to adverse rules (regardless of whether we continue to be classified as a PFIC) with respect to (1) any “excess
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distributions” (generally, any distributions received by the U.S. Holder on its ordinary shares or ADSs in a taxable year
that are greater than 125% of the average annual distributions received by the U.S. Holder in the three preceding taxable
years or, if shorter, the U.S. Holder’s holding period) and (2) any gain realized on the sale or other disposition, including
a pledge, of such ordinary shares or ADSs.
Under these adverse rules (a) the excess distribution or gain will be allocated ratably over the U.S. Holder’s
holding period, (b) the amount allocated to the current taxable year and any taxable year prior to the first taxable year in
which we are classified as a PFIC will be taxed as ordinary income and (c) the amount allocated to each other taxable year
during the U.S. Holder’s holding period in which we were classified as a PFIC (i) will be subject to tax at the highest rate
of tax in effect for the applicable category of taxpayer for that year and (ii) will be subject to an interest charge at a statutory
rate with respect to the resulting tax attributable to each such other taxable year. In addition, non-corporate U.S. Holders
will not be eligible for reduced rates of taxation on any dividends received from us if we are a PFIC in the taxable year in
which such dividends are paid or in the preceding taxable year.
If we are classified as a PFIC, a U.S. Holder will generally be treated as owning a proportionate amount (by value)
of stock or shares owned by us in any direct or indirect subsidiaries that are also PFICs and will be subject to similar
adverse rules with respect to any distributions we receive from, and dispositions we make of, the stock or shares of such
subsidiaries. U.S. Holders are urged to consult their tax advisors about the application of the PFIC rules to any of our
subsidiaries.
If we are classified as a PFIC and then cease to be so classified, a U.S. Holder may make an election (a ”deemed
sale election”) to be treated for U.S. federal income tax purposes as having sold such U.S. Holder’s ordinary shares or
ADSs on the last day of our taxable year during which we were a PFIC. A U.S. Holder that makes a deemed sale election
would then cease to be treated as owning stock in a PFIC, however, gain recognized as a result of making the deemed sale
election would be subject to the adverse rules described above and loss would not be recognized.
PFIC “mark-to-market” election
In certain circumstances, a holder of “marketable stock” of a PFIC can avoid certain of the adverse rules described
above by making a mark-to-market election with respect to such stock. For purposes of these rules “marketable stock” is
stock which is “regularly traded” (traded in greater than de minimis quantities on at least 15 days during each calendar
quarter) on a “qualified exchange” or other market within the meaning of applicable U.S. Treasury Regulations. A
“qualified exchange” includes a national securities exchange that is registered with the SEC.
A U.S. Holder that makes a mark-to-market election must include in gross income, as ordinary income, for each
taxable year that we are a PFIC an amount equal to the excess, if any, of the fair market value of the U.S. Holder’s ordinary
shares or ADSs that are “marketable stock” at the close of the taxable year over the U.S. Holder’s adjusted tax basis in
such ordinary shares or ADSs. An electing U.S. Holder may also claim an ordinary loss deduction for the excess, if any,
of the U.S. Holder’s adjusted tax basis in such ordinary shares or ADSs over their fair market value at the close of the
taxable year, but this deduction is allowable only to the extent of any net mark-to-market gains previously included in
income pursuant to the mark-to-market election. The adjusted tax basis of a U.S. Holder’s ordinary shares or ADSs with
respect to which the mark-to-market election applies would be adjusted to reflect amounts included in gross income or
allowed as a deduction because of such election. If a U.S. Holder makes an effective mark-to-market election with respect
to our ordinary shares or ADSs, gains from an actual sale or other disposition of such ordinary shares or ADSs in a year
in which we are a PFIC would be treated as ordinary income, and any losses incurred on such sale or other disposition
would be treated as ordinary losses to the extent of any net mark-to-market gains previously included in income.
If we are classified as a PFIC for any taxable year in which a U.S. Holder owns ordinary shares or ADSs but
before a mark-to-market election is made, the adverse PFIC rules described above will apply to any mark-to-market gain
recognized in the year the election is made. Otherwise, a mark-to-market election will be effective for the taxable year for
which the election is made and all subsequent taxable years unless the ordinary shares or ADSs are no longer regularly
traded on a qualified exchange or the IRS consents to the revocation of the election. Our ADSs are listed on the Nasdaq
Global Select Market, which is a qualified exchange or other market for purposes of the mark-to-market election.
Consequently, if the ADSs continue to be so listed, and are “regularly traded” for purposes of these rules (for which no
assurance can be given) we expect that the mark-to-market election would be available to a U.S. Holder with respect to
our ADSs.
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A mark-to-market election is not permitted for the shares of any of our subsidiaries that are also classified as
PFICs. Prospective investors should consult their own tax advisors regarding the availability of, and the procedure for, and
the effect of making, a mark-to-market election, and whether making the election would be advisable, including in light
of their particular circumstances.
PFIC “QEF” election
In some cases, a shareholder of a PFIC can avoid the interest charge and the other adverse PFIC consequences
described above by obtaining certain information from the PFIC and by making a QEF election to be taxed currently on
its share of the PFIC’s undistributed income. We do not, however, expect to provide the information regarding our income
that would be necessary in order for a U.S. Holder to make a QEF election if we were classified as a PFIC.
PFIC information reporting requirements
If we are classified as a PFIC in any year with respect to a U.S. Holder, such U.S. Holder will be required to file
an annual information return on IRS Form 8621 regarding distributions received on, and any gain realized on the
disposition of, our ordinary shares and ADSs, and certain U.S. Holders will be required to file an annual information return
(also on IRS Form 8621) relating to their ownership interest.
NO ASSURANCE CAN BE GIVEN THAT WE ARE NOT CURRENTLY A PFIC OR THAT WE WILL NOT
BECOME A PFIC IN THE FUTURE. U.S. HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH
RESPECT TO THE OPERATION OF THE PFIC RULES AND RELATED REPORTING REQUIREMENTS IN LIGHT
OF THEIR PARTICULAR CIRCUMSTANCES, INCLUDING THE ADVISABILITY AND EFFECTS OF MAKING
ANY ELECTION THAT MAY BE AVAILABLE.
U.S. Backup Withholding and Information Reporting
Backup withholding and information reporting requirements may apply to distributions on, and proceeds from
the sale or disposition of, ordinary shares and ADSs that are held by U.S. Holders. The payor will be required to backup
withhold tax on such payments made within the United States, or by a U.S. payor to a U.S. intermediary (and certain
subsidiaries thereof) to a U.S. Holder, other than an exempt recipient, if the U.S. Holder fails to furnish its correct taxpayer
identification number or otherwise fails to comply with, or establish an exemption from, the backup withholding
requirements. Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited
against a U.S. Holder’s U.S. federal income tax liability (if any) or refunded provided the required information is furnished
to the IRS in a timely manner.
Certain U.S. Holders of specified foreign financial assets with an aggregate value in excess of the applicable
dollar threshold are required to report information relating to their holding of ordinary shares or ADSs, subject to certain
exceptions (including an exception for shares held in accounts maintained by certain financial institutions) with their tax
return for each year in which they hold such interest. U.S. Holders should consult their own tax advisors regarding the
information reporting obligations that may arise from their acquisition, ownership or disposition of our ordinary shares or
ADSs.
THE ABOVE DISCUSSION DOES NOT COVER ALL TAX MATTERS THAT MAY BE OF IMPORTANCE
TO A PARTICULAR INVESTOR. PROSPECTIVE INVESTORS ARE STRONGLY URGED TO CONSULT THEIR
OWN TAX ADVISORS ABOUT THE TAX CONSEQUENCES OF AN INVESTMENT IN OUR ORDINARY
SHARES OR ADSs.
F. Dividends and Payment Agents.
Not applicable.
G. Statement by Experts.
Not applicable.
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H. Documents on Display.
We are subject to the informational requirements of the Exchange Act and are required to file reports and other
information with the SEC. Shareholders may read and copy any of our reports and other information at, and obtain copies
upon payment of prescribed fees from, the public reference room maintained by the SEC at 100 F Street N.E., Washington,
D.C. 20549. The public may obtain information on the operation of the public reference room by calling the U.S. Securities
and Exchange Commission at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that contains reports,
proxy and information statements, and other information regarding registrants that make electronic filings with the SEC
using its EDGAR system.
We are a “foreign private issuer” as such term is defined in Rule 405 under the Securities Act, and are not subject
to the same requirements that are imposed upon U.S. domestic issuers by the SEC. Under the Exchange Act, we are subject
to reporting obligations that, in certain respects, are less detailed and less frequent than those of U.S. domestic reporting
companies. As a result, we do not file the same reports that a U.S. domestic issuer would file with the SEC, although we
are required to file or furnish to the SEC the continuous disclosure documents that we are required to file on the AIM
market of the London Stock Exchange.
We will furnish Deutsche Bank Trust Company Americas, the depositary of our ADSs, with our annual reports,
which will include a review of operation and annual audited consolidated financial statements prepared in conformity with
U.S. GAAP, and all notices of shareholders’ meetings and other reports and communications that are made generally
available to our shareholders. The depositary will make such notices, reports and communications available to holders of
ADSs and, upon our requests, will mail to all record holders of ADSs the information contained in any notice of a
shareholders’ meeting received by the depositary from us.
We also make available on our website’s investor relations page, free of charge, our annual report and the text of
our reports on Form 6-K, including any amendments to these reports, as well as certain other SEC filings, as soon as
reasonably practicable after they are electronically filed with or furnished to the SEC. The address for our investor relations
page is “http://www.chi-med.com/investors/.” The information contained on our website is not incorporated by reference
in this annual report.
I. Subsidiary information
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Please see Item 5.F. “Operating and Financial Review and Prospects—Quantitative and Qualitative Disclosures
About Market Risk.”
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A. Debt Securities
Not applicable.
B. Warrants and Rights.
Not applicable.
C. Other Securities.
Not applicable.
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D. American Depositary Shares.
Fees and charges our ADS holders may have to pay
ADS holders will be required to pay the following service fees to Deutsche Bank Trust Company America, the
depositary of our ADS program, and certain taxes and governmental charges (in addition to any applicable fees,
expenses, taxes and other governmental charges payable on the deposited securities represented by ADSs):
Service
Fees
(cid:120) To any person to which ADSs are issued or to any
Up to $0.05 per ADS issued
person to which a distribution is made in respect of ADS
distributions pursuant to stock dividends or other free
distributions of stock, bonus distributions, stock splits or
other distributions (except where converted to cash)
(cid:120) Cancellation or withdrawal of ADSs, including the case
Up to $0.05 per ADS cancelled
of termination of the deposit agreement
(cid:120) Distribution of cash dividends
Up to $0.05 per ADS held
(cid:120) Distribution of cash entitlements (other than cash
Up to $0.05 per ADS held
dividends) and/or cash proceeds from the sale of rights,
securities and other entitlements
(cid:120) Distribution of ADSs pursuant to exercise of rights
Up to $0.05 per ADS held
(cid:120) Depositary services
Up to $0.05 per ADS held on the applicable record
date(s) established by the depositary bank (an
annual fee)
ADS holders will also be responsible to pay certain fees and expenses incurred by the depositary bank and certain taxes
and governmental charges (in addition to any applicable fees, expenses, taxes and other governmental charges payable on
the deposited securities represented by any of your ADSs) such as:
(cid:120) Fees for the transfer and registration of ordinary shares charged by the registrar and transfer agent for
the ordinary shares in the Cayman Islands (i.e., upon deposit and withdrawal of ordinary shares).
(cid:120) Expenses incurred for converting foreign currency into U.S. dollars.
(cid:120) Expenses for cable, telex and fax transmissions and for delivery of securities.
(cid:120) Taxes and duties upon the transfer of securities, including any applicable stamp duties, any stock transfer
charges or withholding taxes (i.e., when ordinary shares are deposited or withdrawn from deposit).
(cid:120) Fees and expenses incurred in connection with the delivery or servicing of ordinary shares on deposit.
(cid:120) Fees and expenses incurred in connection with complying with exchange control regulations and other
regulatory requirements applicable to ordinary shares, ordinary shares deposited securities, ADSs
and ADRs.
(cid:120) Any applicable fees and penalties thereon.
The depositary fees payable upon the issuance and cancellation of ADSs are typically paid to the depositary bank
by the brokers (on behalf of their clients) receiving the newly issued ADSs from the depositary bank and by the brokers
(on behalf of their clients) delivering the ADSs to the depositary bank for cancellation. The brokers in turn charge these
fees to their clients. Depositary fees payable in connection with distributions of cash or securities to ADS holders and the
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depositary services fee are charged by the depositary bank to the holders of record of ADSs as of the applicable ADS
record date.
The depositary fees payable for cash distributions are generally deducted from the cash being distributed or by
selling a portion of distributable property to pay the fees. In the case of distributions other than cash (i.e., share dividends,
rights), the depositary bank charges the applicable fee to the ADS record date holders concurrent with the distribution. In
the case of ADSs registered in the name of the investor (whether certificated or uncertificated in direct registration), the
depositary bank sends invoices to the applicable record date ADS holders. In the case of ADSs held in brokerage and
custodian accounts (via DTC), the depositary bank generally collects its fees through the systems provided by DTC (whose
nominee is the registered holder of the ADSs held in DTC) from the brokers and custodians holding ADSs in their DTC
accounts. The brokers and custodians who hold their clients’ ADSs in DTC accounts in turn charge their clients’ accounts
the amount of the fees paid to the depositary banks.
In the event of refusal to pay the depositary fees, the depositary bank may, under the terms of the deposit
agreement, refuse the requested service until payment is received or may set off the amount of the depositary fees from
any distribution to be made to the ADS holder.
The depositary has agreed to pay certain amounts to us in exchange for its appointment as depositary. We may
use these funds towards our expenses relating to the establishment and maintenance of the ADR program, including
investor relations expenses, or otherwise as we see fit. The depositary has reimbursed us for expenses related to the
administration and maintenance of the facility in the amount of $0.5 million, after deduction of applicable U.S. taxes, for
the year ended December 31, 2016.
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
PART II
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
A. – D. Material Modifications to the Rights of Security Holders
None.
E. Use of Proceeds
U.S. Initial Public Offering
As of December 31, 2016, we have used approximately $54.6 million of the net proceeds from our U.S. initial
public offering as follows:
(cid:120)
approximately $24.2 million to accelerate and broaden clinical development of the drug candidates for which we
retain all worldwide rights, specifically:
i.
ii.
approximately $4.8 million to advance HMPL-523 including the Phase I trial in healthy volunteers in
Australia and the two Phase I studies in hematological cancer in China and Australia;
approximately $11.0 million to advance sulfatinib including the Phase II open-label trial in first-line
neuroendocrine tumors in China, the two Phase III trials in pancreatic and extrapancreatic
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neuroendocrine tumors in China, the Phase I bridging study in the United States, the Phase II trial in
thyroid cancer, and the Phase II trial in biliary tract cancer in China;
approximately $2.8 million to advance epitinib including the Phase II trial in non-small cell lung cancer
patients with activating EGFR-mutation positive with brain metastasis in China;
approximately $0.8 million to advance theliatinib including the Phase I trial in wild-type EGFR-mutation
positive non-small cell lung cancer and the Phase Ib trial in esophageal cancer in China;
approximately $3.1 million to advance HMPL-689 including the Phase I dose escalation trial in healthy
volunteers in Australia; and
approximately $1.7 million to advance HMPL-453 including initiating the Phase I dose escalation trials
in China and Australia.
iii.
iv.
v.
vi.
(cid:120)
approximately $19.1 million to support our share of the research and development costs of our partnered drug
candidates, including:
i.
ii.
approximately $5.4 million to advance savolitinib including preparations to initiate a Phase III study in
papillary renal cell carcinoma, the Phase II study in second-line, EGFR tyrosine kinase inhibitor
refractory non-small cell lung cancer in combination with Iressa, the two Phase II trials in c-Met-driven
first-line non-small cell lung cancer, and the three Phase Ib trials in gastric cancer with c-Met gene
amplification or c-Met over-expression, as monotherapy or in combination with Taxotere;
approximately $13.1 million to advance fruquintinib including Phase II and Phase III trials in third-line
colorectal cancer, Phase II and Phase III trials in third-line non-small cell lung cancer, a Phase Ib trial in
gastric cancer in combination with Taxol, and initiating a Phase II trial in first-line non-small cell lung
cancer in combination with Iressa, which we began enrolling in January 2017; and
iii.
approximately $0.6 million to advance new formulations of HMPL-004, including HM004-6599, and
other botanical drug candidates.
(cid:120)
(cid:120)
approximately $9.1 million from the net proceeds to support our discovery platform:
i.
ii.
approximately $3.6 million for external research services and supplies; and
approximately $5.5 million for our development and discovery research team.
approximately $2.2 million to build production facilities to produce both clinical and commercial supply of our
drug candidates.
There has been no material change in the planned use of proceeds from our initial public offering as described in
our final prospectus dated March 18, 2016 filed with the SEC pursuant to Rule 424(b)(4). Our management retains broad
discretion over the allocation and use of the remaining net proceeds of our U.S. initial public offering.
ITEM 15. CONTROLS AND PROCEDURES
A. Disclosure Controls and Procedures.
As required by Rule 13a-15 under the Exchange Act, management, including our chief executive officer and our
chief financial officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period
covered by this report. Disclosure controls and procedures refer to controls and other procedures designed to ensure that
information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the rules and forms of the SEC. Disclosure controls and
procedures include, without limitation, controls and procedures designed to ensure that information required to be
disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to
management, including our principal executive and principal financial officers, or persons performing similar functions,
as appropriate to allow timely decisions regarding our required disclosure.
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Based on the foregoing, our chief executive officer and our chief financial officer have concluded that, as of
December 31, 2016, our disclosure controls and procedures were effective.
B. Management’s Annual Report on Internal Control over Financial Reporting.
This annual report does not include a report of management’s assessment regarding internal control over financial
reporting since it is being exempted due to a transition period established by rules of the SEC for newly public companies.
In connection with the audits of our consolidated statements of operations for the years ended December 31, 2015
and 2014 and our consolidated balance sheets as of December 31, 2015, we and our independent registered public
accounting firm had identified one material weakness in our internal control over financial reporting. As defined in the
standards established by the PCAOB, a “material weakness” is a deficiency, or combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or
interim financial statements will not be prevented or detected on a timely basis.
The material weakness that had been identified relates to our lack of sufficient financial reporting and accounting
personnel with appropriate knowledge of U.S. GAAP and SEC reporting requirements to properly address complex
U.S. GAAP accounting issues and to prepare and review our consolidated financial statements and related disclosures to
fulfill U.S. GAAP and SEC financial reporting requirements. The material weakness, if not timely remedied, may lead to
significant misstatements in our consolidated financial statements.
We have implemented a number of measures to address the material weakness, including the following:
(cid:120) Allocated additional resources and hired qualified financial and accounting staff with extensive U.S. GAAP
and SEC reporting knowledge and experience to improve the financial oversight function, formalize business
performance reviews and enhance preparation and review processes for the consolidated financial statements
and related disclosures in accordance with U.S. GAAP and SEC reporting requirements.
(cid:120) Established an ongoing program to provide appropriate training to our accounting staff, especially training
related to U.S. GAAP and SEC reporting requirements; and
(cid:120) Made continuous efforts to strengthen our internal audit function for monitoring of U.S. GAAP accounting
and reporting matters.
As of December 31, 2016, based on an assessment conducted by our management on the performance of the
above measures, we determined that the material weakness previously identified in our internal control over financial
reporting has been remediated.
Neither we nor our independent registered public accounting firm undertook a comprehensive assessment of
internal control over financial reporting for the year ended December 31, 2016.
C. Attestation Report of the Independent Registered Public Accounting Firm.
This annual report does not include an attestation report of the company’s independent registered public
accounting firm since the attestation by the company’s independent registered public accounting firm is exempted due to
a transition period established by rules of the SEC for newly public companies.
D. Changes in Internal Control over Financial Reporting.
Other than the remediation measures described, there were no other changes in our internal control over financial
reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the period covered by this annual report that has
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16. [RESERVED]
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERTS
Our audit committee consists of Graeme Jack, Paul Carter and Karen Ferrante, with Graeme Jack serving as
chairman of the committee. Michael Howell, Christopher Huang and Christopher Nash previously served on our audit
201
committee until March 1, 2017, February 1, 2017 and February 1, 2017, respectively. Graeme Jack, Paul Carter and Karen
Ferrante each meet the independence requirements under the rules of the Nasdaq Stock Market and under Rule 10A-3
under the Exchange Act. We have determined that Graeme Jack is an “audit committee financial expert” within the
meaning of Item 407 of Regulation S-K. All members of our audit committee meet the requirements for financial literacy
under the applicable rules and regulations of the SEC and the Nasdaq Stock Market. For information relating to
qualifications and experience of each audit committee member, see Item 6. “Directors, Senior Management and
Employees.”
ITEM 16B. CODE OF ETHICS
Our board of directors has adopted a code of ethics applicable to all of our employees, officers and directors,
including our principal executive officer, principal financial officer, principal accounting officer or controller, and persons
performing similar functions. This code is intended to qualify as a “code of ethics” within the meaning of the applicable
rules of the SEC. Our code of ethics is available on our website at http://www.chi-med.com/leadership-governance/terms-
of-reference-policies/code-of-ethics/. Information contained on, or that can be accessed through, our website is not
incorporated by reference into this annual report. See Item 6.C. “Board Practices—Code of Ethics” for more information.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Principal Accountant Fees and Services
The following table summarizes the fees charged by PricewaterhouseCoopers for certain services rendered to our
company, including some of our subsidiaries and joint ventures, during 2015 and 2016.
Audit fees (1)
Audit-related fees (2)
Tax fees (3)
Total (4)
For the year ended
December 31,
2016
2015
(in thousands)
2,115
—
30
2,145
5,181
256
65
5,502
(1)
(2)
(3)
(4)
“Audit fees” means the aggregate fees billed in each of the fiscal years for professional services rendered by
PricewaterhouseCoopers for the audit of our annual financial statements and review of our interim financial
statements, filing of our Form S-8 and professional services in connection with our initial public offering in the
United States.
“Audit-related fees” includes aggregate fees billed in 2015 for a readiness assessment related to management’s
assessment of internal control over financial reporting.
“Tax fees” means the aggregate fees billed in each of the fiscal years for professional services rendered by
PricewaterhouseCoopers for tax compliance and tax advice.
The fees disclosed are exclusive of out-of-pocket expenses and taxes on the amounts paid, which totaled
approximately $155,000 and $82,000 in 2015 and 2016, respectively.
Audit Committee Pre-approval Policies and Procedures
Our audit committee reviews and pre-approves the scope and the cost of audit services related to us and
permissible non-audit services performed by the independent auditors, other than those for de minimis services which are
approved by the audit committee prior to the completion of the audit. All of the services related to our company provided
by PricewaterhouseCoopers listed above have been approved by the audit committee.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
202
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
None.
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
Not applicable.
ITEM 16G. CORPORATE GOVERNANCE
As permitted by Nasdaq, in lieu of the Nasdaq corporate governance rules, but subject to certain exceptions, we
may follow the practices of our home country which for the purpose of such rules is the Cayman Islands. Certain corporate
governance practices in the Cayman Islands may differ significantly from corporate governance listing standards as, except
for general fiduciary duties and duties of care, Cayman Islands law has no corporate governance regime which prescribes
specific corporate governance standards. For example, we follow Cayman Islands corporate governance practices in lieu
of the corporate governance requirements of the Nasdaq Global Select Market in respect of the following:
(i)
(ii)
(iii)
the majority independent director requirement under Section 5605(b)(1) of the Nasdaq listing rules,
the requirement under Section 5605(d) of the Nasdaq listing rules that a remuneration committee
comprised solely of independent directors governed by a remuneration committee charter oversee
executive compensation, and
the requirement under Section 5605(e) of the Nasdaq listing rules that director nominees be selected or
recommended for selection by either a majority of the independent directors or a nominations committee
comprised solely of independent directors.
Cayman Islands law does not impose a requirement that our board of directors consist of a majority of independent
directors. Nor does Cayman Islands law impose specific requirements on the establishment of a remuneration committee
or nominating committee or nominating process.
ITEM 16H. MINE SAFETY DISCLOSURE
Not applicable.
ITEM 17. FINANCIAL STATEMENTS.
See Item 18 “Financial Statements.”
ITEM 18. FINANCIAL STATEMENTS.
PART III
Our consolidated financial statements and the consolidated financial statements of our three non-consolidated
joint ventures, Shanghai Hutchison Pharmaceuticals, Hutchison Baiyunshan and Nutrition Science Partners, are included
at the end of this annual report.
The consolidated financial statements of Nutrition Science Partners relating to the year ended December 31, 2016
included herein are not the Hong Kong statutory annual financial statements of Nutrition Science Partners for that year.
As Nutrition Science Partners is a private company, it is not required to deliver its financial statements with its annual
returns to the Hong Kong Registrar of Companies and has not done so. Nutrition Science Partners’ auditor has separately
reported on those financial statements. The auditor’s report was unqualified; did not include a reference to any matters to
which the auditor drew attention by way of emphasis without qualifying its report; and did not contain a statement under
sections 406(2), 407(2) or (3) of the Hong Kong Companies Ordinance Cap. 622.
203
ITEM 19. EXHIBITS
EXHIBIT INDEX
1.1*
2.1*
Memorandum and Articles of Association of Hutchison China MediTech Limited (incorporated by
reference to Exhibit 3.1 to our Registration Statement on Form F-1 (file no. 333-207447) filed with the
SEC on October 16, 2015)
Form of Deposit Agreement and all holders and beneficial owners of ADSs issued thereunder (incorporated
by reference to Exhibit 4.1 to Amendment No. 4 to our Registration Statement on Form F-1 (file no. 333-
207447) filed with the SEC on March 4, 2016)
2.2*
Form of American Depositary Receipt (incorporated by reference to Exhibit 4.1 to Amendment No. 4 to
our Registration Statement on Form F-1 (file no. 333-207447) filed with the SEC on March 4, 2016)
2.3*
4.1*+
4.2*+
4.3*+
4.4*+
4.5*+
4.6*+
4.7*
Form of Specimen Certificate for Ordinary Shares (incorporated by reference to Exhibit 4.3 to Amendment
No. 2 to our Registration Statement on Form F-1 (file no. 333-207447) filed with the SEC on February 11,
2016)
License and Collaboration Agreement by and between Hutchison MediPharma Limited and AstraZeneca
AB (publ) dated as of December 21, 2011 (incorporated by reference to Exhibit 10.9 to our Registration
Statement on Form F-1 (file no. 333-207447) filed with the SEC on October 16, 2015)
Amended and Restated Exclusive License and Collaboration Agreement by and among Hutchison
MediPharma Limited, Eli Lilly Trading (Shanghai) Company Limited and Hutchison China MediTech
Limited dated as of October 8, 2013 (incorporated by reference to Exhibit 10.10 to our Registration
Statement on Form F-1 (file no. 333-207447) filed with the SEC on October 16, 2015)
Option Agreement by and between Hutchison China MediTech Limited and Eli Lilly and Company dated
as of October 8, 2013 (incorporated by reference to Exhibit 10.11 to our Registration Statement on Form
F-1 (file no. 333-207447) filed with the SEC on October 16, 2015)
Joint Venture Agreement by and among Hutchison MediPharma (Hong Kong) Limited, Nestlé Health
Science S.A., Nutrition Science Partners Limited and Hutchison China MediTech Limited dated as of
November 27, 2012 (incorporated by reference to Exhibit 10.12 to our Registration Statement on Form F-
1 (file no. 333-207447) filed with the SEC on October 16, 2015)
English translation of Sino-Foreign Joint Venture Contract by and between Guangzhou Baiyunshan
Pharmaceutical Holdings Company Limited and Hutchison Chinese Medicine (Guangzhou) Investment
Limited dated as of November 28, 2004 (incorporated by reference to Exhibit 10.13 to our Registration
Statement on Form F-1 (file no. 333-207447) filed with the SEC on October 16, 2015)
English translation of Sino-Foreign Joint Venture Contract by and between Shanghai Traditional Chinese
Medicine Co., Ltd. and Hutchison Chinese Medicine (Shanghai) Investment Limited dated as of January 6,
2001 (incorporated by reference to Exhibit 10.14 to our Registration Statement on Form F-1 (file no. 333-
207447) filed with the SEC on October 16, 2015)
English translation of First Amendment to Sino-Foreign Joint Venture Contract by and between Shanghai
Traditional Chinese Medicine Co., Ltd. and Hutchison Chinese Medicine (Shanghai) Investment Limited
dated as of July 12, 2001 (incorporated by reference to Exhibit 10.15 to our Registration Statement on
Form F-1 (file no. 333-207447) filed with the SEC on October 16, 2015)
204
4.8*
4.9*
4.10*+
4.11*
4.12*
4.13*
4.14*
4.15*
4.16*
4.17*
4.18*
English translation of Second Amendment to Sino-Foreign Joint Venture Contract by and between
Shanghai Traditional Chinese Medicine Co., Ltd. and Shanghai Hutchison Chinese Medicine (HK)
Investment Limited dated as of November 5, 2007 (incorporated by reference to Exhibit 10.16 to our
Registration Statement on Form F-1 (file no. 333-207447) filed with the SEC on October 16, 2015)
English translation of Third Amendment to Sino-Foreign Joint Venture Contract by and between Shanghai
Traditional Chinese Medicine Co., Ltd. and Shanghai Hutchison Chinese Medicine (HK) Investment
Limited dated as of June 19, 2012 (incorporated by reference to Exhibit 10.17 to our Registration Statement
on Form F-1 (file no. 333-207447) filed with the SEC on October 16, 2015)
English translation of Fourth Amendment to Sino-Foreign Joint Venture Contract by and between Shanghai
Traditional Chinese Medicine Co., Ltd. and Shanghai Hutchison Chinese Medicine (HK) Investment
Limited dated as of March 8, 2013 (incorporated by reference to Exhibit 10.18 to our Registration
Statement on Form F-1 (file no. 333-207447) filed with the SEC on October 16, 2015)
English translation of Sino-Foreign Joint Venture Contract by and between Sinopharm Group Co. Ltd. and
Hutchison Chinese Medicine GSP (HK) Holdings Limited dated as of December 18, 2013 (incorporated
by reference to Exhibit 10.19 to our Registration Statement on Form F-1 (file no. 333-207447) filed with
the SEC on October 16, 2015)
Term Loan Facility Agreement by and among Hutchison China MediTech Finance Holdings Limited,
Hutchison Whampoa Limited and Scotiabank (Hong Kong) Limited dated as of June 24, 2014
(incorporated by reference to Exhibit 10.20 to our Registration Statement on Form F-1 (file no. 333-
207447) filed with the SEC on October 16, 2015)
Guarantee Fee Agreement by and between Hutchison Whampoa Limited and Hutchison China MediTech
Finance Holdings Limited dated as of June 24, 2014 (incorporated by reference to Exhibit 10.21 to our
Registration Statement on Form F-1 (file no. 333-207447) filed with the SEC on October 16, 2015)
Revolving Loan Facility Agreement by and between Hutchison China MediTech (HK) Limited and The
Hongkong and Shanghai Banking Corporation Limited dated January 3, 2013 (incorporated by reference
to Exhibit 10.22 to our Registration Statement on Form F-1 (file no. 333-207447) filed with the SEC on
October 16, 2015)
Form of Executive Employment Agreement for Hutchison China MediTech (HK) Limited executive
officers (incorporated by reference to Exhibit 10.23 to our Registration Statement on Form F-1 (file no.
333-207447) filed with the SEC on October 16, 2015)
English translation of Form of Executive Employment Agreement for Hutchison MediPharma Limited
executive officers (incorporated by reference to Exhibit 10.24 to our Registration Statement on Form F-1
(file no. 333-207447) filed with the SEC on October 16, 2015)
Form of Indemnification Agreement for Directors and Officers (incorporated by reference to Exhibit 10.25
to our Registration Statement on Form F-1 (file no. 333-207447) filed with the SEC on October 16, 2015)
Facility Agreement by and among Hutchison China MediTech (HK) Limited as borrower, Hutchison China
MediTech Limited as guarantor, Bank of America, N.A. and Deutsche Bank AG, Hong Kong Branch as
original banks and Bank of America, N.A. as facility agent dated as of February 29, 2016 (incorporated by
reference to Exhibit 10.26 to Amendment No. 3 to our Registration Statement on Form F-1 (file no. 333-
207447) filed with the SEC on March 1, 2016)
4.19**+
First Amendment to License and Collaboration Agreement by and between Hutchison MediPharma
Limited and AstraZeneca (publ) dated as of August 1, 2016
205
8.1*
List of Significant Subsidiaries of the Company (incorporated by reference to Exhibit 21.1 to our
Registration Statement on Form F-1 (file no. 333-207447) filed with the SEC on October 16, 2015)
11.1*
Code of Ethics (incorporated by reference to Exhibit 99.1 to our Registration Statement on Form F-1 (file
no. 333-207447) filed with the SEC on October 16, 2015)
12.1**
Certification of Chief Executive Officer Required by Rule 13a-14(a)
12.2**
Certification of Chief Financial Officer Required by Rule 13a-14(a)
13.1†
13.2†
Certification of Chief Executive Officer Required by Rule 13a-14(b) and Section 1350 of Chapter 63 of
Title 18 of the United States Code
Certification of Acting Chief Financial Officer Required by Rule 13a-14(b) and Section 1350 of Chapter
63 of Title 18 of the United States Code
15.1**
Consent of PricewaterhouseCoopers, an independent registered accounting firm, regarding the
consolidated financial statements of Hutchison China MediTech Limited
15.2**
Consent of PricewaterhouseCoopers, an independent registered accounting firm, regarding the
consolidated financial statements of Nutrition Science Partners Limited
15.3**
Consent of PricewaterhouseCoopers Zhong Tian LLP,
independent accountants, regarding
the
consolidated financial statements of Shanghai Hutchison Pharmaceuticals Limited
15.4**
Consent of PricewaterhouseCoopers Zhong Tian LLP,
the
consolidated financial statements of Hutchison Whampoa Guangzhou Baiyunshan Chinese Medicine
Company Limited
independent accountants, regarding
15.5**
Consent of Conyers Dill & Pearman
101.INS**
XBRL Instance Document
101.SCH** XBRL Taxonomy Extension Schema Document
101.CAL** XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB** XBRL Taxonomy Extension Label Linkbase Document
101.PRE** XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF** XBRL Taxonomy Extension Definitions Linkbase Document
*
Previously filed.
** Filed herewith.
†
Furnished herewith.
+ Confidential treatment previously requested and granted as to portions of the exhibit. Confidential materials omitted
and filed separately with the Securities and Exchange Commission.
206
The registrant hereby certifies that it meets all of the requirements for filing on annual report on Form 20-F and
that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
SIGNATURES
Hutchison China MediTech Limited
/s/ Christian Hogg
By:
Name: Christian Hogg
Title: Chief Executive Officer
Date: March 13, 2017
207
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Audited Consolidated Financial Statements of Hutchison China MediTech Limited
Reports of Independent Registered Public Accounting Firm
As at December 31, 2016 and December 31, 2015:
Consolidated Balance Sheets
For the Years Ended December 31, 2016, 2015 and 2014:
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income/(Loss)
Consolidated Statements of Changes in Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
Audited Consolidated Financial Statements of Shanghai Hutchison Pharmaceuticals Limited
Independent Auditor’s Report
For the Years Ended December 31, 2016, 2015 and 2014:
Consolidated Income Statements
Consolidated Statements of Comprehensive Income
As at December 31, 2016 and December 31, 2015:
Consolidated Statements of Financial Position
For the Years Ended December 31, 2016, 2015 and 2014:
Consolidated Statements of Changes in Equity
Consolidated Statements of Cash Flows
Notes to the Accounts
Audited Consolidated Financial Statements of Hutchison Whampoa Guangzhou Baiyunshan
Chinese Medicine Company Limited
Independent Auditor’s Report
For the Years Ended December 31, 2016, 2015 and 2014:
Consolidated Income Statements
Consolidated Statements of Comprehensive Income
As at December 31, 2016 and December 31, 2015:
Consolidated Statements of Financial Position
For the Years Ended December 31, 2016, 2015 and 2014:
Consolidated Statements of Changes in Equity
Consolidated Statements of Cash Flows
Notes to the Accounts
Audited Consolidated Financial Statements of Nutrition Science Partners Limited
Independent Auditor’s Report
For the Years Ended December 31, 2016, 2015 and 2014:
Consolidated Income Statements
Consolidated Statements of Comprehensive Income
As at December 31, 2016 and December 31, 2015:
Consolidated Statements of Financial Position
For the Years Ended December 31, 2016, 2015 and 2014:
Consolidated Statements of Changes in Equity
Consolidated Statements of Cash Flows
Notes to the Accounts
F-2
F-3
F-4
F-5
F-6
F-7
F-8
F-53
F-54
F-55
F-56
F-57
F-58
F-59
F-81
F-82
F-83
F-84
F-85
F-86
F-87
F-112
F-113
F-114
F-115
F-116
F-117
F-118
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Hutchison China MediTech Limited
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of
operations, of comprehensive income, of changes in shareholders’ equity and of cash flows present fairly, in all material
respects, the financial position of Hutchison China MediTech Limited (the “Company”) and its subsidiaries (the “Group”)
as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in
the period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of
America. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility
is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit of these
statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
/s/ PricewaterhouseCoopers
Hong Kong
March 13, 2017
F-2
Hutchison China MediTech Limited
Consolidated Balance Sheets
(in US$’000)
Note
2016
2015
December 31,
Assets
Current assets
Cash and cash equivalents
Short-term investments
Accounts receivable—third parties
Accounts receivable—related parties
Other receivables, prepayments and deposits
Amounts due from related parties
Inventories
Deferred tax assets
Total current assets
Property, plant and equipment, net
Leasehold land
Goodwill
Other intangible asset
Long-term prepayment
Deferred costs for initial public offering in the United States
Investments in equity investees
Total assets
Liabilities and shareholders’ equity
Current liabilities
Accounts payable—third parties
Accounts payable—related parties
Other payables, accruals and advance receipts
Deferred revenue
Amounts due to related parties
Short-term bank borrowings
Deferred tax liabilities
Total current liabilities
Deferred tax liabilities
Long-term bank borrowings
Deferred revenue
Other deferred income
Other non-current liabilities
Total liabilities
Commitments and contingencies
Company’s shareholders’ equity
Ordinary shares; $1.00 par value; 75,000,000 shares authorized; 60,705,823 and
56,533,118 shares issued at December 31, 2016 and 2015
Additional paid-in capital
Accumulated losses
Accumulated other comprehensive (loss)/income
Total Company’s shareholders’ equity
Non-controlling interests
Total shareholders’ equity
Total liabilities and shareholders’ equity
7
8
9
25 (b)
10
25 (b)
11
26
12
13
14
14
15
79,431
24,270
40,812
4,223
4,314
1,136
12,822
372
167,380
9,954
1,220
3,137
469
1,771
—
31,941
—
33,346
1,869
3,258
9,293
9,555
250
89,512
8,507
1,343
3,332
571
2,132
4,446
158,506 119,756
342,437 229,599
16
25 (b)
17
25 (b)
18
26
26
18
19
21
30,383
5,155
31,990
962
5,308
19,957
1,364
95,119
3,997
26,830
2,039
2,263
8,129
20,565
3,521
26,177
1,171
6,243
23,077
308
81,062
3,415
26,768
3,498
2,132
10,447
138,377 127,322
60,706
56,533
208,196 113,848
(92,040)
(80,357)
5,015
(4,275)
83,356
184,270
18,921
19,790
204,060 102,277
342,437 229,599
The accompanying notes are an integral part of these consolidated financial statements.
F-3
Hutchison China MediTech Limited
Consolidated Statements of Operations
(in US$’000, except share and per share data)
Revenues
Sales of goods—third parties
Sales of goods—related parties
Revenue from license and collaboration agreements—third parties
Revenue from research and development services—third parties
Revenue from research and development services—related parties
Total revenues
Operating expenses
Costs of sales of goods—third parties
Costs of sales of goods—related parties
Research and development expenses
Selling expenses
Administrative expenses
Total operating expenses
Loss from operations
Other income/(expense)
Interest income
Other income
Interest expense
Other expense
Total other income/(expense)
Loss before income taxes and equity in earnings of equity
investees
Income tax expense
Equity in earnings of equity investees, net of tax
Net income/(loss) from continuing operations
Income from discontinued operation, net of tax
Net income/(loss)
Less: Net income attributable to non-controlling interests
Net income/(loss) attributable to the Company
Accretion on redeemable non-controlling interests
Net income/(loss) attributable to ordinary shareholders of the
Company
Earnings/(losses) per share attributable to ordinary
shareholders of the Company—basic (US$ per share)
Continuing operations
Discontinued operation
Earnings/(losses) per share attributable to ordinary
shareholders of the Company—diluted (US$ per share)
Continuing operations
Discontinued operation
Number of shares used in per share calculation—basic
Number of shares used in per share calculation—diluted
Note
2016
Year Ended December 31,
2015
2014
25 (a)
23
25 (a)
26
15
171,058
9,794
26,444
355
8,429
216,080
(149,132)
(7,196)
(66,871)
(17,998)
(21,580)
(262,777)
(46,697)
502
609
(1,631)
(139)
(659)
(47,356)
(4,331)
66,244
14,557
—
14,557
(2,859)
11,698
—
118,113
8,074
44,060
2,573
5,383
178,203
(104,859)
(5,918)
(47,368)
(10,209)
(19,620)
(187,974)
(9,771)
451
386
(1,404)
(202)
(769)
(10,540)
(1,605)
22,572
10,427
—
10,427
(2,434)
7,993
(43,001)
59,162
7,823
12,336
3,696
4,312
87,329
(53,477)
(5,372)
(29,914)
(4,112)
(12,713)
(105,588)
(18,259)
559
20
(1,516)
(761)
(1,698)
(19,957)
(1,343)
15,180
(6,120)
2,034
(4,086)
(3,220)
(7,306)
(25,510)
11,698
(35,008)
(32,816)
27 (a)
27 (a)
0.20
—
(0.64)
—
(0.64)
0.02
0.20
—
27 (b)
(0.64)
0.02
27 (b)
27 (a) 59,715,173 54,659,315 52,563,387
27 (b) 59,971,050 54,659,315 52,563,387
(0.64)
—
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Hutchison China MediTech Limited
Consolidated Statements of Comprehensive Income/(Loss)
(in US$’000)
Net income/(loss)
Other comprehensive loss
Foreign currency translation loss
Total comprehensive income/(loss)
Less: Comprehensive income attributable to non-controlling interests
Total comprehensive income/(loss) attributable to the Company
Year Ended
December 31,
2015
10,427
2016
14,557
2014
(4,086)
(10,722)
3,835
(1,427)
2,408
(5,557)
4,870
(1,732)
3,138
(2,712)
(6,798)
(2,944)
(9,742)
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Hutchison China MediTech Limited
Consolidated Statements of Changes in Shareholders’ Equity
(in US$’000, except share data in ‘000)
As of December 31, 2013
Net (loss)/income
Non-controlling interests arising from acquisition of a
subsidiary
Purchase of additional interest in a subsidiary of
an equity investee
Issuance of ordinary shares in relation to exercise of
share options (note 21)
Share-based compensation-share options
Foreign currency translation adjustments
Dividend paid to a non-controlling shareholder
of a subsidiary (note 25(a))
Transfer between reserves
Dilution of interests in a subsidiary in relation
to exercise of share options of a subsidiary
Accretion to redemption value of redeemable non-
controlling interests
As of December 31, 2014
Net income
Issuance of ordinary shares in relation to exercise of
share options (note 21)
Issuance of ordinary shares in exchange of
redeemable non-controlling interest
Share-based compensation
Share options
Long-term incentive plan
Long-term incentive plan-treasury shares acquired and
held by Trustee
Foreign currency translation adjustments
Dividend paid to a non-controlling shareholder
of a subsidiary (note 25(a))
Transfer between reserves
Dilution of interests in a subsidiary in relation
to exercise of share options of a subsidiary
Accretion to redemption value of redeemable non-
controlling interests
As of December 31, 2015
Net income
New ordinary shares issued (note 21)
Issuance of ordinary shares in relation to exercise of
share options (note 21)
Issuance costs
Share-based compensation
Share options
Long-term incentive plan
Long-term incentive plan-treasury shares acquired and
held by Trustee (note 22(iii))
Foreign currency translation adjustments
Dividend paid to a non-controlling shareholder
of a subsidiary (note 25(a))
Transfer between reserves
As of December 31, 2016
Ordinary Ordinary Additional
Shares
Shares
Number Value
Paid-in
Capital Losses
Accumulated Comprehensive Shareholders’ controlling Total
Income/(Loss) Equity
Accumulated
Other
Total
Company’s
Non-
52,051
—
52,051
—
99,361
—
(92,575)
(7,306)
12,310
—
Interests Equity
78,107
(4,086)
6,960
3,220
71,147
(7,306)
—
—
—
—
—
—
1,025
—
—
1,025
—
—
1,655
725
—
—
—
—
—
—
—
—
25
—
—
(234)
—
—
—
—
(25)
89
—
—
—
—
(2,436)
—
—
(4)
—
9,003
9,003
(234)
—
(234)
2,680
725
(2,436)
—
—
(276)
2,680
725
(2,712)
—
—
85
(1,179)
—
(1,179)
—
36
121
—
53,076
—
—
53,076
—
(25,510)
76,256
—
—
(100,051)
7,993
—
9,870
—
(25,510)
39,151
7,993
—
17,764
2,434
(25,510)
56,915
10,427
243
243
1,131
3,214
3,214
80,823
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
168
233
401
(1,786)
—
—
24
—
—
—
—
—
—
—
—
—
(24)
42
—
56,533
—
4,080
—
56,533
—
4,080
(43,001)
113,848
—
106,080
—
(92,040)
11,698
—
93
—
—
—
—
—
—
93
—
—
—
—
—
—
333
(14,227)
1,373
1,378
2,751
(604)
—
—
—
—
—
—
—
—
—
—
60,706
—
—
60,706
—
15
208,196
—
(15)
(80,357)
—
—
—
—
—
1,374
—
1,374
84,037
—
84,037
168
233
401
—
—
—
168
233
401
—
(4,855)
(1,786)
(4,855)
—
(702)
(1,786)
(5,557)
—
—
—
—
5,015
—
—
—
—
—
—
—
—
(9,290)
—
—
(4,275)
—
—
42
(590)
—
(590)
—
15
57
(43,001)
83,356
11,698
110,160
426
(14,227)
1,373
1,378
2,751
—
18,921
2,859
—
(43,001)
102,277
14,557
110,160
—
—
426
(14,227)
4
2
6
1,377
1,380
2,757
(604)
(9,290)
—
(1,432)
(604)
(10,722)
—
—
184,270
(564)
—
(564)
—
19,790 204,060
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Hutchison China MediTech Limited
Consolidated Statements of Cash Flows
(in US$’000)
Note
29
Net cash (used in)/generated from operating activities
Investing activities
Acquisition of a subsidiary, net of cash acquired
Purchases of property, plant and equipment
Deposits in short-term investments
Proceeds from short-term investments
Investment in an equity investee
Net cash (used in)/generated from investing activities
Financing activities
Proceeds from issuance of ordinary shares
Proceeds from exercise of share options of a subsidiary
Purchases of treasury shares
Dividends paid to a non-controlling shareholder of a subsidiary
Capital contribution from redeemable non-controlling interests
Repayment of loan to a non-controlling shareholder of a subsidiary
Proceeds from bank borrowings
Repayment of bank borrowings
Payment of issuance costs
Net cash generated from/(used in) financing activities
Net increase/(decrease) in cash and cash equivalents
Effect of exchange rate changes on cash and cash equivalents
Year Ended
December 31,
2015
(9,385)
2016
(9,569)
2014
8,359
—
(4,327)
(80,857)
56,587
(5,000)
(33,597)
110,586
—
(604)
(564)
—
(1,000)
25,128
(28,205)
(12,906)
92,435
49,269
(1,779)
47,490
—
(3,324)
—
12,179
—
8,855
689
(3,729)
(21,035)
8,856
—
(15,219)
1,374
57
(1,786)
(590)
—
—
3,205
(6,410)
(1,321)
(5,471)
(6,001)
(1,004)
(7,005)
2,680
121
—
(1,179)
3,059
(2,250)
8,205
(11,277)
—
(641)
(7,501)
(416)
(7,917)
31,941
79,431
38,946
31,941
46,863
38,946
1,570
2,664
1,220
510
1,466
908
Cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosure for cash flow information
Cash paid for interest
Cash paid for tax, net of refunds
Supplemental disclosure for non-cash activities
Capitalization of amounts due from related parties to investments in equity investees
Issuance of ordinary shares in exchange of redeemable non-controlling interests
Deferred costs for initial public offering in the United States incurred but not yet paid
7,000
—
—
The accompanying notes are an integral part of these consolidated financial statements.
20
—
84,037
3,125
—
—
—
F-7
Hutchison China MediTech Limited
Notes to the Consolidated Financial Statements
1. Organization and Nature of Business
Hutchison China MediTech Limited (the “Company”) and its subsidiaries (together the “Group”) are principally
engaged in researching, developing, manufacturing and selling pharmaceuticals and healthcare products. The Group and
its equity investees have research and development facilities and manufacturing plants in Shanghai and Guangzhou in the
People’s Republic of China (the “PRC”) and sell their products mainly in the PRC and Hong Kong.
The Company considers Hutchison Healthcare Holdings Limited as its immediate holding company and CK
Hutchison Holdings Limited (“CK Hutchison”) as its ultimate holding company. Hutchison Whampoa Limited was the
Company’s ultimate holding company until June 3, 2015 when it became a subsidiary of CK Hutchison upon certain
reorganization within the group.
The Group determines its operating segments from both business and geographic perspectives as follows:
(i)
(ii)
Innovation Platform (Drug research and development (“Drug R&D”)): focuses on discovering and
developing innovative therapeutics in oncology and autoimmune diseases, and the provision of research
and development services; and
Commercial Platform: comprises of the manufacture, marketing and distribution of prescription and
over-the-counter pharmaceuticals in the PRC as well as consumer health products through Hong Kong.
The Commercial Platform is further segregated into two core business areas:
(a)
(b)
Prescription Drugs: comprises the development, manufacture, distribution, marketing and sale
of prescription pharmaceuticals; and
Consumer Health: comprises the development, manufacture, distribution, marketing and sale
of over-the-counter pharmaceuticals and consumer health products.
Innovation Platform and Prescription Drugs business under the Commercial Platform are primarily located in the
PRC. The locations for Consumer Health business under the Commercial Platform are further segregated into the PRC
and Hong Kong.
The Company was incorporated in the Cayman Islands on December 18, 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 office is P.O. Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands.
On March 17, 2016, the Company’s American depository shares (“ADS”), each representing one-half of one
ordinary share, commenced trading on the Nasdaq. Concurrently, the Company issued 3,750,000 ordinary shares in the
form of 7,500,000 ADS for gross proceeds of US$101,250,000. On April 13, 2016, the Company issued an additional
330,000 ordinary shares in the form of 660,000 ADS for gross proceeds of US$8,910,000. Issuance costs totaled
US$14,227,000, of which US$12,906,000 and US$1,321,000 was paid in the years ended December 31, 2016 and 2015
respectively. The Company’s ordinary shares continue to be listed on the AIM regulated by the London Stock Exchange.
Liquidity
As of December 31, 2016, the Group had accumulated losses of US$80,357,000, primarily due to its significant
spendings in research and development activities. The Group regularly monitors current and expected liquidity
requirements to ensure that it maintains sufficient cash balances and adequate credit facilities to meet its liquidity
requirements in the short and long term. As of December 31, 2016, the Group had cash and cash equivalents of
US$79,431,000, short-term investments of US$24,270,000 and unutilized bank borrowing facilities of US$70,000,000.
Short-term investments are primarily comprised of bank deposits maturing over 3 months. As of December 31, 2015, the
Group had cash and cash equivalents of US$31,941,000, nil short-term investments and unutilized bank borrowing
facilities of US$6,923,000. The Group’s operating plan includes the continued receipt of dividends from certain of its
equity investees. Dividends received from equity investees for the years ended December 31, 2016, 2015 and 2014 was
US$30,528,000, US$6,410,000 and US$15,949,000 respectively. However, there can be no assurances that these entities
will continue to declare and pay dividends to their shareholders.
F-8
Based on the Group’s operating plan, the existing cash and cash equivalents and short-term investments are
considered to be sufficient to meet the cash requirements to fund planned operations and other commitments for at least
the next twelve months (the look-forward period used).
2. Particulars of Principal Subsidiaries and Equity Investees
Name
Subsidiaries
Hutchison MediPharma Limited
Equity interest
attributable to
the Group
At
December 31,
2016
2015
Principal activities
Place of
establishment
and operations
PRC
99.75 % 99.75 % Research and development of
pharmaceutical products
Hutchison Whampoa Sinopharm
PRC
51 %
51 % Provision of sales, distribution
Pharmaceuticals (Shanghai) Company Limited
(“Hutchison Sinopharm”)
and marketing services to
pharmaceutical manufacturers
Hutchison Hain Organic (Hong Kong) Limited
Hong Kong
50 %
50 % Wholesale and trading of
(“HHOL”) (note (i))
healthcare and consumer products
Hutchison Hain Organic (Guangzhou) Limited
(“HHOGZL”) (note (i))
Hutchison Healthcare Limited (“HHL”)
PRC
PRC
50 %
50 % Wholesale and trading of
healthcare and consumer products
100 % 100 % Manufacture and distribution of
Hutchison Consumer Products Limited
Hong Kong
100 % 100 % Wholesale and trading of
healthcare and consumer products
healthcare products
Equity investees
Shanghai Hutchison Pharmaceuticals Limited
(“SHPL”)
Hutchison Whampoa Guangzhou Baiyunshan
Chinese Medicine Company Limited
(“HBYS”) (note (ii))
PRC
PRC
50 %
50 % Manufacture and distribution of
prescription drugs products
40 %
40 % Manufacture and distribution of
over-the-counter drug products
Nutrition Science Partners Limited (“NSPL”)
Hong Kong 49.88 % 49.88 % Research and development of
(note (iii))
Notes:
pharmaceutical products
(i) HHOL and HHOGZL are regarded as subsidiaries of the Company, as while both shareholders of these subsidiaries
have equal representation at the Board, in the event of a deadlock, the Group has a casting vote and is therefore able
to unilaterally control the financial and operating policies of HHOL and HHOGZL
(ii) The 50% equity interest in HBYS is held by a 80% owned subsidiary of the Group. The effective equity interest of
the Group in HBYS is therefore 40% for both 2016 and 2015.
(iii) The 50% equity interest in NSPL is held by a 99.75% owned subsidiary of the Group. The effective equity interest of
the Group in NSPL is therefore 49.88% for both 2016 and 2015.
3. Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements reflect the accounts of the Company and all of its
subsidiaries in which a controlling interest is maintained. Investments in equity investees over which the Group has
significant influence are accounted for using the equity method. All inter-company balances and transactions have been
eliminated in consolidation. The consolidated financial statements have been prepared in conformity with generally
accepted accounting principles in the United States of America (“U.S. GAAP”).
F-9
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses
during the reporting period. Estimates are used when accounting for amounts recorded in connection with acquisitions,
including initial fair value determinations of assets and liabilities and other intangible assets as well as subsequent fair
value measurements. Additionally, estimates are used in determining items such as useful lives of property, plant and
equipment, write-down of inventories, allowance for doubtful accounts, share-based compensation, impairments of
long-lived assets, impairment of other intangible asset and goodwill, taxes on income, tax valuation allowances, revenues
and cost accruals from research and development projects. Actual results could differ from those estimates.
Foreign Currency Translation
The Group’s functional currency is Renminbi (“RMB”) but the presentation currency is U.S. dollar (“US$”). The
financial statements of the Company’s subsidiaries with a functional currency other than the US$ have been translated into
the Company’s reporting currency, the US$. All assets and liabilities of the subsidiaries are translated using year-end
exchange rates and revenues and expenses are translated at average exchange rates for the year. Translation adjustments
are reflected in accumulated other comprehensive income in shareholders’ equity.
Net foreign currency exchange losses of US$109,000, US$79,000 and US$480,000 were recorded in other
expense for the years ended December 31, 2016, 2015 and 2014 respectively.
Cash and Cash Equivalents
The Group considers all highly liquid investments purchased with original maturities of three months or less to
be cash equivalents. Cash and cash equivalents consist primarily of cash on hand and demand deposits and are stated at
cost, which approximates fair value.
Short-term Investments
Short-term investments include deposits placed with banks with original maturities of more than three months
but less than one year.
Concentration of Credit Risk
Financial instruments that potentially expose the Group to concentrations of credit risk consist primarily of cash
and cash equivalents, short-term investments, accounts receivable, other receivables and amounts due from related parties.
The Group places substantially all of its cash and cash equivalents and short-term investments in major financial
institutions, which management believes are of high credit quality. The Group has practice to limit the amount of credit
exposure to any particular financial institution.
The Group has no significant concentration of credit risk. The Group has policies in place to ensure that sales of
goods are made to customers with an appropriate credit history and the Group performs periodic credit evaluations of its
customers. Normally the Group does not require collateral from trade debtors.
Foreign Currency Risk
The Group’s operating transactions and its assets and liabilities are mainly denominated in RMB, which is not
freely convertible into foreign currencies. The Group’s cash and cash equivalents are subject to such government controls.
The value of the RMB is subject to changes by the central government policies and international economic and political
developments that affect the supply and demand of RMB in the foreign exchange market. In the PRC, certain foreign
exchange transactions are required by law to be transacted only by authorized financial institutions at exchange rates set
by the People’s Bank of China (the “PBOC”). Remittances in currencies other than RMB by the Group in the PRC must
be processed through the PBOC or other PRC foreign exchange regulatory bodies which require certain supporting
documentation in order to effect the remittance.
F-10
Fair Value of Financial Instruments
Financial instruments that are measured at fair value is determined according to a fair value hierarchy that
prioritizes the inputs and assumptions used, and the valuation techniques used to measure fair value. The three levels of
the fair value hierarchy are described as follows:
Level 1
Level 2
Level 3
Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.
Inputs are quoted prices for similar assets or liabilities in active markets; or quoted
prices for identical or similar instruments in markets that are not active; and
model-derived valuations in which all significant inputs and significant value drivers
are observable in active markets.
Inputs are unobservable inputs based on the Group’s assumptions and valuation
techniques used to measure assets or liabilities at fair value. The inputs require
significant management judgment or estimation.
The assessment of the significance of a particular input to the fair value measurement requires judgment and may
affect the valuation of assets and liabilities and their placement within the fair value hierarchy levels.
The fair value of assets and liabilities is established using the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at the measurement date and a fair value
hierarchy is established based on the inputs used to measure fair value.
Goodwill
Goodwill represents the excess of the purchase price plus fair value of non-controlling interests over the fair value
of identifiable assets and liabilities acquired. Goodwill is not amortized, but is tested for impairment at the reporting unit
level on at least an annual basis or when an event occurs or circumstances change that would more likely than not reduce
the fair value of a reporting unit below its carrying amount. When performing an evaluation of goodwill impairment, the
Group has the option to first assess qualitative factors, such as significant events and changes to expectations and activities
that may have occurred since the last impairment evaluation, to determine if it is more likely than not that goodwill might
be impaired. If as a result of the qualitative assessment, that it is more likely than not that the fair value of the reporting
unit is less than its carrying amount, the two-step quantitative fair value test is performed. No impairment of goodwill
occurred in the years presented.
Property, Plant and Equipment
Property, plant and equipment consist of buildings, leasehold improvements, plant and equipment, furniture,
fixtures, other equipment and motor vehicles. Property, plant and equipment are stated at cost, net of accumulated
depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the depreciable
assets.
Buildings
Plant and equipment
Furniture and fixtures, other equipment and
20 years
10 years
motor vehicles
Leasehold improvements
4-5 years
Shorter of (a) 5 years or (b) remaining term of lease
Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from
the accounts and any resulting gain or loss is reflected in the consolidated statements of operations in the year of
disposition. Additions and improvements that extend the useful life of an asset are capitalized. Repairs and maintenance
costs are expensed as incurred.
Impairment of Long-Lived Assets
The Group evaluates the recoverability of long-lived assets in accordance with authoritative guidance on
accounting for the impairment or disposal of long-lived assets. The Group evaluates long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. If
such indicators exist, the first step of the impairment test is performed to assess if the carrying value of the net assets
F-11
exceeds the undiscounted cash flows of the assets. If yes, then the second step of the impairment test is performed in order
to determine if the carrying value of the net assets exceeds the fair value. If yes, impairment is recognized for the excess.
Leasehold Land
Leasehold land represents fees paid to acquire the right to use the land on which various plants and buildings are
situated for a specified period of time from the date the respective right was granted and are stated at cost less accumulated
amortization and impairment loss, if any. Amortization is computed using straight-line basis over the lease period of
50 years.
Other Intangible Assets
Other intangible assets with finite useful lives are carried at cost less accumulated amortization and impairment
loss, if any. Amortization is computed using straight-line basis over the estimated useful lives of the assets.
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined using the weighted average
cost method. The cost of finished goods comprises raw materials, direct labor, other direct costs and related production
overheads (based on normal operating capacity). Net realizable value is the estimated selling price in the ordinary course
of business, less applicable variable selling expenses. A provision for excess and obsolete inventory will be made based
primarily on forecast of product demand and production requirements. The excess balance determined by this analysis
becomes the basis for excess inventory charge and the written-down value of the inventory becomes its cost. Written-down
inventory is not written up if market conditions improve.
Accounts Receivable
Accounts receivable are stated at the amount management expects to collect from customers based on their
outstanding invoices. Management reviews accounts receivable regularly to determine if any receivable will potentially
be uncollectible. Estimates are used to determine the amount of allowance for doubtful accounts necessary to reduce
accounts receivable to its estimated net realizable value. The amount of the allowance for doubtful accounts is recognized
in the consolidated statements of operations.
Research and Development Expenses
Research and development expenses consist primarily of salaries and benefits, share-based compensation,
materials and supplies, contracted research, consulting arrangements and other expenses incurred to sustain the Group’s
research and development programs. Research and development costs are expensed as incurred.
Operating Leases
Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified
as operating leases. Payments made under operating leases are charged to the consolidated statements of operations on a
straight-line basis over the period of the leases.
Total operating lease rentals for buildings for the years ended December 31, 2016, 2015 and 2014 amounted to
US$1,838,000, US$1,426,000 and US$810,000 respectively. Out of this total, US$524,000, US$237,000 and nil were
recorded in research and development expenses for the years ended December 31, 2016, 2015 and 2014 respectively and
US$1,314,000, US$1,189,000 and US$810,000 were recorded in administrative expenses for the years ended
December 31, 2016, 2015 and 2014 respectively.
Income Taxes
The Group accounts for income taxes under the liability method. Under the liability method, deferred income tax
assets and liabilities are determined based on the differences between the financial reporting and income tax bases of assets
and liabilities and are measured using the tax income rates that will be in effect when the differences are expected to
reverse. A valuation allowance is recorded when it is more likely than not that some of the net deferred income tax asset
will not be realized.
F-12
The Group accounts for a tax position from an uncertain tax position in the consolidated financial statements only
if it is more likely than not that the position is sustainable based on its technical merits and consideration of the relevant
tax authority’s widely understood administrative practices and precedents. If the recognition threshold is met, the Group
records only the portion of the tax position that is greater than 50 percent likely to be realized.
Borrowings
Borrowings are recognized initially at fair value, net of debt issuance costs incurred. Borrowings are subsequently
stated at amortized cost; any difference between the proceeds (net of debt issuance costs) and the redemption value is
recognized in the consolidated statements of operations over the period of the borrowings using the effective interest
method.
The Group has adopted Accounting Standards Update (“ASU”) 2015-03, Interest-Imputation of Interest
(Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs on January 1, 2016. This guidance requires debt
issuance costs to be presented in the consolidated balance sheets as a direct deduction from the carrying value of the
associated debt liability. The Group has applied the guidance retrospectively; accordingly, the consolidated balance sheet
as of December 31, 2015 has been adjusted by a reclassification from other receivables, prepayments and deposits to long-
term bank borrowings for US$155,000.
Defined Contribution Plans
The Company’s subsidiaries in the PRC participate in a government-mandated multi-employer defined
contribution plan pursuant to which certain retirement, medical and other welfare benefits are provided to employees. The
relevant labor regulations require the Company’s subsidiaries in the PRC to pay the local labor and social welfare
authority’s monthly contributions at a stated contribution rate based on the monthly basic compensation of qualified
employees. The relevant local labor and social welfare authorities are responsible for meeting all retirement benefits
obligations and the Company’s subsidiaries in the PRC have no further commitments beyond their monthly contributions.
The contributions to the plan are expensed as incurred.
The Group also makes payments to other defined contribution plans for the benefit of employees employed by
subsidiaries outside the PRC. The defined contribution plans are generally funded by the relevant companies and by
payments from employees of the contribution plans.
The Group’s contributions to defined contribution plans for the years ended December 31, 2016, 2015 and 2014
amounted to US$2,286,000, US$1,653,000 and US$1,370,000 respectively.
Share-Based Compensation
Share options
The Group recognizes share-based compensation expense on share options granted to employees and directors
based on their estimated grant date fair value using the Binomial model. This Binomial pricing model uses various inputs
to measure fair value, including estimated market value of the underlying ordinary share at the grant date, contractual
terms, estimated volatility, risk-free interest rates and expected dividend yields. The Group recognizes share-based
compensation expense, net of estimated forfeitures, in the consolidated statements of operations on a graded vesting basis
over the requisite service period. The Group applies an estimated forfeiture rate derived from historical and expected future
employee termination behavior. If the actual number of forfeitures differs from those estimated by management,
adjustments to compensation expense may be required in future periods.
For share options granted to non-employees, the fair value of the share options is estimated using the Binomial
model. This model utilizes the estimated market value of the Company’s underlying ordinary share at the measurement
date, the contractual terms, estimated volatility, risk-free interest rates and expected dividend yields. Measurement of
share-based compensation is subject to periodic adjustment for changes in the fair value of the award. The Company
recognizes share-based compensation expense, net of estimated forfeitures, in the consolidated statements of operations
on graded vesting basis over the requisite service period.
Share options are classified as equity-settled awards. Share-based compensation expense, when recognized, is
charged to the consolidated statements of operations with the corresponding entry to additional paid-in capital.
F-13
Long-term Incentive Scheme
The Long-Term Incentive Plan (“LTIP”) is recognized as a liability in the consolidated balance sheets before the
determination date (i.e. the date when the achievement of the non-market performance conditions are known, being one
business day following the publication of the annual report for the financial year to which the award relates). Before the
determination date, the LTIP are classified as liability-settled awards as they settle in a variable number of shares based
on a fixed monetary amount, which is determined upon the actual achievement of performance target. After the
determination date, the LTIP are classified as equity-settled awards. The amounts previously recorded as a liability will
be transferred to additional paid-in capital.
The Group recognizes the expense, net of estimated forfeitures, on the LTIP based on a fixed monetary amount
on a straight-line basis over the requisite period. The Group applies an estimated forfeiture rate derived from historical
and expected future employee termination behavior. If the actual number of forfeitures differs from those estimated by
management, adjustments to compensation expense may be required in future periods. Prior to the determination date, the
amount of LTIP that are expected to vest also takes into consideration the achievement of the non-market performance
conditions and the extent to which the performance conditions are likely to be met.
Treasury Shares
The Company accounts for treasury shares under the cost method. As of December 31, 2016 and 2015, the
carrying amount of treasury shares is approximately US$2,390,000 and US$1,786,000 respectively, and the number of
treasury shares is 62,921 and 40,655 respectively. The treasury shares were purchased for the purpose of the LTIP as
disclosed in Note 22(iii). The Company expects to repurchase ordinary shares amounting to approximately US$1,045,000
during 2017, based on the estimated achievement of the LTIP’s non-market performance conditions.
Ordinary Shares
The Company’s ordinary shares are stated at par value of US$1.00 per ordinary share. The difference between
the consideration received, net of issuance cost, and the par value is recorded in additional paid-in capital.
Convertible Preferred Shares
When the Company or its subsidiaries issue preferred shares, the Group assesses whether such instruments should
be liability, mezzanine equity, or permanent equity classified based on multiple indicators such as redemption features,
conversion features, voting rights and other embedded features. Freestanding equity instruments with mandatory
redemption requirements, embodies an obligation to repurchase the issuer’s equity shares by transferring assets, or certain
obligations to issue a variable number of shares, are treated as liability-classified instruments. Equity instruments that are
redeemable at the option of the holder or not solely within the Group’s control are classified as mezzanine equity of the
issuer entity (and redeemable non-controlling interests of the consolidated financial statements of the Group if preferred
shares are issued by its subsidiaries). Subsequent measurements of financing instruments are driven by the instruments’
balance sheet classification.
The Group also reviews the terms of each convertible instrument and determines whether the host instrument is
more akin to debt or equity based on the economic characteristics and risks in order to evaluate if there were any embedded
features which would require bifurcation and separate accounting from the host contract. For embedded conversion
features that are not required to be separated, the Group analyzes the accounting conversion price and the Company’s share
price at the commitment date to identify any beneficial conversion features.
For any amendment to the terms of the preferred shares not classified as liabilities, the Group assesses whether
the amendment is an extinguishment or a modification using the fair value model. The Group considers a significant
change in fair value immediately after the amendment to be substantive and thus triggers extinguishment. A change in fair
value which is not significant immediately after the amendment is considered non-substantive and thus is subject to
modification accounting. When preferred shares are extinguished, the difference between the fair value of the consideration
transferred to the preferred shareholders and the carrying amount of such preferred shares (net of issuance costs) is treated
as a deemed dividend to the preferred shareholders. When preferred shares are modified and such modification results in
a value transfer between preferred shareholders and ordinary shareholders, the change in fair value resulting from the
amendment is treated as a deemed dividend to or from the preferred shareholders.
F-14
Government Incentives
Incentives from governments are recognized at their fair values. Government incentives that are received in
advance are deferred and recognized in the consolidated statements of operations over the period necessary to match them
with the costs that they are intended to compensate. Government incentives in relation to the achievement of stages of
research and development projects are recognized in the consolidated statements of operations when amounts have been
received and all attached conditions have been complied. Non-refundable incentives received without any further
obligations or conditions attached are recognized immediately to the consolidated statements of operations.
Segment Reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the chief executive
officer who is the Group’s chief operating decision maker.
The chief operating decision maker reviews the Group’s internal reporting in order to assess performance, allocate
resources and determined that the Group’s reportable segments are as disclosed in Note 1.
Revenue Recognition
Sales of goods—wholesale
Revenue from our Commercial Platform segments are recognized when goods are delivered and title passes to
the customer and there are no further obligations to the customer. Recognition of revenue also requires reasonable
assurance of collection of sales proceeds and completion of all performance obligations. Sales discounts are issued to
customers as direct discounts at the point-of-sale or indirectly in the form of rebates. Additionally, sales are generally
made with a limited right of return under certain conditions. Revenues are recorded net of provisions for sales discounts
and returns.
Revenues from research and development projects
The Group recognizes revenue for the performance of services when each of the following four criteria are met:
(i) persuasive evidence of an arrangement exists; (ii) services are rendered; (iii) the sales price is fixed or determinable;
and (iv) collectability is reasonably assured.
The Group
follows Accounting Standard Codification
(“ASC”) 605-25, Revenue Recognition—
Multiple-Element Arrangements and ASC 808, Collaborative Arrangements, if applicable, to determine the recognition of
revenue under the Group’s license and collaborative research, development and commercialization agreements. The terms
of these agreements generally contain multiple elements, or deliverables, which may include (i) licenses to the Group’s
intellectual property, (ii) materials and technology, (iii) clinical supply, and/or (iv) participation in joint research or joint
steering committees. The payments the Group may receive under these arrangements typically include one or more of the
following: non-refundable, upfront license fees; funding of research and/or development efforts; amounts due upon the
achievement of specified milestones; and/or royalties on future product sales.
ASC 605-25 provides guidance relating to the separability of deliverables included in an arrangement into
different units of accounting and the allocation of arrangement consideration to the units of accounting. The evaluation of
multiple-element arrangements requires management to make judgments about (i) the identification of deliverables,
(ii) whether such deliverables are separable from the other aspects of the contractual relationship, (iii) the estimated selling
price of each deliverable, and (iv) the expected period of performance for each deliverable.
To determine the units of accounting under a multiple-element arrangement, management evaluates certain
separation criteria, including whether the deliverables have stand-alone value, based on the relevant facts and
circumstances for each arrangement. Management then estimates the selling price for each unit of accounting and allocates
the arrangement consideration to each unit utilizing the relative selling price method. The Company determines the
estimated selling price for deliverables within each agreement using vendor-specific objective evidence (“VSOE”) of
selling price, if available, or third party evidence of selling price if VSOE is not available, or the Company’s best estimate
of selling price, if neither VSOE nor third party evidence is available. Determining the best estimate of selling price for a
deliverable requires significant judgment. The Company typically uses its best estimate of a selling price to estimate the
F-15
selling price for licenses to do development work, since it often does not have VSOE or third party evidence of selling
price for these deliverables. In those circumstances where the Company applies its best estimate of selling price to
determine the estimated selling price of a license to development work, it considers market conditions as well as
entity-specific factors, including those factors contemplated in negotiating the agreements as well as internally developed
estimates that include assumptions related to the market opportunity, estimated development costs, probability of success
and the time needed to commercialize a product candidate pursuant to the license. In validating its best estimate of selling
price, the Company evaluates whether changes in the key assumptions used to determine its best estimate of selling price
will have a significant effect on the allocation of arrangement consideration between deliverables. The Company
recognizes consideration allocated to an individual element when all other revenue recognition criteria are met for
that element.
The allocated consideration for each unit of accounting is recognized over the related obligation period in
accordance with the applicable revenue recognition criteria.
If there are deliverables in an arrangement that are not separable from other aspects of the contractual relationship,
they are treated as a combined unit of accounting, with the allocated revenue for the combined unit recognized in a manner
consistent with the revenue recognition applicable to the final deliverable in the combined unit. Payments received prior
to satisfying the relevant revenue recognition criteria are recorded as unearned revenue in the accompanying balance sheets
and recognized as revenue when the related revenue recognition criteria are met.
The Group typically receives non-refundable, upfront payments when licensing the Group’s intellectual property,
which often occurs in conjunction with a research and development agreement. If management believes that the license to
the Group’s intellectual property has stand-alone value, the Group generally recognizes revenue attributed to the license
upon delivery provided that there are no future performance requirements for use of the license. When management
believes that the license to the Group’s intellectual property does not have stand-alone value, the Group would recognize
revenue attributed to the license rateably over the contractual or estimated performance period. For payments payable on
achievement of milestones that do not meet all of the conditions to be considered substantive, the Group recognizes a
portion of the payment as revenue when the specific milestone is achieved, and the contingency is removed. Other
contingent event-based payments for which payment is either contingent solely upon the passage of time or the result of
collaborator’s performance are recognized when earned. The Company’s collaboration and license agreements generally
include contingent milestone payments related to specified pre-clinical research and development milestones, clinical
development milestones, regulatory milestones and sales-based milestones. Pre-clinical research and development
milestones are typically payable upon the selection of a compound candidate for the next stage of research and
development. Clinical development milestones are typically payable when a product candidate initiates or advances in
clinical trial phases or achieves defined clinical events such as proof-of-concept. Regulatory milestones are typically
payable upon submission for marketing approval with regulatory authorities or upon receipt of actual marketing approvals
for a compound, approvals for additional indications, or upon the first commercial sale. Sales-based milestones are
typically payable when annual sales reach specified levels.
At the inception of each arrangement that includes milestone payments, the Company evaluates whether each
milestone is substantive and at risk to both parties on the basis of the contingent nature of the milestone. This evaluation
includes an assessment of whether (a) the consideration is commensurate with either (i) the entity’s performance to achieve
the milestone or (ii) the enhancement of the value of the delivered item(s) as a result of a specific outcome resulting from
the entity’s performance to achieve the milestone; (b) the consideration relates solely to past performance; and (c) the
consideration is reasonable relative to all of the deliverables and payment terms within the arrangement. The Company
evaluates factors such as the scientific, regulatory, commercial and other risks that must be overcome to achieve the
respective milestone, the level of effort and investment required to achieve the respective milestone and whether the
milestone consideration is reasonable relative to all deliverables and payment terms in the arrangement in making this
assessment.
For further details on the license and collaboration agreements, refer to Note 23.
Interest Income
Interest generated from cash and cash equivalents and short-term investments are recorded over the period earned.
It is recorded in interest income on the consolidated statements of operations and measured based on the actual amount of
interest the Group earns.
F-16
Comprehensive Income/(Loss)
Comprehensive income/(loss) is defined as the change in equity of a business enterprise during a period from
transactions, and other events and circumstances from non-owner sources, and currently consists of net income and gains
and losses on foreign currency translation related to the Company’s subsidiaries.
Earnings/(Losses) per Share
Basic earnings/(losses) per share is computed by dividing net income/(loss) attributable to ordinary shareholders
by the weighted average number of ordinary shares outstanding during the period. Weighted average number of ordinary
shares outstanding during the period excludes treasury shares.
Diluted earnings/(losses) per share is calculated by dividing net income/(loss) attributable to ordinary
shareholders by the weighted average number of ordinary shares and dilutive ordinary share equivalents outstanding during
the period. Dilutive ordinary share equivalents include shares and treasury shares issuable upon the exercise or settlement
of share-based awards issued by the Company and its subsidiaries using the treasury stock method and the ordinary shares
issuable upon the conversion of the preferred shares issued by its subsidiary, Hutchison MediPharma Holdings Limited
(“HMHL”), using the if-converted method.
The computation of diluted earnings/(losses) per share does not assume conversion, exercise, or contingent
issuance of securities that would have an anti-dilutive effect.
In determining the impact from share-based awards and convertible preferred shares issued by HMHL, the
Company first calculates the diluted earnings per share at HMHL and includes in the numerator of consolidated
earnings/(losses) per share the amount based on the diluted earnings/(losses) per share of HMHL multiplied by the number
of shares owned by the Company.
In addition, periodic accretion on preferred shares of HMHL (Note 20) is recorded as deductions to consolidated
net income/(loss) to arrive at net income/(loss) attributable to ordinary shareholders of the Company for purposes of
calculating the consolidated basic earnings/(losses) per share.
Discontinued Operations
A discontinued operation is a component of the Group’s business, the operations and cash flows 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 coordinated 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 classified as discontinued, a single amount is presented in the consolidated statements of
operations, which comprises the post-tax profit or loss of the discontinued operation.
Profit Appropriation and Statutory Reserves
The Group’s subsidiaries established in the PRC are required to make appropriations to certain non-distributable
reserve funds.
In accordance with the laws applicable to the Foreign Investment Enterprises established in the PRC, the Group’s
subsidiaries registered as wholly-owned foreign enterprise have to make appropriations from its after-tax profit
(as determined under generally accepted accounting principles in the PRC (“PRC GAAP”) to reserve funds including
general reserve fund, the enterprise expansion fund and staff bonus and welfare fund. The appropriation to the general
reserve fund must be at least 10% of the after-tax profits calculated in accordance with PRC GAAP. Appropriation is not
required if the general reserve fund has reached 50% of the registered capital of the company. Appropriation to the
enterprise expansion fund and staff bonus and welfare fund is made at the company’s discretion.
The use of the general reserve fund, enterprise expansion fund, statutory surplus reserve and discretionary surplus
fund are restricted to the offsetting of losses or increases the registered capital of the respective company. The staff bonus
and welfare fund is a liability in nature and is restricted to fund payments of special bonus to employees and for the
collective welfare of employees. All these reserves are not allowed to be transferred to the company in terms of cash
dividends, loans or advances, nor can they be distributed except under liquidation.
F-17
For the years ended December 31, 2016, 2015 and 2014, profit appropriation to statutory funds for the Group’s
entities incorporated in the PRC was approximately US$15,000, US$24,000 and US$25,000 respectively. No
appropriation to other reserves was made for any of the years presented.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, Revenue from
Contracts with Customers (Topic 606), to clarify the principles of recognizing revenue and create common revenue
recognition guidance between U.S. GAAP and International Financial Reporting Standards (“IFRS”). In 2016, the FASB
further issued ASU 2016-08 Principal versus Agent Considerations, ASU 2016-10 Identifying Performance Obligations
and Licensing and ASU 2016-12 Narrow-Scope Improvements and Practical Expedients to amend the new revenue
standard and address implementation issues of ASU 2014-09. An entity has the option to apply the provisions of ASU
2014-09 either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of
initially applying this standard recognized at the date of initial application. ASU 2014-09 is effective for fiscal years and
interim periods within those years beginning after December 15, 2017, and early adoption is permitted but not earlier than
the original effective date of December 15, 2016. The new standard supersedes U.S. GAAP guidance on revenue
recognition and requires the use of more estimates and judgements than the current standards. It also requires additional
disclosures.
While the Group is continuing to assess all potential impact of the new guidance, it currently expects the most
material impact will relate to the license and collaboration agreements in the Innovation Platform. Refer to Note
23 for a description of the Group’s license and collaboration agreements. Based on the Group’s preliminary
analysis, the following are some of the key areas of potential difference between the new and current guidance:
(cid:120) The Group has identified the various deliverables in its license and collaboration agreements under existing
guidance (ASC 605). The new guidance introduces the term “distinct” to describe separate deliverables. One
of the key considerations under the new guidance is to assess whether the services are considered “distinct”
in the context of the contract. The Group is in the process of assessing how the new guidance would impact
the identification of separate deliverables.
(cid:120) An agreement contains an option to expand the license into other territories. The Group did not identify the
option as a separate deliverable under existing guidance. The new guidance contains specific guidance on
options that treat them as a material right if the customer would not otherwise receive them without entering
into the arrangement. The Group is in the process of assessing how the new guidance would impact the
accounting for the option.
(cid:120) Royalty revenues are based on future sales. Under existing guidance, royalty revenue is recognized as the
future sales occur. However, under the new guidance royalties are considered variable consideration, which
are required to be estimated unless the criteria for a different pattern of recognition are met. The Group is in
the process of assessing the timing and method of recognition of royalties.
(cid:120) The Group currently uses the milestone method to recognize substantive milestones related to research and
development service deliverables. This results in more one-time recognition of revenue when such milestones
are achieved. This method may not be acceptable under the new guidance; therefore, research and
development services deliverables, which are transferred to the customer over time, will likely be recognized
using a measure of progress such as costs incurred. The objective when measuring progress is to depict the
Group’s performance in transferring control of research and development services promised to a customer
(that is, satisfaction of the Group’s performance obligation). Moreover, the milestone payments would be
regarded as variable consideration and included in the transaction price when considered highly probable
that these would not reverse in future. The Group is in the process of assessing how the new guidance shall
be applied to milestone payments.
(cid:120) The license and collaboration agreements allow certain costs incurred by the Group to be reimbursed. The
Group’s current accounting policy is to concurrently recognize the revenue and related costs as they are
incurred. The Group is in the process of assessing how the new guidance would impact the accounting for
costs reimbursements.
F-18
For sales of goods in the Commercial Platform, while the Group is continuing to evaluate the impact, it expects
there will not be a material impact to the timing of revenue recognition under the new guidance. The Group
expects the timing of revenue recognition will be at the point when the goods have transferred to the customer
and the customer obtains control of the goods as evidenced by delivery of the product, transfer of title and when
no further obligations to the customer remain.
The Group is continuing to evaluate the impact in other areas and the method of adoption of ASU 2014-09 and
related amendments and disclosures. While the Group is in the process of assessing the transition method, it
expects to adopt the new standard using the modified retrospective method in fiscal 2018.
In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of
Deferred Taxes. ASU 2015-17 simplifies the presentation of deferred income taxes, which require the deferred tax
liabilities and assets be classified as noncurrent in a classified balance sheet. ASU 2015-17 is effective for fiscal years and
interim periods within those years beginning after December 15, 2016. The Group has adopted ASU 2015-17 on January
1, 2017 and all current deferred tax liabilities and assets are reclassified to noncurrent. This guidance impacts the
presentation of the Group's consolidated balance sheets only, and prior periods will not be retrospectively adjusted.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10) - Recognition
and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 makes a number of changes to the
accounting for equity investments and financial liabilities under the fair value option, and the presentation and disclosure
requirements for financial instruments. It also simplifies the impairment assessment of equity investments without readily
determinable fair values by requiring assessment for impairment qualitatively at each reporting period. ASU 2016-01 is
effective for fiscal years and interim periods within those years beginning after December 15, 2017. Early adoption of this
particular guidance from ASU 2016-01 is not permitted. The Group does not expect this updated standard to have a material
impact on the consolidated financial statements and associated disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The core principle of Topic 842 is that a
lessee should recognize the assets and liabilities that arise from leases. A lessee should recognize in the balance sheet a
liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying
asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy
election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it
should recognize lease expense for such leases generally on a straight-line basis over the lease term. ASU 2016-02 is
effective for fiscal years and interim periods within those years beginning after December 15, 2018. Early adoption is
permitted. The Group is currently evaluating the method of adoption and the impact ASU 2016-02 will have on the Group’s
consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements
to Employee Share-Based Payment Accounting. ASU 2016-09 involves several aspects of the accounting for share-based
payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and
classification on the statements of cash flows. ASU 2016-09 is effective for fiscal years and interim periods within those
years beginning after December 15, 2016. The Group does not expect ASU 2016-09 to have a material impact to the
Group’s consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other Than
Inventory (Topic 740). This standard will require entities to recognize the income tax consequences of intra-entity transfers
of assets other than inventory at the time of transfer. This standard requires a modified retrospective approach to adoption.
ASU 2016-16 is effective for fiscal years and interim periods within those years beginning after December 31, 2018. The
Group does not expect ASU 2016-16 to have a material impact to the Group’s consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition
of a Business, which revises the definition of a business. To be considered a business, an acquisition would have to include
an input and a substantive process that together significantly contribute to the ability to create outputs. To be a business
without outputs, there will now need to be an organized workforce. ASU 2017-01 is effective for fiscal years and interim
periods within those years beginning after December 15, 2018. The Group currently does not expect ASU 2017-01 to have
a material impact to the Group’s consolidated financial statements, but will apply the guidance upon adoption to business
acquisitions, disposals and segment changes, if any.
In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350), to simplify the
F-19
accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a
hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying
value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will
remain largely unchanged. ASU 2017-04 is effective for fiscal years and interim periods within those years beginning after
December 15, 2019. The Group shall apply the guidance upon adoption to its annual goodwill impairment assessments.
Other amendments that have been issued by the FASB or other standards-setting bodies that do not require
adoption until a future date are not expected to have a material impact on the Group’s consolidated financial statements
upon adoption.
4. Acquisition
In April 2014, the Group invested approximately US$9,597,000 in cash for the subscription of 51% equity
interests in the enlarged share capital of Hutchison Sinopharm which was formerly known as Sinopharm Holding HuYong
Pharmaceutical (Shanghai) Co., Ltd. Hutchison Sinopharm is engaged in providing sales, distribution, and marketing
services to major domestic and multi-national third party pharmaceutical manufacturers. The Group expects the acquisition
will provide a broadened sales and marketing platform for synergy across the Group.
The Group accounted for the transaction using the acquisition method. The allocation of the purchase price is
based on the fair value of assets acquired and liabilities assumed as at the acquisition date. The following table summarizes
the amount invested in Hutchison Sinopharm and the fair value of the assets acquired and liabilities assumed at the
acquisition date.
Cash and cash equivalents
Property, plant and equipment
Goodwill (note (i))
Other intangible asset (note (ii))
Deferred tax assets
Inventories
Accounts receivable and other receivables
Accounts payable and other payables
Deferred tax liabilities
Short-term bank borrowings
Fair value of net assets acquired
Less: Non-controlling interest (note (iii))
Total purchase consideration
Cash and cash equivalents acquired
Less: cash injected
Net cash inflow arising from acquisition
Notes:
In US$’000
10,286
69
3,023
708
100
3,208
21,105
(14,932)
(198)
(4,769)
18,600
(9,003)
9,597
10,286
(9,597)
689
(i) Goodwill 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. This goodwill is attributable to the Prescription Drugs business under
the Commercial Platform.
(ii) Other intangible asset of US$708,000 represents the Good Supply Practice (“GSP”) license which enables
Hutchison Sinopharm to carry out the drug distribution business and is amortized over its estimated useful
life of 10 years.
(iii) The non-controlling interest is measured as the proportion of fair value of the net assets acquired shared
by the non-controlling interest.
(iv) The fair value of accounts receivable and other receivables was equal to the gross contractual amount of
which all was expected to be collectible.
F-20
(v) Acquisition related costs of approximately US$23,000 have been included in the administrative expenses
in the consolidated statements of operations.
(vi) Hutchison Sinopharm contributed revenue of US$50,202,000 and net income of US$55,000 to the Group
for the period from April 25, 2014 to December 31, 2014. If the acquisition had occurred on January 1,
2014, the revenue and net income attributed by Hutchison Sinopharm for the year ended December 31,
2014 would have been US$71,344,000 and US$125,000 respectively.
5. Discontinued Operation
In June 2013, the Group discontinued an operation in the PRC which was part of the Group’s Consumer Health
business under the Commercial Platform segment, as its performance was below expectation in light of increased
competitive activities in the consumer products market.
The results and cash flows of the discontinued operation are set out below.
Other income
Net income before taxes from discontinued operation
Income tax expense
Net income for the year from discontinued operation
Cash flow from discontinued operation
Net cash generated from operating activities
Net increase in cash and cash equivalents
Year Ended
December 31,
2015
(in US$’000)
2014
2016
—
—
—
—
— 2,096
— 2,096
—
(62)
— 2,034
—
—
— 2,515
— 2,515
The other income for the year ended December 31, 2014 represented the compensation income from an arbitration
proceeding against a supplier, being the excess of US$2.5 million compensation proceeds received over the carrying
amount of US$0.4 million receivables recorded in prior years.
6. Fair Value Disclosures
The following table presents the Group’s financial instruments by level within the fair value hierarchy:
As of December 31, 2016
Cash and cash equivalents
Short-term investments
As of December 31, 2015
Cash and cash equivalents
Fair Value Measurement Using
Level 1 Level 2 Level 3 Total
(in US$’000)
79,431
24,270
—
—
— 79,431
— 24,270
31,941
—
— 31,941
Accounts receivable, other receivables, amounts due from related parties, accounts payable and amounts due to
related parties are carried at cost, which approximates fair value due to the short-term nature of these financial instruments
and are therefore, excluded from the above table. The carrying values of bank borrowings also approximate their fair
values.
F-21
7. Cash and Cash Equivalents
Cash at bank and on hand
Short-term bank deposits (note (i))
Denominated in:
US$ (note (ii))
RMB (note (ii))
UK Pound Sterling
Hong Kong dollar (“HK$”)
Euro
December 31,
2016
2015
(in US$’000)
31,218
48,213
79,431
65,509
9,505
408
4,009
—
79,431
31,941
—
31,941
7,352
19,271
318
4,987
13
31,941
Notes:
(i) The weighted average effective interest rate on bank deposits, with maturity ranging from 7 to 90 days for the year
ended December 31, 2016 was 0.58% per annum.
(ii) Certain cash and bank balances denominated in RMB and US$ were deposited with banks in the PRC. The conversion
of these RMB and US$ denominated balances into foreign currencies is subject to the rules and regulations of foreign
exchange control promulgated by the PRC government.
8. Short-term Investments
Bank deposits maturing over three months (note)
Denominated in:
US$
Note:
December 31,
2016
2015
(in US$’000)
24,270
—
The weighted average effective interest rate on bank deposits, with maturity ranging from 91 to 186 days for the
year ended December 31, 2016 was 0.71% per annum.
9. Accounts Receivable
Substantially all the accounts receivable are denominated in RMB and HK$ and are due within one year from the
end of the reporting periods.
The carrying value of accounts receivable approximates their fair values.
Movements on the allowance for doubtful accounts, which are only in respect of accounts receivable—third
parties, are as follows:
As at January 1
Allowance
Allowance written back
Exchange difference
As at December 31
2016
2015
(in US$’000)
2014
3,127
29
(237)
(199)
1,793 1,670
185
1,408
—
—
(62)
(74)
2,720 3,127 1,793
F-22
In December 2015, the Group recorded a provision amounting to approximately US$1,322,000 which represents
the outstanding balance due from a distributor. The Group terminated the distributor’s exclusive distribution rights in
January 2016. As of December 31, 2016, the provision remains as the Group is pursuing collection.
As at December 31, 2016 and 2015, accounts receivable of approximately US$26,000 and US$52,000
respectively were past due but not impaired. These are in respect of a number of independent customers for whom there is
no recent history of default. The ageing analysis of these receivables is as follows:
Up to 3 months
3 to 6 months
6 to 12 months
December 31,
2016
2015
(in US$’000)
—
—
26
26
—
—
52
52
The credit quality of accounts receivable neither past due nor impaired has been assessed by reference to historical
information about the counterparty default rates. These counterparties do not have defaults in the past.
10. Other Receivables, Prepayments and Deposits
Other receivables, prepayments and deposits consisted of the following:
Prepayments
Purchase rebate
Other services receivables
Deposits
Value-added tax receivables
Others
11. Inventories
Inventories consisted of the following:
Raw materials
Finished goods
December 31,
2016
2015
(in US$’000)
699
238
756
620
1,380
621
4,314
1,179
299
232
309
748
491
3,258
December 31,
2016
2015
(in US$’000)
660
12,162
12,822
753
8,802
9,555
Movements on the provision for excess and obsolete inventories are as follows:
As at January 1
Provision
Decrease due to sale of inventories
Exchange difference
As at December 31
2016
25
140
—
(5)
160
2015
(in US$’000)
34
25
(33)
(1)
25
2014
126
15
(106)
(1)
34
F-23
12. Property, Plant and Equipment
Property, plant and equipment consisted of the following:
2016
2015
(in US$’000)
Cost
Buildings
Leasehold improvements
Plant and equipment
Furniture and fixtures, other equipment and motor vehicles
Construction in progress
Total Cost as at December 31
Less: Accumulated depreciation
As at January 1
Depreciation
Disposals
Exchange differences
As at December 31
2,232
6,296
86
2,392
5,989
88
13,976 12,806
567
21,842
1,760
24,350
13,335
2,239
(230)
(948)
14,396
9,954
12,501
1,908
(550)
(524)
13,335
8,507
Depreciation expense for the years ended December 31, 2016, 2015 and 2014 is approximately US$2,239,000,
US$1,908,000 and US$1,180,000 respectively.
13. Leasehold Land
The Group’s interests in leasehold land represent prepaid operating lease payments and are located in the PRC.
Cost
As at January 1
Exchange differences
As at December 31
Accumulated amortization
As at January 1
Amortization expense
Exchange differences
As at December 31
Net book value
As at December 31
2016 2015 2014
(in US$’000)
1,651
(110)
1,541
1,720 1,761
(41)
1,651 1,720
(69)
308
35
(22)
321
284
37
(13)
308
253
37
(6)
284
1,220
1,343 1,436
14. Goodwill and Other Intangible Asset
Goodwill arising from the acquisition of Hutchison Sinopharm in 2014, which is included in the Prescription
Drugs business under the Commercial Platform (Note 4), was US$2,730,000 and US$2,925,000 as of December 31, 2016
and 2015 respectively. Goodwill arising from the acquisition of HHL in 2009, which is included in the Consumer Health
business under the Commercial Platform, was US$407,000 as of both December 31, 2016 and 2015.
F-24
Movement on goodwill is as follows:
As at January 1
Addition
Exchange differences
As at December 31
3,332
—
(195)
3,137
2016
2014
Commercial
Platform
2015
(in US$’000)
3,430
—
(98)
3,332
407
3,023
—
3,430
The Group performed its most recent annual impairment test as of December 31, 2016 and concluded that
goodwill was not impaired.
Other intangible asset consists of the GSP license arising from the acquisition of Hutchison Sinopharm
(see Note 4), which was recorded at fair value and is amortized on a straight-line basis over its estimated useful life of
10 years.
Movement on other intangible asset is as follows:
GSP License
Cost
As at January 1
Addition
Exchange differences
As at December 31
Accumulated amortization
As at January 1
Amortization expense
Exchange differences
As at December 31
Net book value
As at December 31
2016
2015
(in US$’000)
2014
685
—
(45)
640
114
67
(10)
171
714
—
(29)
685
48
70
(4)
114
—
708
6
714
—
48
—
48
469
571
666
The estimated aggregate amortization expense for each of the next five years as of December 31, 2016 is
as follows:
2017
2018
2019
2020
2021
GSP License
(in US$’000)
64
64
64
64
64
F-25
15. Investments in Equity Investees
Investments in equity investees consisted of the following:
HBYS
SHPL
NSPL
Other
December 31,
2016
2015
(in US$’000)
63,536
77,939
16,806
225
158,506
60,762
49,709
9,046
239
119,756
Particulars regarding the principal equity investees are as disclosed in Note 2. All of the equity investees are
private companies and there are no quoted market prices available for their shares.
Summarized financial information for the significant equity investees HBYS, SHPL and NSPL are as follows:
(i) Summarized balance sheets
Commercial Platform
Consumer Health
HBYS
December 31
Prescription Drugs
SHPL
December 31
Innovation Platform
Drug R&D
NSPL
December 31
2016
2015
2016
2015
2016
2015
(in US$’000)
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Net assets
Non-controlling interests
98,554
88,263
129,456
5,393
95,513 30,000
123,181 114,383 146,350
97,656
3,034
30,000
(70,218) (61,467) (86,946) (124,617) (1,782) (14,941)
—
(18,148)
18,093
133,369
—
(6,297)
18,093
127,072
(16,116)
125,063
(3,540)
121,523
(6,926)
150,134
—
150,134
(7,089)
93,263
—
93,263
—
33,611
—
33,611
(ii) Summarized statements of operations
Commercial Platform
Consumer Health
HBYS
Year Ended December 31
2015
2014
2016
Prescription Drugs
SHPL
Year Ended December 31
2015
2014
2016
Innovation Platform
Drug R&D(a)
NSPL
Year Ended December 31
2014
2015
2016
Revenue
Gross profit
Depreciation and
amortization
Interest income
Finance cost
Income/(loss) before
224,131
89,355
211,603 243,746 222,368
96,421 158,131
91,461
181,140 154,703
127,608 109,965
(in US$’000)
(2,958)
238
(123)
(3,274)
628
(158)
(3,206)
1,322
(139)
(3,526)
565
—
(2,765)
306
—
(2,651)
257
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
taxes
Income tax expense
Net income/(loss)
Non-controlling
interests
Net income/(loss)
attributable to the
shareholders of
equity investee
23,759
(3,631)
20,128
25,164
(3,948)
21,216
24,805 148,144
(3,940) (27,645)
120,499
20,865
37,401
(6,094)
31,307
31,505 (8,482)
—
(5,103)
(8,482)
26,402
(7,552) (16,812)
—
(16,812)
—
(7,552)
248
160
(90)
—
—
—
—
—
—
20,376
21,376
20,775
120,499
31,307
26,402
(8,482)
(7,552)
(16,812)
F-26
Notes:
(a) NSPL only incurred research and development expenses in 2016, 2015 and 2014.
(b) The net income for other individual immaterial equity investees for the years ended December 31, 2016 and 2015 was
approximately US$95,000 and US$12,000 respectively. The net loss for the year ended December 31, 2014 was
approximately US$5,000.
(c) HBYS and SHPL have been granted the High and New Technology Enterprise status. Accordingly, the companies
are eligible to a preferential income tax rate of 15% for the years ended December 31, 2016, 2015 and 2014.
(iii) Reconciliation of summarized financial information
Reconciliation of the summarized financial information presented to the carrying amount of investments in equity
investees is as follows:
Commercial Platform
Consumer Health
HBYS
2015
2016
2014
2016
Prescription Drugs
SHPL
2015
(in US$’000)
Innovation Platform
Drug R&D
NSPL
2014
2016
2015
2014
Opening net assets at
January 1 after
non-controlling
interests
Purchase of
121,523
111,506 106,586
93,263
71,906
66,476 18,093
25,645
42,457
additional interests
in a subsidiary of
an equity investee
Net income/(loss)
attributable to the
shareholders of
equity investee
Dividend declared
Other comprehensive
income
Investments
Capitalization of
loans
Closing net assets at
December 31 after
non-controlling
interests
Group’s share of net
assets
Goodwill
Carrying value
—
—
(468)
—
—
—
—
—
—
20,376
(6,000)
20,775 120,499
21,376
(6,410) (12,820) (55,057)
31,307
(6,410) (19,077)
26,402 (8,482)
—
(7,552) (16,812)
—
—
(8,827)
—
(4,949)
—
(2,567)
—
(8,571)
—
(3,540)
—
(1,895)
—
—
10,000
—
—
—
—
—
—
—
—
14,000
—
—
—
—
127,072
121,523 111,506 150,134
93,263
71,906 33,611
18,093
25,645
63,536
—
63,536
60,762
—
60,762
55,753
—
55,753
75,067
2,872
77,939
46,632
3,077
49,709
35,953 16,806
3,205
—
39,158 16,806
9,046
—
9,046
12,823
—
12,823
The equity investees had the following lease commitments and capital commitments:
F-27
(a)
The equity investees lease various factories and offices under non-cancellable operating lease agreements. Future
aggregate minimum payments under non-cancellable operating leases as of the dates indicated are as follows:
Not later than 1 year
Between 1 to 2 years
Total minimum lease payments
December 31,
2016
2015
(in US$’000)
1,511
1,184
2,695
1,452
509
1,961
(b)
An equity investee leases plant and equipment under non-cancellable finance lease agreements. Future aggregate
minimum payments under non-cancellable finance leases as of the dates indicated are as follows:
Not later than 1 year
Between 1 to 2 years
Between 2 to 3 years
Between 3 to 4 years
Between 4 to 5 years
Later than 5 years
Total minimum finance lease payments
(c)
Capital commitments
The equity investees had the following capital commitments:
Property, plant and equipment
Contracted but not provided for
16. Accounts Payable
December 31,
2016
2015
(in US$’000)
118
118
118
118
118
28
618
—
—
—
—
—
—
—
December 31,
2015
2016
(in US$’000)
6,162 27,789
Substantially all the accounts payable due to third parties are denominated in RMB and due within one year from
the end of the reporting period.
The carrying value of accounts payable approximates their fair values due to their short-term maturities.
17. Other Payables, Accruals and Advance Receipts
Other payables, accruals and advance receipts consisted of the following:
Accrued research and development expenses
Accrued salaries and benefits
Accrued selling and marketing expenses
Accrued general administration and other expenses
Payments in advance from customers
Deferred government incentives
Current tax liabilities
Others
F-28
December 31,
2016
2015
(in US$’000)
11,771
7,057
4,340
4,078
899
1,755
274
1,816
3,758
5,521
4,430
7,253
641
1,256
442
2,876
31,990 26,177
18. Bank Borrowings
Summarized below are the bank borrowings as of December 31, 2016 and 2015:
Non-current (note (i))
Current (notes (ii) and (iii))
December 31,
2016
2015
(in US$’000)
26,830
19,957
46,787
26,768
23,077
49,845
The weighted average interest rate for bank borrowings outstanding as of December 31, 2016 and 2015 was
1.52% and 1.39% respectively.
Notes:
(i) In December 2011, the Group, through its subsidiary entered into a three-year term loan with a bank in
the aggregate principal amount of HK$210,000,000 (US$26,923,000). The term loan bears interest at
1.50% over the Hong Kong Interbank Offered Rate (“HIBOR”) per annum. In June 2014, the term loan
was refinanced into a four-year term loan which bears interest at 1.35% over the HIBOR per annum.
Accordingly, the term loan is recorded as a long-term bank borrowing as at December 31, 2016 and 2015.
The term loan is unsecured and guaranteed by Hutchison Whampoa Limited (an indirect subsidiary of CK
Hutchison) as at December 31, 2016 and 2015. An annual fee is paid to Hutchison Whampoa Limited for
the guarantee (note 25(a)).
(ii) In February 2016, the Group through its subsidiary, entered into a facility agreement with banks for the
provision of unsecured credit facilities in the aggregate amount of HK$468,000,000 (US$60,000,000).
These credit facilities include (i) a HK$156,000,000 (US$20,000,000) term loan facility with a term of 18
months and an annual interest rate of 1.35% over HIBOR, and (ii) a HK$312,000,000 (US$40,000,000)
revolving loan facility with a term of 12 months and an annual interest rate of 1.30% over HIBOR. These
credit facilities are guaranteed by the Company and include certain financial covenant requirements. The
term loan has been drawn from this facility as of December 31, 2016 and is classified as short-term
borrowings.
(iii) As at December 31, 2015, the Group, through its subsidiary had revolving loans of HK$180,000,000
(US$23,077,000) which bears interest at 1.05% over HIBOR per annum till October 2015 and 1.25% over
HIBOR per annum from November 2015 and are unsecured. The borrowing was classified as short-term
borrowings as of December 31, 2015.
(iv) The carrying amount of all bank borrowings approximates their fair values. The fair value of bank
borrowings was estimated using a discounted cash flows approach (an income approach) using market
based observable inputs. Such fair value measurements are considered Level 2 under the fair value
hierarchy.
(v) The Group’s bank borrowings are repayable as follows:
Within 1 year
Between 2 and 5 years
December 31,
2016
2015
(in US$’000)
19,957 23,077
26,830 26,768
46,787 49,845
(vi) As at December 31, 2016 and 2015, the carrying amounts of the Group’s bank borrowings are all
denominated in HK$.
F-29
(vii) As at December 31, 2016 and 2015, the Group has unutilized bank borrowing facilities in relation to
revolving loan facilities of US$70,000,000 and US$6,923,000, respectively.
19. Commitments and Contingencies
(a) Lease commitments
The Group leases various factories and offices under non-cancellable operating lease agreements. Future
aggregate minimum payments under non-cancellable operating leases as of the date indicated are as follows:
Not later than 1 year
Between 1 to 2 years
Between 2 to 3 years
Between 3 to 4 years
Between 4 to 5 years
Later than 5 years
Total minimum lease payments
(b) Capital commitments
The Group had the following capital commitments:
Property, plant and equipment
Contracted but not provided for
December 31,
2015
2016
(in US$’000)
1,711
1,383
1,053
597
108
45
4,897
1,274
519
134
129
129
183
2,368
December 31,
2015
2016
(in US$’000)
2,545
593
In addition, the Group has also undertaken to provide the necessary additional funds for NSPL to finance its
ongoing operations.
20. Redeemable Non-controlling Interests
As at December 31, 2016 and 2015, no redeemable non-controlling interests were outstanding.
In November and December 2010, the Company and HMHL, entered into subscription and shareholders’
agreements (“SSAs”) with Mitsui & Co., Ltd. (“Mitsui”) and SBCVC Fund III Company Limited (“SBCVC”)
(collectively, the “preferred shareholders”), whereby HMHL issued 7,390,029 redeemable convertible preferred shares
(“Preferred Shares”) for an aggregate consideration of US$20.1 million. The Preferred Shares on an as-if-converted basis
represented approximately 19.76% of the aggregate issued and outstanding share capital of HMHL on the closing date.
In October 2012, the Company repurchased all 2,815,249 Preferred Shares from SBCVC. The remaining
4,574,780 Preferred Shares of US$12.5 million held by Mitsui represents approximately 12.24% of HMHL on a fully
diluted basis.
In May and June 2014, the Company and HMHL further entered into two subscription agreements with Mitsui,
whereby HMHL issued a total of 672,713 HMHL’s Preferred Shares to Mitsui and 4,825,418 HMHL’s ordinary shares to
the Company for an aggregate consideration of US$25.0 million, after which Mitsui’s interest in HMHL remained at
12.24% on a fully diluted basis.
On July 23, 2015, the Company entered into a subscription agreement (the “Agreement”) with Mitsui under
which the Company issued 3,214,404 new ordinary shares of the Company (“Subscription Shares”) valued at
approximately US$84.0 million in exchange for the Preferred Shares held by Mitsui with carrying value of
US$84.0 million (including accretion adjustment up to July 23, 2015). The transaction was completed on July 23, 2015
F-30
and as a result of this transaction, Mitsui held approximately 5.69% of the enlarged share capital of the Company. The
outstanding balance of redeemable non-controlling interests was extinguished with the corresponding increase in the
Company’s shares and additional paid-in capital.
Accounting for preferred shares
The preferred shares issued by HMHL are redeemable upon occurrence of an event that is not solely within the
control of the issuer. Accordingly, the redeemable preferred shares issued by HMHL are recorded and accounted for as
redeemable non-controlling interests outside of permanent equity in the Group’s consolidated balance sheets. The Group
recorded accretion when it is probable that the preferred shares will become redeemable. The accretion, which increases
the carrying value of the redeemable non-controlling interests, is recorded against retained earnings, or in the absence of
retained earnings, by recording against the additional paid-in capital. During the years ended December 31, 2015 and 2014,
HMHL recorded an accretion of US$43,001,000 and US$25,510,000 respectively to the preferred shares based on such
preferred shareholder’s share of the estimated valuation of HMHL.
21. Ordinary Shares
The Company is authorized to issue 75,000,000 ordinary shares. On March 17, 2016 and April 13, 2016, the
Company issued 3,750,000 and 330,000 ordinary shares, respectively in the form of ADS in a public offering on the
Nasdaq.
A summary of ordinary shares transactions (in thousands) is as follows:
As at January 1
Issuances of shares
Issuances in relation to exercise of options
As at December 31
2014
2015
2016
56,533 53,076 52,051
—
1,025
60,706 56,533 53,076
3,214
243
4,080
93
Each ordinary share is entitled to one vote. The holders of ordinary shares are also entitled to receive dividends
whenever funds are legally available and when declared by the Board of Directors of the Company.
22. Share-based Compensation
(i) Share-based Compensation of the Company
The Company conditionally adopted a share option scheme on June 4, 2005 (as amended on March 21, 2007) and
such scheme has a term of 10 years. It expired in 2016 and no further share options can be granted. Another share option
scheme was conditionally adopted on April 24, 2015 (the “HCML Share Option Scheme”). 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 affiliates, and subsidiaries or affiliates of the Company share
options to subscribe for shares of the Company.
The aggregate number of shares issuable under the HCML Share Option Scheme is 2,425,597 ordinary shares.
The aggregate number of shares issuable under the prior share option scheme which expired in 2016 is 345,910 ordinary
shares. As of December 31, 2016, the number of shares authorized but unissued was 14,294,177 ordinary shares.
Share options granted are generally subject to a three-year or four-year vesting schedule, depending on the nature
and the purpose of the grant. Share options subject to three-year vesting schedule, in general, vest 33.3% upon the first
anniversary of the vesting commencement date as defined in the grant letter, and 33.3% every subsequent year. Share
options subject to four-year vesting schedule, in general, vest 25% upon the first anniversary of the vesting commencement
date as defined in the grant letter, and 25% every subsequent year. However, certain share option grants may have a
different vesting schedule as approved by the Board of Directors of the Company. No outstanding share options will be
exercisable or subject to vesting after the expiry of a maximum of eight to ten years from the date of grant.
On December 17, 2014, 593,686 share options were cancelled with the consent of the relevant eligible employees
in exchange for 1,187,372 new share options of a subsidiary. On June 15, 2016, these 1,187,372 share options were
cancelled with the consent of the relevant eligible employees in exchange for 593,686 new share options of the Company
F-31
(Note (ii)). These were accounted for as modifications of the original share options granted which did not result in any
incremental fair value to the Group.
As of December 31, 2014, 75,000 outstanding share options were held by non-employees. These share options
are subject to re-measurement through each vesting date to determine the appropriate share-based compensation expense.
These share options were fully vested as of December 31, 2014 and were exercised during the year ended December 31,
2015. As of December 31, 2016 and 2015, no share options were held by non-employees.
A summary of the Company’s share option activity and related information is as follows:
Outstanding at January 1, 2014
Granted
Exercised
Cancelled
Outstanding at December 31, 2014
Granted
Exercised
Cancelled
Outstanding at December 31, 2015
Granted
Exercised
Cancelled
Outstanding at December 31, 2016
Vested and expected to vest at December 31, 2014
Vested and exercisable at December 31, 2014
Vested and expected to vest at December 31, 2015
Vested and exercisable at December 31, 2015
Vested and expected to vest at December 31, 2016
Vested and exercisable at December 31, 2016
Number of
share
options
2,303,317
—
(1,025,228)
(593,686)
684,403
—
(242,038)
—
442,365
693,686
(92,705)
(3,750)
1,039,596
569,931
419,878
333,393
291,015
1,039,596
767,376
Weighted-average
Exercise Price in
£ per share
3.67
—
1.59
6.10
4.67
—
3.77
—
5.16
19.70
3.54
6.10
15.00
4.39
3.91
4.85
4.67
15.00
14.64
Weighted-average
remaining
contractual life
(years)
Aggregate
intrinsic value
(in £’000)
6.79
6,423
6.53
10,061
6.77
6.38
5.64
6.05
5.77
6.77
6.66
8,003
5,506
4,256
7,685
6,762
7,900
6,106
The Company uses the Binomial model to estimate the fair value of share option awards using various
assumptions that require management to apply judgment and make estimates, including:
Volatility
The Company calculated its expected volatility with reference to the historical volatility prior to the issuances of
share options.
Risk-free Rate
The risk-free interest rates used in the Binomial model are with reference to the sovereign yield of the
United Kingdom because the Company’s shares are currently listed on AIM and denominated in pounds sterling (£).
Dividends
The Company has not declared or paid any dividends and does not currently expect to do so in the foreseeable
future, and therefore uses an expected dividend yield of zero in the Binomial model.
F-32
In determining the fair value of share options granted, the following assumptions were used in the Binomial model
for awards granted in the periods indicated:
Effective date of
grant of share options
Value of each share option
Significant inputs into the valuation model:
£
June 24,
2011
1.841 £
December 20, June 15,
2013
3.154 £ 8.991
2016
Exercise price
Share price at effective date of grant
Expected volatility
Risk-free interest rate
Contractual life of share options
Expected dividend yield
£
£
4.405 £
4.325 £
46.6%
3.13%
10 years
0%
6.100 £ 19.700
6.100 £ 19.700
39.0%
36.0%
1.00%
3.16%
8 years
10 years
0%
0%
The following table summarizes the Company’s share option values:
Weighted-average grant-date fair value of share option granted
during the period in £
Total intrinsic value of share options exercised in £'000
Total intrinsic value of share options exercised in US$’000
Share-based Compensation Expense
Year Ended
December 31,
2015
2014
2016
8.991
1,422
1,907
—
—
3,296
7,738
5,020 12,034
The Company recognizes compensation expense for only the portion of options expected to vest, on a graded
vesting approach over the requisite service period. The following table presents share-based compensation expense
included in the Group’s consolidated statements of operations:
Research and development expenses
Administrative expenses
Year Ended
December 31,
2015 2014
(in US$’000)
74
14
88
539
233
772
2016
1,278
—
1,278
As of December 31, 2016, the total unrecognized compensation cost was US$457,000, net of estimated forfeiture
rates, and will be recognized on a graded vesting approach over the weighted-average remaining service period of
1.02 years.
Cash received from option exercises under the share option plan for the years ended December 31, 2016, 2015
and 2014 was approximately US$426,000, US$1,374,000 and US$2,680,000 respectively. The Company will issue new
shares to satisfy share options exercises.
(ii) Share-based Compensation of a subsidiary
HMHL adopted a share option scheme on August 6, 2008 (as amended on April 15, 2011) and such scheme has
a term of 6 years. It expired in 2014 and no further share options can be granted. Another share option scheme was adopted
on December 17, 2014 (the “HMHL Share Option Scheme”). Pursuant to the HMHL Share Option Scheme, any employee
or director of HMHL and any of its holding company, subsidiaries and affiliates is eligible to participate in the HMHL
Share Option Scheme subject to the discretion of the board of directors of HMHL.
The aggregate number of shares issuable under the HMHL Share Option Scheme is 2,144,408 ordinary shares.
As of December 31, 2016, the number of shares authorized but unissued was 157,111,839 ordinary shares.
F-33
Share options granted are generally subject to a four-year vesting schedule, depending on the nature and the
purpose of the grant. Share options subject to four-year vesting schedule, in general, vest 25% upon the first anniversary
of the vesting commencement date as defined in the grant letter, and 25% every subsequent year. No outstanding share
options will be exercisable or subject to vesting after the expiry of a maximum of six or nine years from the date of grant.
On December 20, 2013, 2,485,189 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. For the share options in exchange for new share options under HCML Share Option
Scheme, this was accounted for as a modification of the original share options which did not result in any incremental fair
value to the Group. For the share options in exchange for cash consideration, this was accounted for as a modification in
classification that changed the award’s classification from equity-settled to a liability.
A liability has been recognized on the modification date taking into account the requisite service period that has
been provided by the employee at the modification date. As at December 31, 2016, US$1.4 million have been recognized
in other payables. As at December 31, 2015, US$0.9 million and US$0.8 million were recognized in other non-current
liabilities and other payables respectively.
On June 15, 2016, 1,187,372 share options pursuant to the HMHL Share Option Schemes were cancelled with
the consent of the relevant eligible employees in exchange for 593,686 new share options of the Company pursuant to the
HCML Share Option Schemes. This was accounted for as a modification of the original share options granted which did
not result in any incremental fair value to the Group.
Rider
A summary of the subsidiary’s share option activity and related information follows:
Outstanding at January 1, 2014
Outstanding at January 1, 2014
Granted
Granted
Exercised
Exercised
Lapsed
Lapsed
Cancelled
Cancelled
Outstanding at December 31, 2014
Outstanding at December 31, 2014
Granted
Granted
Exercised
Exercised
Lapsed
Lapsed
Cancelled
Cancelled
Outstanding at December 31, 2015
Outstanding at December 31, 2015
Granted
Granted
Exercised
Exercised
Lapsed
Lapsed
Cancelled
Cancelled
Outstanding at December 31, 2016
Outstanding at December 31, 2016
Vested and expected to vest at December 31, 2014
Vested and expected to vest at December 31, 2014
Vested and exercisable at December 31, 2014
Vested and exercisable at December 31, 2014
Vested and expected to vest at December 31, 2015
Vested and expected to vest at December 31, 2015
Vested and exercisable at December 31, 2015
Vested and exercisable at December 31, 2015
Vested and expected to vest at December 31, 2016
Vested and expected to vest at December 31, 2016
Vested and exercisable at December 31, 2016
Vested and exercisable at December 31, 2016
Number of
Number of
share
share
options
options
538,420
538,420
1,187,372
1,187,372
(80,924)
(80,924)
(393,212)
(393,212)
(39,884)
(39,884)
1,211,772
1,211,772
—
—
(24,400)
(24,400)
—
—
—
—
1,187,372
1,187,372
—
—
—
—
—
—
(1,187,372)
(1,187,372)
—
—
769,714
769,714
316,393
316,393
759,918
759,918
593,686
593,686
—
—
—
—
Weighted-average
Weighted-average
Exercise Price in
Exercise Price in
US$ per share
US$ per share
2.03
2.03
7.82
7.82
1.5
1.50
2.15
2.15
1.7
1.70
7.71
7.71
—
—
2.34
2.34
—
—
—
—
7.82
7.82
—
—
—
—
—
—
7.82
7.82
—
—
7.75
7.75
7.48
7.48
7.82
7.82
7.82
7.82
—
—
—
—
Weighted-average
Weighted-average
remaining
remaining
contractual life
contractual life
(years)
(years)
—
Aggregate
Aggregate
intrinsic value
intrinsic value
(in US$’000)
(in US$’000)
—
8.84
8.84
134
134
7.97
7.97
32,292
32,292
—
—
8.88
8.88
8.55
8.55
7.97
7.97
7.97
7.97
—
—
—
—
—
—
54
54
107
107
20,667
20,667
16,146
16,146
—
—
—
—
The subsidiary uses the Binomial model to estimate the fair value of share option awards using various
assumptions that require management to apply judgment and make estimates, including:
Volatility
The subsidiary calculated its expected volatility with reference to the historical volatility of the comparable
companies for the past five to six years as of the valuation date.
F-34
Risk-free Rate
The risk-free interest rates used in the Binomial model are with reference to the sovereign yield of the
United States.
Dividends
The subsidiary has not declared or paid any dividends and does not currently expect to do so in the foreseeable
future, and therefore uses an expected dividend yield of zero in the Binomial model.
The following table summarizes the subsidiary’s share option values:
Effective date of grant of share options
April 18,
2011
December 17,
2014
August 2,
2010
Value of each share option
Significant inputs into the valuation model:
US$
0.258 US$
0.923 US$
3.490
Exercise price
Share price at effective date of grant
Expected volatility
Risk-free interest rate
Contractual life of share options
Expected dividend yield
US$
US$
2.240 US$
1.030 US$
48.6 %
2.007 %
6 years
2.360 US$
2.048 US$
55.4 %
2.439 %
6 years
0 %
0 %
7.820
7.820
48.4 %
1.660 %
9 years
0 %
Weighted-average fair value of share option granted
during the period
Total intrinsic value of share options exercised
Share-based Compensation Expense
Year Ended
December 31,
2016
2015
2014
(in US$’000, except
per share data)
—
—
—
352
3.49
247
The subsidiary recognizes compensation expense for only the portion of options expected to vest, on a graded
vesting approach over the requisite service period. The following table presents share-based compensation expense
included in the Group’s consolidated statements of operations:
Research and development
Year Ended
December 31,
2015
(in US$’000)
1,063
2016
502
2014
293
As of December 31, 2016, the total unrecognized compensation cost was US$165,000, net of estimated forfeiture
rate, which represents the expenses to be recognized for cash consideration payable related to the share option
modification.
Cash received from option exercises under the share option plan for the years ended December 31, 2016, 2015
and 2014 were nil, US$57,000 and US$121,000 respectively.
(iii) Long-term Incentive Plan (“LTIP”)
The Company granted awards under LTIP on October 19, 2015. The LTIP awards grant to participating directors
or employees a conditional right to receive ordinary shares of the Company or the equivalent ADS (collectively the
“Ordinary Shares”), to be purchased by a trustee consolidated by the Company (the “Trustee”) up to a maximum cash
amount depending upon the achievement of annual performance targets for each financial year of the Company stipulated
in the LTIP awards. The Trustee has been set up solely for the purpose of purchasing and holding the Ordinary Shares
during the vesting period on behalf of the Group using funds provided by the Group.
F-35
On the determination date, the Company will determine the cash amount, based on the actual achievement of
each annual performance target, for the Trustee to purchase the Ordinary Shares. The Ordinary Shares will then be held
by the Trustee until they are vested. Vesting will occur one business day after the publication date of the annual report of
the Company for the financial year falling two years after the financial year to which the LTIP award relates. Vesting will
also depend upon continued employment of the award holder with the Group and will otherwise be at the discretion of the
Board of Directors of the Company. The initial LTIP awards will cover a three-year period from 2014 to 2016 (the “LTIP
Period”). The maximum cash amount per annum for the LTIP Period stipulated in the LTIP awards is approximately
US$1.8 million.
LTIP awards prior to the determination date
As the extent of achievement of the performance targets is uncertain prior to the determination date, a probability
based on management’s assessment on the achievement of the performance target has been assigned to calculate the
amount to be recognized as an expense over the requisite period with corresponding entry to liability. As at December 31,
2016 and 2015, approximately US$356,000 and US$75,000 was recorded as liability for LTIP awards prior to the
determination date.
LTIP awards after the determination date
Upon the determination date, if the performance target is achieved, the Company will pay the fixed monetary
amount to the Trustee to purchase the Ordinary Shares. If the performance target is not achieved, no Ordinary Shares of
the Company will be purchased and the amount previously recorded in the liability will be reversed through profit or loss.
Any cumulative compensation expense previously recognized as a liability will be transferred to additional paid-in capital,
as an equity-settled award.
On March 24, 2016, the Company granted awards under the LTIP to senior managers, giving them a conditional
right to receive ordinary shares to be purchased by the Trustee up to a maximum cash amount of US$312,500 in aggregate
that do not stipulate performance targets. Shares under such LTIP awards are subject to the vesting schedule of 25% on
each of the first, second, third and fourth anniversaries of the date of grant.
Any ordinary shares purchased on behalf of an LTIP grantee are to be held by the Trustee until they are vested.
Vesting will also depend upon the continued employment of the award holder and will otherwise be at the discretion of
the Board.
As at December 31, 2016, the number of Ordinary Shares purchased and held by the Trustee is 62,921 amounted
to approximately US$2.4 million, with none and US$25,000 of the LTIP awards have been vested and forfeited during the
year ended December 31, 2016. Other than the treasury shares, the Trustee does not have any assets or liabilities as at
December 31, 2016. As at December 31, 2016, approximately US$604,000 was paid to the Trustee and debited to the
additional paid-in capital as treasury shares and approximately US$1,356,000 was recorded as a compensation expense
with a credit to additional paid-in capital.
The following table presents the expenses recognized under the LTIP awards:
Research and development expenses
Administrative expenses
Year Ended
December 31,
2015
2016
(in US$’000)
850
811
1,661
156
152
308
As of December 31, 2016, the total unrecognized compensation cost was approximately US$1,466,000 net of the
estimated probability rate, and will be recognized over the requisite period.
F-36
23. Revenue from License and Collaboration Agreements—Third Parties
The Group recognized revenue from license and collaboration agreements—third parties of approximately
US$26.4 million, US$44.1 million and US$12.3 million for the years ended December 31, 2016, 2015 and 2014
respectively, which consisted of the following:
Milestone revenue
Amortization of upfront payment
Research and development services
Year Ended
December 31,
2015
(in US$’000)
19,212
1,907
22,941
44,060
2016
9,931
1,679
14,834
26,444
2014
5,000
701
6,635
12,336
The revenue is mainly from 2 license and collaboration agreements as follows:
License and collaboration agreement with Eli Lilly
On October 8, 2013, the Group entered into a licensing, co-development and commercialization agreement in
China with Eli Lilly (“Lilly”) relating to fruquintinib, a targeted oncology therapy for the treatment of various types of
solid tumors. Under the terms of the agreement, the Group is entitled to receive a series of payments of up to
US$86.5 million, including upfront payments and development and regulatory approval milestones. Should fruquintinib
be successfully commercialized in China, the Group would receive tiered royalties based on certain percentages of net
sales. Development costs after the first development milestone are shared between the Group and Lilly. Following
execution of the agreement, the Group received a non-refundable, upfront payment of US$6.5 million.
In addition, the Group also signed an option agreement which grants Lilly an exclusive option to expand the
fruquintinib rights beyond Hong Kong and China. The option agreement further sets out certain milestone payments and
royalty rates that apply in the event the option is exercised on a global basis. However, these are subject to further
negotiation should the option be exercised on a specific territory basis as opposed to a global basis. The option was not
considered to be a separate deliverable in the arrangement as it was not considered to be substantive. As at December 31,
2016, the option has not been exercised.
The license rights to fruquintinib, delivered at the inception of the arrangement, did not have stand-alone value
apart from the other deliverables in the arrangement which include the development services, the participation in the joint
steering committee and the manufacturing of active pharmaceutical ingredients during the development phase. The
non-refundable upfront payment was deferred and is being recognized rateably over the development period, which has
been estimated to end in 2018. The Group recognizes milestone revenue relating to the deliverables in the agreement as a
single unit of accounting using the milestone method.
For the years ended December 31, 2016 and 2014, the Group did not recognize any milestone revenue in relation
to this contract. For the year ended December 31, 2015, the Group recognized US$19.2 million milestone revenues in
relation to the achievement of the “proof of concept” milestone for two indications. The Group recognized US$1.7 million,
US$1.8 million and US$0.6 million revenue from amortization of the upfront payment during the years ended
December 31, 2016, 2015 and 2014 respectively. In addition, the Group recognized US$12.1 million, US$19.4 million
and nil for the provision of research and development services for the years ended December 31, 2016, 2015 and 2014
respectively.
License and collaboration agreement with AstraZeneca
On December 21, 2011, the Group and AstraZeneca (“AZ”) entered into a global licensing, co-development, and
commercialization agreement for savolitinib (“AZ Agreement”), a novel targeted therapy and a highly selective inhibitor
of the c-Met receptor tyrosine kinase for the treatment of cancer. Under the terms of the agreement, development costs for
savolitinib in China will be shared between the Group and AZ, with the Group continuing to lead the development in
China. AZ will lead and pay for the development of savolitinib for the rest of the world. The Group received a
non-refundable upfront payment of US$20.0 million upon the signing of the agreement and may receive up to
US$120.0 million contingent upon the successful achievement of clinical development and first-sale milestones. The
F-37
agreement also contains possible significant future commercial sale milestones and up to double-digit percentage royalties
on net sales.
The license right to develop savolitinib in the rest of the world was delivered to AZ at the inception of the
arrangement. Such license had stand-alone value apart from the other deliverables in the arrangement which include the
development of savolitinib in China and the participation in the joint steering committee. The non-refundable up-front
payment was allocated to (a) the license to develop savolitinib in the rest of the world, which was recognized at inception
and (b) the research and development services for which amount allocated has been deferred and is being recognized
rateably over the development period which is expected to be end in 2021. The Group recognizes milestone revenue
relating to the deliverables, in the agreement as a single unit of accounting using the milestone method.
The Group recognized milestone revenue of US$9.9 million, nil and US$5.0 million for the years ended
December 31, 2016, 2015 and 2014 respectively. The milestones were in relation to the initiation of phase IIb in the
primary indication and secondary indications. The Group also recognized US$2.7 million, US$3.5 million and
US$6.6 million for the provision of research and development services for the years ended December 31, 2016, 2015 and
2014 respectively. In addition, the Group recognized less than US$0.1 million, US$0.1 million and US$0.1 million as
revenue from amortization of the upfront payment during the years ended December 31, 2016, 2015 and 2014 respectively.
In August 2016, the Group entered into an amendment to the AZ Agreement. Under the terms of the amendment,
the Group shall pay for up to a maximum of US$50 million of phase III clinical trial costs related to developing savolitinib
for papillary renal cell carcinoma. In return, AZ agrees to increase ex-China royalties on net sales by an additional 5%
over the royalties stipulated in the original agreement until cumulative additional royalties paid reaches US$250 million,
after which the additional royalty decreases to 3% for 24 months and then 1.5% thereafter. The costs of the additional
Phase III clinical trial costs shall be expensed to research and development expense as incurred. Under the current revenue
recognition policy, future royalties shall be recognized as revenue from license and collaboration agreements—third parties
as net sales occur. The amendment does not impact the original accounting of the AZ Agreement under the milestone
method.
License and collaboration agreement with Ortho-McNeil-Janssen
In November 2015, Ortho-McNeil-Janssen Pharmaceuticals, Inc. (“Janssen”) terminated the license and
collaboration agreement between HMPL and Janssen dated June 2, 2010 for the discovery and development of novel small
molecule therapeutics against a target in the area of inflammation/immunology. All licenses and other rights granted by
the Group to Janssen have been terminated upon the termination date. The Group does not have any outstanding liabilities
or obligations due to/from Janssen in relation to the termination of the agreement.
24. Government Incentives
The Group receives government grants from the PRC Government (including the National level and Shanghai
Municipal City). These grants are given in support of drug research and development activities and are conditional upon
i) the Group spending a predetermined amount, regardless of success or failure of the research and development projects
and ii) the achievement of certain stages of research and development projects being approved by relevant PRC
government authority. These government grants are subject to ongoing reporting and monitoring by the PRC Government
over the period of the grant.
Government incentives which are deferred and recognized in the consolidated statements of operations over the
period necessary to match them with the costs that they are intended to compensate are recognized in other payable,
accruals and advance receipts (Note 17) and will be refundable to the PRC Government if the related research and
development projects are suspended. For the years ended December 31, 2016, 2015 and 2014, the Group received
government grants of US$1,872,000, US$4,898,000 and US$859,000 respectively.
The government grants recorded as a reduction to research and development expenses for the years ended
December 31, 2016, 2015 and 2014 were US$1,269,000, US$3,664,000 and US$3,558,000 respectively.
F-38
25. Significant Related Party Transactions
The Group has the following significant transactions during the year with related parties which were carried out
in the normal course of business at terms determined and agreed by the relevant parties:
(a) Transactions with related parties:
Sales of goods to
—Indirect subsidiaries of CK Hutchison
9,794
8,074 7,823
Income from provision of research and development services
2016
Year Ended
December 31,
2015
(in US$’000)
2014
—Equity investees
Purchase of goods from
—A non-controlling shareholder of a subsidiary
—Equity investees
Providing consultancy services to
—An equity investee
Rendering of marketing services from
—Indirect subsidiaries of CK Hutchison
—An equity investee
Rendering of management services from
—Indirect subsidiaries of CK Hutchison
Interest paid to
—An immediate holding company
—A non-controlling shareholder of a subsidiary
Guarantee fee on bank loan to
—An indirect subsidiary of CK Hutchison
Dividend paid to
8,429
5,383 4,312
13,798
280
14,078
11,894 6,727
3,701 2,480
15,595 9,207
—
—
38
741
8,401
9,142
751
480
5,093 —
480
5,844
874
845
989
152
78
230
144
85
229
113
19
132
471
471
471
—A non-controlling shareholder of a subsidiary
564
590 1,179
F-39
(b) Balances with related parties included in:
Accounts receivable from related parties:
—Indirect subsidiaries of CK Hutchison (note (i))
—An equity investee (note (i))
Accounts payable due to related parties:
—An indirect subsidiary of CK Hutchison (note (i))
—A non-controlling shareholder of a subsidiary (note (i))
Amounts due from related parties:
—Indirect subsidiaries of CK Hutchison (note (i))
—Equity investees (note (i))
—Loan to an equity investee (note (ii))
Amounts due to related parties:
—Immediate holding company (note (iii))
—An indirect subsidiary of CK Hutchison (note (i))
—An equity investee
—Loan from a non-controlling shareholder of a subsidiary (note (iv))
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))
—Interest payable due to a non-controlling shareholder of a subsidiary
Other deferred income:
—An equity investee (note (vi))
Other non-current liabilities
—Immediate holding company (note (iii))
Notes:
December 31,
2016
2015
(in US$’000)
2,589
1,634
4,223
1,379
490
1,869
19
5,136
5,155
—
3,521
3,521
107
1,029
—
1,136
136
2,157
7,000
9,293
2,086
152
3,070
—
5,308
1,775
20
1,898
2,550
6,243
1,550
579
14
2,143
—
579
105
684
1,771
2,132
6,000
9,000
(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 an equity investee is unsecured and interest-bearing (with waiver of interest) as at December 31,
2015. The loan has been capitalized on June 8, 2016 and included in investment in equity investees as at
December 31, 2016.
(iii) Amount due to immediate holding company is unsecured, interest-bearing. As of December 31, 2016,
approximately US$2,086,000 (December 31, 2015: US$1,775,000) is repayable within one year or
repayable on demand and US$6,000,000 is repayable within two years from December 2018.
(iv) Loan from a non-controlling shareholder of a subsidiary is unsecured, interest-bearing, is repayable in
October 2018 and is recorded in other non-current liabilities. The balance was recorded in current
liabilities as at December 31, 2015. US$1,000,000 was repaid during the year ended December 31, 2016.
(v) Loan from a non-controlling shareholder of a subsidiary is unsecured, interest bearing (with waiver of
interest) and is recorded in other non-current liabilities.
(vi) Other deferred income represents amount recognized from granting of promotion and marketing rights.
F-40
26. Income Taxes
Continuing operations:
Current tax
—HK (note (i))
—PRC (note (ii))
Deferred income tax—PRC (note (ii))
Income tax expense
Notes:
Year Ended
December 31,
2015
(in US$’000)
2014
2016
520
458
3,353
4,331
150
415
131
62
1,040 1,150
1,605 1,343
(i) The Company, a subsidiary incorporated in the British Virgin Islands and its Hong Kong subsidiaries are
subject to Hong Kong profits tax which has been provided for at the rate of 16.5% on the estimated
assessable profits less estimated available tax losses, in each entity, for the years ended December 31,
2016, 2015 and 2014.
(ii) Taxation in the PRC has been provided for at the applicable rate on the estimated assessable profits less
estimated available tax losses in each entity. Under the PRC Enterprise Income Tax Law (the “EIT Law”),
the standard enterprise income tax rate is 25%. In addition, the EIT Law provides for, among others, a
preferential tax rate of 15% for companies which qualifies as High and New Technology Enterprises.
Hutchison MediPharma Limited qualifies as a High and New Technology Enterprise. Pursuant to the EIT
law, a 10% withholding tax is levied on dividends declared by PRC companies to their foreign investors.
A lower withholding tax rate of 5% is applicable under the China-HK Tax Arrangement (Note) if direct
foreign investors with at least 25% equity interest in the PRC companies are incorporated in Hong Kong,
and meet the conditions or requirements pursuant to the relevant PRC tax regulations regarding beneficial
ownership. Since the equity holders of the major subsidiaries and equity investees of the Company are
Hong Kong incorporated companies and meet the aforesaid conditions or requirements, the Company has
used 5% to provide for deferred tax liabilities on retained earnings which are anticipated to be distributed.
As of December 31, 2016 and 2015, the amounts accrued in deferred tax liabilities relating to withholding
tax on dividends were determined on the basis that 100% of the distributable reserves of the major
subsidiaries and equity investees operating in the PRC will be distributed as dividends.
F-41
The reconciliation of the Group’s reported income tax expense to the theoretical tax amount that would arise
using the tax rates of the Company against the Group’s loss before income taxes and equity in earnings of equity investees
is as follows:
Continuing operations:
Loss before income taxes and equity in earnings of equity
investees
Tax calculated at the statutory tax rate of the Company
Tax effects of:
Different tax rates available to different jurisdictions
Tax valuation allowance
Preferential tax deduction
Expenses not deductible for tax purposes
Utilization of previously unrecognized tax losses
Withholding tax on undistributed earnings of PRC entities
Others
Income tax expense
2016
Year Ended
December 31,
2015
(in US$’000)
2014
(47,356)
(7,814)
(10,540) (19,957)
(3,293)
(1,739)
453
9,886
(3,205)
688
(21)
3,532
812
4,331
(2,953)
6,601
(2,096)
253
(34)
1,216
357
1,605
3,551
783
—
399
(1,055)
1,161
(203)
1,343
Note: The Arrangement between the Mainland of China and the Hong Kong Special Administrative Region for the
Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income.
Deferred income tax assets and liabilities as at December 31 are as follows:
Deferred tax assets
Deferred tax liabilities
Net deferred tax liabilities
December 31,
2015
2016
(in US$’000)
372
250
(5,361) (3,723)
(4,989) (3,473)
The movements in net deferred income tax liabilities are as follows:
As at January 1
Exchange differences
Acquisition of a subsidiary (Note 4)
Utilization of previously recognized withholding tax on
undistributed earnings
(Charged)/Credited to the consolidated statements of operations
—withholding tax on undistributed earnings of PRC entities
—deferred tax on amortization of intangible assets
—deferred tax on provision of assets
—utilization of previously recognized tax losses
As at December 31
2016
2015
2014
(3,473)
311
—
(in US’000)
(2,842) (2,267)
4
(98)
88
—
1,526
321
797
(3,532)
32
147
—
(4,989)
(1,216) (1,161)
11
—
(128)
(3,473) (2,842)
24
152
—
The deferred tax assets and liabilities are offset when there is a legally enforceable right to set off and when the
deferred income taxes relate to the same fiscal authority.
F-42
The significant components of deferred tax assets and liabilities are as follows:
Deferred income tax assets:
Tax losses
Others
Total deferred income tax assets
Less: Valuation allowance
Deferred income tax assets
Deferred income tax liabilities:
Undistributed earnings from PRC entities
Others
Deferred income tax liabilities
December 31,
2016
2015
(in US$’000)
20,145
372
20,517
(20,145)
372
11,393
250
11,643
(11,393)
250
5,230
131
5,361
3,560
163
3,723
The tax losses can be carried forward against future taxable income and will expire in the following years:
No expiry date
2015
2016
2017
2018
2019
2020
2021
December 31,
2016
2015
(in US$’000)
32,859
—
—
3,651
807
4,012
34,059
53,194
128,582
28,699
—
—
3,982
865
4,298
33,735
—
71,579
The Company believes that it is more likely than not that future operations will not generate sufficient taxable
income to realize the benefit of the deferred income tax assets as the subsidiaries of the Company have had sustained tax
losses, which will expire if not utilized within five years in the case of PRC companies whereas Hong Kong subsidiaries
do not generate profits taxable in Hong Kong to utilize their tax losses. Accordingly, a valuation allowance has been
recorded against the deferred income tax assets arising from the tax losses of the Company.
The table below summarizes changes in the deferred tax valuation allowance:
Deferred income tax valuation allowance:
At January 1
Exchange differences
Charged to consolidated statements of operations
Utilization of previously unrecognized tax losses
Write-off of expired tax losses
Others
At December 31
2016
December 31,
2015
(in US$’000)
2014
11,393
(825)
9,886
(21)
—
(288)
20,145
7,455
(235)
6,601
(34)
(1,493)
(901)
11,393
9,470
(135)
783
(1,055)
(1,169)
(439)
7,455
The Group recognizes interests and penalties, if any, under other payables, accruals and advance receipts on its
consolidated balance sheets and under other expenses in its consolidated statements of operations. As of December 31,
2016, 2015 and 2014, the Group did not have any material unrecognized uncertain tax positions.
F-43
27. Earnings/(Losses) per Share
(a) Basic earnings/(losses) per share
Basic earnings/(losses) per share is calculated by dividing the net income/(loss) attributable to ordinary
shareholders of the Company by the weighted average number of ordinary shares in issue during the year. Periodic
accretion to Preferred Shares of HMHL (Note 20) is recorded as deductions to consolidated net income to arrive at net
income/(loss) available to the Company’s ordinary shareholders for purpose of calculating the consolidated basic
earnings/(losses) per share.
Weighted average number of outstanding ordinary shares in issue
Net income/(loss) from continuing operations (US$’000)
Net income attributable to non-controlling interests (US$’000)
Accretion on redeemable non-controlling interests (US$’000)
Net income/(loss) for the year attributable to ordinary shareholders of the
Company—Continuing operations (US$’000)
Income from discontinued operation, net of tax (US$’000)
Net income attributable to non-controlling interests (US$’000)
Net income for the year attributable to ordinary shareholders of the
Company—Discontinued operation (US$’000)
Earnings/(losses) per share attributable to ordinary shareholders of the
Company (US$ per share)
—Continuing operations
—Discontinued operation
(b) Diluted earnings/(losses) per share
2016
59,715,173
14,557
(2,859)
—
Year Ended
December 31,
2015
54,659,315
10,427
(2,434)
(43,001)
2014
52,563,387
(6,120)
(2,203)
(25,510)
11,698
—
—
—
11,698
(35,008)
—
—
(33,833)
2,034
(1,017)
—
(35,008)
1,017
(32,816)
0.20
—
0.20
(0.64)
—
(0.64)
(0.64)
0.02
(0.62)
Diluted earnings/(losses) per share is calculated by dividing net income/(loss) attributable to ordinary
shareholders, by the weighted average number of ordinary and dilutive ordinary share equivalent outstanding during the
period. Dilutive ordinary share equivalents include shares and treasury shares issuable upon the exercise or settlement of
share-based awards issued by the Company and its subsidiaries using the treasury stock method and the ordinary shares
issuable upon the conversion of the Preferred Shares issued by HMHL using the if-converted method. The computation of
diluted earnings/(losses) per share does not assume conversion, exercise, or contingent issuance of securities that would
have an anti-dilutive effect.
In determining the impact from share-based awards and Preferred Shares issued by HMHL, the Company first
calculates the diluted earnings per share at the HMHL and includes in the numerator of consolidated earnings/(losses) per
share the amount based on the diluted earnings/(losses) per share of HMHL multiplied by the number of shares owned by
the Company. If dilutive, the percentage of the Company’s shareholding in HMHL was calculated by treating Preferred
Shares issued by HMHL as having been converted at the beginning of the period and share options as having been exercised
during the period.
F-44
For purpose of calculating earnings per share for discontinued operation, the same number of potential ordinary
shares used in computing the diluted per share amount for income from continuing operations was used in computing
diluted per share amount for income from discontinued operation.
Weighted average number of outstanding ordinary shares in issue
Adjustment for share options
Net income/(loss) for the year attributable to ordinary shareholders of the
Company—Continuing operations (US$’000)
Income from discontinued operation, net of tax (US$’000)
Net income attributable to non-controlling interests (US$’000)
Net income for the year attributable to ordinary shareholders of the
Company—Discontinued operation (US$’000)
(Losses)/earnings per share attributable to ordinary shareholders of the
Company (US$ per share)
—Continuing operations
—Discontinued operation
Year Ended
December 31,
2015
2014
54,659,315 52,563,387
—
54,659,315 52,563,387
—
2016
59,715,173
255,877
59,971,050
11,698
—
—
(35,008)
—
—
(33,833)
2,034
(1,017)
—
11,698
—
(35,008)
1,017
(32,816)
0.20
—
0.20
(0.64)
—
(0.64)
(0.64)
0.02
(0.62)
For the years ended December 31, 2015 and 2014, the Preferred Shares issued by HMHL and share options issued
by the Company and HMHL were not included in the calculation of diluted loss per share because of their anti-dilutive
effect.
28. Segment Reporting
The reportable segments are strategic business units that offer different products and services. They are managed
separately because each business requires different technological advancements and marketing approaches. Details of the
reportable segments are included in Note 1. The performance of the reportable segments are assessed based on three
measurements: (a) losses or earnings of subsidiaries before interest income, interest expenses, income tax expenses and
equity in earnings of equity investees, net of tax (“Adjusted (LBIT)/EBIT”), (b) equity in earnings of equity investees, net
of tax and (c) operating profit/(loss).
The segment information for continuing operations is as follows:
Innovation
Platform
Drug
R&D
Year Ended December 31, 2016
Commercial Platform
Prescription
Drugs
Consumer
Health
Revenue from external customers
Adjusted (LBIT)/EBIT
Interest income
Equity in earnings of equity investees, net of tax
Operating (loss)/profit
Interest expenses
Additions to non-current assets (other
than financial instrument and deferred
tax assets)
Depreciation/amortization
Income tax expense
PRC
PRC
PRC
Hong
Kong
Unallocated
Total
(in US$’000)
35,228
(36,657)
52
(4,232)
(40,837)
—
149,861
2,377
31
60,288
62,696
—
6,984
(493)
34
10,188
9,729
—
24,007
1,852
1
—
1,853
79
—
(13,306)
384
—
(12,922)
1,552
216,080
(46,227)
502
66,244
20,519
1,631
4,138
2,176
—
67
102
777
20
3
(497)
51
19
289
51
41
3,762
4,327
2,341
4,331
F-45
Innovation
Platform
Drug
R&D
December 31, 2016
Commercial Platform
Prescription
Drugs
Consumer
Health
Total assets
Property, plant and equipment
Leasehold land
Goodwill
Other intangible asset
Investments in equity investees
PRC
PRC
PRC
Hong
Kong
Unallocated
Total
(in US$’000)
53,774
9,686
1,220
—
—
17,031
134,681
145
—
2,730
469
77,939
67,161
34
—
407
—
63,536
10,701
40
—
—
—
—
76,120
49
—
—
—
—
342,437
9,954
1,220
3,137
469
158,506
Innovation
Platform
Drug
R&D
Year Ended December 31, 2015
Commercial Platform
Prescription
Drugs
Consumer
Health
Revenue from external customers
Adjusted (LBIT)/EBIT
Interest income
Equity in earnings of equity investees, net of tax
Operating (loss)/profit
Interest expenses
Additions to non-current assets (other
than financial instrument and deferred tax
assets)
Depreciation/amortization
Income tax expense
PRC
PRC
PRC
Hong
Kong
Unallocated
Total
52,016
(119)
79
(3,770)
(3,810)
—
105,478
676
114
(in US$’000)
3,028 17,681
1,211
(169)
1
29
—
15,653 10,689
1,212
16,443 10,549
85
—
—
—
(11,186)
228
—
(10,958)
1,319
178,203
(9,587)
451
22,572
13,436
1,404
3,218
1,864
—
88
94
239
5
11
—
4
5
148
9
41
1,218
3,324
2,015
1,605
Innovation
Platform
Drug
R&D
December 31, 2015
Commercial Platform
Prescription
Drugs
Consumer
Health
Total assets
Property, plant and equipment
Leasehold land
Goodwill
Other intangible asset
Investments in equity investees
PRC
PRC
PRC
Hong
Kong Unallocated
Total
49,545
8,312
1,343
—
—
9,285
(in US$’000)
97,572 66,552 8,651
27
7
— —
407 —
— —
49,709 60,762 —
122
—
2,925
571
7,279
39
—
—
—
—
229,599
8,507
1,343
3,332
571
119,756
F-46
Innovation
Platform
Drug
R&D
Year Ended December 31, 2014
Commercial Platform
Prescription
Drugs
Consumer
Health
Revenue from external customers
Adjusted (LBIT)/EBIT
Interest income
Equity in earnings of equity investees, net of tax
Operating (loss)/profit
Interest expenses
Additions to non-current assets (other than
financial instrument and deferred tax assets)
Depreciation/amortization
Income tax expense
PRC
PRC
PRC
Hong
Kong
Unallocated
Total
20,344
(13,817)
33
(8,409)
(22,193)
—
50,202
48
68
(in US$’000)
3,847 12,936
999
3
—
1,002
19
771
12
13,201 10,388
13,317 11,171
77
10
—
(7,001)
443
—
(6,558)
1,410
87,329
(19,000)
559
15,180
(3,261)
1,516
3,671
1,145
—
915
65
51
24
6
—
2
7
131
6
42
1,161
4,618
1,265
1,343
The group had discontinued part of its Consumer Health business under the Commercial Platform in the PRC for
the year ended December 31, 2014. Details of the discontinued operation and segment information are included in Note 5.
Revenue from external customers is after elimination of inter-segment sales. The amount eliminated attributable
to sales within Consumer Health business from Hong Kong to the PRC of US$1,306,000, US$2,874,000 and US$105,000
for the years ended December 31, 2016, 2015 and 2014 respectively. Sales between segments are carried out at mutually
agreed terms.
There was no customer who accounted for over 10% of the Group’s revenue for the year ended December 31,
2016. There was one customer under the Innovation Platform who accounted for 23% and 13% of the Group’s revenue
for the years ended December 31, 2015 and 2014 respectively.
Unallocated expenses mainly represent corporate expenses which include corporate employee benefit expenses
and the relevant share-based compensation expenses. Unallocated assets mainly comprise cash and cash equivalents and
short-term investments.
A reconciliation of adjusted (LBIT)/EBIT to net income/(loss) from continuing operations is provided as follows:
Adjusted LBIT
Interest income
Equity in earnings of equity investees, net of tax
Interest expenses
Income taxes
Net income/(loss) from continuing operations
Year Ended
December 31,
2015
(in US$’000)
2016
2014
(46,227)
451
502
22,572
66,244
(1,404)
(1,631)
(4,331)
(1,605)
14,557 10,427
(9,587) (19,000)
559
15,180
(1,516)
(1,343)
(6,120)
F-47
29. Note to Consolidated Statements of Cash Flows
Reconciliation of net income/(loss) for the year to net cash (used in)/generated from operating activities:
Net income/(loss)
Adjustments to reconcile net income/(loss) to net cash (used
in)/generated from operating activities
2016
Year Ended
December 31,
2015
(in US$’000)
14,557 10,427
2014
(4,086)
Amortization of finance costs
Depreciation and amortization
Loss on retirement of property, plant and equipment
Movement on the provision for excess and obsolete inventories
Movement on the allowance for doubtful accounts
Share-based compensation expense-share options
Share-based compensation expense-long-term incentive plan
92
2,341
30
163
(208)
1,780
1,661
62
2,015
60
4
1,408
1,151
308
31
1,265
36
56
185
1,065
—
Equity in earnings of equity investees, net of tax
Dividend received from equity investees
Unrealized currency translation loss
Income taxes
Changes in operating assets and liabilities
Accounts receivable—third parties
Accounts receivable—related parties
Other receivables, prepayments and deposits
Amounts due from related parties
Inventories
Long-term prepayment
Accounts payable—third parties
Accounts payable—related parties
Other payables, accruals and advance receipts
Deferred revenue
Other deferred income
Amounts due to related parties
Net cash (used in)/generated from operating activities
(66,244)
30,528
633
1,667
(22,572)
(15,180)
6,410 15,949
173
497
198
1,093
(7,258)
(2,354)
(1,129)
1,157
(3,430)
361
9,818
1,634
7,554
(1,668)
131
(1,385)
(9,569)
(12,030)
315
(459)
(3,010)
(5,154)
(2,132)
2,328
1,331
4,660
(1,907)
2,132
3,977
(9,385)
8,285
1,754
423
(5,029)
167
—
2,332
(162)
(47)
(697)
—
1,342
8,359
30. Litigation
From time to time, the Group may become involved in litigation relating to claims arising from the ordinary
course of business. The Group believes that there are currently no claims or actions pending against the Group, the ultimate
disposition of which could have a material adverse effect on the Group’s results of operations, financial position or cash
flows. However, litigation is subject to inherent uncertainties and the Group’s view of these matters may change in the
future. When an unfavorable outcome occurs, there exists the possibility of a material adverse impact on the Group’s
financial position and results of operations for the periods in which the unfavorable outcome occurs, and potentially in
future periods.
31. Restricted Net Assets
Relevant PRC laws and regulations permit payments of dividends by the Company’s subsidiaries in China only
out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. In
addition, the Company’s subsidiaries in China are required to make certain appropriation of net after-tax profits or increase
in net assets to the statutory surplus fund prior to payment of any dividends. In addition, registered share capital and capital
reserve accounts are also restricted from withdrawal in the PRC, up to the amount of net assets held in each subsidiary. As
a result of these and other restrictions under PRC laws and regulations, the Company’s subsidiaries in China are restricted
in their ability to transfer their net assets to the Group in terms of cash dividends, loans or advances, with restricted portions
F-48
amounting to US$100,825,000 and US$80,040,000 as at December 31, 2016 and 2015 respectively. Even though the
Group currently does not require any such dividends, loans or advances from the PRC subsidiaries, for working capital
and other funding purposes, the Group may in the future require additional cash resources from the Company’s subsidiaries
in China due to changes in business conditions, to fund future acquisitions and development, or merely to declare and pay
dividends to make distributions to shareholders.
Further, the Group has certain investments in equity investees, of which the Group’s equity in undistributed
earnings amounted to US$116,953,000 and US$74,715,000 as at December 31, 2016 and 2015 respectively.
32. Additional Information: Condensed Financial Statements of the Company
Regulation S-X requires condensed financial information as to financial position, changes in financial position
and results of operations of a parent company as of the same dates and for the same periods for which audited consolidated
financial statements have been presented when the restricted net assets of consolidated and unconsolidated subsidiaries
together exceed 25 percent of consolidated net assets as of the end of the most recently completed fiscal year.
The Company’s investments in its subsidiaries are accounted for under the equity method of accounting. Such
investments are presented on separate condensed balance sheets of the Company as “Investments in subsidiaries” and the
Company’s shares of the profit or loss of subsidiaries are presented as “Equity in earnings of subsidiaries, net of tax” in
the separate condensed statements of operations. Ordinarily under the equity method, an investor in an equity method
investee would cease to recognize its share of the losses of an investee once the carrying value of the investment has been
reduced to nil absent an undertaking by the investor to provide continuing support and fund losses. For the purpose of this
condensed financial information of the parent company, the Company has continued to reflect its share, based on its
proportionate interest, of the losses of a subsidiary regardless of the carrying value of the investment even though the
Company is not legally obligated to provide continuing support or fund losses.
The Company’s subsidiaries did not pay any dividends to the Company for the periods presented except for
Hutchison Chinese Medicine Holding Limited and Hutchison Chinese Medicine (Shanghai) Investment Limited.
Hutchison Chinese Medicine Holding Limited declared dividends of nil, US$1,923,000 and US$2,564,000 during the
years ended December 31, 2016, 2015 and 2014 respectively. Hutchison Chinese Medicine (Shanghai) Investment Limited
declared dividends of US$12,115,000 and US$2,949,000 and US$15,385,000 during the years ended December 31, 2016,
2015 and 2014 respectively. These dividends were settled by off-setting against amounts due to the same subsidiaries.
Certain information and footnote disclosures generally included in financial statements prepared in accordance
with U.S. GAAP have been condensed and omitted. The footnote disclosures represent supplemental information relating
to the operations of the Company, as such, these statements should be read in conjunction with the notes to the consolidated
financial statements of the Group.
F-49
Condensed Balance Sheets
(in US$’000)
Assets
Current assets
Cash and cash equivalents
Prepayments
Amounts due from subsidiaries
Amounts due from related parties
Total current assets
Investments in subsidiaries
Deferred costs for initial public offering in the United States
Total assets
Liabilities and shareholders’ equity
Current liabilities
Other payables and accruals
Amounts due to subsidiaries
Amounts due to immediate holding company
Amount due to a related party
Total current liabilities
Other deferred income
Total liabilities
Company’s shareholders’ equity
December 31,
2016
2015
98
82
61,711
76
61,967
1
19
—
76
96
125,546 93,396
—
4,446
187,513 97,938
2,148
—
596
6
5,224
9,029
329
—
2,750 14,582
—
14,582
493
3,243
Ordinary share; $1.00 par value; 75,000,000 shares authorized;
60,705,823 and 56,533,118 shares issued at December 31, 2016 and
2015
Other shareholders’ equity
Total Company’s shareholders’ equity
Total liabilities and shareholders’ equity
60,706 56,533
123,564 26,823
184,270 83,356
187,513 97,938
Condensed Statements of Operations
(in US$’000)
Operating expenses
Administrative expenses
Other income/(expense)
Interest expense
Other income/(expense)
Total other income/(expense)
Income tax expenses
Equity in earnings of subsidiaries, net of tax
Net income/(loss)
Year Ended December 31,
2014
2015
2016
(5,072) (4,658) (1,146)
(4)
(7)
(11)
—
(6)
101
95
(230)
(3)
(98)
(101)
—
16,905 12,662 (6,059)
7,993 (7,306)
11,698
Condensed Statements of Comprehensive Income/(loss)
(in US$’000)
Year Ended December 31,
2014
2015
2016
Net income/(loss)
Other comprehensive loss
Foreign currency translation loss
Total comprehensive income/(loss)
11,698
7,993
(7,306)
(9,290)
2,408
(4,855)
3,138
(2,436)
(9,742)
F-50
Condensed Statements of Cash Flows
(in US$’000)
Year Ended December 31,
2015
2016
2014
Operating activities
Net income/(loss)
Adjustments to reconcile net income/(loss) to net cash
used in operating activities
Equity in earnings of subsidiaries, net of tax
Loss on dilution of interest in a subsidiary
Changes in operating assets and liabilities
Prepayments
Other deferred income
Amounts due to a related party
Amounts due from/to subsidiaries
Other payables and accruals
Amounts due to immediate holding company
Net cash used in operating activities
Financing activities
Proceeds from issuance of ordinary shares
Payment of issuance costs
Net cash from financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
11,698
7,993
(7,306)
(16,905)
—
(12,662)
3
6,059
98
(63)
493
6
(92,418)
(235)
267
(97,157)
110,160
(12,906)
97,254
97
1
98
(18)
—
—
3,171
1,425
88
—
(1)
—
—
1,379
(318)
89
—
—
—
—
—
1
1
—
—
—
—
1
1
33. Subsequent Events
On February 28, 2017, the Group through its subsidiary, entered into 2 separate facility agreements with banks
for the provision of unsecured credit facilities in the aggregate amount of HK$546,000,000 (US$70,000,000). The first
credit facility includes (i) a HK$156,000,000 (US$20,000,000) term loan facility and (ii) a HK$195,000,000
(US$25,000,000) revolving loan facility, both with a term of 18 months and an annual interest rate of 1.25% over HIBOR.
The term loan has been drawn from this first facility on March 9, 2017. The second credit facility includes (i) a
HK$78,000,000 (US$10,000,000) term loan facility and (ii) a HK$117,000,000 (US$15,000,000) revolving loan facility,
both with a term of 18 months and an annual interest rate of 1.25% over HIBOR. These credit facilities are guaranteed by
the Company and include certain financial covenant requirements. No amounts have been drawn from this second facility.
On March 10, 2017, the Group has repaid the HK$156,000,000 (US$20,000,000) term loan facility entered in
February 2016. No amounts remain outstanding related to the unsecured credit facilities in the aggregate amount of
HK$468,000,000 (US$60,000,000). Upon the repayment, the HK$468,000,000 (US$60,000,000) unsecured credit facility
has been terminated.
F-51
SHANGHAI HUTCHISON
PHARMACEUTICALS LIMITED
F-52
Independent Auditor’s Report
To the Board of Directors and Shareholders of Shanghai Hutchison Pharmaceuticals Limited
We have audited the accompanying consolidated financial statements of Shanghai Hutchison Pharmaceuticals
Limited and its subsidiaries, which comprise the consolidated statements of financial position as of December 31, 2016
and 2015, and the related consolidated income statements, consolidated statements of comprehensive income, of changes
in equity and of cash flows for each of the three years in the period ended December 31, 2016.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements in
accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board;
this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair
presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We
conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks
of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk
assessments, we consider internal control relevant to the Company’s preparation and fair presentation of the consolidated
financial statements 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 Company’s internal control. Accordingly, we express no such opinion.
An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant
accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial
statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of Shanghai Hutchison Pharmaceuticals Limited and its subsidiaries at December 31, 2016 and 2015,
and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016
in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.
/s/ PricewaterhouseCoopers Zhong Tian LLP
Shanghai, the People’s Republic of China
March 10, 2017
F-53
Shanghai Hutchison Pharmaceuticals Limited
Consolidated Income Statements
For the Years Ended December 31, 2016, 2015 and 2014
Revenue
Cost of sales
Gross profit
Selling expenses
Administrative expenses
Other net operating income
Gain on disposal of assets held for sale
Profit before taxation
Taxation charge
Profit for the year
Note
2016
2015
2014
5
6
18
7
8
US$’000
222,368
(64,237)
158,131
(92,487)
(13,278)
7,242
88,536
148,144
(27,645)
120,499
US$’000
181,140
(53,532)
127,608
(78,429)
(12,317)
539
—
37,401
(6,094)
31,307
US$’000
154,703
(44,738)
109,965
(70,239)
(8,932)
711
—
31,505
(5,103)
26,402
The accompanying notes are an integral part of these consolidated financial statements.
F-54
Shanghai Hutchison Pharmaceuticals Limited
Consolidated Statements of Comprehensive Income
For the Years Ended December 31, 2016, 2015 and 2014
Profit for the year
Other comprehensive loss that has been or may be reclassified subsequently to profit or
loss:
Exchange translation differences
Total comprehensive income for the year (net of tax)
2016
US$’000
120,499
2015
US$’000
31,307
2014
US$’000
26,402
(8,571)
111,928
(3,540)
27,767
(1,895)
24,507
The accompanying notes are an integral part of these consolidated financial statements.
F-55
Shanghai Hutchison Pharmaceuticals Limited
Consolidated Statements of Financial Position
As at December 31, 2016 and 2015
ASSETS
Non-current assets
Property, plant and equipment
Leasehold land
Other intangible asset
Deferred tax assets
Current assets
Inventories
Trade and bills receivables
Other receivables, prepayments and deposits
Cash and cash equivalents
Bank deposits maturing over three months
Non-current assets classified as held for sale
Total assets
EQUITY
Capital and reserves attributable to the Company’s equity holders
Share capital
Reserves
Total equity
LIABILITIES
Current liabilities
Trade payables
Other payables, accruals and advance receipts
Bank borrowings
Current tax liabilities
Non-current liability
Deferred income
Total liabilities
Net current assets
Total equity and liabilities
Note
2016
US$’000
2015
US$’000
10
11
12
13
14
15
16
17
17
18
88,390
7,244
1,741
3,310
100,685
47,844
23,718
11,262
20,292
40,205
143,321
—
143,321
244,006
84,791
7,932
2,096
4,509
99,328
40,685
23,174
2,139
43,141
3,767
112,906
12,735
125,641
224,969
19
33,382
116,752
150,134
33,382
59,881
93,263
20
21
22
23
7,979
65,249
—
13,718
86,946
4,407
91,358
25,577
3,275
124,617
6,926
93,872
56,375
244,006
7,089
131,706
1,024
224,969
The accompanying notes are an integral part of these consolidated financial statements.
F-56
Shanghai Hutchison Pharmaceuticals Limited
Consolidated Statements of Changes in Equity
For the Years Ended December 31, 2016, 2015 and 2014
As at January 1, 2014
Profit for the year
Other comprehensive loss that has been or may be reclassified
subsequently to profit or loss:
Exchange translation differences
Total comprehensive (loss)/income for the year (net of tax)
Transfer between reserves
Dividend paid to shareholders
As at December 31, 2014
As at January 1, 2015
Profit for the year
Other comprehensive loss that has been or may be reclassified
subsequently to profit or loss:
Exchange translation differences
Total comprehensive (loss)/income for the year (net of tax)
Dividend paid to shareholders
As at December 31, 2015
As at January 1, 2016
Profit for the year
Other comprehensive loss that has been or may be reclassified
subsequently to profit or loss:
Exchange translation differences
Total comprehensive (loss)/income for the year (net of tax)
Transfer between reserves
Dividend paid to shareholders
As at December 31, 2016
Share
capital
US$’000
33,382
—
reserve
US$’000
Exchange General Retained Total
equity
US$’000
66,476
26,402
earnings
US$’000
24,508
26,402
reserves
US$’000
910
—
7,676
—
—
—
—
—
33,382
(1,895)
(1,895)
—
—
5,781
—
—
15
—
925
—
26,402
(15)
(19,077)
31,818
(1,895)
24,507
—
(19,077)
71,906
Share
capital
US$’000
33,382
—
reserve
US$’000
Exchange General Retained Total
equity
US$’000
71,906
31,307
earnings
US$’000
31,818
31,307
reserves
US$’000
925
—
5,781
—
—
—
—
33,382
(3,540)
(3,540)
—
2,241
—
—
—
925
—
31,307
(6,410)
56,715
(3,540)
27,767
(6,410)
93,263
Share
capital
US$’000
33,382
—
Exchange General Retained Total
equity
US$’000
93,263
120,499
reserve
US$’000
2,241
—
reserves
US$’000
925
—
56,715
120,499
earnings
US$’000
—
—
—
—
33,382
(8,571)
(8,571)
—
—
(6,330)
—
—
30
—
955
—
120,499
(30)
(55,057)
122,127
(8,571)
111,928
—
(55,057)
150,134
The accompanying notes are an integral part of these consolidated financial statements.
F-57
Shanghai Hutchison Pharmaceuticals Limited
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2016, 2015 and 2014
Cash flows from operating activities
Net cash generated from operations
Interest received
Income tax paid
Net cash generated from operating activities
Cash flows from investing activities
Purchase of property, plant and equipment
Proceeds from disposal of property, plant and equipment
Proceeds from disposal of assets held for sale, net of costs
Deposits into bank deposits maturing over three months
Proceeds from bank deposits maturing over three months
Capitalized interest expense paid for property, plant and equipment
Government grants received relating to property, plant and equipment
Net cash generated from/(used in) investing activities
Cash flows from financing activities
Dividend paid to shareholders
New bank borrowings
Repayment of bank borrowings
Net cash (used in)/generated from financing activities
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at January 1
Exchange differences
Cash and cash equivalents at December 31
Analysis of cash and bank balances
—Cash and cash equivalents
—Bank deposits maturing over three months
Note
2016
US$’000
2015
US$’000
2014
US$’000
24
64,310
467
(15,595)
49,182
51,007
300
(6,199)
45,108
20,114
257
(5,494)
14,877
18
(11,171)
4
58,839
(57,001)
20,563
(768)
166
10,632
(44,899)
1
31,146
(3,087)
1,619
(1,934)
2,816
(14,338)
(27,655)
19
—
(2,299)
—
(691)
559
(30,067)
(55,057)
—
(25,577)
(80,634)
(20,820)
43,141
(2,029)
20,292
(6,410)
16,764
(13,176)
(2,822)
27,948
16,575
(1,382)
43,141
(19,077)
21,169
—
2,092
(13,098)
30,331
(658)
16,575
17
17
17
20,292
40,205
60,497
43,141
3,767
46,908
16,575
2,299
18,874
The accompanying notes are an integral part of these consolidated financial statements.
F-58
Shanghai Hutchison Pharmaceuticals Limited
Notes To The Accounts
1. General information
Shanghai Hutchison Pharmaceuticals Limited (the “Company”) and its subsidiaries (together the “Group”) are
principally engaged in manufacturing and selling prescription drug products. The Group has manufacturing plants in the
People’s Republic of China (the “PRC”) and sell mainly in the PRC.
The Company was incorporated in the PRC on April 30, 2001 as a Chinese-Foreign Equity joint venture and the
approved operation period is 50 years. The Company is jointly controlled by Shanghai Hutchison Chinese Medicine (HK)
Investment Limited (“SHCM(HK)IL”) and Shanghai Traditional Chinese Medicine Co., Ltd (“SHTCML”).
These consolidated accounts are presented in United States dollars (“US$”), unless otherwise stated and have
been approved for issue by the Company’s Board of Directors on March 10, 2017.
2. Summary of significant accounting policies
The consolidated accounts of the Company have been prepared in accordance with International Financial
Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). 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 IASB that are relevant to the Group’s operations and mandatory for annual periods beginning January 1,
2016. 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 financial position.
The following standards, amendments and interpretations were in issue but not yet effective for financial year
ended December 31, 2016 and have not been early adopted by the Group:
IAS 7 (Amendments)(1)
IAS 12 (Amendments)(1)
IAS 40 (Amendments)(2)
IFRS 2 (Amendments)(2)
IFRS 9(2)
IFRS 15(2)
IFRS 15 (Amendments)(2)
Disclosure Initiative
Recognition of Deferred Tax Assets for Unrealized Losses
Transfers of Investment Property
Classification and Measurement of Share-based Payment Transactions
Financial Instruments
Revenue from Contracts with Customers
Revenue from Contracts with Customers
IFRS 10 and IAS 28 (Amendments)(4)
IFRS 16(3)
IFRIC Interpretation 22(2)
Annual Improvements 2014-2016(1) (2)
Sale or Contribution of Assets between an Investor and its Associate
or Joint Venture
Leases
Foreign Currency Transactions and Advance Consideration
Improvements to IFRSs
(1) Effective for the Group for annual periods beginning on or after January 1, 2017.
(2) Effective for the Group for annual periods beginning on or after January 1, 2018.
(3) Effective for the Group for annual periods beginning on or after January 1, 2019.
(4) In December 2015, the IASB postponed the effective date of this amendment indefinitely pending the outcome of its
research project on the equity method of accounting.
The adoption of standards, amendments and interpretations listed above in future periods is not expected to have
any material effects on the Group’s results of operations and financial position, except for the adoption of IFRS 15 and
IFRS 16 which the management is still assessing the impact. While the Group is continuing to evaluate the impact, it
expects there will not be a material impact to the timing of revenue recognition under the new guidance. The Group expects
the timing of recognition will be at the point when the goods have transferred to the customer and the customer obtains
F-59
control of the goods as evidenced by delivery of the product, transfer of title and when no further obligations to the
customer remain. Additionally, while the Group is in the process of assessing the transition method, it expects to adopt the
new standard using the modified retrospective method in fiscal 2018.
(a) Basis of consolidation
The consolidated accounts of the Group include the accounts of the Company and its subsidiaries made up to
December 31, 2016, 2015 and 2014.
The accounting policies of subsidiaries have been changed where necessary to ensure consistency with the
policies adopted by the Group.
All significant intercompany transactions and balances within the Group are eliminated on consolidation.
(b) Subsidiaries
The subsidiaries are all entities over which the Group has control. The Group controls an entity when the Group
is exposed, 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, the 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.
(c) 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 its subsidiaries is Renminbi (“RMB”) whereas the consolidated accounts are presented in United States dollars
(“US dollars”), which is the Company’s presentation currency.
The accounts of the Company and its subsidiaries are translated into the Company’s presentation currency using
the year end rates of exchange for the statement of financial position items and the average rates of exchange for the year
for the income statement items. Exchange differences are recognized directly in the consolidated statement of
comprehensive income.
(d) 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 recognized as a separate asset, as appropriate,
only when it is probable that future economic benefits associated with the item will flow 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 financial
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 estimated useful lives of the depreciable assets are as follows:
Buildings
Leasehold improvements
Plant and equipment
Furniture and fixtures, other equipment and
30 years
Over the unexpired period of the lease or 5 years, whichever is shorter
10 years
motor vehicles
5 years
F-60
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(i)).
Gains and losses on disposals are determined by comparing net sales proceeds with the carrying amount of the
relevant assets and are recognized in income statement.
(e) Construction in progress
Construction in progress represents buildings, plant and machinery under construction and pending installation
and is stated at cost less accumulated impairment losses (if any). Cost includes the costs of construction of buildings and
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(d).
(f) Leasehold land
Leasehold land is stated at cost less accumulated amortization 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. Amortization of leasehold land is calculated on a
straight-line basis over the period of the land use rights.
(g) Other intangible asset
The Group’s other intangible asset represents promotion and marketing rights. Other intangible asset has definite
useful live and is carried at historical cost less accumulated amortization and accumulated impairment losses. Amortization
is calculated using the straight-line method to allocate its costs over its estimated useful live of ten years.
(h) Research and development
Research expenditure is recognized as an expense as incurred. Costs incurred on development projects (relating
to the design and testing of new or improved products) are recognized as intangible assets when it is probable that the
project will generate future economic benefits by considering its commercial and technological feasibility, and costs can
be measured reliably. Other development expenditures are recognized as an expense as incurred. Development costs
previously recognized as an expense are not recognized as an asset in a subsequent period. Development costs with a finite
useful life that have been capitalized (if any) are amortized on a straight-line basis over the period of expected benefit not
exceeding five years. The capitalized 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.
(i) Impairment of non-financial assets
Assets that have an indefinite useful life such as goodwill or intangible assets not ready to use are not subject to
amortization 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 recognized in the income statement.
(j) Non-current assets classified as held for sale
Non-current assets are classified as held for sale when their carrying amount is to be recovered principally through
a sale transaction and a sale is considered highly probable. The non-current assets, are stated at the lower of carrying
amount and fair value less costs to sell. Property, plant and equipment and leasehold land are classified as held for sale are
not depreciated and amortized.
F-61
(k) Inventories
Inventories are stated at the lower of cost and net realizable value. Cost is determined using the weighted average
cost method. The cost of finished goods comprises raw materials, direct labor, other direct costs and related production
overheads (based on normal operating capacity). Net realizable value is the estimated selling price in the ordinary course
of business, less applicable variable selling expenses.
(l) Trade and other receivables
Trade and other receivables are recognized initially at fair value and subsequently measured at amortized 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 flows, discounted at the
effective interest rate. The amount of the provision is recognized in the income statement.
(m) Cash and cash equivalents
In the consolidated statement of cash flows, cash and cash equivalents include cash in hand, deposits held at call
with banks, other short-term highly liquid investments with original maturities of three months or less.
(n) Borrowings
Borrowings are recognized initially at fair value, net of transaction costs incurred. Borrowings are subsequently
stated at amortized cost; any difference between the proceeds (net of transaction costs) and the redemption value is
recognized in the income statement over the period of the borrowings using the effective interest method.
(o) Financial liabilities and equity instruments
Financial liabilities and equity instruments issued by the Group are classified according to the substance of the
contractual arrangements entered into and the definitions of a financial liability and an equity instrument. Financial
liabilities (including trade and other payables) are initially measured at fair value, and are subsequently measured at
amortized cost, using the effective interest method. An equity instrument is any contract that does not meet the definition
of financial liability and evidences a residual interest in the assets of the Group after deducting all of its liabilities.
Ordinary shares are classified 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.
(p) 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
balance sheet date in the country where the Group operates and generates 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
Inside basis differences
Deferred income tax is recognized, using the liability method, on temporary differences arising between the tax
bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax
liabilities are not recognized if they arise from the initial recognition of goodwill, the deferred income tax is not accounted
for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the
time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax
rates (and laws) that have been enacted or substantively enacted by the balance sheet date and are expected to apply when
the related deferred income tax asset is realized or the deferred income tax liability is settled.
F-62
Deferred income tax assets are recognized only to the extent that it is probable that future taxable profit will be
available against which the temporary differences can be utilized.
Outside basis differences
Deferred income tax liabilities are provided on taxable temporary differences arising from investments in
subsidiaries, except for deferred income tax liability where the timing of the reversal of the temporary difference is
controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future.
Deferred income tax assets are recognized on deductible temporary differences arising from investments in
subsidiaries, only to the extent that it is probable the temporary difference will reverse in the future and there is sufficient
taxable profit available against which the temporary difference can be utilized.
(q) Employee benefits
The employees of the Group participate in defined contribution retirement benefit plans organized by the relevant
municipal and provincial governments in the PRC under which the Group required to make monthly contributions to the
plans calculated as a percentage of the employees’ salaries. The municipal and provincial governments undertake to assume
the retirement benefit obligations to all existing and future retired employees payable under the plan described above.
Other than the monthly contributions, the Group has no further obligations for the payment of the retirement and other
post retirement benefits of its employees. The assets of these plans are held separately from those of the Group in an
independent fund managed by the PRC government.
(r) Provisions
Provisions are recognized when the Group has a present legal or constructive obligation as a result of past events;
it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably
estimated. Provisions are not recognized for future operating losses.
(s) Operating leases
Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified
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.
(t) 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 recognized in the income statement in the period in which they are incurred.
(u) Government incentives
Incentives from government are recognized 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 recognized in the income statement over the period
necessary to match them with the costs that they are intended to compensate.
Government grants relating to property, plant and equipment are included in non-current liabilities as deferred
income and credited to the income statement on a straight-line basis over the expected lives of the related assets.
(v) Revenue and income recognition
Revenue comprises the fair value of the consideration received and receivable for the sales of goods in the
ordinary course of the Group’s activities. The Group recognizes revenue when the amount of revenue can be reliably
F-63
measured; when it is probable that future economic benefits will flow to the entity; and when specific 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 recognized as follows:
(i) Sales of goods
Sales of goods are recognized when a group entity has delivered products to the customer, the customer has
accepted the products and collectability of the related receivables is reasonably assured.
(ii) Sales rebates
Certain sales rebates are provided to customers when their business performance for the quarter and the whole
year meets certain criteria. Sales rebates are recognized in profit or loss based on management’s estimation at each
period end.
(iii) Other service income
Other service income is recognized when services are rendered.
(iv) Interest income
Interest income is recognized on a time-proportion basis using the effective interest method.
(w) Segment information
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating
decision maker. The board of directors, who is responsible for allocating resources and assessing performance of the
operating segments, has been identified as the steering committee that makes strategic decisions.
3. Financial risk management
(a) Financial risk factors
The Group’s activities expose it to a variety of financial risks, including credit risk, cash flow interest rate risk
and liquidity risk. The Group does not use any derivative financial instruments for speculative purpose.
(i) Credit risk
The carrying amounts of cash at bank, bank deposits, trade receivables (including bills receivables) and other
receivables included in the consolidated statement of financial position represent the Group’s maximum exposure to credit
risk of the counterparty in relation to its financial assets.
Substantially all of the Group’s cash at banks are deposited in major financial institutions, which management
believes are of high credit quality. The Group has a practice to limit the amount of credit exposure to any financial
institution.
Bills receivables are mostly to be settled by reputable banks or state-owned banks and therefore the management
considers that they will not expose the Group to any significant credit risk.
The Group has no significant concentrations of credit risk. The Group has policies in place to ensure that the sales
of products are made to customers with appropriate credit history and the Group performs periodic credit evaluations of
its customers.
F-64
Management makes periodic assessment on the recoverability of trade receivables and other receivables. 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.
(ii) Cash flow interest rate risk
The Group has no significant interest-bearing assets except for bank deposits and cash at bank, details of which
have been disclosed in Note 17. The Group’s exposure to interest rate risk is mainly attributable to its bank borrowings,
which bear interest at fixed rate. The fixed rate interest bearing financial liabilities expose the Group to fair value interest
rate risk. Details of the Group’s bank borrowings are disclosed in Note 22. The Group considers the exposure to the change
in interest rate risk is insignificant and no sensitivity analysis has been performed.
(iii) Liquidity risk
Prudent liquidity management implies maintaining sufficient 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 sufficient cash balances and adequate credit facilities to meet its liquidity requirements in the short and
long term.
As at December 31, 2016 and 2015, the Group’s current financial liabilities were due for settlement contractually
within twelve months.
(b) Capital risk management
The Group’s objectives when managing capital are to safeguard the Group’s ability to provide returns for
shareholders and benefits 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 liabilities to assets ratio. This ratio is calculated as total liabilities
divided by total assets as shown on the consolidated statement of financial position.
Currently, it is the Group’s strategy to maintain a reasonable liabilities to assets ratio. The liabilities to assets ratio
as at December 31, 2016 and 2015 were as follows:
Total liabilities
Total assets
Liabilities to assets ratio
2016
(US$’000)
2015
(US$’000)
93,872 131,706
244,006 224,969
38.5 %
58.5 %
The decrease in the liabilities to assets ratio was primarily resulted from the replacement of the bank borrowings
and the derecognition of an advanced receipt of land compensation.
(c) Fair value estimation
The Group does not have any financial assets or liabilities which are carried at fair value. The carrying amounts
of the Group’s current financial assets, including cash and bank balances, trade and bills receivables, and other receivables
and current financial liabilities, including trade payables, other payables and accruals and bank borrowings approximate
their fair values due to their short-term maturities. The carrying amounts of the Group’s financial instruments carried at
cost or amortized cost are not materially different from their fair values.
The face values less any estimated credit adjustments for financial assets and liabilities with a maturity of less
than one year are assumed to approximate their fair values. The fair value of financial liabilities for disclosure purposes is
F-65
estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Group
for similar financial instruments.
4. Critical accounting estimates and judgements
Note 2 includes a summary of the significant accounting policies used in the preparation of the accounts. The
preparation of accounts often requires the use of judgements to select specific accounting methods and policies from
several acceptable alternatives. Furthermore, significant 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 significant assumptions and estimates, as well as the accounting policies
and methods used in the preparation of the accounts.
(a) Sales rebates
Certain sales rebates are provided to customers when their business performance for the quarter and the whole
year meets certain criteria. The estimate of sales rebates during the year is based on actual and projected sales transactions
and collection status. Changes in the performance at year end may cause the sales rebate estimation to change.
(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 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
identification 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 recognized
in the period in which such estimate has been changed.
(d) Deferred income tax
Deferred tax is recognized using the liability method on temporary differences arising between the tax bases of
assets and liabilities against which the deductible temporary differences and the carry forward of unused tax losses and tax
credits can be utilized. Where the final outcomes are different from the estimations, such differences will impact the
carrying amount of deferred tax in the period in which such determination is made.
(e) Disposal of assets classified as held for sale
In October, 2016, the Group completed the disposal of assets classified as held for sale, including leasehold land
and property, plant and equipment, to the municipal government (Note 18). 90% of the consideration has been collected
as of December 31, 2016, with the remaining 10% as a retainer to be received upon the deregistration of the land certificate
after the municipal government completing its clearing and inspection of the land according to the agreement. The gain of
US$88.5 million representing the consideration less the assets classified as held for sale was recognized in full on the
disposal date. The Group determined that the whole transaction had been completed on October 20, 2016 since the risk
and rewards of ownership of the land had been passed to the municipal government, no additional costs were expected to
be incurred, no further obligations to be fulfilled by the Group, and there was no recoverability risk on the receivable. If
the final outcome is different from these judgements, it will impact the timing and amounts of gain to be recognized.
5. Revenue and segment information
The Group is principally engaged in manufacturing and distribution of drug products.
F-66
The management has reviewed the Group’s internal reporting in order to assess performance and allocate
resources, and has determined that the Group has two reportable operating segments as follows:
—Manufacturing and sales of drug products.
—Distribution and provision of marketing services of drug products.
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 approaches. The
performance of the reportable segments are assessed based on a measure of earnings or losses before interest income and
tax expenses (“Adjusted EBIT”). Operating profit/(loss) is the same as profit before taxation in the consolidated income
statements for each of the years presented.
In 2016, the Group has identified the Distribution and provision of marketing services of drug products as a
separate reportable segment. This was due to the revenue from external customers having increased in 2016. In prior years,
this operating segment was not separately reported as it was immaterial. The presentation as at and for the years ended
December 31, 2015 and 2014 have been represented below for comparison.
The segment information for the reportable segments for the year is as follows:
As at and for the year ended December 31, 2016
Distribution
and provision
Manufacturing of marketing
services of
drug products
PRC
and sales of
drug products
PRC
(US$’000)
(US$’000)
Revenue from external customers
Adjusted EBIT/(LBIT)
Interest income
Operating profit/(loss)
Additions to non-current assets (other than financial
instrument and deferred tax assets)
Depreciation/amortization
Impairment of property, plant and equipment
Total segment assets
205,809
169,312
562
169,874
11,919
3,503
1,174
239,843
Total
16,559
(21,733)
3
(21,730)
(US$’000)
222,368
147,579
565
148,144
20
23
—
4,163
11,939
3,526
1,174
244,006
As at and for the year ended December 31, 2015
Distribution
and provision
Manufacturing of marketing
and sales of
drug products
PRC
(US$’000)
services of
drug products
PRC
Total
(US$’000)
6,319
(2,292)
5
(2,287)
(US$’000)
181,140
37,095
306
37,401
6
23
2,594
49,237
2,765
224,969
Revenue from external customers
Adjusted EBIT/(LBIT)
Interest income
Operating profit/(loss)
Additions to non-current assets (other than financial
instrument and deferred tax assets)
Depreciation/amortization
Total segment assets
174,821
39,387
301
39,688
49,231
2,742
222,375
F-67
Rider 1
Weighted‐average
remaining
contractual life
(years)
Aggregate
intrinsic value
(in US$’000)
For the year ended December 31, 2014
Outstanding at January 1, 2014
Granted
Exercised
Lapsed
Cancelled
Outstanding at December 31, 2014
Granted
Exercised
Lapsed
Cancelled
Outstanding at December 31, 2015
Granted
Exercised
Lapsed
Cancelled
Outstanding at December 31, 2016
Depreciation/amortization
Vested and expected to vest at December 31, 2014
Vested and exercisable at December 31, 2014
Vested and expected to vest at December 31, 2015
US$30,446,000 for 2016 (2015: US$3,277,000; 2014: nil).
Vested and exercisable at December 31, 2015
Vested and expected to vest at December 31, 2016
Vested and exercisable at December 31, 2016
Revenue from external customers
Adjusted EBIT
Interest income
Operating profit
Additions to non-current assets (other than financial
instrument and deferred tax assets)
8.84
Distribution
and provision
services of
drug products
PRC
Number of Weighted‐average
Exercise Price in
share
US$ per share
options
2.03
538,420
7.82
1,187,372
1.5
(80,924)
2.15
(393,212)
1.7
(39,884)
7.71
1,211,772
Manufacturing of marketing
—
—
and sales of
drug products
2.34
(24,400)
PRC
—
—
(US$’000)
—
—
154,703
1,187,372
7.82
31,248
—
—
257
—
—
31,505
—
—
(1,187,372)
7.82
35,606
—
—
2,651
7.75
769,714
7.48
316,393
7.82
759,918
7.82
593,686
—
—
—
—
(US$’000)
—
—
—
8.88
8.55
7.97
7.97
—
—
Sales between segments are carried out at mutually agreed terms.
Total
7.97
(US$’000)
154,703
31,248
257
31,505
—
—
—
—
35,606
2,651
134
32,292
—
54
107
20,667
16,146
—
—
Revenue from external customers is after elimination of inter-segment sales. The amount eliminated was
6. Other net operating income
Rider 2
Interest income
Interest income
Net foreign exchange losses
Net foreign exchange losses
Other operating income
Other operating income
Other government subsidy (note)
Other government subsidy (note)
Rider 3
Note:
2014
2014
Year Ended
Year Ended
December 31,
December 31,
2016
2015
2015
2016
(US$’000) (US$’000) (US$’000)
(US$’000) (US$’000)
(US$’000)
257
565
257
565
(51)
(15)
(15)
(51)
469
168
469
168
—
6,560
—
6,560
711
7,242
7,242
711
306
306
(25)
(25)
258
258
—
—
539
539
Other net operating income includes the government subsidy of US$6.6 million, which relates to a research
Buildings
and development project that was completed in June 2016 and collection occurred in September 2016. No
further conditions or obligations remained after September 2016.
Leasehold improvements
Plant and equipment
Furniture and fixtures, other
Over the unexpired period of the lease or 5 years,
whichever is shorter
30 years
10 years
equipment and motor vehicles
5 years
F-68
7. Operating profit
Operating profit is stated after charging/(crediting) the following:
Auditor’s remuneration
Amortization of leasehold land
Amortization of other intangible asset
Cost of inventories recognized as expense
Depreciation of property, plant and equipment
Provision for inventories (note)
Reverse of provision for trade receivables
Impairment of property, plant and equipment
Loss on disposal of property, plant and equipment
Operating lease rentals in respect of land and buildings
Research and development expense
Employee benefit expenses (Note 9)
Note:
Year Ended
December 31,
2015
2014
2016
(US$’000) (US$’000) (US$’000)
47
276
—
27,504
2,375
263
—
—
38
599
(69)
42,605
71
271
217
32,378
2,277
1,569
—
—
34
670
1,442
49,398
138
166
225
47,047
3,135
1,236
(81)
1,174
179
737
1,753
61,092
Provision for inventories mainly related to obsolete or damaged inventories.
Other operating profit also includes gains recorded for the disposal of asset held for sale of US$88.5 million
(Note 18).
8. Taxation charge
Current tax
Deferred income tax (Note 13)
Taxation charge
Year Ended
December 31,
2015
2014
2016
(US$’000) (US$’000) (US$’000)
5,279
7,928
(176)
(1,834)
5,103
6,094
26,709
936
27,645
The taxation charge on the Group’s profit before taxation differs from the theoretical amount that would arise
using the Group’s weighted average tax rate as follows:
Profit before taxation
Tax calculated at the statutory tax rates of respective companies
Tax effects of:
Expenses not deductible for tax purposes
Temporary differences
Under/(over) provision in prior years
Tax concession (Note)
Tax losses for which no deferred tax assets was recognized
Taxation charge
Year Ended
December 31,
2015
2014
2016
(US$’000) (US$’000) (US$’000)
31,505
37,401
148,144
7,876
9,351
37,036
8,124
—
237
(18,203)
451
27,645
389
—
(98)
(4,101)
553
6,094
873
(195)
(17)
(3,434)
—
5,103
F-69
Notes:
The Company has been granted High and New Technology Enterprise status (“HNTE status”). Accordingly,
the Company is subjected to a preferential income tax rate of 15.0% up to 2016 (2015: 15.0%; 2014: 15.0%) and the HNTE
status is renewable subject to approval by the relevant authorities.
The weighted average tax rate calculated at the domestic tax rates of the respective companies for the year was
25.0% (2015: 25.0%; 2014: 25.0%).
The effective tax rate for the year was 18.7% (2015: 16.3%; 2014: 16.2%).
9. Employee benefit expenses
Wages, salaries and bonuses
Pension costs—defined contribution plans
Staff welfare
2016
2014
Year Ended
December 31,
2015
(US$’000) (US$’000) (US$’000)
28,910
32,776
3,377
3,837
10,318
12,785
42,605
49,398
48,350
4,929
7,813
61,092
Employee benefit expenses of approximately US$13,548,000 (2015: US$19,585,000; 2014: US$16,971,000) are
included in cost of sales.
10. Property, plant and equipment
Furniture
and
fixtures,
other
equipment
and motor Construction
Plant
and
Buildings
situated in Leasehold
the PRC
(US$’000)
(US$’000)
improvements equipment vehicles
(US$’000) (US$’000)
in progress
(US$’000)
Total
(US$’000)
Cost
As at January 1, 2016
Exchange differences
Additions
Disposals
Transfers
Transfer from non-current assets classified as
held for sale
As at December 31, 2016
Accumulated depreciation and impairment
As at January 1, 2016
Exchange differences
Depreciation
Disposals
Impairment
Transfer from non-current assets classified as
held for sale
As at December 31, 2016
Net book value
As at December 31, 2016
—
(3,001)
—
—
70,222
—
67,221
—
(48)
1,168
—
—
—
1,120
318
(21)
15
(177)
179
1,403
(803)
349
(293)
16,553
3,925
(362)
801
(234)
1,817
82,837
(2,114)
10,774
(120)
(88,771)
88,483
(6,301)
11,939
(824)
—
1
315
2,794
20,003
266
6,213
—
2,606
3,061
96,358
279
(13)
45
(177)
—
—
134
898
(100)
1,251
(246)
—
810
2,613
2,515
(186)
671
(218)
—
145
2,927
—
—
—
1,174
3,692
(347)
3,135
(641)
1,174
—
1,174
955
7,968
66,101
181
17,390
3,286
1,432
88,390
F-70
Buildings
situated in Leasehold
Plant
and
Furniture
and
fixtures,
other
equipment
and motor Construction
the PRC
(US$’000)
improvements equipment vehicles
(US$’000)
(US$’000) (US$’000)
23,065
(922)
—
—
—
2,156
(86)
5
(41)
—
13,660
(547)
71
(47)
—
(22,143)
—
(1,716)
318
(11,734)
1,403
16,385
(677)
851
—
1,368
(59)
244
(37)
9,199
(384)
610
(34)
(16,559)
—
(1,237)
279
(8,493)
898
4,266
(181)
470
(163)
34
(501)
3,925
2,587
(115)
572
(145)
(384)
2,515
in progress
(US$’000)
Total
(US$’000)
39,346
(2,762)
46,287
—
(34)
82,493
(4,498)
46,833
(251)
—
—
82,837
(36,094)
88,483
—
—
—
—
29,539
(1,235)
2,277
(216)
—
—
(26,673)
3,692
—
39
505
1,410
82,837
84,791
Furniture
and
fixtures,
other
equipment
and motor Construction
Plant
and
Buildings
situated in Leasehold
the PRC
(US$’000)
(US$’000)
improvements equipment vehicles
(US$’000) (US$’000)
23,619
(554)
—
—
—
23,065
15,821
(375)
939
—
16,385
1,730
(43)
9
—
460
2,156
1,145
(29)
252
—
1,368
13,467
(318)
243
(309)
577
13,660
9,003
(213)
677
(268)
9,199
3,718
(91)
671
(108)
76
4,266
2,226
(54)
507
(92)
2,587
in progress
(US$’000)
Total
(US$’000)
6,074
(298)
34,683
—
(1,113)
39,346
48,608
(1,304)
35,606
(417)
—
82,493
—
—
—
—
—
28,195
(671)
2,375
(360)
29,539
6,680
788
4,461
1,679
39,346
52,954
Cost
As at January 1, 2015
Exchange differences
Additions
Disposals
Transfers
Transfer to non-current assets classified as
held for sale
As at December 31, 2015
Accumulated depreciation and impairment
As at January 1, 2015
Exchange differences
Depreciation
Disposals
Transfer to non-current assets classified as
held for sale
As at December 31, 2015
Net book value
As at December 31, 2015
Cost
As at January 1, 2014
Exchange differences
Additions
Disposals
Transfers
As at December 31, 2014
Accumulated depreciation and impairment
As at January 1, 2014
Exchange differences
Depreciation
Disposals
As at December 31, 2014
Net book value
As at December 31, 2014
During 2016, the finance cost of US$639,000 (2015: US$2,029,000; 2014: US$650,000) of bank borrowings was
capitalized.
Construction in progress mainly related to the construction of new factory in Fengpu District, Shanghai. In
September 2016, the new factory was put into operation.
F-71
11. Leasehold land
The Group’s interests in leasehold land represent prepaid operating lease payments and are located in the PRC.
Cost
As at January 1
Exchange differences
Transfer to non-current assets classified as held for sale
As at December 31
Accumulated amortization
As at January 1
Exchange differences
Amortization charge
Transfer to non-current assets classified as held for sale
As at December 31
Net book value
As at December 31
12. Other intangible asset
Cost
As at January 1
Exchange differences
Additions
As at December 31
Accumulated amortization
As at January 1
Exchange difference
Amortization charge
As at December 31
Net book value
As at December 31
13. Deferred tax assets
Deferred tax assets
—to be recovered within 12 months
—to be recovered after 12 months
The movements in deferred tax assets are as follows:
As at January 1
Exchange differences
(Debited)/credited to the consolidated income statements
—accrued expenses, provisions and depreciation allowances
As at December 31
F-72
2016
(US$’000) (US$’000) (US$’000)
2014
2015
8,514
(568)
—
7,946
13,729
(550)
(4,665)
8,514
14,057
(328)
—
13,729
582
(46)
166
—
702
1,740
(78)
271
(1,351)
582
1,500
(36)
276
—
1,740
7,244
7,932
11,989
2016
(US$’000) (US$’000) (US$’000)
2015
2014
2,308
(154)
—
2,154
—
(96)
2,404
2,308
212
(24)
225
413
—
(5)
217
212
—
—
—
—
—
—
—
—
1,741
2,096
—
December 31,
2016
2015
(US$’000) (US$’000)
3,029
281
3,310
3,815
694
4,509
2016
2014
2015
(US$’000) (US$’000) (US$’000)
2,676
(64)
2,788
(113)
4,509
(263)
(936)
3,310
1,834
4,509
176
2,788
The deferred tax assets and liabilities are offset when there is a legally enforceable right to set off and when the
deferred taxes related to the same fiscal authority.
The Group’s deferred tax assets and liabilities are mainly related to the temporary differences including accrued
expenses, provisions and depreciation allowances. The potential deferred tax assets in respect of tax losses which have not
been recognized in the consolidated accounts amounted to approximately US$944,000 (2015: US$542,000).
These unrecognized tax losses can be carried forward against future taxable income and will expire in the
following years:
2019
2020
2021
14. Inventories
Raw materials
Work in progress
Finished goods
15. Trade and bills receivables
Trade receivables from third parties
Trade receivables from related parties (Note 26(b))
Bills receivables
December 31,
2016
2015
(US$’000) (US$’000)
16
2,151
—
2,167
15
2,008
1,751
3,774
December 31,
2016
(US$’000)
29,010
10,161
8,673
47,844
2015
(US$’000)
22,008
8,562
10,115
40,685
December 31,
2016
(US$’000)
10,657
7,010
6,051
23,718
2015
(US$’000)
10,916
4,102
8,156
23,174
All the trade and bills receivables are denominated in RMB and are due within one year from the end of the
reporting period.
The carrying value of trade and bills receivables approximates their fair values.
Movements on the provision for trade receivables are as follows:
As at January 1
Exchange difference
Reverse of provision for trade receivables
Amount written off as uncollectible
As at December 31
2015
2014
2016
(US$’000) (US$’000) (US$’000)
140
(3)
—
—
137
131
(5)
(81)
(45)
—
137
(6)
—
—
131
There is no impaired and provided receivables as at December 31, 2016. (The impaired and provided receivables
as at December 31, 2015 and 2014 amounted to US$131,000 and US$137,000 respectively were aged over 6 months.)
F-73
16. Other receivables, prepayments and deposits
Other receivables, prepayments and deposits
Prepayments to suppliers
Interest receivables
Deposits
Receivable from disposal of asset held for sale (Note 18)
Others
17. Cash and bank balances
Cash at bank and on hand (note (i))
Short-term deposits (note (ii))
Cash and cash equivalents
Bank deposits maturing over three months (note (ii))
Cash and bank balances
Notes:
December 31,
2016
(US$’000)
2015
(US$’000)
112
87
7
9,690
1,366
11,262
3
8
7
—
2,121
2,139
December 31,
2016
(US$’000)
20,292
—
20,292
2015
(US$’000)
42,662
479
43,141
40,205
60,497
3,767
46,908
(i) The cash and bank balances denominated in RMB were deposited with banks in the PRC. The conversion
of these RMB denominated balances into foreign currencies is subject to the rules and regulations of
foreign exchange control promulgated by the PRC government.
(ii) The weighted average effective interest rate on 2016 bank deposits, with maturity ranging from 37 days
to 181 days, (2015: 90 days to 365 days) was 2.1% (2015: 2.0%) per annum. Cash at bank earns interest
at floating rates based on daily bank deposit rates.
18. Non-current assets classified as held for sale
The Company’s prior manufacturing facilities and factory site (“the Site”) was located in Putuo District, Shanghai,
an area of Shanghai 12 kilometers from the city centre. The area was re-zoned in 2014 from industrial usage into a new
science and technology, commercial and residential development area called Smart City.
On December 9, 2015, the Company entered into an agreement (“the Agreement”) with the relevant Shanghai
government authorities for the surrender of its then remaining 36 years land-use right in respect of the Site.
The Company reclassified the following assets from non-current assets to non-current assets classified as held
for sales.
Buildings situated in the PRC
Leasehold land
Leasehold improvements
Plant and equipment
Furniture and fixtures, other equipment
F-74
December 31,
2015
(US$’000)
5,584
3,314
479
3,241
117
12,735
Under the Agreement, the Company will receive cash compensation in three installments. As at December 31,
2015, the Company had received the first installment of approximately US$ 31.1 million of the compensation which was
recorded in other payables, accruals and advanced receipts (which was equivalent to approximately US$29.9 million in
October 2016 based on the prevailing exchange rate at that time).
In October 2016, the Company completed the surrender of the Site and received the second installment of
US$59.7 million. The remaining US$9.7 million final installment (which was equivalent to US$9.9 million in October
2016 based on the prevailing exchange rate at that time) has been recorded as a current asset and is expected to be received
in early 2017 after the Shanghai government completes certain procedures of which the Company has no further
obligations.
Upon the disposal of the non-current assets classified as held for sales, the Company derecognized the carrying
values of the non-current assets classified as held for sales amounted to approximately US$10.1 million, and recognized a
gain of US$88.5 million after deducting the costs of US$0.9 million. US$2.1 million was reclassified from non-current
assets classified as held for sale to property, plant and equipment as the Company was able to retain such assets for
continuing use at the new factory site. Upon the reclassification, the Company recognized US$0.2 million in depreciation
expense for the period from December 9, 2015 to October 20, 2016 as if such assets were continuously depreciated in
property, plant and equipment.
19. Share capital
Registered and fully paid share capital
Registered and fully paid:
As at December 31, 2014; January 1, 2015; December 31, 2015; January 1,
2016 and December 31, 2016
Nominal amount
(US$’000)
33,382
20. Trade payables
Trade payables due to third parties
Trade payable due to a related party (Note 26(b))
December 31,
2016
(US$’000)
6,323
1,656
7,979
2015
(US$’000)
3,121
1,286
4,407
All the trade payables are denominated in RMB 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.
F-75
21. Other payables, accruals and advance receipts
Other payables and accruals
Accrued operating expenses
Accrued salaries
Other payables
Advance receipts
Payments in advance from customers
Payments in advance for assets held for sale (note (i))
Payments in advance for other government subsidy (note (ii))
December 31,
2016
2015
(US$’000) (US$’000)
27,448
13,932
17,780
59,160
27,172
8,400
23,722
59,294
274
—
5,815
6,089
65,249
918
31,146
—
32,064
91,358
Notes:
(i) As at December 31, 2015, the Company has received approximately US$31.1 million of the Compensation
(Note 18).
(ii) As at December 31, 2016, the Company has received approximately US$5.8 million from a government
subsidy relating to a research and development project that has not met the criteria of the subsidy
22. Bank borrowings
Short-term bank borrowing (note (i))
Weighted average effective interest rate (note (ii))
Notes:
December 31,
2016
(US$’000)
2015
(US$’000)
—
25,577
—
6.25 %
(i) The short-term bank borrowing is unsecured, interest-bearing, denominated in RMB and the carrying
amount of the bank borrowings approximates their values.
(ii) The finance costs incurred in the course of drawdown of bank borrowings directly for the purpose of fixed
assets requisition.
23. Deferred income
Deferred government incentives
—Property, plant and equipment
—Research and development projects
December 31,
2016
2015
(US$’000) (US$’000)
6,413
513
6,926
7,017
72
7,089
Deferred income represents government incentives of approximately US$6,413,000 (2015: US$7,017,000)
received by the Group mainly in relation to property, plant and equipment.
F-76
24. Notes to the consolidated statement of cash flows
Reconciliation of profit for the year to net cash generated from operations:
Profit for the year
Adjustments for:
Taxation charge
Amortization of leasehold land
Amortization of other intangible asset
Provision for inventories
Reverse of provision for trade receivables
Depreciation on property, plant and equipment
Loss on disposal of property, plant and equipment
Impairment of property, plant and equipment
Gain on disposal of assets held for sale
Interest income
Exchange differences
Operating profit before working capital changes
Changes in working capital:
—Increase in inventories
—(Increase)/decrease in trade and bills receivables
—Decrease/(increase) in other receivables, prepayments and deposits
—Increase /(decrease) in trade payables
—Increase/(decrease) in other payables, accruals and advance receipts
—Decrease in deferred income
—Payment for other intangible asset
Net cash generated from operations
25. Commitments
(a) Capital commitments
The Group had the following capital commitments:
Year Ended
December 31,
2015
2016
2014
(US$’000) (US$’000) (US$’000)
26,402
31,307
120,499
27,645
166
225
1,236
(81)
3,135
179
1,174
(88,536)
(565)
186
65,263
6,094
271
217
1,569
—
2,277
34
—
—
(306)
1,720
43,183
5,103
276
—
263
—
2,375
38
—
—
(257)
(291)
33,909
(8,395)
(463)
922
3,572
3,740
(329)
—
(7,118)
(4,236)
361
(5,530)
25,979
(430)
(1,202)
64,310 51,007
(11,013)
355
(1,346)
(805)
(105)
(881)
—
20,114
Property, plant and equipment
Contracted but not provided for
December 31,
2016
2015
(US$’000) (US$’000)
—
9,979
Capital commitment for property, plant and equipment contracted is mainly for the construction in progress of
new plant of the Group.
(b) Operating lease commitments
The Group leases various factories and offices 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:
December 31,
Not later than 1 year
Between 1 to 2 years
F-77
2015
2016
(US$’000) (US$’000)
393
405
798
405
104
509
26. Significant related party transactions
Save as disclosed above, the Group has the following significant 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:
Year Ended
December 31,
2015
(US$’000) (US$’000) (US$’000)
2014
2016
Sales of goods to
—A fellow subsidiary of SHTCML
—A fellow subsidiary of SHCM(HK)IL
Purchase of goods from
—Fellow subsidiaries of SHTCML
Rendering of marketing services from
—A fellow subsidiary of SHTCML
Rendering of research and development services from
—A fellow subsidiary of SHCM(HK)IL
Rendering of consultancy services from
—A fellow subsidiary of SHCM(HK)IL
Provision of marketing services to
—A fellow subsidiary of SHCM(HK)IL
26,044
—
26,044
17,478
3,549
21,027
17,880
2,408
20,288
17,792
11,151
13,035
223
389
358
315
286
121
—
—
8,401
5,093
38
—
No transactions have been entered into with the directors of the Company (being the key management personnel)
during the year ended December 31, 2016 (2015 and 2014: nil).
(b) Balances with related parties included in:
Trade receivables from related parties:
—A fellow subsidiary of SHTCML (note)
—A fellow subsidiary of SHCM(HK)IL
Trade payable due to a related party:
—A fellow subsidiary of SHTCML (note)
Amounts due to related parties:
—Fellow subsidiaries of SHCM(HK)IL (note)
Note:
December 31,
2016
2015
(US$’000) (US$’000)
3,943
3,067
7,010
2,204
1,898
4,102
1,656
1,286
739
1,965
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.
F-78
27. Particulars of principal subsidiaries
Place of
establishment
and
operation
Nominal
value of
registered capital
Equity interest
attributable to the
Group
As at December 31,
2016
2015 Type of legal entity
Principal activities
PRC
RMB1,500,000
100 %
100 % Limited liability company Agriculture & sales of Chinese herbs
Name
Hutchison Heze Bio Resources &
Technology Co., Limited
Shanghai Shangyao Hutchison
Whampoa GSP Company Limited
PRC
RMB20,000,000
100 %
100 % Limited liability company
Distribution of drug products
Note:
As at December 31, 2014, Shanghai Shangyao Hutchison Whampoa GSP Company Limited had obtained its
business license, while its paid-in capital was not yet injected by the Company. As at December 31, 2015, the paid-in
capital has been injected by the Company.
28. Subsequent events
On February 27, 2017, the Company received the final installment of the land compensation amounting to
approximately US$9.7 million (Note 18).
F-79
HUTCHISON WHAMPOA GUANGZHOU
BAIYUNSHAN CHINESE MEDICINE
COMPANY LIMITED
F-80
To the Board of Directors and Shareholders of Hutchison Whampoa Guangzhou Baiyunshan Chinese Medicine
Company Limited
Independent Auditor’s Report
We have audited the accompanying consolidated financial statements of Hutchison Whampoa Guangzhou
Baiyunshan Chinese Medicine Company Limited and its subsidiaries, which comprise the consolidated statements of
financial position as of December 31, 2016 and 2015, and the related consolidated income statements, consolidated
statements of comprehensive income, of changes in equity and of cash flows for each of the three years in the period ended
December 31, 2016.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements in
accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board;
this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair
presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We
conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks
of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk
assessments, we consider internal control relevant to the Company’s preparation and fair presentation of the consolidated
financial statements 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 Company’s internal control. Accordingly, we express no such opinion.
An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant
accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial
statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of Hutchison Whampoa Guangzhou Baiyunshan Chinese Medicine Company Limited and its
subsidiaries at December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2016 in accordance with International Financial Reporting Standards as issued by
the International Accounting Standards Board.
/s/ PricewaterhouseCoopers Zhong Tian LLP
Guangzhou, the People’s Republic of China
March 10, 2017
F-81
Hutchison Whampoa Guangzhou Baiyunshan Chinese Medicine Company Limited
Consolidated Income Statements
For the Years Ended December 31, 2016, 2015 and 2014
Note
2016
2015
2014
Revenue
Cost of sales
Gross profit
Selling expenses
Administrative expenses
Other net operating income
Operating profit
Share of profits/(losses), net of tax of:
Joint venture
Associated companies
Finance costs
Profit before taxation
Taxation charge
Profit for the year
Attributable to:
Equity holders of the Company
Non-controlling interests
US$’000
US$’000
211,603
224,131
US$’000
5
243,746
(134,776) (120,142) (147,325)
96,421
(51,303)
(23,488)
3,344
24,974
91,461
(45,325)
(23,722)
2,902
25,316
89,355
(46,873)
(21,716)
3,097
23,863
6
7
14
5
(123)
23,759
(3,631)
20,128
7
(1)
(158)
25,164
(3,948)
21,216
4
(34)
(139)
24,805
(3,940)
20,865
8
9
20,376
(248)
20,128
21,376
(160)
21,216
20,775
90
20,865
The accompanying notes are an integral part of these consolidated financial statements.
F-82
Hutchison Whampoa Guangzhou Baiyunshan Chinese Medicine Company Limited
Consolidated Statements of Comprehensive Income
For the Years Ended December 31, 2016, 2015 and 2014
Profit for the year
Other comprehensive loss that has been or may be reclassified subsequently to profit or
loss:
Exchange translation differences
Total comprehensive income for the year (net of tax)
Attributable to:
Equity holders of the Company
Non-controlling interests
2015
2016
US$’000 US$’000 US$’000
20,865
21,216
20,128
2014
(9,248)
10,880
(5,097)
16,119
(2,647)
18,218
11,549
(669)
10,880
16,427
(308)
16,119
18,208
10
18,218
The accompanying notes are an integral part of these consolidated financial statements.
F-83
Hutchison Whampoa Guangzhou Baiyunshan Chinese Medicine Company Limited
Consolidated Statements of Financial Position
As at December 31, 2016 and 2015
ASSETS
Non-current assets
Property, plant and equipment
Leasehold land
Goodwill
Other intangible assets
Investment in a joint venture
Investments in associated companies
Other non-current assets
Deferred tax assets
Current assets
Inventories
Trade and bills receivables
Other receivables, prepayments and deposits
Cash and cash equivalents
Bank deposits maturing over three months
Assets classified as held for sale
Total assets
EQUITY
Capital and reserves attributable to the Company’s equity holders
Share capital
Reserves
Non-controlling interests
Total equity
(cid:289)
LIABILITIES
Current liabilities
Trade payables
Other payables, accruals and advance receipts
Bank borrowing
Current tax liabilities
Liabilities directly associated with assets classified as held for sale
Non-current liabilities
Deferred income
Deferred tax liabilities
Finance lease payables
Total liabilities
Net current assets
Total equity and liabilities
Note
2016
2015
US$’000
US$’000
11
12
13
14
15
16
65,130
10,056
8,237
3,076
181
203
10,504
1,717
99,104
54,691
11,037
9,010
708
178
213
11,768
1,009
88,614
17
18
19
19
28,839
39,901
3,671
23,448
1,675
39,393
37,033
6,189
31,155
262
97,534 114,032
—
25,097
122,631 114,032
221,735 202,646
20
21
24,103
24,103
102,969
97,420
127,072 121,523
3,540
133,369 125,063
6,297
(cid:289)
(cid:289)
(cid:289)
(cid:289)
(cid:289)
(cid:289)
22
23
24
20
25
16
26
18,575
33,689
—
892
53,156
17,062
70,218
17,444
42,513
923
587
61,467
—
61,467
17,566
131
451
18,148
88,366
52,413
221,735
15,774
342
—
16,116
77,583
52,565
202,646
The accompanying notes are an integral part of these consolidated financial statements.
F-84
Hutchison Whampoa Guangzhou Baiyunshan Chinese Medicine Company Limited
Consolidated Statements of Changes in Equity
For the Years Ended December 31, 2016, 2015 and 2014
As at January 1, 2014
Profit for the year
Other comprehensive loss that has been or
Attributable to equity holders of the Company
Share
capital
US$’000
24,103 15,159
reserve
US$’000
Exchange General Retained
reserves earnings
US$’000 US$’000
Total
US$’000
131 67,193 106,586
—
—
—
20,775
20,775
Non-
controlling
interests
US$’000
Total
equity
US$’000
3,400 109,986
20,865
90
may be reclassified subsequently to
profit or loss:
Exchange translation differences
Total comprehensive (loss)/income for the
year (net of tax)
Dividend paid to shareholders
Changes in ownership interests in a
subsidiary without change of control
As at December 31, 2014
—
(2,567)
—
—
(2,567)
(80)
(2,647)
—
—
(2,567)
—
—
—
20,775
(12,820)
18,208
(12,820)
10
—
18,218
(12,820)
—
24,103
—
12,592
—
131
(468)
74,680
(468)
111,506
392
(76)
3,802 115,308
As at January 1, 2015
Profit/(loss) for the year
Other comprehensive loss that has been or
may be reclassified subsequently to profit
or loss:
Exchange translation differences
Total comprehensive (loss)/ income for the
year (net of tax)
Dividend paid to shareholders
Capital contribution from a non-controlling
Attributable to equity holders of the Company
Share
capital
US$’000
24,103 12,592
Exchange General Retained
reserves earnings
US$’000 US$’000
reserve
US$’000
Total
US$’000
131 74,680 111,506
—
—
— 21,376
21,376
Non-
controlling
interests
US$’000
Total
equity
US$’000
3,802 115,308
21,216
(160)
—
(4,949)
—
—
(4,949)
(148)
(5,097)
—
—
(4,949)
—
— 21,376
(6,410)
—
16,427
(6,410)
(308)
—
16,119
(6,410)
shareholder of a subsidiary
As at December 31, 2015
—
24,103
—
7,643
—
—
131 89,646
—
121,523
46
46
3,540 125,063
As at January 1, 2016
Profit/(loss) for the year
Other comprehensive loss that has been or
Attributable to equity holders of the Company
Exchange General Retained
Share
capital reserve reserves earnings Total
US$’000
24,103
—
US$’000
US$’000 US$’000
US$’000
7,643
—
131
—
89,646
20,376
121,523
20,376
Non-
controlling
interests
US$’000
Total
equity
US$’000
3,540 125,063
20,128
(248)
may be reclassified subsequently to
profit or loss:
Exchange translation differences
Total comprehensive (loss)/income for
the year (net of tax)
Dividend paid to shareholders
Dividend payable to a non-controlling
shareholder of a subsidiary
Capital contribution from a non-
controlling shareholder of a subsidiary
(Note 14)
As at December 31, 2016
—
(8,827)
—
—
(8,827)
(421)
(9,248)
— (8,827)
—
—
—
—
20,376
(6,000)
11,549
(6,000)
(669)
—
10,880
(6,000)
—
—
—
—
—
(174)
(174)
—
24,103
—
(1,184)
—
—
131 104,022
—
127,072
3,600
3,600
6,297 133,369
The accompanying notes are an integral part of these consolidated financial statements.
F-85
Hutchison Whampoa Guangzhou Baiyunshan Chinese Medicine Company Limited
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2016, 2015 and 2014
Cash flows from operating activities
Net cash generated from operations
Interest received
Finance costs paid
Income tax paid
Net cash generated from operating activities
Cash flows from investing activities
Purchase of property, plant and equipment
Proceeds from disposal of property plant and equipment
Deposits into bank deposits maturing over three months
Proceeds from bank deposits maturing over three months
Purchase of leasehold land
Government grants received relating to property, plant and equipment
Net cash used in investing activities
Cash flows from financing activities
Dividend paid to shareholders
New bank borrowing
Repayment of bank borrowing
Capital contribution from a non-controlling shareholder of a subsidiary
Purchase of additional interests in a subsidiary
Net cash used in financing activities
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at January 1
Exchange differences
Cash and cash equivalents at December 31
Analysis of cash and bank balances
—Cash and cash equivalents
—Bank deposits maturing over three months
Note
2016
2015
2014
US$’000
US$’000
US$’000
27 (a)
(cid:289)
27 (c)
19
19
16,426 (cid:289)
238 (cid:289)
(412)(cid:289)
(4,159)(cid:289)
12,093 (cid:289)
(cid:289)
(13,219)(cid:289)
— (cid:289)
(1,466)(cid:289)
53 (cid:289)
— (cid:289)
3,733 (cid:289)
(10,899)(cid:289)
(cid:289)
(6,000)(cid:289)
— (cid:289)
(923)(cid:289)
— (cid:289)
— (cid:289)
(6,923)(cid:289)
(5,729)(cid:289)
31,155 (cid:289)
(1,844)(cid:289)
23,582 (cid:289)
(cid:289)
23,582 (cid:289)
1,675 (cid:289)
25,257 (cid:289)
12,278
628
(36)
(4,703)
8,167
22,148
1,322
(37)
(3,481)
19,952
(21,698)
—
(3,178)
23,749
—
451
(676)
(11,597)
122
(21,679)
20,538
(6,798)
11,589
(7,825)
(6,410)
923
(625)
46
—
(6,066)
1,425
31,004
(1,274)
31,155
(12,820)
625
—
—
(76)
(12,271)
(144)
31,895
(747)
31,004
31,155
262
31,417
31,004
20,833
51,837
The accompanying notes are an integral part of these consolidated financial statements.
F-86
Hutchison Whampoa Guangzhou Baiyunshan Chinese Medicine Company Limited
Notes To The Accounts
1. General information
Hutchison Whampoa Guangzhou Baiyunshan Chinese Medicine Company Limited (the “Company”) and its
subsidiaries (together the “Group”) are principally engaged in manufacturing and selling of over-the-counter drug products.
The Group has manufacturing plants in the People’s Republic of China (the “PRC”) and sell mainly in the PRC.
The Company was incorporated in the PRC on April 12, 2005 as a Chinese-Foreign Equity joint venture. The
Company is jointly controlled by Guangzhou Hutchison Chinese Medicine (HK) Investment Limited (“GZHCMHK”) and
Guangzhou Baiyunshan Pharmaceutical Holdings Co., Ltd (“GBPHCL”).
These consolidated accounts are presented in United States dollars (“US$”), unless otherwise stated and have
been approved for issue by the Company’s Board of Directors on March 10, 2017.
2. Summary of significant accounting policies
The consolidated accounts of the Company have been prepared in accordance with International Financial
Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). 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 IASB that are relevant to the Group’s operations and mandatory for annual periods beginning January 1,
2016. 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 financial position.
The following standards, amendments and interpretations were in issue but not yet effective for financial year
ended December 31, 2016 and have not been early adopted by the Group:
IAS 7 (Amendments)(1)
IAS 12 (Amendments)(1)
IAS 40 (Amendments)(2)
IFRS 2 (Amendments)(2)
IFRS 9(2)
IFRS 15(2)
IFRS 15 (Amendments)(2)
IFRS 10 and IAS 28 (Amendments)(4)
IFRS 16(3)
IFRIC Interpretation 22(2)
Annual Improvements 2014-2016(1) (2)
Disclosure Initiative
Recognition of Deferred Tax Assets for Unrealized Losses
Transfers of Investment Property
Classification and Measurement of Share-based Payment Transactions
Financial Instruments
Revenue from Contracts with Customers
Revenue from Contracts with Customers
Sale or Contribution of Assets between an Investor and its Associate
or Joint Venture
Leases
Foreign Currency Transactions and Advance Consideration
Improvements to IFRSs
(1) Effective for the Group for annual periods beginning on or after January 1, 2017.
(2) Effective for the Group for annual periods beginning on or after January 1, 2018.
(3) Effective for the Group for annual periods beginning on or after January 1, 2019.
(4) In December 2015, the IASB postponed the effective date of this amendment indefinitely pending the outcome of its
research project on the equity method of accounting.
The adoption of standards, amendments and interpretations listed above in future periods is not expected to have
any material effects on the Group’s results of operations and financial position, except for the adoption of IFRS 15 and
IFRS 16 which the management is still assessing the impact. While the Group is continuing to evaluate the impact, it
expects there will not be a material impact to the timing of revenue recognition under the new guidance. The Group expects
the timing of recognition will be at the point when the goods have transferred to the customer and the customer obtains
F-87
control of the goods as evidenced by delivery of the product, transfer of title and when no further obligations to the
customer remain. Additionally, while the Group is in the process of assessing the transition method, it expects to adopt the
new standard using the modified retrospective method in fiscal 2018.
(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 December 31 and also incorporate the Group’s interests in joint venture and associated companies,
and on the basis set out in Notes 2(e) and 2(f) below.
The accounting policies of subsidiaries, joint ventures and associated companies have been changed where
necessary to ensure consistency with the policies adopted by the Group.
All significant 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.
(b) Subsidiaries
Subsidiaries are all entities over which the Group has control. The Group controls an entity when the Group is
exposed, or has rights, to variable returns 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.
(c) 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. Identifiable assets acquired and liabilities and contingent
liabilities assumed in a business combination are measured initially at their fair values at the acquisition date.
The Group recognizes any non-controlling interest in the acquiree on an acquisition-by-acquisition basis.
Non-controlling interests in the acquiree that are present ownership interests and entitle their holders to a proportionate
share of the entity’s net assets in the event of liquidation are measured at either fair value or the present ownership interests’
proportionate share in the recognized amounts of the acquiree’s identifiable 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 over the fair value of the identifiable net assets acquired is recorded
as goodwill. If the total of consideration transferred, non-controlling interest recognized and previously held interest
measured is less than the fair value of the net assets of the aqcuiree acquired in the case of a bargain purchase, the difference
is recognized directly in the income statement.
(d) 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.
F-88
(e) Joint arrangements
Investments in joint arrangements are classified either as joint operations or joint ventures depending on the
contractual rights and obligations of each investor. The Group has assessed the nature of its joint arrangement and
determined to be a joint venture. Joint venture is accounted for using the equity method.
Weighted‐average
remaining
contractual life
(years)
Under the equity method of accounting, interest in joint venture is initially recognized at cost and adjusted
thereafter to recognize the Group’s share of the post-acquisition profits or losses and movements in other comprehensive
Rider 1
income. The Group determines at each reporting date whether there is any objective evidence that the investment in the
joint venture is impaired. If this is the case, the Group calculates the amount of impairment as the difference between the
recoverable amount of the joint venture and its carrying value and recognizes the amount adjacent to “share of profits less
Aggregate
losses after tax of joint venture” in the income statement.
intrinsic value
(in US$’000)
share
options
538,420
Outstanding at January 1, 2014
(f) Associated companies
1,187,372
Granted
(80,924)
Exercised
An associate is an entity, other than a subsidiary or a joint venture, in which the Group has a long-term equity
(393,212)
Lapsed
interest and over which the Group is in position to exercise significant influence over its management, including
(39,884)
Cancelled
participation in the financial and operating policy decisions.
1,211,772
Outstanding at December 31, 2014
—
Granted
The results and net assets of associates are incorporated in these accounts using the equity method of accounting, except
(24,400)
Exercised
when the investment is classified as held for sales, in which case it is accounted for under IFRS 5, Non-current assets held
—
Lapsed
for sale and discontinued operations. The total carrying amount of such investments is reduced to recognize any identified
—
Cancelled
impairment loss in the value of individual investments.
1,187,372
Outstanding at December 31, 2015
—
Granted
(g) Foreign currency translation
Exercised
—
—
Lapsed
Items included in the accounts of each of the Group’s companies are measured using the currency of the primary
(1,187,372)
Cancelled
economic environment in which the entity operates (the “functional currency”). The functional currency of the Company
—
Outstanding at December 31, 2016
and its subsidiaries, joint venture and associated companies is Renminbi (“RMB”) whereas the consolidated accounts are
769,714
Vested and expected to vest at December 31, 2014
presented in United States dollars (“US dollars”), which is the Company’s presentation currency.
316,393
Vested and exercisable at December 31, 2014
759,918
Vested and expected to vest at December 31, 2015
The accounts of the Company, subsidiaries, joint venture and associated companies are translated into the
593,686
Vested and exercisable at December 31, 2015
Company’s presentation currency using the year end rates of exchange for the statement of financial position items and
—
Vested and expected to vest at December 31, 2016
the average rates of exchange for the year for the income statement items. Exchange differences are recognized directly in
—
Vested and exercisable at December 31, 2016
the consolidated statement of comprehensive income.
Number of Weighted‐average
Exercise Price in
US$ per share
2.03
7.82
1.5
2.15
1.7
7.71
—
2.34
—
—
7.82
—
—
—
7.82
—
7.75
7.48
7.82
7.82
—
—
—
54
107
20,667
16,146
—
—
—
8.88
8.55
7.97
7.97
—
—
32,292
7.97
8.84
134
(h) Property, plant and equipment
Rider 2
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.
Interest income
Net foreign exchange losses
Other operating income
Other government subsidy (note)
Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate,
only when it is probable that future economic benefits associated with the item will flow 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 financial
period in which they are incurred.
(US$’000) (US$’000)
257
(15)
469
—
711
306
(25)
258
—
539
2016
(US$’000)
565
(51)
168
6,560
7,242
2014
Year Ended
December 31,
2015
Depreciation is calculated using the straight-line method to allocate their costs less accumulated impairment losses
over their estimated useful lives. The estimated useful lives of the depreciable assets are as follows:
Rider 3
Buildings
Buildings
30 years
30 years
Leasehold improvements
Leasehold improvements
Plant and equipment
Plant and equipment
Furniture and fixtures, other
Furniture and fixtures, other
Over the unexpired period of the lease or 5years,
Over the unexpired period of the lease or 5 years,
whichever is shorter
whichever is shorter
10 years
10 years
equipment and motor vehicles
equipment and motor vehicles
5 years
5 years
F-89
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(n)).
Gains and losses on disposals are determined by comparing net sales proceeds with the carrying amount of the
relevant assets and are recognized in the income statement.
(i) Construction in progress
Construction in progress represents buildings, plant and machinery under construction and pending installation
and is stated at cost less accumulated impairment losses (if any). Cost includes the costs of construction of buildings and
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(h).
(j) Leasehold land
Leasehold land is stated at cost less accumulated amortization 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. Amortization of leasehold land is calculated on a
straight-line basis over the period of the land use rights.
(k) Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net
identifiable assets of the acquired subsidiary/business at the date of acquisition, or the excess of fair value of business over
its fair value of the net identifiable assets injected to the Company upon its formation. If the cost of acquisition is less than
the fair value of the Group’s share of the net identifiable assets of the acquired subsidiary, the difference is recognized
directly in the consolidated income statement.
Goodwill is retained at the carrying amount as a separate asset, and subject to impairment test annually when
there are indications that the carrying value may not be recoverable.
The profit or loss on disposal of a subsidiary is calculated by reference to the net assets at the date of disposal
including the attributable amount of goodwill.
(l) Other intangible assets
The Group’s other intangible assets mainly include distribution network and drugs licenses contributed from non-
controlling shareholders. Other intangible assets have a definite useful life and are carried at historical cost less
accumulated amortization and accumulated impairment losses, if any. Amortization is calculated using the straight-line
method to allocate its costs over its estimated useful life of ten years.
(m) Research and development
Research expenditure is recognized as an expense as incurred. Costs incurred on development projects (relating
to the design and testing of new or improved products) are recognized as intangible assets when it is probable that the
project will generate future economic benefits by considering its commercial and technological feasibility, and costs can
be measured reliably. Other development expenditures are recognized as an expense as incurred. Development costs
previously recognized as an expense are not recognized as an asset in a subsequent period. Development costs with a finite
useful life that have been capitalized (if any) are amortized on a straight-line basis over the period of expected benefit not
exceeding five years. The capitalized 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.
F-90
(n) Impairment of non-financial assets
Assets that have an indefinite useful life such as goodwill or intangible assets not ready to use are not subject to
amortization 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 recognized in the income statement.
(o) Non-current assets (or disposal groups) classified as held for sale
Non-current assets (or disposal groups) are classified as held for sale when their carrying amount is to be
recovered principally through a sale transaction and a sale is considered highly probable. The non-current assets (or
disposal groups) except for certain assets as explained below, are stated at the lower of carrying amount and fair value less
costs to sell. Deferred tax assets, and financial assets (other than investments in subsidiaries and associates), which are
classified as held for sale, would continue to be measured in accordance with the policies set out elsewhere in Note 2.
(p) Inventories
Inventories are stated at the lower of cost and net realizable value. Cost is determined using the weighted average
cost method. The cost of finished goods comprises raw materials, direct labor, other direct costs and related production
overheads (based on normal operating capacity). Net realizable value is the estimated selling price in the ordinary course
of business, less applicable variable selling expenses.
(q) Trade and other receivables
Trade and other receivables are recognized initially at fair value and subsequently measured at amortized 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 flows, discounted at the
effective interest rate. The amount of the provision is recognized in the income statement.
(r) Cash and cash equivalents
In the consolidated statement of cash flows, cash and cash equivalents include cash in hand, deposits held at call
with banks, other short-term highly liquid investments with original maturities of three months or less.
(s) Borrowing
Borrowing is recognized initially at fair value, net of transaction costs incurred. Borrowing is subsequently stated
at amortized cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognized
in the income statement over the period of the borrowings using the effective interest method.
(t) Financial liabilities and equity instruments
Financial liabilities and equity instruments issued by the Group are classified according to the substance of the
contractual arrangements entered into and the definitions of a financial liability and an equity instrument. Financial
liabilities (including trade and other payables) are initially measured at fair value, and are subsequently measured at
amortized cost, using the effective interest method. An equity instrument is any contract that does not meet the definition
of financial liability and evidences a residual interest in the assets of the Group after deducting all of its liabilities.
Ordinary shares are classified 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.
F-91
(u) 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
balance sheet date in the country where the Group operates and generates 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
Inside basis differences
Deferred income tax is recognized, using the liability method, on temporary differences arising between the tax
bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax
liabilities are not recognized if they arise from the initial recognition of goodwill, and the deferred income tax is not
accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination
that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined
using tax rates (and laws) that have been enacted or substantively enacted by the balance sheet date and are expected to
apply when the related deferred income tax asset is realized or the deferred income tax liability is settled.
Deferred income tax assets are recognized only to the extent that it is probable that future taxable profit will be
available against which the temporary differences can be utilized.
Outside basis differences
Deferred income tax liabilities are provided on taxable temporary differences arising from investments in
subsidiaries, associates and joint arrangements, except for deferred income tax liability where the timing of the reversal of
the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the
foreseeable future. Generally the Group is unable to control the reversal of the temporary difference for associates. Only
when there is an agreement in place that gives the Group the ability to control the reversal of the temporary difference in
the foreseeable future, deferred tax liability in relation to taxable temporary differences arising from the associate’s
undistributed profits is not recognized.
Deferred income tax assets are recognized on deductible temporary differences arising from investments in
subsidiaries, associates and joint arrangements only to the extent that it is probable the temporary difference will reverse
in the future and there is sufficient taxable profit available against which the temporary difference can be utilized.
(v) Employee benefits
The employees of the Group participate in defined contribution retirement benefit plans organized by the relevant
municipal and provincial governments in the PRC under which the Group is required to make monthly contributions to the
plans, calculated as a percentage of the employees’ salaries. The municipal and provincial governments undertake to
assume the retirement benefit obligations to all existing and future retired employees payable under the plan described
above. Other than the monthly contributions, the Group has no further obligations for the payment of the retirement and
other post retirement benefits of its employees. The assets of these plans are held separately from those of the Group in an
independent fund managed by the PRC government.
(w) Provisions
Provisions are recognized when the Group has a present legal or constructive obligation as a result of past events;
it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably
estimated. Provisions are not recognized for future operating losses.
F-92
(x) Leases
Leases that transfer substantially all the rewards and risks of ownership of the assets to the Group, other than legal
title, are accounted for as finance leases. At the inception of a finance lease, the cost of the leased asset is capitalized at the
present value of the minimum lease payments and recorded together with the obligation, excluding the interest element, to
reflect the purchase and financing. Assets held under capitalized finance leases, including prepaid land lease payments
under finance leases, are included in property, plant and equipment, and depreciated over the shorter of the lease terms and
the estimated useful lives of the assets. The finance costs of such leases are charged to the income statement so as to
provide a constant periodic rate of charge over the lease terms.
Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified
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.
(y) 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 recognized in the income statement in the period in which they are incurred.
(z) Government incentives
Incentives from government are recognized 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 recognized in the income statement over the period
necessary to match them with the costs that they are intended to compensate.
Government grants relating to property, plant and equipment are included in other payables, accruals and advance
receipts and non-current liabilities as deferred income and credited to the income statement on a straight-line basis over
the expected lives of the related assets.
(aa) Revenue and income recognition
Revenue comprises the fair value of the consideration received and receivable for the sales of goods in the
ordinary course of the Group’s activities. The Group recognizes revenue when the amount of revenue can be reliably
measured; when it is probable that future economic benefits will flow to the entity; and when specific 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 recognized as follows:
(i)
Sales of goods
Sales of goods are recognized when a group entity has delivered products to the customer, the customer has
accepted the products and collectability of the related receivables is reasonably assured.
(ii)
Sales rebates
Certain sales rebates are provided to customers when their business performance for the whole year meets certain
criteria. Sales rebates are recognized in profit or loss based on management’s estimation at each period end.
(iii)
Interest income
Interest income is recognized on a time-proportion basis using the effective interest method.
F-93
(ab) Segment information
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating
decision-maker. The board of directors, who is responsible for allocating resources and assessing performance of the
operating segments, has been identified as the steering committee that makes strategic decisions.
3. Financial risk management
(a) Financial risk factors
The Group’s activities expose it to a variety of financial risks, including credit risk, cash flow interest rate risk
and liquidity risk. The Group does not use any derivative financial instruments for speculative purpose.
(i)
Credit risk
The carrying amounts of cash at bank, bank deposits, trade receivables (including bills receivables) and other
receivables included in the consolidated statement of financial position represent the Group’s maximum exposure to credit
risk of the counterparty in relation to its financial assets.
Substantially all of the Group’s cash at banks and bank deposits are deposited in major financial institutions,
which management believes are of high credit quality.
Bills receivables are mostly to be settled by reputable banks or state-owned banks and therefore the management
considers that they will not expose the Group to any significant credit risk.
The Group has no significant concentrations of credit risk. The Group has practice in place to ensure that the sales
of products are made to customers with appropriate credit history and the Group performs periodic credit evaluations of
its customers.
Management makes periodic assessment on the recoverability of trade receivables and other receivables. 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.
(ii)
Cash flow interest rate risk
The Group has no significant interest-bearing assets except for cash at bank and bank deposits, details of which
have been disclosed in Note 19. The Group’s exposure to interest rate risk is mainly attributable to its bank borrowing,
which bear interest at fixed rate. The fixed rate interest bearing financial liabilities expose the Group to fair value interest
rate risk. Details of the Group’s bank borrowing are disclosed in Note 24. The Group considers the exposure to the change
in interest rate risk is insignificant and no sensitivity analysis has been performed.
(iii)
Liquidity risk
Prudent liquidity management implies maintaining sufficient 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 sufficient cash balances and adequate credit facilities to meet its liquidity requirements in the short and
long term.
As at December 31, 2016 and 2015, the Group’s current financial liabilities were mainly due for settlement
contractually within twelve months.
(b) Capital risk management
The Group’s objectives when managing capital are to safeguard the Group’s ability to provide returns for
shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.
F-94
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 liabilities to assets ratio. This ratio is calculated as total liabilities
divided by total assets as shown on the consolidated statement of financial position.
Currently, it is the Group’s strategy to maintain a reasonable liabilities to assets ratio. The liabilities to assets ratio
as at December 31, 2016 and 2015 were as follows:
Total liabilities
Total assets
Liabilities to assets ratio
(c) Fair value estimation
December 31,
2016
(US$’000)
88,366
221,735
2015
(US$’000)
77,583
202,646
39.9 %
38.3 %
The Group does not have any financial assets or liabilities which are carried at fair value. The carrying amounts
of the Group’s current financial assets, including cash and bank balances, trade and bills receivables, other receivables and
current financial liabilities, including trade payables, other payables and accruals and bank borrowing approximate their
fair values due to their short-term maturities. The carrying amounts of the Group’s financial instruments carried at cost or
amortized cost are not materially different from their fair values.
The face values less any estimated credit adjustments for financial assets and liabilities with a maturity of less
than one year are assumed to approximate their fair values. The fair value of financial liabilities for disclosure purposes is
estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Group
for similar financial instruments.
4. Critical accounting estimates and judgements
Note 2 include a summary of the significant accounting policies used in the preparation of the accounts. The
preparation of accounts often requires the use of judgements to select specific accounting methods and policies from
several acceptable alternatives. Furthermore, significant 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 significant assumptions and estimates, as well as the accounting policies
and methods used in the preparation of the accounts.
(a) Sales rebates
Certain sales rebates are provided to customers when their business performance for the whole year meets certain
criteria. The estimate of sales rebates during the year is based on actual and projected sales transactions and collection
status. Changes in the performance at year end may cause the sales rebate estimation to change.
(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.
F-95
(c) Impairment of non-financial assets
The Group tests annually whether the carrying amount of goodwill (Note 13) has suffered any impairment. Other
non-financial 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(n). 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 disposal and value-in-use. The value-in-use calculation requires the entity to
estimate the future cash flows 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 flow 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
identification 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 recognized
in the period in which such estimate has been changed.
(e) Deferred income tax
Deferred tax is recognized using the liability method on temporary differences arising between the tax bases of
assets and liabilities against which the deductible temporary differences and the carry forward of unused tax losses and tax
credits can be utilized. Where the final outcomes are different from the estimations, such differences will impact the
carrying amount of deferred tax in the period in which such determination is made.
5. Revenue and segment information
The Group is principally engaged in manufacturing and selling of drugs products.
The management has reviewed the Group’s internal reporting in order to assess performance and allocate
resources, and has determined that the Group has two reportable operating segments as follows:
—Manufacturing and sales of drug products.
—Wholesales of drug products, and related materials not produced by the Group.
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 approaches. The
performance of the reportable segments are assessed based on a measure of earnings or losses before share of profits less
losses after tax of joint ventures and associated companies, interest income, finance costs and tax expenses (“Adjusted
EBIT”).
F-96
The segment information for the reportable segments for the year is as follows:
As at and for the year ended December 31, 2016
Manufacturing and
sales of drug
products
PRC
(US$’000)
Wholesales of drug
products, and related
materials not produced
by the Group
PRC
(US$’000)
Revenue from external customers
Adjusted EBIT
Interest income
Operating profit
Share of profits, net of tax of joint venture and associated
companies
Finance costs
Additions to non-current assets (other than financial instrument
and deferred tax assets)
Depreciation/amortization
Impairment of property, plant and equipment
Total segment assets
155,838
23,077
160
23,237
19
(123)
20,924
2,902
617
185,407
As at and for the year ended December 31, 2015
Manufacturing and
sales of drug
products
PRC
(US$’000)
Wholesales of drug
products, and related
materials not produced
by the Group
PRC
(US$’000)
Revenue from external customers
Adjusted EBIT
Interest income
Operating profit
Share of profits, net of tax of joint venture and associated
companies
Finance costs
Additions to non-current assets (other than financial instrument
and deferred tax assets)
Depreciation/amortization
Total segment assets
144,510
24,152
496
24,648
6
(158)
21,698
3,221
169,659
For the year ended December 31, 2014
Manufacturing and
sales of drug
products
PRC
(US$’000)
Wholesales of drug
products, and related
materials not produced
by the Group
PRC
(US$’000)
Revenue from external customers
Adjusted EBIT
Interest income
Operating profit
Share of losses, net of tax of joint venture and associated
companies
Finance costs
Additions to non-current assets (other than financial instrument
and deferred tax assets)
Depreciation/amortization
166,646
23,180
993
24,173
(30)
(139)
18,301
3,025
F-97
Total
(US$’000)
68,293 224,131
23,625
238
23,863
548
78
626
—
—
19
(123)
—
56
—
36,328
20,924
2,958
617
221,735
Total
(US$’000)
67,093 211,603
24,688
628
25,316
536
132
668
—
—
6
(158)
—
53
32,987
21,698
3,274
202,646
Total
(US$’000)
77,100 243,746
23,652
1,322
24,974
472
329
801
—
—
(30)
(139)
94
181
18,395
3,206
Revenue from external customers is after elimination of inter-segment sales. The amount eliminated was
US$16,181,000 for 2016 (2015: US$19,010,000; 2014: US$22,116,000).
Sales between segments are carried out at mutually agreed terms.
A reconciliation of Adjusted EBIT for reportable segments to profit before taxation is provided as follows:
Adjusted EBIT for reportable segments
Interest income
Share of profits/(losses), net of tax of joint venture and
associated companies
Finance costs
Profit before taxation
6. Other net operating income
Interest income
Other operating income
Other operating expenses
7. Operating profit
Operating profit is stated after charging/(crediting) the following:
Auditor’s remuneration
Amortization of leasehold land
Amortization of other intangible asset
Cost of inventories recognized as expense
Depreciation of property, plant and equipment
Provision for inventories (note)
Inventories provision written back
Provision for trade receivables
Impairment of property, plant and equipment
Loss on disposal of property, plant and equipment
Operating lease rentals in respect of land and buildings
Research and development expense
Employee benefit expenses (Note 10)
Note:
2016
Year Ended
December 31,
2015
(US$’000) (US$’000) (US$’000)
23,652
1,322
24,688
628
23,625
238
2014
19
(123)
23,759
6
(158)
25,164
(30)
(139)
24,805
2016
2014
Year Ended
December 31,
2015
(US$’000) (US$’000) (US$’000)
1,322
2,541
(519)
3,344
238
3,435
(576)
3,097
628
2,574
(300)
2,902
2016
2014
Year Ended
December 31,
2015
(US$’000) (US$’000) (US$’000)
89
239
129
138,213
2,838
—
(14)
62
—
191
700
1,421
30,914
89
271
126
111,064
2,877
340
—
77
—
54
1,022
1,284
31,838
90
255
476
122,969
2,227
972
—
38
617
60
872
1,098
31,910
The provision of inventories mainly relate to obsolete or damaged inventories.
F-98
8. Finance costs
Interest expense on short-term bank borrowing
Interest expense on other payable due to an affiliated company of
Year Ended
December 31,
2015
2016
(US$’000) (US$’000) (US$’000)
37
2014
38
36
GBPHCL (Note 29(b))
85
123
122
158
102
139
9. Taxation charge
Current tax
Deferred income tax (Note 16)
Taxation charge
2016
Year Ended
December 31,
2015
(US$’000) (US$’000) (US$’000)
4,203
(263)
3,940
4,034
(86)
3,948
4,518
(887)
3,631
2014
The taxation charge on the Group’s profit before taxation differs from the theoretical amount that would arise
using the Group’s weighted average tax rate as follows:
Profit before taxation
Tax calculated at the statutory tax rates of respective companies
Tax effects of:
Expenses not deductible for tax purposes
Tax concession (note)
Tax losses for which no deferred tax assets was recognized
Others
Taxation charge
Note:
2016
Year Ended
December 31,
2015
(US$’000) (US$’000) (US$’000)
24,805
25,164
6,201
6,291
23,759
5,940
2014
244
(2,783)
250
(20)
3,631
207
(2,699)
131
18
3,948
222
(2,530)
241
(194)
3,940
The Company has been granted High and New Technology Enterprise status (“HNTE status”). Accordingly,
the Company is subjected to a preferential income tax rate of 15% up to 2016 (2015: 15%; 2014: 15%) and the HNTE
status is renewable subject to the approval by the relevant tax authorities.
The weighted average tax rate calculated at the statutory tax rates of respective companies for the year was
25% (2015: 25%; 2014: 25%).
The effective tax rate for the year was 15.3% (2015: 15.7%; 2014: 15.9%).
10. Employee benefit expenses
Year Ended
December 31,
2015
2014
2016
(US$’000) (US$’000) (US$’000)
23,490 22,902 22,922
7,193
799
31,910 31,838 30,914
7,417
1,003
7,695
1,241
Wages, salaries and bonuses
Pension costs—defined contribution plans
Staff welfare
F-99
Employee benefit expenses of approximately US$8,704,000 (2015: US$8,611,000; 2014: US$9,139,000) are
included in cost of sales.
11. Property, plant and equipment
Buildings
situated in Leasehold
the PRC
(US$’000)
Plant and
improvements equipment
(US$’000)
(US$’000)
Furniture and
fixtures, other
equipment
and motor
vehicles
(US$’000)
Construction
in progress
(US$’000)
Total
(US$’000)
Cost
As at January 1, 2016
Exchange differences
Additions
Disposals
Transfers
Transfer to assets classified as held for
sale (Note 20)
As at December 31, 2016
Accumulated depreciation and impairment
As at January 1, 2016
Exchange differences
Depreciation
Disposals
Impairment
Transfer to assets classified as held for
sale (Note 20)
As at December 31, 2016
Net book value
21,891
(1,451)
64
—
226
—
20,730
5,917
(422)
683
(1)
487
—
6,664
4,866
(354)
752
(25)
—
12,794
(922)
706
(11)
1,134
7,888
(562)
926
(53)
17
31,259 78,698
(5,943)
(2,654)
17,838
15,390
(89)
—
—
(1,377)
—
5,239
—
13,701
(447)
7,769
—
(447)
42,618 90,057
1,857
(130)
159
—
—
10,070
(695)
592
(9)
130
—
1,886
—
10,088
6,163
(442)
793
(19)
—
(206)
6,289
— 24,007
(1,689)
—
2,227
—
(29)
—
617
—
—
(206)
— 24,927
As at December 31, 2016
14,066
3,353
3,613
1,480
42,618 65,130
Buildings
situated in Leasehold
the PRC
(US$’000)
Plant and
improvements equipment
(US$’000)
(US$’000)
Furniture and
fixtures, other
equipment
and motor
vehicles
(US$’000)
Construction
in progress
(US$’000)
Total
(US$’000)
Cost
As at January 1, 2015
Exchange differences
Additions
Disposals
Transfers
As at December 31, 2015
Accumulated depreciation
As at January 1, 2015
Exchange differences
Depreciation
Disposals
As at December 31, 2015
Net book value
As at December 31, 2015
22,677
(910)
65
(13)
72
21,891
5,313
(232)
836
—
5,917
4,295
(190)
573
—
188
4,866
13,275
(535)
663
(609)
—
12,794
1,665
(73)
265
—
1,857
10,276
(583)
949
(572)
10,070
7,842
(323)
352
(53)
70
7,888
5,629
(244)
827
(49)
6,163
9,989 58,078
(2,899)
(941)
22,541 24,194
(675)
—
31,259 78,698
—
(330)
— 22,883
(1,132)
—
2,877
—
—
(621)
— 24,007
15,974
3,009
2,724
1,725
31,259 54,691
F-100
Buildings
situated in Leasehold
the PRC
(US$’000)
Plant and
improvements equipment
(US$’000)
(US$’000)
Furniture and
fixtures, other
equipment
and motor
vehicles
(US$’000)
Construction
in progress
(US$’000)
Total
(US$’000)
Cost
As at January 1, 2014
Exchange differences
Additions
Disposals
Transfers
As at December 31, 2014
Accumulated depreciation
As at January 1, 2014
Exchange differences
Depreciation
Disposals
As at December 31, 2014
Net book value
As at December 31, 2014
21,564
(513)
—
(322)
1,948
22,677
4,812
(116)
707
(90)
5,313
4,288
(101)
—
—
108
4,295
13,728
(321)
64
(476)
280
13,275
1,564
(37)
138
—
1,665
9,761
(226)
1,212
(471)
10,276
7,517
(179)
1,153
(649)
—
7,842
5,554
(133)
781
(573)
5,629
(85)
2,030 49,127
(1,199)
10,380 11,597
(1,447)
—
(2,336)
—
9,989 58,078
— 21,691
(512)
—
2,838
—
—
(1,134)
— 22,883
17,364
2,630
2,999
2,213
9,989 35,195
As at December 31, 2016, no buildings were pledged as security for the short-term bank borrowing. (2015:
US$136,000; 2014: US$316,000).
12. Leasehold land
The Group’s interests in leasehold land represent prepaid operating lease payments and are located in the PRC.
2016
(US$’000)
2015
2014
(US$’000) (US$’000)
Cost
As at January 1
Exchange differences
Addition
As at December 31
Accumulated amortization
As at January 1
Exchange differences
Amortization charge
As at December 31
Net book value
As at December 31
12,642
(843)
—
6,886
(191)
6,473
11,799 12,642 13,168
13,168
(526)
—
1,605
(117)
255
1,743
1,396
(62)
271
1,605
1,187
(30)
239
1,396
10,056 11,037 11,772
As at December 31, 2015 and 2014, the net book value of leasehold land pledged as security for the short-term
bank borrowing amounted to US$133,000 and US$142,000, respectively.
Rider 4
13. Goodwill
Cost
Cost
2016
2016
(US$’000)
(US$’000)
2015
2015
2014
2014
(US$’000) (US$’000)
(US$’000) (US$’000)
As at January 1
As at January 1
Transfer to assets classified as held for sale (Note 20)
Transfer to assets classified as held for sale (Note 20)
Exchange differences
Exchange differences
As at December 31
As at December 31
9,010
9,010
(172)
(172)
(601)
(601)
8,237
8,237
9,385
9,385
—
—
(375)
(375)
9,010
9,010
9,610
9,610
—
—
(225)
(225)
9,385
9,385
Rider 5
F-101
2016
Year Ended December 31,
2015
2014
Revenue
Cost of sales of goods
Research and development expenses
Selling expenses
Administrative expenses
Total other income/(expense)
Income tax expense
Equity in earnings of equity investees, net of tax
Net income/(loss) from continuing operations
Income from discontinued operations
Net income/(loss)
Net income/(loss) attributable to our company
$’000
%
216,080 100.0
(72.4)
(156,328)
(31.0)
(66,871)
(17,998)
(21,580)
(8.3)
(10.0)
(659)
(4,331)
66,244
14,557
(0.3)
(2.0)
30.7
6.7
— —
14,557
11,698
6.7
5.4
Rider 6
Revenue
Cost of sales
Selling expenses
Administrative expenses
Taxation charge
Profit attributable to equity holders of Hutchison Baiyunshan
Equity in earnings of equity investee attributable to our company
%
$’000
%
$’000
178,203
(110,777)
(47,368)
100.0
87,329
(62.2) (58,849)
(26.6) (29,914)
100.0
(67.4)
(34.3)
(4.7)
(1.9)
(1.5)
17.4
(7.0)
2.3
(4.7)
(8.4)
(10,209)
(5.7)
(4,112)
(19,620)
(11.0) (12,713)
(14.6)
(769)
(1,605)
22,572
10,427
—
10,427
7,993
(0.4)
(0.9)
(1,698)
(1,343)
12.7
15,180
5.9
(6,120)
—
5.9
4.5
2,034
(4,086)
(7,306)
Year Ended December 31,
2016
2015
($’000)
%
($’000)
%
224,131 100.0
211,603 100.0
(134,776)
(46,873)
(21,716)
(3,631)
20,376
10,188
(60.1)
(20.9)
(9.7)
(1.6)
9.1
4.5
(120,142)
(45,325)
(23,722)
(3,948)
21,376
10,688
(56.8)
(21.4)
(11.2)
(1.9)
10.1
5.1
The Company was set up with cash and non-cash assets (which constitutes a business) contributed by GZHCMHK
and GBPHCL respectively. Upon formation, the Company accounted for the businesses contributed by GBPHCL using
acquisition method at fair value and goodwill of US$9,193,000 was recognized. The goodwill is attributable to
manufacturing and sales of the drug products segment and is attributable to the anticipated profitability of the distribution
of the Company’s products in the market and the anticipated future operating synergies. No impairment was recognized in
the years presented.
For the purposes of impairment reviews, the recoverable amount of goodwill is determined based on value-in-use
calculations. The value-in-use calculations use cash flow projections based on projected revenues and estimated costs
covering a five-year period. Projections in excess of five years are used to take into account increasing market share and
growth momentum, which does not exceed the long-term average growth rate of pharmacy industry in the PRC.
There are a number of assumptions and estimates involved for the preparation of cash flow projections for the
period covered by the approved budget. Key assumptions are set out below:
Expected growth in revenue
Pre-tax discount rate
Long-term growth rate
2016
2015
2014
3 %
13 %
3 %
3 %
13 %
3 %
5 %
11 %
3 %
Management prepared the financial budgets taking into account actual and prior years’ performances and market
development expectations. Judgement is required to determine key assumptions adopted in the cash flow projections.
However, as there is sufficient headroom, reasonably possible changes to key assumptions will not have material impact
on the goodwill assessment.
14. Other intangible assets
Other intangible assets mainly include distribution network and drugs licenses. During the year, the distribution
network was transferred to assets classified as held for sale and certain drugs licenses were contributed from a subsidiary’s
non-controlling shareholder.
2016
2015
(US$’000) (US$’000) (US$’000)
2014
Cost
As at January 1
Exchange differences
Contribution of other intangible assets from a subsidiary’s
non-controlling shareholder (note)
Transfer to assets classified as held for sale (Note 20)
As at December 31
Accumulated amortization
As at January 1
Exchange differences
Amortization charge
Transfer to assets classified as held for sale (Note 20)
As at December 31
Net book value
As at December 31
Note:
1,231
(265)
1,282
(51)
1,313
(31)
3,600
(1,149)
3,417
—
—
1,231
—
—
1,282
523
(55)
476
(603)
341
417
(20)
126
—
523
295
(7)
129
—
417
3,076
708
865
In June 2015, the Group and Guangdong Lai Da Pharmaceutical Company Limited (“GLDAPC”) entered into
an agreement to form Hutchison Whampoa Baiyunshan Laida Pharmaceutical (Shantou) Co. Ltd. (“Laida”), a Good
Manufacturing Practice company to manufacture, sell and distribute drug product. Pursuant to the agreement, the Group
agreed to contribute cash of US$9.0 million for a 70% ownership stake in Laida and GLDAPC agreed to contribute cash
representing share capital of less than US$0.1 million and their drug product licenses for a 30% ownership stake in Laida.
In January 2016, GLDAPC completed its contribution of other intangible assets totaling US$3.6 million, which was
F-102
recorded at fair value and is amortized on a straight-line basis over its estimated useful life of 10 years.
15. Other non-current assets
Other non-current assets relate to the ongoing acquisition of leasehold land rights. It represents prepayments for
the land use right and construction costs. Since the title of the land is in the registration process, the respective prepayments
are recorded in other non-current assets until the registration process is completed and title has transferred to the Company.
As at December 31, 2016, this process is still in progress.
16. Deferred tax assets and liabilities
Deferred tax assets
—to be recovered after 12 months
—to be recovered within 12 months
Deferred tax liabilities
—to be recovered after 12 months
—to be recovered within 12 months
Net deferred tax assets
December 31,
2016
2015
(US$’000) (US$’000)
1,167
550
658
351
(131)
—
1,586
(342)
—
667
The movements in net deferred income tax assets are as follows:
2016
2015
(US$’000) (US$’000)
At January 1
Exchange differences
Transfer to assets classified as held for sale (Note 20)
Credited/(debited) to the consolidated income statement
—tax losses
—accrued expenses, provisions, depreciation allowances
At December 31
2014
(US$’000)
352
(9)
—
606
(25)
—
667
(81)
113
552
335
1,586
354
(268)
667
—
263
606
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 fiscal authority.
The Group’s deferred tax assets and liabilities are mainly related to the temporary differences including tax losses,
accrued expenses, provisions and depreciation allowances. The potential deferred tax assets in respect of tax losses which
have not been recognized in the consolidated accounts amounted to approximately US$606,000 (2015: US$385,000).
These unrecognized tax losses can be carried forward against future taxable income and will expire in the
following years:
2019
2020
2021
December 31,
2016
(US$’000)
2015
(US$’000)
939
492
992
2,423
963
578
—
1,541
F-103
17. Inventories
Raw materials
Work in progress
Finished goods
18. Trade and bills receivables
Trade receivables from third parties
Trade receivables from related parties (Note 29(b))
Bills receivables
December 31,
2016
2015
(US$’000) (US$’000)
7,018
9,979
22,396
39,393
10,326
9,537
8,976
28,839
December 31,
2016
2015
(US$’000) (US$’000)
18,650
—
18,383
37,033
223
466
39,212
39,901
All the trade and bills receivables are denominated in RMB and are due within one year from the end of the
reporting period.
The carrying value of trade and bills receivables approximates their fair values.
Movements on the provision for trade and bills receivables are as follows:
At January 1
Exchange differences
Provision
Transfer to assets classified as held for sale
Amount written off as uncollectible
At December 31
The provided receivables are aged over 1 year.
19. Cash and bank balances
2016
2014
2015
(US$’000) (US$’000) (US$’000)
228
(5)
62
—
—
285
285
(12)
77
—
(185)
165
165
(12)
38
(81)
—
110
Cash and cash equivalents
Included in assets classified as held for sale (Note 20)
Cash and cash equivalents as per consolidated statements of financial
position
Bank deposits maturing over three months (note (i))
Cash and bank balances
Notes:
December 31,
2016
2015
(US$’000) (US$’000)
31,155
—
23,582
(134)
23,448
1,675
25,123
31,155
262
31,417
(i) The weighted average effective interest rate on bank deposits as at December 31, 2016 with maturity
ranging from 91 days to 365 days (2015: 91 days to 365 days) was 1.3% (2015: 2.1%) per annum. Cash
at bank earns interest at floating rates based on daily bank deposit rates.
(ii) The cash at bank balances are denominated in RMB and were deposited with banks in the PRC. The
F-104
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.
20. Assets classified as held for sale
In December 2016, the board of directors and shareholders of Nanyang Baiyunshan Hutchison Whampoa
Guanbao Pharmaceutical Company Limited (“NBHG”) have agreed in principle to a potential divestment of the
Company’s 60% majority interest in NBHG. The remaining step prior to the divestment is to complete the government-
mandated auction process. The Company has held discussions and agreed initial consideration with potential buyers and
determined that a divestment is highly probable. Accordingly, the Company reclassified the remaining assets and liabilities
of NBHG as assets classified as held for sale and liabilities directly associated with assets classified as held for sale
respectively.
The major classes of assets and liabilities associated with NBHG classified as net assets held for sale as of
December 31, 2016 are as follows:
Assets classified as held for sale:
Goodwill
Property, plant and equipment
Intangible assets
Deferred tax assets
Cash and cash equivalents
Inventories
Trade and bill receivables
Other receivables, prepayment and deposits
Total assets classified as held for sale
Liabilities directly associated with assets classified as held for sale:
Trade payables
Other payables, accruals and advance receipts
Current tax liabilities
Deferred tax liabilities
Total liabilities classified as held for sale
(US$’000)
172
241
546
23
134
6,949
12,360
4,672
25,097
(9,400)
(6,705)
(821)
(136)
(17,062)
In 2016, the Company has been shifting its Good Supply Practice (“GSP”) distribution business from NBHG to
Hutchison Whampoa Guangzhou Baiyunshan Pharmaceuticals Limited (“HWGBPL”), a wholly owned subsidiary where
such GSP business shall continue. Accordingly, the disposal of NBHG was not presented as discontinued operation. For
the year ended December 31, 2016, NBHG had revenue and profit for the year of US$62 million and US$0.1 million,
respectively, which is part of continuing operations. Both NBHG and HWGBPL are part of the segment for wholesales of
drug products and related materials not produced by the Group.
21. Share capital
Registered and fully paid share capital
Registered and fully paid:
As at December 31, 2014, January 1, 2015, December 31, 2015, January 1, 2016
and December 31, 2016
24,103
Nominal amount
(US$’000)
F-105
22. Trade payables
Trade payables due to third parties
Trade payables due to related parties (Note 29(b))
December 31,
2016
2015
(US$’000) (US$’000)
13,293
4,151
17,444
13,285
5,290
18,575
All the trade payables are denominated in RMB 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.
23. Other payables, accruals and advance receipts
Other payables and accruals
Accrued operating expenses
Accrued salaries
Finance lease payables (Note 26)
Other payables
Advance receipts
Payments in advance from customers
Deferred government incentives (note)
Note:
December 31,
2016
2015
(US$’000) (US$’000)
6,046
5,072
93
17,048
28,259
7,492
4,552
—
16,331
28,375
3,499
1,931
5,430
33,689
11,952
2,186
14,138
42,513
The deferred government incentives are related to the property, plant and equipment and research and
development projects which are expected to be completed within one year.
24. Bank borrowing
Short-term bank borrowing
Weighted average effective interest rate
December 31,
2016
(US$’000)
—
—
2015
(US$’000)
923
7 %
As at December 31, 2015, the short-term bank borrowing was secured by certain buildings and leasehold land of
a subsidiary (Notes 11 and 12). This bank borrowing was interest bearing and denominated in RMB.
25. Deferred income
Deferred government incentives:
Buildings and other non-current assets
Others
December 31,
2016
(US$’000)
2015
(US$’000)
13,462
4,104
17,566
10,578
5,196
15,774
F-106
26. Finance lease payables
The Group leased certain of its plant and equipment. These leases are classified as finance leases and have
remaining lease terms of six years.
As at December 31, 2016, the total future minimum lease payments under finance leases and their present
values were as follows:
Amounts payable:
Not later than 1 year
Between 1 to 2 years
Between 2 to 3 years
Between 3 to 4 years
Between 4 to 5 years
Later than 5 years
Total minimum finance lease payments
Future finance charges
Total net finance lease payables
Portion classified as current liabilities (Note 23)
Non-current portion
Present value of
Minimum lease minimum lease
payments
2016
(US$’000)
payments
2016
(US$’000)
93
98
103
108
114
28
544
118
118
118
118
118
28
618
(74)
544
(93)
451
F-107
27. Notes to the consolidated statement of cash flows
(a) Reconciliation of profit for the year to net cash generated from operations:
Profit for the year
Adjustments for:
Taxation charge
Amortization of leasehold land
Amortization of other intangible assets
Movement on the provision for excess and obsolete inventories
Provision for trade receivables
Depreciation on property, plant and equipment
Loss on disposal of property, plant and equipment
Impairment of property, plant and equipment
Amortization of deferred income
Interest income
Share of (profits)/losses, net of tax of:
Joint venture
Associated companies
Gain on acquisition of an associated company
Finance costs
Exchange differences
Operating profit before working capital changes
Changes in working capital:
—Decrease/(increase) in inventories
—(Increase)/decrease in trade and bills receivables
—(Increase)/decrease in other receivables, prepayments and deposits
—Increase/(decrease) in trade payables
—Decrease in other payables, accruals and advance receipts
Net cash generated from operations
(b) Supplemental disclosure for non-cash activities
Year Ended
December 31,
2015
(US$’000) (US$’000) (US$’000)
20,865
21,216
20,128
2014
2016
3,631
255
476
972
38
2,227
60
617
(1,941)
(238)
3,948
271
126
340
77
2,877
54
—
(1,262)
(628)
3,940
239
129
(14)
62
2,838
191
—
(628)
(1,322)
(14)
(5)
—
123
(810)
25,519
(7)
1
—
158
(710)
26,461
(4)
34
(194)
139
(800)
25,475
2,633
(15,266)
(2,153)
10,531
(4,838)
16,426
3,837
5,992
(911)
(12,424)
(10,677)
12,278
(5,772)
1,880
6,004
(983)
(4,456)
22,148
During the year, non-controlling shareholder of a subsidiary made additional capital contribution in the form of
intangible assets amounting to US$3,600,000 (Note 14). Additionally, as at December 31, 2016, there are accruals for
purchase of property, plant and equipment of US$3,654,000.
(c) Changes in ownership interests in a subsidiary without change of control
Fuyang Baiyunshan Hutchison Whampoa Chinese Medicine Technology Company Limited (“FYBYS”) was a
51% owned subsidiary of the Group. In 2014, the Group increased its investments in FYBYS by approximately
US$1,872,000. In addition, the Company acquired an additional 3.3806% interest for a consideration of approximately
US$76,000. FYBYS has become a 75% owned subsidiary of the Group after the transaction.
F-108
28. Commitments
(a) Capital commitments
The Group had the following capital commitments:
Property, plant and equipment
Contracted but not provided for
December 31,
2016
2015
(US$’000) (US$’000)
6,162
17,810
Capital commitment for property, plant and equipment contracted is mainly for the construction in progress of a
new manufacturing plant.
(b) Operating lease commitments
The Group leases various factories and warehouses under non-cancellable operating lease agreements. The future
aggregate minimum lease payments in respect of land and buildings under non-cancellable operating leases were
as follows:
December 31,
Not later than 1 year
Between 1 to 2 years
29. Significant related party transactions
2015
2016
(US$’000) (US$’000)
1,059
104
1,163
1,106
1,080
2,186
Save as disclosed above, the Group has the following significant transactions during the years with related parties
which were carried out in the normal course of business at terms determined and agreed by the relevant parties:
(a) Transactions with related parties:
Year Ended
December 31,
2015
(US$’000) (US$’000) (US$’000)
2014
2016
Sales of goods to
—Fellow subsidiaries of GBPHCL
—A fellow subsidiary of GZHCMHK
Other services income from
—Fellow subsidiaries of GBPHCL
Purchase of goods from
—Fellow subsidiaries of GBPHCL
Advertising expenses to
—A fellow subsidiary of GBPHCL
22,872
280
23,152
25,688
152
25,840
24,973
73
25,046
2,310
875
1,295
36,291
32,156
25,613
3,527
6,353
—
No transactions have been entered into with the directors of the Company (being the key management personnel)
during the year ended December 31, 2016 (2015 and 2014: nil).
F-109
(b) Balances with related parties included in:
Trade receivables from related parties:
—Fellow subsidiaries of GBPHCL (Note 18 and note (i))
Trade payables due to related parties:
—Fellow subsidiaries of GBPHCL (Note 22 and note (i))
Other receivables from related parties
—Fellow subsidiaries of GBPHCL (note (i))
Other payables, accruals and advance receipts due to related parties
—Fellow subsidiaries of GZHCMHK (note (i))
—Fellow subsidiaries of GBPHCL (note (i))
—A fellow subsidiary of GBPHCL (note (ii))
December 31,
2016
2015
(US$’000) (US$’000)
466
—
5,290
4,151
972
968
286
539
2,332
3,157
193
1,703
2,403
4,299
Notes:
(i) Balances 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) Balance is unsecured, interest bearing and repayable on demand. The carrying value of balance with a related party
approximates its fair value due to its short-term maturity.
30. Particulars of principal subsidiaries, joint venture and associated companies
Place of
establishment
and
operation
PRC
Nominal value
of registered
capital in RMB
As at
December 31,
Equity interest
attributable
to the Group
As at
December 31,
2016
2015
75 %
75 %
2016
3,650,000
2015
3,650,000
Type of legal entity
Limited liability company
Principal activity
Agriculture and sales of Chinese herbs
Name
FYBYS
Nanyang Baiyunshan
Hutchison Whampoa
Danshen R&D Limited
NBHG
Wenshan Baiyunshan
Hutchison Whampoa
Qidan Sanqi Chinese
Medicine Co. Ltd.
Shen Nong Garden
Traditional Chinese
Medicine Museum
Hutchison Whampoa
Guangzhou Baiyunshan
Health & Wellness Co. Ltd
Bozhou Baiyunshan
Pharmaceuticals Co Ltd
Hutchison Whampoa
Guangzhou Baiyunshan
Chinese Medicine
(Bozhou) Co. Ltd
HWGBPL
Daqing Baiyunshan
Hutchison Whampoa
Banlangen Technology
Company Limited
Laida
Joint Venture
Qing Yuan Baiyunshan
Hutchison Whampoa
ChuanXinLian R&D
Limited
Associated companies
Tibet Lizhi Guangzhou
Pharmaceutical
Development Co. Ltd.
Linyi Shenghe Jiuzhou
Pharmaceuticals Company
Limited
PRC
PRC
1,000,000
30,000,000
1,000,000
30,000,000
51 %
60 %
51 %
60 %
Limited liability company
Limited liability company
Agriculture and sales of Chinese herbs
Sales of drug products
PRC
2,000,000
2,000,000
51 %
51 %
Limited liability company
Agriculture and sales of Chinese herbs
PRC
1,000,000
1,000,000
100 %
100 % Non-profit making organization
Promote awareness of Chinese herbs
PRC
10,000,000
10,000,000
100 %
100 %
Limited liability company
PRC
500,000
500,000
100 %
100 %
Limited liability company
PRC
PRC
100,000,000
10,000,000
100,000,000
10,000,000
100 %
100 %
100 %
100 %
Limited liability company
Limited liability company
Health supplemented food distribution
Manufacture, sales and distribution of drug
products
Manufacture, sales and distribution of drug
products
Sales and marketing of drug products
PRC
1,020,400
1,020,400
51 %
51 %
Limited liability company
PRC
10,000,000
1,000,000
70 %
70 %
Limited liability company
Agriculture and sales of Chinese herbs
Manufacture, sales and distribution of drug
products
PRC
1,000,000
1,000,000
50 %
50 %
Limited liability company
Agriculture and sales of Chinese herbs
PRC
2,000,000
2,000,000
20 %
20 %
Limited liability company
Trading of Chinese herbs
PRC
3,000,000
3,000,000
30 %
30 %
Limited liability company
Agriculture and sales of Chinese herbs
F-110
NUTRITION SCIENCE PARTNERS LIMITED
F-111
To the Board of Directors and Shareholders of Nutrition Science Partners Limited
Independent Auditor’s Report
We have audited the accompanying consolidated financial statements of Nutrition Science Partners Limited and
its subsidiary, which comprise the consolidated statements of financial position as of December 31, 2016 and 2015, and
the related consolidated income statements, consolidated statements of comprehensive income, of changes in equity and
of cash flows for each of the three years in the period ended December 31, 2016.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements in
accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board;
this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair
presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We
conducted our audits in accordance with audit standards generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks
of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk
assessments, we consider internal control relevant to the Company’s preparation and fair presentation of the consolidated
financial statements 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 Company’s internal control. Accordingly, we express no such opinion.
An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant
accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial
statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of Nutrition Science Partners Limited and its subsidiary at December 31, 2016 and 2015, and the results
of their operations and their cash flows for each of the three years in the period ended December 31, 2016, in accordance
with International Financial Reporting Standards as issued by the International Accounting Standards Board.
/s/ PricewaterhouseCoopers
Hong Kong
March 10, 2017
F-112
Nutrition Science Partners Limited
Consolidated Income Statements
For the Years Ended December 31, 2016, 2015 and 2014
Note 2016
2015
2014
Turnover
Service fee charged by related parties
Clinical trial expenses
Other research and development costs
Other expenses
Operating loss
Loss before taxation
Taxation
Loss for the year
—
—
12 (8,123) (5,712)
(40)
(427)
(281) (1,371)
(42)
(38)
US$’000 US$’000 US$’000
—
(4,594)
(8,778)
(3,381)
(59)
(8,482) (7,552) (16,812)
(8,482) (7,552) (16,812)
5
—
(8,482) (7,552) (16,812)
—
—
The accompanying notes are an integral part of these consolidated financial statements.
F-113
Nutrition Science Partners Limited
Consolidated Statements of Comprehensive Income
For the Years Ended December 31, 2016, 2015 and 2014
Loss for the year
Total comprehensive loss for the year
2014
2015
2016
US$’000 US$’000 US$’000
(8,482) (7,552) (16,812)
(8,482) (7,552) (16,812)
The accompanying notes are an integral part of these consolidated financial statements.
F-114
Nutrition Science Partners Limited
Consolidated Statements of Financial Position
As at December 31, 2016 and 2015
ASSETS
Non-current assets
Intangible assets
Current assets
Prepayments
Cash and cash equivalents
Total assets
EQUITY
Capital and reserves attributable to the Company’s equity holders
Share capital
Accumulated losses
Total equity
LIABILITIES
Current liabilities
Other payables and accruals
Amounts due to related companies
Shareholders’ loans
Total liabilities
Net current assets/(liabilities)
Total equity and liabilities
Note
2016
US$’000
2015
US$’000
7
30,000
30,000
8
—
5,393
5,393
35,393
410
2,624
3,034
33,034
84,000
9
60,000
(50,389) (41,907)
18,093
33,611
10
11
451
140
490
1,642
14,000
—
1,782
14,941
3,611 (11,907)
33,034
35,393
The accompanying notes are an integral part of these consolidated financial statements.
F-115
Nutrition Science Partners Limited
Consolidated Statements of Changes in Equity
For the Years Ended December 31, 2016, 2015 and 2014
Share
capital
US$’000
Share
premium
US$’000
Accumulated
losses
US$’000
Total
equity
US$’000
42,457
(16,812)
—
25,645
Total
equity
US$’000
25,645
(7,552)
18,093
Total
equity
US$’000
18,093
10,000
14,000
(8,482)
33,611
At January 1, 2014
Loss for the year and total comprehensive loss for the year
Transition to no-par value regime on March 3, 2014 (Note 9)
At December 31, 2014
2
—
59,998
60,000
59,998
—
(59,998)
—
(17,543)
(16,812)
—
(34,355)
At January 1, 2015
Loss for the year and total comprehensive loss for the year
At December 31, 2015
At January 1, 2016
Issuance of share capital
Capitalization of shareholder's loans (Note 11)
Loss for the year and total comprehensive loss for the year
At December 31, 2016
Share
capital
US$’000
60,000
-
60,000
Accumulated
losses
US$’000
(34,355)
(7,552)
(41,907)
Share
capital
US$’000
60,000
10,000
14,000
—
84,000
Accumulated
losses
US$’000
(41,907)
—
—
(8,482)
(50,389)
The accompanying notes are an integral part of these consolidated financial statements.
F-116
Nutrition Science Partners Limited
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2016, 2015 and 2014
Cash flows from operating activities
Loss before taxation
Operating loss before working capital changes
Changes in working capital:
Decrease/(increase) in prepayments
Decrease in other payables and accruals
Increase/(decrease) in amounts due to related companies
Net cash used in operating activities
Cash flows from financing activities
Proceeds from issue of shares
Proceeds from shareholders’ loans
Net cash generated from financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at January 1
Cash and cash equivalents at December 31
Analysis of balance of cash and cash equivalents
Bank balance
Non-cash financing activity
Capitalization of shareholders' loans
Note 2016
2015
2014
US$’000 US$’000 US$’000
(8,482)
(8,482)
(7,552) (16,812)
(7,552) (16,812)
410
(311)
1,152
(7,231)
1,889
(1,942)
(20)
(1,475)
(1,905)
(590)
(7,625) (20,782)
9 10,000
—
11
10,000
2,769
2,624
5,393
—
—
10,000
4,000
10,000
4,000
(3,625) (10,782)
17,031
6,249
6,249
2,624
5,393
2,624
6,249
11
14,000
—
—
The accompanying notes are an integral part of these consolidated financial statements.
F-117
Nutrition Science Partners Limited
Notes To The Accounts
1. General information
Nutrition Science Partners Limited (the “Company”) and its subsidiary (together, the “Group”) are principally
engaged in the research and development of pharmaceutical products. The Company was incorporated in Hong Kong on
May 28, 2012 as a limited liability company. The registered office of the Company is located at 22nd Floor, Hutchison
House, 10 Harcourt Road, Hong Kong.
On November 27, 2012, Hutchison MediPharma (Hong Kong) Limited (“HMPHK”), a subsidiary of Hutchison
China MediTech Limited (“Chi-Med”, which together with its subsidiaries, hereinafter collectively referred to as the
“Chi-Med Group”) and Nestlé Health Science S.A. (“NHS”), a subsidiary of Nestlé S.A. (“Nestlé”), entered into a joint
venture agreement (“JV Agreement”). Pursuant to the JV Agreement, Nestlé agreed to contribute cash of US$30,000,000
and the Chi-Med Group agreed to contribute assets and business processes including (i) the global development and
commercial rights of a novel, oral therapy drug candidate for Inflammatory Bowel Disease and (ii) the exclusive rights to
its extensive botanical library and well-established botanical research and development platform in the field of
gastrointestinal disease into the Company. The Company would be jointly owned by HMPHK and NHS having 50% equity
interest each.
These consolidated financial statements are presented in United States dollars (“US$”), unless otherwise stated
and have been approved for issue by the Company’s Board of Directors on March 10, 2017.
2. Summary of significant accounting policies
The consolidated accounts of the Company have been prepared in accordance with International Financial
Reporting Standards (“IFRS”) as issued by International Accounting Standards Board (“IASB”). These consolidated
accounts have been prepared under the historical cost convention.
As of December 31, 2016, the Company has accumulated losses of US$50,389,000 (2015: US$41,907,000) due
to its research and development activities. The company relies on HMPHK and NHS for financial support. In preparing
these consolidated accounts, management, including the directors of the Company, has taken into account all available
information about the foreseeable future, which is at least, but is not limited to, twelve months from the end of the report
issuance date. Management considers a wide range of factors relating to the availability and sufficiency of the Group’s
financial resources to satisfy its working capital and other financing requirements for a reasonable period of time,
including, the progress and results of its new and in-progress research and development projects (“IPR&D projects”), the
Group’s current and expected future financial performance and operating cash flows, availability of loans and other
financial support from shareholders, and potential sources of new funds. HMPHK and NHS have confirmed their intention
to provide financial support to the Company to meet its liabilities as and when they fall due. Accordingly, the Directors
are of the opinion that the Group will be able to meet its liabilities as and when they fall due within the next twelve months
and therefore have prepared these consolidated financial statements on a going concern basis.
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 January 1, 2016. The adoption of these new and revised standards, amendments and
interpretations did not have a material effect on the Group’s results of operations or financial position.
F-118
The following standards, amendments and interpretations were in issue but not yet effective for financial year
ended December 31, 2016 and have not been early adopted by the Group:
IAS 7 (Amendments)(1)
IAS 12 (Amendments)(1)
IAS 40 (Amendments)(2)
IFRS 2 (Amendments)(2)
IFRS 9(2)
IFRS 15(2)
IFRS 15 (Amendments)(2)
Disclosure Initiative
Recognition of Deferred Tax Assets for Unrealized Losses
Transfers of Investment Property
Classification and Measurement of Share-based Payment
Transactions
Financial Instruments
Revenue from Contracts with Customers
Revenue from Contracts with Customers
IFRS 10 and IAS 28 (Amendments)(4)
IFRS 16(3)
IFRIC Interpretation 22(2)
Annual Improvements 2014-2016(1) (2)
Sale or Contribution of Assets between an Investor and its Associate
or Joint Venture
Leases
Foreign Currency Transactions and Advance Consideration
Improvements to IFRSs
(1)
(2)
(3)
(4)
Effective for the Group for annual periods beginning on or after January 1, 2017.
Effective for the Group for annual periods beginning on or after January 1, 2018.
Effective for the Group for annual periods beginning on or after January 1, 2019.
In December 2015, the IASB postponed the effective date of this amendment indefinitely pending the outcome of
its research project on the equity method of accounting.
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 financial position.
(a) Basis of consolidation
The consolidated accounts of the Group include the accounts of the Company and its subsidiary. The accounts of
the subsidiary is prepared for the same reporting period as the Company, using consistent accounting policies. The results
of the subsidiary are consolidated from the date on which the Group obtained control, and will continue to be consolidated
until the date that such control ceases. All intra-group assets and liabilities, equity, income, expenses and cash flows
relating to transactions between members of the Group are eliminated in full on consolidation.
(b) Subsidiary
The subsidiary is an entity over which the Group has control. The Group controls an entity when the Group is
exposed to, or has rights to variable returns from its involvement with the entity and has the ability to affect those returns
through its power over the entity. In the consolidated accounts, the subsidiary is accounted for as described in
Note 2(a) above.
(c) 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 consolidated accounts are presented
in US$, which is the Company’s functional and presentation currency.
(d) Segment information
The Group has one reporting segment which is research and development. All segment assets are located in Hong
Kong. The Group’s chief operating decision-makers review the consolidated results of the Group for the purposes of
resource allocation and performance assessment. Therefore, no additional reportable segment and geographical
information has been presented.
F-119
(e) Related parties
A party is considered to be related to the Group if:
(a)
the party is a person or a close member of that person’s family and that person
(i)
has control or joint control over the Group;
(ii) has significant influence over the Group; or
(iii) is a member of the key management personnel of the Group or of a parent of the Group; or
(b)
the party is an entity where any of the following conditions applies:
(i)
the entity and the Group are members of the same group;
(ii) one entity is an associate or joint venture of the other entity (or of a parent, subsidiary or fellow
subsidiary of the other entity);
(iii) the entity and the Group are joint ventures of the same third party;
(iv) one entity is a joint venture of a third entity and the other entity is an associate of the third entity;
(v)
the entity is a post-employment benefit plan for the benefit of employees of either the Group or an
entity related to the Group;
(vi) the entity is controlled or jointly controlled by a person identified in (a); and
(vii) a person identified in (a)(i) has significant influence over the entity or is a member of the key
management personnel of the entity (or of a parent of the entity).
(f) Financial assets
Initial recognition and measurement
Financial assets of the Group are classified, at initial recognition, as loans and receivables. When financial assets
are recognized initially, they are measured at fair value plus any transaction costs that are attributable to the acquisition of
the financial assets.
All regular way purchases and sales of financial assets are recognized on the trade date, that is, the date that the
Group commits to purchase or sell the asset. Regular way purchases or sales are purchases or sales of financial assets that
require delivery of assets within the period generally established by regulation or convention in the marketplace.
Subsequent measurement of loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted
in an active market. After initial measurement, such assets are subsequently measured at amortized cost using the effective
interest method less any allowance for impairment. Amortized cost is calculated by taking into account any discount or
premium on acquisition and includes fees or costs that are an integral part of the effective interest rate. The effective
interest rate amortization and the loss arising from impairment are recognized in the consolidated income statements.
(g) Impairment of financial assets
The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset
or a group of financial assets are impaired. An impairment exists if one or more events that occurred after the initial
recognition of the asset have an impact on the estimated future cash flows of the financial asset or the group of financial
assets that can be reliably estimated. Evidence of impairment may include indications that a debtor or a group of debtors
is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that
F-120
they will enter bankruptcy or other financial reorganization and observable data indicating that there is a measurable
decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.
Financial assets carried at amortized cost
For financial assets carried at amortized cost, the Group first assesses whether impairment exists individually for
financial assets that are individually significant, or collectively for financial assets that are not individually significant. If
the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether
significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively
assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is,
or continues to be, recognized are not included in a collective assessment of impairment.
The amount of any impairment loss identified is measured as the difference between the asset’s carrying amount
and the present value of estimated future cash flows (excluding future credit losses that have not yet been incurred). The
present value of the estimated future cash flows is discounted at the financial asset’s original effective interest rate (i.e., the
effective interest rate computed at initial recognition).
The carrying amount of the asset is reduced through the use of an allowance account and the loss is recognized
in the consolidated income statements. Interest income continues to be accrued on the reduced carrying amount and is
accrued using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.
Loans and receivables together with any associated allowance are written off when there is no realistic prospect of future
recovery and all collateral has been realized or has been transferred to the Group.
If, in a subsequent period, the amount of the estimated impairment loss increases or decreases because of an event
occurring after the impairment was recognized, the previously recognized impairment loss is increased or reduced by
adjusting the allowance account. If a write-off is later recovered, the recovery is credited to the consolidated income
statements.
(h) Borrowings
Borrowings are recognized initially at fair value, net of transaction costs incurred. Borrowings are subsequently
stated at amortized cost; any difference between the proceeds (net of transaction costs) and the redemption value is
recognized in the consolidated income statements over the period of the borrowings using the effective interest method.
(i) Cash and cash equivalents
In the consolidated statements of cash flows, cash and cash equivalents comprise cash at bank.
(j) Provisions
Provisions are recognized when the Group has a present legal or constructive obligation as a result of past events;
it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably
estimated. Provisions are not recognized for future operating losses.
(k) Intangible assets
Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets
acquired in a business combination is its fair value at the date of acquisition. The useful lives of intangible assets are
assessed to be either finite or indefinite. Intangible assets with finite lives are subsequently amortized over the useful
economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The
amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at least
annually. The Group has no intangible assets with indefinite lives.
Research and development costs
All research costs are charged to the consolidated income statements as incurred.
F-121
Expenditures incurred on projects to develop new products is capitalized and deferred only when the Group can
demonstrate the technical feasibility of completing the intangible asset so that it will be available for use or sale, its
intention to complete and its ability to use or sell the asset, how the asset will generate future economic benefits, the
availability of resources to complete the project and the ability to measure reliably the expenditure during the development.
Product development expenditures which does not meet these criteria are expensed when incurred.
(l) Income tax
The current tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance
sheet date in the countries where the Company and its subsidiary 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 and establish provisions where appropriate on the basis of amounts expected to be paid to the tax
authorities.
3. Financial risk management
(a) Financial risk factors
The Group’s activities expose it to a variety of financial risks, including credit risk and liquidity risk. The Group
does not use any derivative financial instruments for speculative purpose.
(i) Credit risk
The carrying amounts of cash and cash equivalents included in the consolidated statements of financial position
represent the Group’s maximum exposure to credit risk of the counterparty in relation to its financial asset. The Group’s
bank balance is maintained with a creditworthy bank with no recent history of default.
(ii) Liquidity risk
The Group’s objective is to maintain a balance between continuity of funding and flexibility through balances
with related companies and shareholders.
As at December 31, 2016 and 2015, the Group’s current financial liabilities were all contractually due for
settlement within twelve months.
(b) Capital management
The primary objectives of the Group’s capital management are to safeguard the Group’s ability to continue as a
going concern.
The Group manages its capital structure and makes adjustments to it in light of changes in economic conditions
and the risk characteristics of the underlying assets. To maintain or adjust the capital structure, the Group may issue new
shares. The Group is not subject to any externally imposed capital requirements. No changes were made to these
objectives, policies or processes for managing capital during the years ended December 31, 2016, 2015 and 2014.
(c) Fair value estimation
The fair values of the financial asset and liabilities of the Group approximate their carrying amounts largely due
to the short term maturities of these instruments.
4. Critical accounting estimates and judgements
Note 2 includes a summary of the significant accounting policies used in the preparation of the consolidated
accounts. The preparation of the consolidated accounts often requires the use of judgements to select specific accounting
methods and policies from several acceptable alternatives. Furthermore, significant estimates and assumptions concerning
the future may be required in selecting and applying those methods and policies in the accounts. The Group bases its
F-122
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 significant assumptions and estimates, as well as the accounting policies
and methods used in the preparation of the accounts.
(i) Impairment of intangible assets
The Group tests annually whether intangible assets not ready for use have incurred any impairment. Assets are
reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets
exceeds its recoverable amount in accordance with the accounting policy stated in Note 2(k). 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 flows
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 flow projections which has been prepared on the basis of management’s assumptions
and estimates.
The Group has adopted an income approach to determine the value-in-use of the intangible assets, which applies
a probability weighting that considers the risk of development and commercialization to the estimated future net cash
flows that are derived from projected revenues and estimated costs. These projections are based on factors such as relevant
market size, patent protection, probability of success rate, expected timing of commercialization and industry trends. The
estimated future net cash flows are then discounted to the present value using an appropriate discount rate. Key
assumptions and sensitivities are disclosed in Note 7.
5. Taxation
No Hong Kong profits tax has been provided as the Group had no assessable profit for the years ended December
31, 2016, 2015 and 2014.
The taxation on the Group’s loss before taxation differs from the theoretical account that would arise using the
applicable tax rate as follows:
Loss before taxation
Calculated at a taxation rate of 16.5%
(2015 and 2014: 16.5%)
Tax effect of expenses not deductible for
tax
Taxation
6. Directors’ emoluments
2016
(US$’000)
Year Ended
December 31,
2015
(US$’000)
2014
(US$’000)
(8,482)
(7,552)
(16,812)
(1,400)
(1,246)
(2,774)
1,400
—
1,246
—
2,774
—
None of the directors received any fees or emoluments from the Group in respect of their services rendered to the
Group during the years ended December 31, 2016, 2015 and 2014.
F-123
7. Intangible assets
December 31, 2016
Cost at January 1, 2016 and December 31, 2016
December 31, 2015
Cost at January 1, 2015 and December 31, 2015
Impairment test for intangible assets
IPR&D
projects and
others
(US$’000)
30,000
30,000
The recoverable amount of the intangible asset is determined based on a value-in-use calculation. The calculation
uses cash flow projections based on projected revenues and estimated costs. The projections are based on factors such as
projected market size and market share, probability of success rate, timing of commercialization and estimated useful life
of the underlying assets. The size of the projected market and the projected market share for the drug has not changed
significantly between 2015 and 2016. However, based on the latest development plans which includes developing an
enhanced version of the drug with higher potential efficacy, the Company expects commercialization to occur in 2023 and
new patent protections to extend the period of projected cash flows. The probability of success has also been updated based
on industry historical success rates and factoring in the longer time to commercialization. The discount rate used of 20.37%
(2015: 19.53%) is derived from a capital asset pricing model using data from the markets. The budgeted revenues and
costs are determined by management based on the most recent development plan of the project and its expectation of
market development. Reasonably probable changes in any key assumptions disclosed in the sensitivity table would not
cause the carrying amount of the intangible asset to exceed the recoverable amount.
The key assumptions used in the value-in-use calculation are as follows:
Key assumptions
Projected market size
Projected market share
Probability of success rate (Phase III)
Period of projected cash flows
Headroom
2016
US$10 billion
10% of projected market size
61%
24 years
US$9 million
2015
US$10 billion
10% of projected market size
65%
17 years
US$7 million
The Company prepared the financial budgets taking into account actual and prior year performance and market
development expectations. Judgement is required to determine key assumptions adopted in the cash flow projections.
The sensitivity of the value-in-use of the intangible assets to the changes in key assumptions is:
Change in
assumption
Impact on the value(cid:827)in(cid:827)use of the intangible assets
Increase in assumption
2016
2015
Decrease in assumption
2016
2015
—Market size
5%
Increase by 13 %
Increase by 13 % Decrease by 12 % Decrease by 19 %
—Probability
of success
rate
2%
Increase by 13 %
Increase by 13 % Decrease by 14 % Decrease by 12 %
—Discount rate
1% point
Decrease by 16 % Decrease by 18 %
Increase by 18 %
Increase by 20 %
F-124
8. Cash and cash equivalents
Cash at bank
December 31,
2016
2015
(US$’000) (US$’000)
2,624
5,393
The carrying amounts of the cash and cash equivalents are denominated in US$.
9. Share capital
2016
Number of
shares
2015
Number of
(US$’000) shares
(US$’000)
2014
Number of
shares
(US$’000)
Issued and fully paid:
Ordinary shares
At January 1
Issue of shares (note (ii))
Capitalization of shareholders' loan (Note 11)
Translation to no-par value regime on March 3, 2014 (note (i))
At December 31
Share capital as at December 31
Notes:
20,000
20,000
2,000
—
42,000
60,000
10,000
14,000
—
84,000
84,000
20,000
—
—
—
20,000
60,000
—
—
—
60,000
60,000
20,000
—
—
—
20,000
2
—
—
59,998
60,000
60,000
(i) In accordance with section 135 of the Hong Kong Companies Ordinance (Cap. 622), the Company’s shares no longer
have a par or nominal value with effect from March 3, 2014. There is no impact on the number of shares in issue or
the relative entitlement of any of the shareholders of the Company as a result of this transition. In accordance with the
transitional provisions set out in section 37 of Schedule 11 to the Hong Kong Companies Ordinance (Cap. 622) on
March 3, 2014, the amounts standing to the credit of the share premium account have become part of the Company’s
share capital.
(ii) On March 30, 2016, 20,000 additional ordinary shares of US$500 each were issued at a total cash consideration of
US$10,000,000. They are issued equally to the two existing shareholders.
10. Amounts due to related companies
The amounts due to related companies are unsecured, interest-free and repayable on demand.
11. Shareholders’ loans
The shareholders’ loans of US$5,000,000 each, totalling US$10,000,000 were unsecured, interest-bearing (with
immediate waiver of interest) and with an original maturity date of June 9, 2015, which is subject to extension from time
to time by written consent from shareholders at the request of the Company. The loan agreement was renewed on
August 24, 2015, with an effective date of June 9, 2015, and the maturity date extended to June 9, 2016.
On August 24, 2015, the shareholders have provided a further loan of US$2,000,000 each, totalling
US$4,000,000. The loans are unsecured, interest-bearing (with immediate waiver of interest) and with a maturity date of
August 23, 2016, which is subject to extension from time to time by written consent from shareholders at the request of
the Company.
In June 2016, shareholders’ loans of US$14,000,000 in aggregate were waived and capitalized as share capital of
the Company.
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12. Significant related party transactions
(a)
Save as disclosed above, the Group has the following significant transactions during the years with related parties
which were carried out in the normal course of business at terms equivalent to those that prevail in arm’s length
transactions and agreed by the relevant parties:
Year Ended
December 31,
2015
2014
2016
Service fees charged by a subsidiary of Chi-Med (note)
Service fees charged by an affiliate of NHS
Note:
(US$’000) (US$’000) (US$’000)
4,191
403
4,594
5,099
613
5,712
8,123
—
8,123
On March 25, 2013, Hutchison MediPharma Limited (“HMP”), a subsidiary of Chi-Med, and NHS entered
into a research and development collaboration agreement as contemplated by the JV Agreement for the
exclusive rights to conduct research to evaluate and develop products from HMP’s extensive botanical library
and well established botanical research and development platform in the field of gastrointestinal disease.
The Company will own the right to any products arising from the future research and development. HMP and
NHS will provide the necessary services and employees in order to facilitate the Company with the on-going
research activities. HMP and NHS will be remunerated by a fee paid by the Company for the services and
staff provided.
The agreement will end on December 31, 2022, until which time the Company is required to spend a minimum
of US$500,000 in each calendar year on research activities.
(b)
Other transaction with related party:
On March 25, 2013, the Company and Nestec Ltd., an affiliate of NHS, entered into an option agreement for the
exclusive option to obtain exclusive royalty-bearing licenses to commercialize certain products in certain territories. The
exercise price of the option is either fixed or subject to negotiation upon the receipt of the exercise notice, depending on
the territories. The value of the option is considered as negligible on day one. Because the option is not a derivative, it
would not be subject to fair value remeasurement in the subsequent periods. As of December 31, 2016, the option has not
been exercised.
(c)
Compensation of key management personnel of the Group:
No compensation was paid by the Group to the key management personnel of the Group in respect of their
services rendered to the Group during the years ended December 31, 2016, 2015 and 2014.
13. Financial instruments by category
Financial asset
The carrying amount of the Group’s financial asset, comprising cash and cash equivalents, which is categorized
as loans and receivables, amounted to US$5,393,000 as at December 31, 2016 (2015: US$2,624,000).
Financial liabilities
The aggregate carrying amount of the Group’s financial liabilities, including other payables and accruals,
shareholders’ loans and amounts due to related companies, which are categorized as financial liabilities at amortized cost,
amounted to US$1,782,000 as at December 31, 2016 (2015: US$14,941,000).
F-126
14. Subsidiary
Name
Nutrition Science Partners
(UK) Limited
15. Subsequent event
Place of
establishment
and
operation
Nominal value
of issued
ordinary share
capital in GBP
As at December 31,
Equity interest
attributable to
the Group
As at December 31,
2016
2015
2016
2015
United Kingdom
1
1
100%
100%
Type of
legal entity
Principal
activity
Limited liability
company
Inactive
On February 22, 2017, 7,000 additional ordinary shares of US$2,000 each were issued at a total consideration
of US$14,000,000. They were issued equally to the two existing shareholders.
F-127
Information For Shareholders
Listing
The ordinary shares of the Company are listed on AIM regulated by the London Stock
Exchange and in the form of American depositary shares (“ADSs”) on the Nasdaq
Stock Market. Each ADS represents ownership of one-half of one ordinary share of
the Company. Additional information and specific enquiries concerning the ADSs
should be directed to the ADS Depositary at the address given on this page.
April 26, 2017 to April 27, 2017
April 27, 2017
August 2017
Code
HCM
Financial Calendar
Closure of Register of Members
Annual General Meeting
Interim Results Announcement
Registered Office
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 Office
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)370 707 4040
+44 (0)370 873 5851
CREST Depositary
Computershare Investor Services PLC
The Pavilions
Bridgwater Road
Bristol BS99 6ZY
United Kingdom
Telephone:
Facsimile:
+44 (0)370 702 0000
+44 (0)370 703 6114
ADS Depositary
Deutsche Bank Trust Company Americas
60 Wall Street, New York
New York 10005
United States
Telephone:
Facsimile:
+001 212 250 9100
+001 732 544 6346
Shareholders Contact
Please direct enquiries to:
22nd Floor, Hutchison House
10 Harcourt Road
Hong Kong
Attn:
E-mail:
Facsimile:
Edith Shih
Non-executive Director & Company Secretary
ediths@ckh.com.hk
+852 2128 1778
Investor Information
Corporate press releases, financial 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
References
Unless the context requires otherwise, references in this Annual Report to the “Group,” the “Company,” “Chi-Med,” “Chi-Med Group,” “we,” “us” and “our” mean Hutchison China MediTech Limited and its
consolidated subsidiaries and joint ventures unless otherwise stated or indicated by context.
Past Performance and Forward-Looking Statements
The performance and results of operations of the Group contained within this Annual Report are historical in nature, and past performance is no guarantee of future results of the Group. This Annual Report contains
forward-looking statements within the meaning of the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by words like “will,”
“expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” “pipeline,” “could,” “potential,” “believe,” “first-in-class,” “best-in-class,” “designed to,” “objective,” “guidance,” “pursue,” or similar terms,
or by express or implied discussions regarding potential drug candidates, potential indications for drug candidates or by discussions of strategy, plans, expectations or intentions. You should not place undue
reliance on these statements. Such forward-looking statements are based on the current beliefs and expectations of management regarding future events, and are subject to significant known and unknown
risks and uncertainties. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those set forth in the forward-
looking statements. There can be no guarantee that any of our drug candidates will be approved for sale in any market, or that any approvals which are obtained will be obtained at any particular time, or that
any such drug candidates will achieve any particular revenue or net income levels. In particular, management’s expectations could be affected by, among other things: unexpected regulatory actions or delays or
government regulation generally; the uncertainties inherent in research and development, including the inability to meet our key study assumptions regarding enrollment rates, timing and availability of subjects
meeting a study’s inclusion and exclusion criteria and funding requirements, changes to clinical protocols, unexpected adverse events or safety, quality or manufacturing issues; the inability of a drug candidate
to meet the primary or secondary endpoint of a study; the inability of a drug candidate to obtain regulatory approval in different jurisdictions or gain commercial acceptance after obtaining regulatory approval;
global trends toward health care cost containment, including ongoing pricing pressures; uncertainties regarding actual or potential legal proceedings, including, among others, actual or potential product liability
litigation, litigation and investigations regarding sales and marketing practices, intellectual property disputes, and government investigations generally; and general economic and industry conditions, including
uncertainties regarding the effects of the persistently weak economic and financial environment in many countries and uncertainties regarding future global exchange rates. For further discussion of these and
other risks, see Chi-Med’s filings with the U.S. Securities and Exchange Commission and on AIM. Chi-Med is providing the information in this Annual Report as of this date and does not undertake any obligation to
update any forward-looking statements as a result of new information, future events or otherwise.
In addition, this Annual Report contains statistical data and estimates that Chi-Med obtained from industry publications and reports generated by third-party market research firms, including Frost & Sullivan,
an independent market research firm, and publicly available data. All patient population, market size and market share estimates are based on Frost & Sullivan research, unless otherwise noted. Although Chi-
Med believes that the publications, reports and surveys are reliable, Chi-Med has not independently verified the data. Such data involves risks and uncertainties and are subject to change based on various
factors, including those discussed above.
(Incorporated in the Cayman Islands with limited liability)
2016 Annual Report
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