(Incorporated in the Cayman Islands with limited liability)
2017 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
Tony MOK
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
Chief Scientific Officer
Non-executive Directors
Dan ELDAR, BA, MA, MA, PhD
Edith SHIH, BSE, MA, MA, EdM, Solicitor, FCIS, FCS(PE)
Independent Non-executive Directors
Paul CARTER, BA, FCMA
Senior Independent Director
Karen FERRANTE, MD, BSc
Graeme JACK, BCom, CA (ANZ), FHKICPA
Tony MOK*, BMSc, MD, FRCPC, FHKCP, FHKAM, FRCP, FASCO
AUDIT COMMITTEE
Graeme JACK (Chairman)
Paul CARTER
Karen FERRANTE
*Appointed on October 12, 2017
Contents
Section
Corporate Information
2017 At a Glance
Highlights
Potential Milestones Targeted for 2018
Chairman’s Statement
Financial Review
Operations Review
Innovation Platform
Commercial Platform
Biographical Details of Directors
Report of the Directors
Corporate Governance Report
Form 20-F (with certain items or sub-items highlighted below)
Introduction
Risk Factors
History and Development of the Company
Our Organizational Structure
Business Overview
Operating and Financial Review and Prospects
Directors, Senior Management and Employees
Major Shareholders and Related Party Transactions
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217
Consolidated Financial Statements
F-1 to F-129
Information for Shareholders
2017 At a Glance
A Risk-balanced Global-focused Biopharmaceutical Company
Innovation Platform
Deep late-stage pipeline
Commercial Platform
Solid cash flow from operations
Group
Year of major progress; results in line with guidance
Group revenue up 12% to $241.2 million (2016: $216.1m);
Net loss attributable to Chi-Med $26.7 million (2016: Net profit $11.7m), including
$88.0 million in research and development expenses on an adjusted (non-GAAP) basis
(2016: $76.1m).
Strengthened cash position: Expected to be sufficient to accelerate
and broaden pipeline into 2020
Cash resources of $479.6 million at Group level as of December 31, 2017 ($173.7m
as of December 31, 2016), including cash and cash equivalents, short-term
investments and unutilized bank facilities;
Completed Nasdaq follow-on offering, raising net proceeds of $292.7 million in
late 2017.
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HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
Innovation Platform
2017 At a Glance
Submitted first China New Drug Application (“NDA”) on fruquintinib;
initiated first global Phase III registration study on savolitinib; five
other pivotal Phase III studies underway and more preparing to
start; and discovery engine aiming to produce 1-2 novel clinical
drug candidates per year
Deep clinical pipeline of novel small molecule tyrosine kinase inhibitors (“TKIs”):
Eight clinical drug candidates now in active or completing clinical trials in 36 target
patient populations (“TPP”) (2016: 30) around the world; over 3,500 subjects dosed
in trials to date, over 700 in 2017;
Stream of second-generation immunotherapy compounds advancing through pre-
clinical development.
Savolitinib – Highly selective TKI of the mesenchymal epithelial
transition factor (“c-MET”) – Global Phase III studies underway
or in planning in kidney and lung cancers with Phase I/Ib
studies in over a dozen exploratory TPPs in multiple further
cancer indications:
Presented positive Phase Ib/II data in second- and third-line non-small cell lung
cancer (“NSCLC”), combination of savolitinib and Tagrisso® or Iressa® at the 2017
World Conference on Lung Cancer (“WCLC”); AstraZeneca AB (publ) (“AstraZeneca”)
have now agreed to proceed with development in second-line NSCLC with the
initiation of multiple studies including a global randomized, chemotherapy-doublet
controlled study of savolitinib plus Tagrisso® in first-generation epidermal growth
factor receptor (“EGFR”)-TKI refractory, c-MET gene amplified, T790M negative
NSCLC patients;
Presented positive Phase II data in c-MET-driven papillary renal cell carcinoma
(“PRCC”) at the ASCO Genitourinary Cancers Symposium; then initiated global Phase
III study, the SAVOIR study, in c-MET-driven PRCC in a head-to-head comparison with
current standard therapy Sutent® (sunitinib), the first Phase III study ever conducted
with molecularly selected patients in renal cell carcinoma (“RCC”).
HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
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2017 At a Glance
Fruquintinib – Highly selective TKI of vascular endothelial growth
factor receptor (“VEGFR”) 1/2/3 – Likely to be Chi-Med’s first China
Food and Drug Administration (“CFDA”)-approved TKI, Phase III
studies in colorectal cancer (“CRC”), lung and gastric cancers in
China either complete or enrolling and global development
now underway:
Positive outcome in Phase III study, the FRESCO study, in third-line CRC patients
in China; 2017 American Society of Clinical Oncology (“ASCO”) oral presentation;
potentially best-in-class in terms of both efficacy and safety relative to Stivarga®
(regorafenib); NDA submitted to the Center for Drug Evaluation of the CFDA in June
2017 and technical reviews and inspections are ongoing;
Completed enrollment in early 2018 of a 527 patient Phase III study, the FALUCA
study, in third-line NSCLC in China;
Presented positive Phase Ib data, at the 2017 ASCO Gastrointestinal Cancers
Symposium, for fruquintinib in combination with Taxol® (paclitaxel) in second-line
gastric cancer; then initiated the FRUTIGA study, an over 500 patient Phase III study
in China;
Initiated Phase I development of fruquintinib in the United States in late 2017.
In addition, presented positive preliminary proof-of-concept
efficacy and safety data on multiple drug candidates over last
year, including:
Savolitinib in c-MET-driven gastric cancer;
Fruquintinib in combination with Iressa® in first-line EGFR mutation positive NSCLC;
Sulfatinib against VEGFR, fibroblast growth factor receptor 1/2/3 (“FGFR”) and colony
stimulating factor 1 receptor (“CSF-1R”), in neuroendocrine tumors (“NET”) as well as
thyroid cancer;
Theliatinib in EGFR wild-type esophageal cancer.
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HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
2017 At a Glance
Initiated early/proof-of-concept development on multiple drug
candidates over last year, including:
Savolitinib in combination with Imfinzi® (durvalumab), AstraZeneca’s anti-
programmed death-ligand 1 (“PD-L1”) antibody – Phase II in PRCC and clear cell renal
cell carcinoma (“ccRCC”) in Europe;
Savolitinib – Phase II study in pulmonary sarcomatoid carcinoma in China;
Savolitinib – Phase II study in prostate cancer in Canada;
Sulfatinib – Phase II in second-line biliary tract cancer in China;
Epitinib – Phase Ib/II in EGFR gene amplified glioblastoma in China;
HMPL-523 against spleen tyrosine kinase (“Syk”) – Phase I in hematological cancer
in China;
HMPL-453 against FGFR 1/2/3 – Phase I in all comer solid tumors in Australia
and China;
HMPL-689 against phosphoinositide 3-kinase delta (“PI3Kδ”) – Phase I in
hematological cancer in China;
Theliatinib against EGFR wild-type – Phase Ib in esophageal cancer in China.
Commercial Platform
High-performance drug marketing and distribution platform
covers ~300 cities/towns in China with approximately 3,300 sales
people. High-value products and household-name brands
Total consolidated sales up 13% to $205.2 million (2016: $180.9m);
Total sales of non-consolidated joint ventures up 6% to $472.0 million
(2016: $446.5m);
Total consolidated net income attributable to Chi-Med up 25% to $37.5
million (2016: $29.9m) on an adjusted (non-GAAP) basis which excludes
one-time gains.
HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
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Highlights
Innovation Platform – a deep, broad, and risk-balanced global oncology/immunology pipeline.
Consolidated revenue from our Innovation Platform was $36.0 million (2016: $35.2m) from milestone payments from Eli Lilly and
Company (“Lilly”) (fruquintinib NDA filing) and AstraZeneca (savolitinib Phase III initiation) and service fee payments from Lilly,
AstraZeneca and Nutrition Science Partners Limited (“NSP”), our 50/50 joint venture with Nestlé Health Science S.A. (“Nestlé”). Net
loss attributable to Chi-Med from our Innovation Platform of $51.9 million (2016: -$40.7m) primarily driven by $75.5 million (2016:
$66.9m) in research and development expenses, or $88.0 million (2016: $76.1m) on an adjusted (non-GAAP) basis, spent on our
active or completing clinical trials in 36 TPPs, six of which are pivotal Phase III studies on savolitinib, fruquintinib, and sulfatinib.
Savolitinib: Potential first-in-class selective c-MET inhibitor currently in active clinical studies in 14 TPPs worldwide in multiple
tumor types including kidney, lung, gastric and prostate cancers as a monotherapy or in combination with other targeted and
immunotherapy agents. Developing globally in partnership with AstraZeneca:
1.
Kidney cancer:
a.
b.
c.
Presented Phase II global multi-center study in advanced PRCC at the 2017 ASCO Genitourinary Cancers Symposium
showing robust efficacy with savolitinib monotherapy in c-MET-driven patients. Median progression free survival
(“PFS”) of 6.2 months in patients with c-MET-driven tumors 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, based on confirmed partial responses (“PRs”). Encouraging durable response and a tolerable
safety profile were reported in savolitinib treated patients. The full article has now been published in the September
2017 issue of the Journal of Clinical Oncology.
A global Phase III study, the SAVOIR study, was initiated in late June 2017. The SAVOIR study is an open-label,
randomized, controlled trial evaluating the efficacy and safety of savolitinib, compared with Sutent®, in patients with
c-MET-driven, unresectable, locally advanced or metastatic PRCC. Approximately 180 patients will be randomized in
the United States, Europe, Asia and Latin America; c-MET-driven PRCC will be selected via the use of a companion
diagnostic kit.
During 2017, the CALYPSO study confirmed a safe dose of savolitinib in combination with Imfinzi® (PD-L1 antibody)
in RCC patients. Subsequently, a Phase II expansion of CALYPSO was initiated, in both PRCC and ccRCC in the U.K.
and Spain.
2.
Lung cancer:
a.
Presented Phase Ib/II data, the TATTON (Part B) study, in second- and third-line NSCLC, combination of the savolitinib
600mg once-daily (“QD”) plus Tagrisso® 80mg QD combination dose regimen at the 2017 WCLC. In c-MET gene
amplified NSCLC patients refractory to first-generation EGFR TKIs (Iressa®/Tarceva®) confirmed PRs were reported
in 14/23 (ORR 61%) of T790M mutation negative patients, as well as confirmed PRs in 6/11 (55% ORR) of T790M
mutation positive patients. In NSCLC patients refractory to third-generation EGFR TKIs (primarily Tagrisso®) confirmed
PRs were observed in 10/30 (ORR 33%) patients. Since 2017 WCLC, both PFS and duration of response (“DoR”) have
further matured. The safety profile of savolitinib plus Tagrisso® is in line with previous reports and going forward,
AstraZeneca has concluded that a weight-based dosing algorithm will be applied for the combination.
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HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
Highlights
AstraZeneca has now agreed to proceed with development in second-line NSCLC with multiple studies including:
(1) a global randomized chemotherapy-doublet (platinum plus Alimta® (pemetrexed)) controlled study of savolitinib
plus Tagrisso® combination in first-generation (Iressa®/Tarceva®) EGFR-TKI refractory, c-MET gene amplified, T790M
negative NSCLC patients, targeted to start in H2 2018; (2) TATTON (Part D), already enrolling, a study of savolitinib
300mg QD combined with Tagrisso® 80mg QD, aimed at exploring the lower dose in the context of maximizing
long-term tolerability of the savolitinib and Tagrisso® combination for patients who could be on the combination
for long periods of time; and (3) further supporting studies. We expect that later in 2018 or early 2019, the mature
TATTON (Part B) and preliminary TATTON (Part D) data will enable AstraZeneca to engage in regulatory discussion
for both second- and third-line NSCLC.
b.
Presented Phase Ib/II data in second-line NSCLC, combination of savolitinib and Iressa® at the 2017 WCLC. In c-MET
gene amplified NSCLC patients refractory to first-generation EGFR TKIs (Iressa® and Tarceva®) confirmed PRs were
reported in 12/23 (ORR 52%) of T790M mutation negative patients, similar to that recorded by the savolitinib and
Tagrisso® combination. Plans for a registration study in China for this combination are currently under discussion
with AstraZeneca.
3.
Gastric cancer:
a.
As at the latest report in 2017, Phase II studies in China and South Korea had screened over 850 gastric cancer
patients, enrolled 54 c-Met-driven patients (31 China and 23 South Korea) and continue to enroll. Presented preliminary
China savolitinib monotherapy data at the 2017 Chinese Society of Clinical Oncology (“CSCO”) conference. Based
on confirmed and unconfirmed PRs, we reported an ORR of 43% (3/7 patients) and disease control rate (“DCR”) of
86% in c-MET gene amplified patients.
Fruquintinib: Designed to be a best-in-class selective inhibitor of VEGFR 1/2/3 – we are developing outside of China and in
partnership with Lilly within China:
1.
2.
3.
CRC (third-line): Reported in March 2017 that fruquintinib met the primary endpoint of median overall survival (“OS”),
9.30 months versus 6.57 months (p<0.001), and all secondary endpoints in the FRESCO Phase III study as a monotherapy
among third-line CRC patients in China; and further that the adverse events (“AEs”) demonstrated in FRESCO did not identify
any new or unexpected safety issues; then presented the full FRESCO data-set in an oral presentation at the 2017 ASCO
and CSCO conferences and completed submission of our China NDA in June 2017.
NSCLC (third-line): Completed enrollment in early 2018 of a 527 patient Phase III study, named FALUCA, with a primary
endpoint of OS, to evaluate fruquintinib as a monotherapy in third-line NSCLC patients in China; expect top-line Phase III
data to be reported in late 2018.
Gastric cancer (second-line): Presented positive preliminary data in the Phase Ib dose finding/expansion study in early
2017 at the ASCO Gastrointestinal Cancers Symposium. Established a well-tolerated combination dose of fruquintinib with
Taxol® with encouraging efficacy, including ORR of 36% based on confirmed PRs; DCR of 68%; ≥16 week PFS of 50% and
≥7 month OS of 50%. In late 2017, we initiated the FRUTIGA study, a randomized, double-blind, Phase III study in which
we target to enroll over 500 patients.
HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
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Highlights
4.
5.
6.
NSCLC (first-line): In early 2017, we initiated a Phase II study of fruquintinib in combination with Iressa® in first-line NSCLC
patients with EGFR activating mutations in China. Preliminary data was presented at the 2017 WCLC in which 17 efficacy
evaluable patients showed an ORR of 76% (13/17 including 4 unconfirmed at data cut-off) and a DCR of 100% (17/17).
There were no serious AEs or those that led to death. We have now completed enrollment of about 50 patients and are
monitoring outcome.
In December 2017, we initiated a multi-center, open-label, Phase I clinical study to evaluate the safety, tolerability and
pharmacokinetics (“PK”) of fruquintinib in the United States, which is the first step toward development of fruquintinib
outside China.
Production facility in Suzhou, China operated by Chi-Med is now ready to support the commercial launch of fruquintinib, if
approved, in 2018. The Suzhou facility is now entering the CFDA Pre-Approval Inspection (“PAI”) and Good Manufacturing
Practice (“GMP”) certification stage of the NDA process.
Sulfatinib: A unique angio-immuno TKI 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 as well as
multiple Phase II studies:
1.
NET and Biliary tract cancer:
a.
b.
c.
Presented positive preliminary Phase II data at the European Neuroendocrine Tumor Society (“ENETS”) conference
in early 2017. Established that sulfatinib was well tolerated with highly encouraging efficacy in both pancreatic NET
(ORR 17.1% based on confirmed PRs; DCR 90.2%; and median PFS 19.4 months) and non-pancreatic NET (ORR 15.0%
based on confirmed PRs; DCR 92.5%; and median PFS 13.4 months), including 100% DCR in 12 patients who had
disease progression on targeted therapies such as Sutent® 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 of median PFS and expected to complete enrollment in 2019.
Initiated a Phase II proof-of-concept study in biliary tract cancer in China in early 2017.
U.S. Phase I study has confirmed the recommended Phase II dose (“RP2D”). Planning is now underway for expansion
in the United States into a multi-arm Phase IIa study to explore efficacy and safety in Sutent® and Afinitor® refractory
pancreatic NET patients as well as solid tumor patients.
2.
Thyroid cancer: Presented Phase II data at ASCO and at the American Thyroid Association Annual Meetings in 2017 in
patients with locally advanced or metastatic radioactive iodine (“RAI”)-refractory differentiated thyroid cancer (“DTC”)
or medullary thyroid cancer (“MTC”) in China. Preliminary data in 16 efficacy evaluable patients showing an ORR of
30.0% in RAI-DTC and an ORR of 16.7% in MTC patients based on confirmed PRs, with all other patients reporting stable
disease (“SD”).
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HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
Highlights
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: Epitinib has been shown to be well tolerated with encouraging preliminary efficacy. Including
confirmed and unconfirmed PRs, epitinib showed an overall ORR (lung and brain) of 62% in all EGFR TKI naïve NSCLC
patients (those patients not previously treated with an EGFR TKI) and an ORR of 70% in EGFR TKI naïve NSCLC patients
who also had measurable brain metastasis and were c-MET negative. Enrollment continued in 2017 to explore a further
dose regimen; we expect to decide on the Phase III dose and initiate the Phase III during 2018.
2.
Glioblastoma: Initiated a Phase Ib/II study in glioblastoma, a primary brain cancer that harbors high levels of EGFR gene
amplification, in March 2018.
HMPL-523: Potential first-in-class Syk inhibitor in oncology and immunology:
1.
2.
Immunology: We have submitted investigational new drug (“IND”) applications for autoimmune diseases and target,
pending the submission of additional data requested by the U.S. Food & Drug Administration (“FDA”), to progress into a
Phase II proof-of-concept study in immunology in late 2018 or early 2019.
Hematological cancer: Currently enrolling Phase I dose escalation studies in Australia and China in patients with hematologic
malignancies. We have established the RP2D in both Australia and China. We are now in the process of increasing the
number of clinical sites in both countries to support Phase Ib/II expansion in a broad range of indolent non-Hodgkin’s
lymphoma sub-types.
HMPL-689: Potential best-in-class, highly selective PI3Kδ inhibitor, which we believe should have meaningful advantages in
safety and tolerability over Zydelig® (idelalisib) and selectivity over Aliqopa® (copanlisib):
Hematological cancer: Completed Phase I study in healthy volunteers in Australia, and subsequently initiated a Phase I dose
escalation and expansion study in patients with hematologic malignancies in China in August 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 high-level of protein over-expression:
Esophageal cancer: Presented preliminary Phase I results at the 2017 CSCO conference with no dose limiting toxicities or
maximum tolerated dose established. The Phase I included seven esophageal cancer patients, five of whom were evaluated
for response, with all five achieving SD. Subsequently, in early 2017, we began a Phase Ib expansion and are opening further
clinical sites in China.
HMPL-453: Potential first-in-class and/or best-in-class selective FGFR 1/2/3 inhibitor:
Solid tumors: During the first half of 2017, we initiated Phase I dose escalation studies in both Australia and China.
HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
9
Highlights
Commercial Platform – a deeply established, cash-generative, pharmaceutical business in China – an established
platform to commercialize our Innovation Platform drug candidates.
Total consolidated sales from the Commercial Platform were up 13% to $205.2 million (2016: $180.9m) mainly resulting from
growth in our Prescription Drug commercial services business. Total sales of non-consolidated joint ventures were up 6% to $472.0
million (2016: $446.5m). Flat first half sales, due to a price increase on our main cardiovascular prescription drug and a relatively
quiet influenza season on the over-the-counter (“OTC”) drug business, were offset by very strong second half sales across both the
Prescription Drug and Consumer Health businesses. This resulted in total consolidated net income attributable to Chi-Med of $40.0
million (2016: $70.3m), or up 25% to $37.5 million (2016: $29.9m) on an adjusted (non-GAAP) basis excluding one-time gains of
$2.5 million in 2017 from research and development subsidies and $40.4 million in 2016 primarily from property compensation.
Prescription Drugs business continuing profit growth – consolidated sales up 11% to $166.4 million (2016: $149.9m);
total sales of non-consolidated Prescription Drugs joint venture up 10% to $244.6 million (2016: $222.4m); and
total consolidated net income attributable to Chi-Med up 28% to $26.5 million (2016: $20.7m) on an adjusted
(non-GAAP) basis excluding one-time gains.
1.
2.
3.
Shanghai Hutchison Pharmaceuticals Limited (“SHPL”) – our large-scale non-consolidated Prescription Drugs joint venture –
Continued progress on She Xiang Bao Xin (“SXBX”) pill, our most important commercial product, a prescription vasodilator
that accounts for 15.4% (2016: 12.0%) of China’s rapidly growing, approximately $2.0 billion, botanical coronary artery
disease prescription drug market. SXBX pill is a proprietary product with full patent protection through 2029. During late
2016 and early 2017, we were able to effectively implement a pricing strategy that led to very strong second half sales
growth, $114.9 million (up 20% versus H2 2016), and materially improved margins.
Shanghai government subsidy – In 2017, SHPL recognized a one-time research and development subsidy totaling $5.9
million, equivalent to $2.5 million in net income attributable to Chi-Med.
Hutchison Whampoa Sinopharm Pharmaceuticals (Shanghai) Limited (“Hutchison Sinopharm”) – our Prescription Drugs
commercial services business – Continued commercial success in 2017 on Seroquel® (bi-polar disorder/schizophrenia),
including securing inclusion of Seroquel XR® (extended release (“XR”) formulation) on the National Drug Reimbursement
List (“NDRL”) in China, leading to a 22% increase in service fees to $11.4 million (2016: $9.3m) received from AstraZeneca;
and Concor® (hypertension/high blood pressure) where strong sales led Merck Serono, in late 2017, to expand Hutchison
Sinopharm’s exclusive territory by over 70% to now cover a total of six provinces and municipalities with a population
of over 360 million people. As a result, service fees from Concor® increased 31% to $1.8 million (2016: $1.4m).
10 HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
Highlights
Consumer Health business first half constrained but very strong second half – consolidated sales up 25% to $38.8
million (2016: $31.0m); total sales of non-consolidated Consumer Health joint venture flat at $227.4 million (2016:
$224.1m); and total consolidated net income attributable to Chi-Med up 20% to $11.0 million (2016: $9.2m).
1.
Hutchison Whampoa Guangzhou Baiyunshan Chinese Medicine Company Limited (“HBYS”) – our large-scale non-consolidated
OTC drug joint venture – 2017 was a year of major change with the move of a large part of our production to a new
state-of-the-art, high-capacity, cost-efficient factory in central China. The first half of 2017 was consequently affected by
short-term capacity constraints; as well as an increase in certain key raw material prices; and a mild influenza season.
The second half of the year, however, was very strong, with the new factory up and running and raw material prices
drawing back. Sales of our two key products, Fu Fang Dan Shen (“FFDS”) tablets (angina) and Banlangen granules (anti-
viral), accelerated, increasing to $54.5 million (up 17% versus H2 2016), and margins were also materially improved.
2.
Divestment of Nanyang Baiyunshan Hutchison Whampoa Guanbao Pharmaceutical Company Limited (“Guanbao”) – In
September 2017, HBYS divested Guanbao, a 60% subsidiary of HBYS for a consideration approximately equal to its carrying
value. Guanbao was a low-margin, regional OTC logistics business, with no strategic value to Chi-Med.
HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
11
Potential Milestones Targeted for 2018
Savolitinib:
Second-line NSCLC – Initiation of a global randomized, chemotherapy-doublet controlled study of savolitinib plus Tagrisso®
in first-generation (Iressa®/Tarceva®) EGFR-TKI refractory, c-MET gene amplified, T790M negative NSCLC along with multiple
supporting studies;
Third-line NSCLC – AstraZeneca to decide global registration strategy in third-generation (Tagrisso®) EGFR-TKI refractory NSCLC;
AstraZeneca/Chi-Med agreement on registration strategy in China for savolitinib plus Iressa® combination in
second-line NSCLC;
Release of results of global PRCC molecular epidemiology study (“MES”) and review of the potential Breakthrough Therapy
opportunity in c-MET-driven PRCC.
Fruquintinib:
NDA approval and launch in China, with our partner Lilly, in advanced CRC;
Release of top-line results for the FALUCA Phase III study in third-line NSCLC in late 2018.
Epitinib (EGFR):
Initiation of Phase III registration study in first-line NSCLC patients with EGFR activating mutations with brain metastasis
in China.
HMPL-523 (Syk):
Presentation of preliminary safety and efficacy data from Phase I/Ib dose escalation and dose expansion study in
hematological cancer in Australia and China.
12 HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
Chairman’s Statement
Chi-Med is consistently making significant progress
towards its goal of being an innovative global
biopharmaceutical company based in China, and our
achievements last year amply demonstrate this.
Our recent successes in advancing fruquintinib
through NDA with the CFDA as well as starting
our first global Phase III study in oncology with
savolitinib have been particularly important. We
are also making solid progress on our other six, un-
partnered, clinical drug candidates as well as rapidly
growing our Commercial Platform, which stands
ready to launch our drug candidates in China, if
approved. We believe that we are well positioned
to create shareholder value and our confidence in
doing so stems from the following factors.
The undisputed need for oncology drugs in
China – In 2016, global market sales of oncology
drugs grew by 11% to $175.7 billion making it the
largest treatment area in the global pharmaceutical
market, with a 17% market share. In China, despite
being the home to 4.3 million new cancer patients
per year, or about 20-30% of those in the world,
2016 market sales of oncology drugs were just $7.3
billion, or about 4% of the global market. In our
view, it is almost inevitable that the China oncology
market is set to emerge over the coming decade
as an area of major opportunity, spurred by China’s
increasing emphasis on innovation combined with
its rapidly improving regulatory environment.
China regulatory reforms – An important
development in the context of our ambitions is the
transformation that is occurring in the regulatory
environment in China. In the clinical and regulatory
arena, dozens of policy documents have been
published by the State Council and CFDA, aiming to
strengthen and speed up China's clinical trial and
approvals process. These include new standards,
supervision and accountability mechanisms. Also,
the new Priority Review and Market Authorization
Holder systems are both clearly helping to
streamline the approval of innovative therapies that
meet major unmet medical needs in China.
In the commercial arena, the recent inclusion of 36
novel drugs on the NDRL is a first step away from
the 100% self-pay system. Many targeted therapies
in oncology are now set to be at least partially
HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
13
Simon To
Chairman
The reason we have created
such a broad portfolio of assets
is because we believe that the
future of cancer treatment lies
in combination therapies.
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
[1] W. Su, et al, 2014 American Association of Cancer Research (note legend yellow = >50%; green = <50%).
Screening at 1µM against 253 Kinases
reimbursed. While prices have been negotiated
down to between about one-third and one-half of
global prices, both innovators and patients in China
are set to benefit from broadening of access to these
important therapies.
World-class science – Chi-Med has invested
about $500 million, including payments from our
partners, in building an engine of global oncology
innovation in China. Our approximately 360-person
strong scientific team has created and advanced
into development, a portfolio of eight differentiated
targeted therapies, primarily in the field of oncology.
These highly selective drug candidates, all we believe
with first- or best-in-class potential, act on novel
molecular targets, such as c-MET, Syk and FGFR, as
well as on validated targets, including EGFR, VEGFR
and PI3Kδ. To add to these, we are developing the
next wave of pre-clinical drug candidates against
multiple second-generation immunotherapy
targets which we believe are nearing readiness for
clinical trials.
The reason we have created such a broad portfolio
of assets is because we believe that the future of
cancer treatment lies in combination therapies. As
understanding around the biology of cancer has
evolved over the past ten years, it has become
Use of co-crystal structures
Focus on small
molecule interactions
with kinases
� Optimize binding to on-
target protein, for potency.
� Minimize binding to off-
target proteins for selectivity.
14 HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
increasingly clear in many solid tumor and
hematological cancer indications, that combination
therapy, acting on multiple primary, secondary and
resistance signaling pathways will be required to
provide meaningful clinical outcomes. High selectivity
and clean drug-drug interaction profiles are essential,
if a drug is to be used in a combination regimen.
Establishing the infrastructure and financial
support needed to achieve our goal – During the
past two years, we have taken steps to further build
ourselves into a company with the resources to take
advantage of opportunities and ultimately become
a major player in both China and the global markets.
As long-standing board members retired last year,
we appointed five new directors to Chi-Med’s ten-
person board, all with deep industry or financial
experience and all well positioned to help the
company develop. This is important as we embark
into new areas, such as establishing our clinical and
regulatory team in the United States, and looking to
launch fruquintinib outside of China.
In financing, our initial and follow-on public offerings
on Nasdaq during the last two years have raised
$411.5 million in cash for the company. We believe
that these resources, along with the substantial cash
generation of our Commercial Platform, will take
us through to approvals on multiple drugs. They
will also allow us to rapidly expand the indications
in which we are developing these drugs, as well as
taking un-partnered assets further into development
by ourselves, thereby maximizing the economic
value to Chi-Med of these innovations.
For all these reasons, we are highly confident
about Chi-Med’s long-term prospects. As always,
our success and prospects are the result of the
commitment and dedication of our people, and I
would like to express my deep appreciation to all
our management and staff and for the support of
the investors, directors and partners of Chi-Med.
Simon To
Chairman
March 12, 2018
Financial Review
Chi-Med Group revenue for the year ended
December 31, 2017 increased 12% to $241.2 million
(2016: $216.1m), mainly due to the increase in
revenue generated by our Commercial Platform
to $205.2 million in 2017 (2016: $180.9m) driven
by the progress of our consolidated joint venture
Hutchison Sinopharm. On the Innovation Platform,
we saw stable revenue of $36.0 million in 2017
(2016: $35.2m), reflecting almost equal levels of
milestone payments, service fees and clinical cost
reimbursements received from AstraZeneca, Lilly and
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 HBYS, since these are accounted for using
the equity method.
Our Commercial Platform, which continues to be
an important profit and cash source for Chi-Med,
recorded operating profit of $45.1 million (2016:
$74.3m) as a result of strong organic growth in
SHPL’s coronary artery disease Prescription Drug
business and certain of our Consumer Health
businesses, but was still lower than 2016 which had
included a major $40.4 million one-time property
gain. The Innovation Platform incurred an operating
loss of $52.0 million (2016: -$40.8m) 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,
declined to $11.5 million (2016: $12.9m) primarily
because 2016 included higher third-party advisor
costs in the audit, compliance and legal areas in
relation to our initial public offering on Nasdaq in
that year.
Consequently, Chi-Med Group’s operating loss was
$18.4 million (2016: profit of $20.5m).
HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
15
Christian Hogg
Chief Executive Officer
We believe that the cash
resources that we currently
hold are sufficient to fund
all our near-term activities,
including the full development
of our clinical drug pipeline
into 2020.
Financial Review
The aggregate of interest and income tax expenses
significantly, with a total of six Phase III studies
As of December 31, 2017, we had available cash
of Chi-Med Group, as well as net income attributable
either underway or completing. We plan for multiple
resources of $479.6 million (December 31, 2016:
to non-controlling interests during the year fell
further Phase III studies to start in 2018 as well as
$173.7m) at the Chi-Med Group level including cash
6% to $8.3 million (2016: $8.8m) due mainly to
to continue early development through Phase Ib/II
and cash equivalents and short-term investments
higher taxes in 2016 because of the major one-time
studies in 22 TPPs.
property gain in 2016.
of $358.3 million (December 31, 2016: $103.7m)
and unutilized bank borrowing facilities of $121.3
We have, and will continue to try to partially offset
million (December 31, 2016: $70.0m). In addition, as
The resulting total Group net loss attributable to
increasing clinical investment with cash generated
of December 31, 2017, our non-consolidated joint
Chi-Med was therefore $26.7 million (2016: net
in our operating activities from dividends paid
ventures (SHPL, HBYS and NSP) held $67.0 million
income $11.7m).
by our non-consolidated Commercial Platform
(December 31, 2016: $91.0m) in available
joint ventures, as well as payments received from
cash resources.
As a result, Group net loss attributable to ordinary
AstraZeneca, Lilly, and NSP, our joint venture with
shareholders of Chi-Med in 2017, was -$0.43 per
Nestlé. In aggregate, in 2017, these helped offset
Outstanding bank loans as of December 31, 2017
ordinary share/-$0.22 per American depositary
a meaningful portion of the $88.0 million (2016:
amounted to $30.0 million (December 31, 2016:
share (“ADS”), compared to net income attributable
$76.1m) in research and development expenses on
$46.8m) at the Chi-Med Group level, with a weighted
to ordinary shareholders of Chi-Med of $0.20 per
an adjusted (non-GAAP) basis.
ordinary share/$0.10 per ADS, in 2016.
average cost of borrowing in 2017 of 2.7% (2016:
2.5%). As of December 31, 2017 and 2016, our non-
In October 2017, we completed a follow-on
consolidated joint ventures had no outstanding
Cash and Financing
During the past two years, we have had a high
offering on Nasdaq and raised $301.3 million
bank loans.
in new equity capital, or $292.7 million net of
degree of success in proof-of-concept studies on
expenses incurred, to strengthen our balance
In summary, we believe that the cash resources that
our eight clinical drug candidates and that has
sheet and support development plans, through to
we currently hold are sufficient to fund all our near-
naturally led us to expand investment. The scale of
planned NDA submissions, for several of our lead
term activities, including the full development of our
our late-stage clinical trial programs has expanded
drug candidates.
clinical drug pipeline into 2020.
16 HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
Operations Review – Innovation Platform
36 active or completing trials on 8 drug candidates
Four drug candidates in Ph.III, or about to start
HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
17
Operations Review – Innovation Platform
INNOVATION PLATFORM
The Chi-Med pipeline of drug candidates has been
We are currently testing savolitinib in partnership
ORRs of <10% and median PFS in first-line setting
with AstraZeneca in multiple Phase Ib/II studies, both
of 4-6 months and second-line setting of only 1-3
created and developed by the in-house research
as a monotherapy and in combination with other
months (ESPN study, Tannir N. M. et al.).
and development operation which was started in
targeted therapies, and in June 2017, we initiated
2002. Since then, we have built a large team of
our first global Phase III registration study in PRCC. In
During early 2017, we presented the results of our
about 360 scientists and staff (December 31, 2016:
late 2017, we presented positive Phase Ib/II data at
109-patient global Phase II study in PRCC at the
330) based in China and operating a fully-integrated
the WCLC on savolitinib in combination with Tagrisso®
ASCO Genitourinary Cancers Symposium, as well
drug discovery and development operation covering
and Iressa®, in both second- and third-line NSCLC,
as in the Journal of Clinical Oncology as a Rapid
chemistry, biology, pharmacology, toxicology,
and are now working closely with AstraZeneca on
Communication Manuscript. This Phase II study was
chemistry and manufacturing controls for clinical
next steps for development as discussed below.
the largest and most comprehensive clinical study in
and commercial supply, clinical and regulatory and
other functions. Looking ahead, we plan to continue
to build and leverage this platform, as we have in
the past decade, to produce a stream of novel drug
candidates with global potential.
Innovation Platform revenue in 2017 was $36.0
million (2016: $35.2m) reflecting generally
similar levels of milestone payments, service fees
and clinical cost reimbursements received from
AstraZeneca and Lilly to those received last year.
Net loss attributable to Chi-Med increased to $51.9
million (2016: -$40.7m) driven by $88.0 million
(2016: $76.1m) in research operations and clinical
development spending of our pipeline of eight drug
candidates on an as adjusted (non-GAAP) basis. Since
inception, the Innovation Platform has dosed over
3,500 patients/subjects in clinical trials of our drug
candidates with over 700 dosed in 2017 primarily as
a result of enrollment in the six Phase III studies that
Savolitinib – PRCC Phase II
Clear efficacy & durable response in MET+ PRCC patients
Median PFS –
big advantage in MET+ patients.
100
)
%
(
y
t
i
l
i
b
a
b
o
r
P
80
60
40
20
0
Events, n
Median, mo.
MET+ (n=44)
MET– (n=46)
34 (77.3%)
43 (93.5%)
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
MET+
MET-
MET unknown
0
2
4
6
8
Months
10
12
14
16
18
we had underway during the year.
Savolitinib – Kidney cancer: High proportion of
PRCC ever conducted. Of 109 patients treated with
Product Pipeline Progress
Savolitinib (AZD6094): Savolitinib is a potential
MET-driven patients.
savolitinib, PRCC was c-MET-driven in 44 patients
(40%), c-MET-independent in 46 (42%) and MET
TPP (Target Patient Population) 1 – Enrolling
status unknown in 19 (17%). c-MET-driven PRCC was
first-in-class inhibitor of c-MET, an enzyme which has
(NCT03091192) – Phase III PRCC savolitinib 600mg
strongly associated with encouragingly durable
been shown to function abnormally in many types of
QD monotherapy (Global) – PRCC is the most common
response to savolitinib with ORR in the c-MET-driven
solid tumors. We designed savolitinib to be a potent
of the non-clear cell RCCs representing about 14%
group of 18.2% (8/44) as compared to 0% (0/46) in
and highly selective oral inhibitor, which, through
of kidney cancer. Approximately 366,000 new
the c-MET-independent group (p=0.002, based on
chemical structure modification, addresses human
cases of kidney cancer were diagnosed globally in
confirmed PRs). Median PFS for patients with c-MET-
metabolite-related renal toxicity, the primary issue
2015, equating to about 50,000 cases of PRCC, with
driven and c-MET-independent PRCC was 6.2 months
that halted development of several other selective
approximately half harboring c-MET-driven disease. No
(95% CI: 4.1–7.0) and 1.4 months (95% CI: 1.4–2.7),
c-MET inhibitors. In clinical studies to date, involving
targeted therapies have been approved specifically for
respectively (hazard ratio=0.33; 95% CI: 0.20–0.52;
over 500 patients, savolitinib has shown promising
PRCC, and to date only modest efficacy in non-ccRCC
signs of clinical efficacy in patients with c-MET gene
has been reported in sub-group analyses of broader
alterations in PRCC, NSCLC, CRC and gastric cancer
RCC studies of VEGFR (e.g. Sutent®) and mammalian
with an acceptable safety profile.
target of rapamycin (mTOR) (e.g. Afinitor®) TKIs, with
log-rank p<0.0001). Savolitinib was well tolerated,
with no reported treatment related Grade ≥3 AEs
exceeding 5% incidence. Total aggregate savolitinib
treatment related Grade ≥3 AEs occurred in just
18 HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
Operations Review – Innovation Platform
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 (N Eng J Med 369;8, R J Motzer et al).
A global Phase III registration study, the SAVOIR
study, of savolitinib versus Sutent® in c-MET-driven
metastatic PRCC patients was initiated in June 2017.
The primary endpoint for efficacy in the SAVOIR
study is median PFS, with secondary endpoints
of OS, ORR, DoR and DCR. We expect to complete
enrollment in late 2019.
Furthermore, in order to fully understand the role
of c-MET-driven disease in PRCC we are currently
conducting a global MES (molecular epidemiology
study). The MES is in the process of screening, using
our companion diagnostic, archived tissue samples
from over 300 PRCC patients to identify c-MET-
driven disease. Historical medical records from these
patients will then be used to determine if c-MET-
driven disease is predictive of worse outcome,
in terms of PFS and OS, in PRCC patients. If this is
proven to be the case, we will consider engaging
in discussions regarding Breakthrough Therapy
potential with the U.S. FDA.
TPP 2 – Enrolling (NCT02761057) – 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, to assess the
efficacy of multiple TKIs in metastatic PRCC including
Sutent ®; Cabometyx ® (cabozantinib); Xalkori ®
(crizotinib) and savolitinib. PAPMET began enrolling
patients in 2016, and is expected to enroll about
180 patients in over 70 locations in the United States
with top-line data targeted for reporting in 2019.
Spain) – A dose finding study began in 2016, named
the CALYPSO study, at St. Bartholomew’s Hospital in
London, to assess safety/tolerability of savolitinib
and Imfinzi ® combination therapy as well as
preliminary efficacy of savolitinib as a monotherapy
or combination therapy in several c-MET-driven
kidney cancer patient populations. During 2016,
the dose-finding phase of the CALYPSO study
successfully established the combination dose of
savolitinib and Imfinzi® and the study moved on
to the Phase II expansion stage in PRCC and ccRCC
patients in the U.K. and Spain to further explore
efficacy during 2017.
Savolitinib – Lung cancer: Savolitinib’s largest
market opportunity.
TPP 3, TPP 4 and TPP 5 – Enrolling (NCT02819596) –
Phase II study of savolitinib (600mg daily)
monotherapy and in combination with Imfinzi®
(anti-PD-L1) in both PRCC and ccRCC patients (U.K./
TPP 6 – Enrolling (NCT02143466) – Phase Ib/II expansion
NSCLC (second-line), EGFR TKI refractory, savolitinib
(600mg QD) in combination with Tagrisso® (Global) –
In October 2016, at the European Society for Medical
Savolitinib – 2nd Line NSCLC[1] combo with Tagrisso®
TATTON A/B compelling – now starting next stage of development
TATTON A [2] – signal…
MET testing
confirmation
Objective response
rate, n (%)
Local or Central
Confirmed PR [6]
Total
(n = 10)
6 (60%)
before treatment …
… after 4-weeks.
…TATTON B [3] – …confirmation
... and BTD [4] potential?
MET testing
confirmation
Objective response
rate, n (%)
Local or Central
Confirmed PR [6]
Confirmed PR [6]
Stable Disease ≥6 weeks
Central*
Progressive Disease/death
Not Evaluable
MET+ / T790M+
(n = 11)
6 (55%)
(n = 7)
4 (57%)
3 (43%)
0
0
MET+ (T790M-)
(n = 23)
14 (61%)
(n = 15)
8 (53%)
6 (40%)
1 (7%)
0
Total
(n = 34)
20 (59%)
(n = 22)
12 (55%)
9 (41%)
1 (5%)
0 (0)
10
0
-10
-20
-30
-40
-50
-60
-70
-80
-90
e
z
i
s
n
o
i
s
e
l
r
o
m
u
t
n
i
e
n
i
l
e
s
a
b
m
o
r
f
e
g
n
a
h
c
%
t
s
e
B
-100
…this patient
DoR, months (range)
9.7 (2.8*–9.7)
NR (1.6*–5.9*)
NR (1.6*–9.7)
* Centrally confirmed MET-amplification (fluorescence in-situ hybridization, MET gene copy ≥5 or MET/CEP7 ratio ≥2) [5]
...in 1st generation EGFRm-TKI refractory
NSCLC patients regardless of T790M status.
[1] EGFRm NSCLC; [2] ESMO 2016 Galbraith - Novel Clinical Trials for Prec. Med.; [3] WCLC 2017 – Ahn M-J, et al. TATTON Phase Ib expansion cohort; [4] U.S. FDA Breakthrough Therapy designation potential; [5] Some local MET-
status determined via IHC+3 in ≥50% of tumor cells; [6] PR = Partial Response.
HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
19
Operations Review – Innovation Platform
Savolitinib – 3rd Line NSCLC[1] combo with Tagrisso®
No treatment options post Tagrisso® – pivotal decision pending
…TATTON B [2] – ...promising efficacy in MET+ Tagrisso failure patients...
MET testing confirmation
Objective response rate, n (%)
Local or Central*
Confirmed PR [3]
Central*
Confirmed PR [3]
SD [4] ≥ 6 weeks
PD [5] / death
Not evaluable
Prior 3rd Gen. T790M directed EGFR-TKI
MET+ (n = 30)
10 (33%)
(n = 25)
7 (28%)
13 (52%)
4 (16%)
1 (4%)
* Centrally confirmed MET-amplification (fluorescence in-situ hybridization, MET gene copy ≥5 or MET/CEP7 ratio ≥2).
DoR [6], months (range)
NR (2.2*–9.6*)
... regardless of T790M status & despite increased
presence of concurrent driver genes
e
z
i
s
n
o
i
s
e
l
r
o
m
u
t
n
i
e
n
i
l
e
s
a
b
m
o
r
f
e
g
n
a
h
c
%
t
s
e
B
100
80
60
40
20
0
-20
-40
-60
-80
-100
[1] EGFRm NSCLC; [2] WCLC 2017 – Ahn M-J, et al. TATTON Phase Ib expansion cohort; waterfall plot based on evaluable patients (n=30): all patients dosed and with on-treatment assessment or discontinuation prior to first tumor
assessment; data cut-off Aug 31, 2017; [3] PR = Partial Response; [4] SD = Stable Disease; [5] PD = Progressive Disease; [6] DoR = Duration of Response.
Oncology meeting, AstraZeneca presented preliminary
II/III registration strategy. In this first-generation
ASCO, by Harvard Medical School and Massachusetts
proof-of-concept data, the TATTON study (Part A), on 17
EGFR TKI refractory NSCLC population, we estimate
General Hospital Cancer Center (“HMS/MGH”),
evaluable first-generation EGFR TKI (Iressa®/Tarceva®)
that c-MET gene amplification occurs in 15-20% of
showed that about 30% (7/23 patients) of Tagrisso®
refractory second-line NSCLC patients who had no prior
patients. Preliminary data from TATTON (Part B), in
resistant third-line NSCLC patients harbor c-MET gene
exposure to third-generation EGFR TKIs (Tagrisso®/
34 evaluable patients, was presented at the 2017
amplification. This third-line patient population is
rocelitinib). Molecular analysis of both c-MET and
WCLC and showed confirmed PRs in 14/23 (ORR 61%)
generally heavily pre-treated and highly complex
T790M status was completed for patients with sufficient
of T790M mutation negative patients, as well as
from a molecular analysis standpoint, with the HMS/
available tumor tissue. Of patients treated with the
confirmed PRs in 6/11 (55% ORR) of T790M mutation
MGH study showing that more than half the c-MET
savolitinib and Tagrisso® combination, confirmed PRs
positive patients. AstraZeneca has recently decided
gene amplification patients also harbored additional
were reported in 4/5 (80% ORR) c-MET positive/T790M
to progress into the next stage of development in
genetic alterations, including but not limited to, EGFR
negative patients and in 6/10 (60% ORR) c-MET positive
this indication, with plans outlined below.
gene amplification and K-Ras mutations.
patients regardless of T790M status.
TPP 7 – Enrolling (NCT02143466) – Phase Ib/II NSCLC
The TATTON (Part B) study, presented at the 2017
In 2016, we initiated a global Phase Ib/II expansion
(third-line), EGFR/T790M TKI-refractory, savolitinib
WCLC, also included preliminary data in 30 evaluable
study in second-line NSCLC, the TATTON study (Part
(600mg QD) in combination with Tagrisso® (Global) –
patients previously treated with third-generation
B), aiming to recruit sufficient c-MET gene amplified
The TATTON study (Part B) also enrolled third-line
T790M-directed EGFR inhibitors, primarily Tagrisso®.
patients, who had progressed after prior treatment
NSCLC patients that had progressed after treatment
Confirmed PRs were observed in 10/30 (ORR 33%)
with a first-generation EGFR inhibitor (Iressa ®/
with Tagrisso® as a result of c-MET gene amplification
of these patients, and while this is lower than the
Tarceva®), to support a decision on global Phase
acquired resistance. Data presented in June 2017 at
55-61% ORR in TPP 6, it was as expected given
20 HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
Operations Review – Innovation Platform
the additional driver genes at work post Tagrisso®
generation (Iressa®/Tarceva®) EGFR-TKI refractory,
monotherapy failure. We believe that the savolitinib/
c-MET-driven and T790M negative NSCLC patients.
Tagrisso® combination is an important treatment
This second-line NSCLC study, currently targeted to
option for these late-stage patients who have no
start in H2 2018, will start as a Phase II study until
remaining targeted treatment alternatives.
such time that regulatory discussions have taken
place on dosing approach, and will be powered
Tagrisso® sales in 2017, only the second year since
based on TATTON (Part B) for ORR and PFS.
its launch, were $955 million. At current pricing, this
would indicate that over 5,000 patients were treated
To further support dosing approach ahead of
with Tagrisso® during 2017, thereby indicating that
regulatory discussions, AstraZeneca has already
the market potential for savolitinib in third-line,
initiated TATTON (Part D), exploring savolitinib
Tagrisso® resistant, NSCLC is material.
300mg QD dose combined with Tagrisso® 80mg
AstraZeneca decision on further development
maximizing tolerability of the combination for
QD, to explore the lower dose in the context of
of TPP 6 and TPP 7:
patients who could be on the combination for long
periods of time. A second supporting study, a Phase
In December 2017, AstraZeneca’s governance
II, aiming at strengthening the dose justification in
committee in oncology reviewed the TATTON (Part
EGFR-TKI refractory, c-MET-driven NSCLC will also
B) data that had been presented at the 2017 WCLC,
start in H2 2018, randomizing to either 300mg
to decide strategy for further development of
savolitinib QD plus Tagrisso® 80mg QD or 600
mutation advanced NSCLC with centrally confirmed
the savolitinib and Tagrisso® combination in first-
mg savolitinib (with weight based dosing) QD
c-MET gene amplification who had progressed
generation (Iressa®/Tarceva®) and third-generation
plus Tagrisso® 80mg QD with a primary endpoint
following first-generation EGFR inhibitor therapy.
(Tagrisso®) EGFR-TKI refractory NSCLC.
of tolerability.
Preliminary results showed confirmed PRs in 12/23
(ORR 52%) of T790M mutation negative patients, as
At that time, while the above strong ORR data was
Late in 2018 or early in 2019, and subject to the
well as confirmed PRs in 2/23 (9% ORR) of T790M
available for the savolitinib 600mg QD plus Tagrisso®
outcome of the mature TATTON (Part B) data as well
mutation positive patients. The 52% ORR in T790M
80mg QD combination dose regimen, neither
as preliminary TATTON (Part D) results, we expect
mutation negative patients was as expected, and
median PFS nor DoR had been reached. Since then,
AstraZeneca to engage in regulatory discussions
similar to that recorded in TATTON (Part B) for this
both PFS and DoR have continued to mature. The
regarding our dosing approach for the savolitinib
TPP, and indicating that for these patients Iressa®
safety profile of the combination is in line with
and Tagrisso® combination as well as potential
might be the most cost-efficient combination
previous reports for savolitinib 600mg QD plus
Breakthrough Therapy. These regulatory discussions
partner for savolitinib. The low 9% ORR in T790M
Tagrisso® 80mg and going forward, AstraZeneca has
will also enable AstraZeneca to decide development
mutation positive patients was also as expected, as
concluded that a weight-based dosing algorithm will
strategy in third-line NSCLC (TPP 7), defined as third-
Iressa® does not effectively address T790M mutants.
be applied for the combination, similar to the dosing
generation (Tagrisso®) EGFR-TKI refractory, c-MET
In terms of safety, the savolitinib plus Iressa®
algorithm used in the SAVOIR Phase III study in PRCC.
gene amplified NSCLC patients.
combination dose was safe and well tolerated.
Encouraged by the TATTON (Part B) data, AstraZeneca
TPP 8 – completed (NCT02374645) – Phase II NSCLC
With the launch of multiple lower-priced, and
has decided to proceed with development in second-
(second-line), EGFR TKI-refractory, savolitinib (600mg
reimbursed, generic first-generation EGFR TKIs
line NSCLC (TPP 6). Planning is now underway
QD) in combination with Iressa® (China) – Also at
in China in 2017, combined with the very high
to initiate a global randomized chemotherapy-
the 2017 WCLC, we presented Phase II proof-of-
~50% proportion of NSCLC patients who harbor the
doublet (platinum plus Alimta®) controlled study of
concept data assessing savolitinib in combination
EGFR activating mutations, we believe there may
the savolitinib plus Tagrisso® combination in first-
with Iressa® in patients in China with EGFR activating
be a surge in c-MET gene amplified second-line
HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
21
Operations Review – Innovation Platform
Savolitinib – 2nd Line NSCLC combo with Iressa®[1]
Compelling in MET+ / T790M-, pivotal decision under discussion
Iressa® / savo combo in 1st gen. EGFRm-TKI refractory
patients [2]...outstanding response in MET+ / T790M-
MET testing
confirmation
Objective response
rate, n (%)
MET+ / T790M+
(n = 23)
MET+ (T790M-)
(n = 23)
MET+ / T790M unk.
(n = 5)
Central *
Confirmed PR [3]
SD [4] ≥ 6 weeks
PD [5] / death
Not evaluable
2 (9%)
9 (39%)
7 (30%)
5 (22%)
12 (52%)
7 (30%)
3 (13%)
1 (4%)
2 (40%)
2 (40%)
0
1 (20%)
Total
(n = 51)
16 (31%)
18 (35%)
10 (20%)
7 (14%)
...Iressa® combo – ~6mo. DoR [6]
in MET+ / T790M- patients
PR
PR
PR
PR
PR
PR
PR
PR
PR
PR
PR
PR
PR
PR
PR
PR
PR
PR
PR
PR
PR
PR
PR
PR
PR
PR
M-)
0
9
7
(T
+
T
E
M
+
M
0
9
7
T
/
+
T
E
M
0
2
4
• 12 patients had PRs
• 7 patients were on
treatment beyond 6
months
• 7 patients remain on
treatment at cut-off[7]
• 2 patients show PRs
• 3 patients were on
treatment beyond 6
months
• 0 patients remain on
treatment at cut-off[7]
12
12
14
14
6
8
Months on treatment
10
* Centrally confirmed MET-amplification (fluorescence in-situ hybridization, MET gene copy ≥5 or MET/CEP7 ratio ≥2) [8].
[1] EGFRm NSCLC; [2] WCLC 2017 Yang J-J, et al. A Ph.Ib trial of savolitinib plus gefitinib for patients with EGFR-mutant MET-amplified advanced NSCLC; [3]
PR = Partial Response; [4] SD = Stable Disease; [5] PD = Progressive Disease; [6] DoR = Duration of Response; [7] Aug 21, 2017; [8] On TATTON B, some local
MET-status determined via IHC+3 in ≥50% of tumor cells.
22 HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
NSCLC patients in China over the coming years. We
continue to discuss Phase III plans in this TPP for
the savolitinib/Iressa® combination in China with
AstraZeneca and expect to reach agreement in 2018.
TPP 9 and TPP 10 – Enrolling (NCT01985555/
NCT02897479) – Phase II c-MET-driven NSCLC
savolitinib (600mg QD) monotherapy (China) –
Phase II studies of savolitinib are also ongoing in
NSCLC and other lung cancer patient populations,
focusing on those with c-MET-driven disease.
Savolitinib – Gastric cancer: Multiple Phase II
studies underway in Asia in c-MET-driven patients.
Phase II gastric cancer studies are ongoing in
China as well as the VIKTORY study, being run at
Samsung Medical Center in South Korea, in which
savolitinib is represented in two out of the ten
treatment arms. As at the latest report in 2017, a
total of over 850 gastric cancer patients have been
screened in these studies and those patients with
confirmed c-MET-driven disease are being treated
with either savolitinib monotherapy or savolitinib
in combination with Taxotere®. Presentations of
preliminary data from these studies were made in
2017 at CSCO (China Phase II) and ASCO (VIKTORY
Phase II).
In China, as of June 2017, a total of 441 metastatic
gastric cancer patients had been screened with
13.2% (58/441) determined to have aberrant c-MET,
of which 5.0% (22/441) were c-MET gene amplified.
A total of 31 patients in China have been enrolled to
date in TPP 11 below. In South Korea, as of January
2017, a total of 438 metastatic gastric cancer
patients had been screened with 5.3% (23/438)
being patients with c-MET-driven (gene amplification
or over-expression) disease. A total of 23 patients in
South Korea have been enrolled to date in TPP 11,
12 and 13 below.
Operations Review – Innovation Platform
TPP 11 – Enrolling South Korea (NCT02449551)/China
TPP 14 – Enrolling (NCT03385655) – Phase II of
Sutent®, Nexavar® (sorafenib) and Stivarga®, and can
(NCT01985555) – Phase II gastric cancer, savolitinib
savolitinib in patients with metastatic Castration-
potentially significantly expand the use and market
monotherapy, patients with c-MET gene amplification
Resistant Prostate Cancer (“mCRPC”) (Canada) –
potential of fruquintinib.
(South Korea/China) – Preliminary results were
Phase II study sponsored by the Canadian Cancer
presented at the 2017 CSCO conference for the
Trials Group to determine: the effect of savolitinib on
In addition to our NDA submission in third-line CRC
efficacy evaluable c-MET gene amplified patients
prostate-specific antigen (“PSA”) decline and time to
in China, last month we completed enrollment in
in China. Based on confirmed and unconfirmed
PSA progression; ORR as determined by RECIST 1.1
FALUCA, a pivotal Phase III study of fruquintinib
PRs, ORR was 42.9% (3/7) and DCR was 85.7% (6/7),
criteria: to evaluate the safety and toxicity profile
in 527 third-line NSCLC patients, and late last
with ORR of 13.6% (3/22) and DCR of 40.9% (9/22)
of savolitinib in mCRPC patients; and to identify
year initiated FRUTIGA, a pivotal Phase III study
amongst the overall efficacy evaluable aberrant
potential predictive and prognostic factors. The
of fruquintinib in combination with Taxol® in the
c-MET set. As of data cut-off, the longest duration
umbrella study targets to enroll around 500 patients
second-line setting for gastric cancer. Furthermore,
of treatment was in excess of two years. Savolitinib
into six treatment arms based on molecular status,
a Phase II study of fruquintinib in combination with
monotherapy was determined as safe and well
with patients with c-MET-driven disease receiving
Iressa® in first-line EGFR activating mutation NSCLC
tolerated in patients with advanced gastric cancer.
savolitinib. High levels of c-MET over expression can
began in early 2017, with encouraging preliminary
Grade 3 or above treatment emergent AEs occurring
be prevalent prostate cancer patients.
results presented at the 2017 WCLC; and a Phase I
in above 5% of patients included abnormal hepatic
study of fruquintinib in the United States was also
function in 12.9% (4/31), each of gastrointestinal
Fruquintinib (HMPL-013): Fruquintinib is a
initiated in late 2017, the first step in development
bleeding or decreased appetite in 9.7% (3/31 each),
highly selective and potent oral inhibitor of VEGFR
outside China. In China, fruquintinib is jointly
and each of diarrhea or gastrointestinal perforation
1/2/3 that was designed to be a global best-
developed with Lilly, our commercial partner.
in 6.4% (2/31 each). This China study concluded that
in-class VEGFR inhibitor for many types of solid
savolitinib monotherapy demonstrated promising
tumors. Fruquintinib’s unique kinase selectivity has
TPP 15 – NDA submitted June 2017 (NCT02314819) –
anti-tumor efficacy in gastric cancer patients with
been shown to reduce off-target toxicity thereby
Phase III study in CRC (third-line), fruquintinib
c-MET gene amplification, and the potential benefit
allowing for better target coverage, as well as
monotherapy (China) – The FRESCO study is a pivotal
to these patients warrants further exploration, with
possible use in combination with other agents
Phase III study in 416 patients with locally advanced
Phase II enrollment continuing in China. The VIKTORY
such as chemotherapies, targeted therapies and
or metastatic CRC disease that progressed following
Phase II study is ongoing in c-MET gene amplified
immunotherapies. We believe these are points
at least two prior systemic chemotherapies. Patients
patients in South Korea, with preliminary data likely
of meaningful differentiation compared to other
were randomized in a 2:1 ratio to receive either
to be presented at a major scientific conference in
approved small molecule VEGFR inhibitors, such as
5mg of fruquintinib QD orally, on a 3 weeks on/1
2018.
TPP 12 and TPP 13 – Enrolling (NCT02447380/
NCT02447406) – Phase II studies of savolitinib
(600mg QD) in combination with Taxotere® in
c-MET over-expression or c-MET gene amplification
gastric cancer (South Korea) – Phase II studies are
underway to assess safety/tolerability of savolitinib
and Taxotere® combination as well as preliminary
efficacy of the combination therapy in both c-MET
gene amplified patients and the approximately 40%
of gastric cancer patients, that harbor c-MET over-
expression. The VIKTORY Phase II is ongoing in South
Korea in TPP 12 and 13, with preliminary data likely
to be presented at a major scientific conference
in 2018.
Fruquintinib – 3rd Line colorectal cancer
Best-in-class efficacy/safety – Ph.III FRESCO data ASCO 2017[1]
Overall Survival (Primary Endpoint)
Median (months)
95% CI
Stratified HR (95% CI)
Fruquintinib + BSC
(N=278)
9.30
8.18 – 10.45
Placebo + BSC
(N=138)
6.57
5.88 – 8.11
0.65 (0.51 – 0.83)
p-value <0.001
l
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b
a
b
o
r
P
1.00
0.75
0.50
0.25
0.00
Fruquintinib + BSC
Placebo + BSC
0
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
[1] ASCO = American Society of Clinical Oncology Annual Meeting.
Months
HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
23
Operations Review – Innovation Platform
Fruquintinib – FALUCA Phase III in 3L NSCLC
Phase III enrollment complete (n=527); top-line results Q4 2018
3L NSCLC Phase II: Progression Free Survival
Fruquintinib (n=61)
Placebo (n=30)
Events, n
Median, mo.
40 (65.6%)
21 (70.0%)
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
13
14
Time from randomization (months)
clinical data and statistical analysis; and chemistry,
manufacturing and control of standards and process.
We have also facilitated the conduct of clinical
site visits including Good Clinical Practice (GCP)
and Good Laboratory Practice (GLP) inspections.
We are currently entering the PAI (pre-approval
inspection) process for our active pharmaceutical
ingredient (API) contract manufacturer as well as
the PAI and GMP certification process for our Suzhou
formulation facility.
TPP 16 – Enrollment complete (NCT02691299) –
Phase III study of fruquintinib monotherapy in third-
line NSCLC (China) – Following a positive Phase
II study comparing fruquintinib with placebo in
advanced non-squamous NSCLC patients who have
failed two prior systemic chemotherapies, or third-
line NSCLC, we initiated a Phase III registration study,
the FALUCA study, in December 2015. Results of the
Phase II study were presented at the 2016 WCLC and
have been accepted for publication in the Journal of
Clinical Oncology. In February 2018, we completed
enrollment of the FALUCA study in China, in which
week off cycle, plus best supportive care or placebo
is in contrast to Stivarga® which was markedly
a total of 527 patients were randomized at a 2:1
plus best supportive care. The primary endpoint of
worse and often difficult to manage in this
ratio to receive either 5mg of fruquintinib orally
median OS was 9.30 months [95% CI: 8.18–10.45] in
patient population in the CONCUR study. The most
once per day, on a 3 weeks on/1 week off cycle plus
the fruquintinib group versus 6.57 months [95% CI:
5.88–8.11] in the placebo group, with a hazard ratio
of 0.65 [95% CI: 0.51–0.83; two-sided p<0.001]. The
secondary endpoint of median PFS was 3.71 months
[95% CI: 3.65–4.63] in the fruquintinib group versus
1.84 months [95% CI: 1.81–1.84] in the placebo
frequently reported fruquintinib-related Grade
≥3 AEs included hypertension (21.2%), hand-
foot skin reaction (10.8%), proteinuria (3.2%)
best supportive care, or placebo plus best supportive
care. The primary endpoint for FALUCA is OS, with
secondary endpoints including PFS, ORR, DCR and
and diarrhea (2.9%), all possibly associated with
VEGFR inhibition. No other Grade ≥3 AEs exceeded
1.4% in the fruquintinib population, including
DoR. We expect to reach median OS endpoint
maturity and report top-line results in late 2018.
group, with a hazard ratio of 0.26 [95% CI: 0.21–0.34;
hepatic function AEs such as elevations in bilirubin
TPP 17 – Enrolling (NCT02976116) – Phase II study of
two-sided p<0.001]. Significant benefits were also
(1.4%), alanine aminotransferase (“ALT”) (0.7%) or
fruquintinib in combination with Iressa® in first-line
seen in other secondary endpoints. The fruquintinib
aspartate aminotransferase (“AST”) (0.4%). In terms
NSCLC (China) – In early 2017, we initiated a multi-
group DCR was 62.2% vs. 12.3% for placebo
of tolerability, dose interruptions or reductions
center, single-arm, open-label, dose-finding Phase
(p<0.001), while the ORR based on confirmed PRs
occurred in only 35.3% and 24.1% of patients in the
II study of fruquintinib in combination with Iressa®
was 4.7% vs. 0% for placebo (p=0.012).
fruquintinib arm, respectively, and only 15.1% of
in the first-line setting for patients with advanced
patients discontinued treatment of fruquintinib due
or metastatic NSCLC with EGFR activating mutations.
In terms of safety, results showed that fruquintinib
to AEs vs. 5.8% for placebo.
had a manageable safety profile with lower off-
We have enrolled about 50 patients in this study
with the objective to evaluate the safety and
target toxicities compared to other VEGFR TKIs. Of
Since completing submission of the NDA to the
tolerability as well as efficacy of the combination
particular interest was that the Grade 3 or above
CFDA in early June 2017, we have engaged with
therapy. Preliminary data was presented at the
hepatotoxicity was similar for the fruquintinib
the Center for Drug Evaluation (CDE) to conduct
2017 WCLC, with the eight (31%) Grade 3 treatment
group as compared to the placebo group, which
reviews in the areas of: pharmacology & toxicity;
emergent AEs being increased ALT (19%); increased
24 HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
Fruquintinib – 1L NSCLC combo with Iressa®
Two small molecule TKIs allow for better management of toxicity
Promising efficacy in first-line – 76% ORR (13/17).[1,2,3]
)
%
(
e
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h
c
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c
r
e
p
t
s
e
B
20
10
0
-10
-20
-30
-40
-50
-60
Disease Control Rate (DCR)[1][2]
Median time to response (days)
100% (17/17)
56.0
Stable Disease
Partial Response
Data as of October 10, 2017.
Combination of highly selective TKIs vs. MAbs: daily dose
flexibility improves tolerability. This enables maintained
drug exposure, leading to more durable response.[2,3]
PR
PR
PR
SD
PR
PR
PR
SD
PR
PR
PR
PR
PR
PR
PR
[4]
PR
PR
SD
PR
SD
PR
PR
SD
PR
PR
PR
SD
PR
PR
SD
PR
PR
PR
PR
PR
PR
5mg fruquintinib + 250mg Iressa®
4mg fruquintinib + 250mg Iressa®
3mg fruquintinib + 250mg Iressa®
fruquintinib and Iressa® interrupted
Partial Response[2]
Stable Disease
Treatment continuing
PR
SD
0
28
56
84
112
140
168
196
224
252
Data as of October 10, 2017.
Duration of Treatment (days)
[1] Best tumor response for efficacy evaluable patients (patients who had both baseline and post-baseline tumor assessments); ORR = Objective Response
Rate; [2] Four PRs not yet confirmed at the time of data cut-off date; [3] Lu, S., et al, “A Phase II study of fruquintinib in combination with gefitinib in stage
IIIb/IV NSCLC patients harboring EGFR activating mutations”, ID 10907 IASLC 18th World Conference on Lung Cancer, Yokohama, Japan, October 15–18,
2017; [4] Drug discontinuation due to Grade 3 proteinuria and Grade 3 QTc prolonged.
Operations Review – Innovation Platform
AST (4%); proteinuria (4%) and hypertension (4%).
There were no serious AEs or those that lead to
death. Preliminary results in 17 efficacy evaluable
patients showed an ORR of 76% (13/17), including
9 confirmed and 4 unconfirmed PRs at the time of
data cut-off, as well as a DCR of 100% (17/17).
Fruquintinib’s unique safety and tolerability profile,
resulting from its high kinase selectivity, combined
with flexibility to adjust dosage to manage
treatment emergent toxicities due to its shorter half-
life versus monoclonal antibody therapies, along
with its potent anti-angiogenic effect, makes it a
high potential combination partner for EGFR-TKIs.
Subject to continued positive data in TPP 16, we will
consider Phase III registration studies both inside
and outside of China.
TPP 18 – Enrolling (NCT03251378) – Phase I
fruquintinib monotherapy in advanced solid tumors
(U.S.) – In December 2017, we initiated a multi-
center, open-label, Phase I clinical study to evaluate
the safety, tolerability and PK of fruquintinib in
U.S. patients with solid tumors. Upon completion,
likely in late 2018, our intention is to begin
exploring multiple innovative combination studies
of fruquintinib and other TKIs, chemotherapy and
immunotherapy agents in the United States.
TPP 19 – Enrolling (NCT03223376) – Phase III
study of fruquintinib in combination with Taxol® in
gastric cancer (second-line) (China) – In early 2017,
at the ASCO Gastrointestinal Cancers Symposium,
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 28 of 32 patients were
efficacy evaluable with an ORR of 36% (10/28 based
on confirmed PRs) and a DCR of 68% (19/28). At
fruquintinib RP2D, ≥16 week PFS was 50% and
≥7 month OS was 50%. Tolerability of the RP2D
combination was as expected with common
treatment related Grade ≥3 AEs being neutropenia
(41%), leukopenia (28%), decreased hemoglobin
HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
25
Operations Review – Innovation Platform
Sulfatinib’s unique angio-immuno kinase profile
Multi-indication global development program, initially for NETs[1]
Sulfatinib’s unique angio-immuno kinase profile & MoA[2]
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
(minimize T-cell
loss/seepage)
FGFR
Antigen release
(activation of
T(cid:430)cells)
CSF-1R
Blocks negative regulators
(suppresses macrophage cloak)
[1] NET = Neuroendocrine Tumors; [2] MoA = Mechanism of Action.
data that show sulfatinib, in addition to inhibiting
VEGFR and FGFR1, is a potent inhibitor of CSF-1R, a
signaling pathway involved in blocking the activation
of tumor-associated macrophages. Sulfatinib is the
first oncology candidate that we have taken through
proof-of-concept in China and subsequently started
clinical development in the United States. We are
currently conducting six clinical studies on sulfatinib
and retain all rights to sulfatinib worldwide.
In early 2017, at the ENETS conference, we presented
the results of an open-label, single-arm Phase II
study in China to assess the efficacy and safety
of sulfatinib 300mg QD monotherapy in patients
(6%), and hand-foot syndrome (6%). Based on this
endpoints including PFS, ORR, DCR and quality-of-life
with advanced Grade 1 or 2 NETs. A total of 81
encouraging Phase Ib data, in October 2017 we
score. Biomarkers related to the anti-tumor activity
patients (41 pancreatic NET and 40 extra-pancreatic
initiated the FRUTIGA study, a randomized, double-
of fruquintinib will also be explored. We intend to
NET) were enrolled. The majority of patients had
blind, Phase III study to evaluate the efficacy
conduct an interim analysis of the FRUTIGA study for
Grade 2 diseases (79%) and had failed previous
and safety of fruquintinib combined with Taxol®
futility, sometime during 2019.
systemic treatments (65%). As of January 2017, 13
compared with Taxol® monotherapy for second-line
patients had confirmed PR and 61 patients had SD,
treatment of advanced gastric or gastroesophageal
Sulfatinib (HMPL-012): Sulfatinib is an oral drug
corresponding to an overall ORR of 16.0% (13/81),
junction (GEJ) adenocarcinoma, in patients who
candidate with a unique angio-immuno kinase
with 17.1% (7/41) in pancreatic NET and 15.0% (6/40)
had failed first-line standard 5-flourouracil (5-FU)-
profile which provides both anti-angiogenesis effect
in extra-pancreatic NET, and an overall DCR of 91.4%.
based chemotherapy. A total of over 500 patients
and, we believe, activates and effectively enhances
Median overall PFS was estimated to be 16.6 months
are expected to be enrolled into FRUTIGA at a 1:1
the body’s immune system, specifically T-cells.
(95% CI: 13.4, 19.4) with longer median PFS in
ratio. The primary endpoint is OS, with secondary
Importantly, in 2016 we presented pre-clinical
pancreatic NET estimated at 19.4 months and shorter
26 HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
Sulfatinib – China NET – Phase II (ENETS 2017 [1])
Efficacy in all NET; & patients who failed on Sutent®/Afinitor®
Phase II: Progression-Free Survival (PFS)
100%
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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
15
12
Time (months)
18
21
Data has yet to reach maturity – data cut-off as of
Jan 20, 2017.
[1] ENETS = European Neuroendocrine Tumour Society.
Sulfatinib – China NET – Phase II (ENETS 2017 [1])
Tumor devascularization & central necrosis
2
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Week 52
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[1] ENETS = European Neuroendocrine Tumour Society. Data cut-off as of Jan 20, 2017.
Operations Review – Innovation Platform
time to response, DoR, safety and tolerability. We
expect to complete enrollment in 2019 and present
top-line results thereafter.
TPP 21 – Enrolling (NCT02588170) – 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 in 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, DoR, safety and tolerability. We
expect to complete enrollment in 2019 and present
top-line results thereafter.
TPP 22 – Enrolling (NCT02549937) – Phase I
sulfatinib monotherapy in advanced solid tumors
(U.S.) – A Phase I study in cancer patients in the
United States is now close to completion having
confirmed the RP2D dose. We are currently in final
planning for an expansion of sulfatinib development
in the United States into a multi-arm Phase IIa study
to explore efficacy and safety in both NET and solid
tumor patients.
TPP 23 and TPP 24 – Enrollment complete
(NCT02614495) – Phase II study in recurrent/
refractory thyroid cancer patients (China) – In 2016,
we began an open-label, Phase II proof-of-concept
median PFS in extra-pancreatic NET estimated at
II efficacy data and tolerability in patients with
study in patients with recurrent/refractory MTC or
13.4 months. Importantly, there were fourteen
advanced NETs, we initiated two randomized Phase
RAI-refractory DTC in China where there are few safe
patients who had progressed after treatment with
III trials (TPP 20 and TPP 21 below) in China along
and effective treatment options. In June 2017, we
targeted therapies (e.g. Sutent® and Afinitor®) and
with U.S. development (TPP 22 below).
all benefited from sulfatinib treatment (4 PRs and
presented preliminary Phase II data at ASCO showing
that as at December 31, 2016 a total of 18 patients
10 SDs). These Phase II data compared favorably
TPP 20 – Enrolling (NCT02589821) – Phase III
had been enrolled, and treated with sulfatinib, with
to the less than 10% ORR and 11.4 month median
pancreatic NET sulfatinib monotherapy (China) –
preliminary data showing that confirmed PRs were
PFS for Sutent® and Afinitor®, the two approved
In 2016, we initiated the SANET-p study, which
reported in 3/10 (30.0% ORR) RAI-refractory DTC
single agent therapies for pancreatic NET. Sulfatinib
was well tolerated with Grade ≥3 AEs, with >5%
incidence, regardless of causality of hypertension
is a pivotal Phase III study in patients with low-
patients and 1/6 (16.7% ORR) MTC patients, and all
or intermediate-grade, advanced pancreatic NET.
other patients were SD.
Patients are randomized in a 2:1 ratio to receive
(31%), proteinuria (14%), hyperuricemia (10%),
either 300mg of sulfatinib orally QD, or placebo, on
TPP 25 – Enrolling (NCT02966821) – Phase II study
hypertriglyceridemia (9%), diarrhea (7%) and ALT
a 28-day treatment cycle. The primary endpoint is
in chemotherapy refractory biliary tract cancer
increase (6%). Based on the above promising Phase
PFS, with secondary endpoints including ORR, DCR,
patients (China) – In early 2017, we began a Phase
HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
27
Operations Review – Innovation Platform
Epitinib –70% response in NSCLC with brain mets[1]
Unmet medical need for ~50% of NSCLC patients with brain mets[2]
Phase Ib [1] – epitinib monotherapy in EGFRm+ NSCLC
patients – efficacy in lung in-line with Iressa®/Tarceva®
EGFR TKI naïve
excl. c-MET +ve (N=19)
68.4% (13/19) #
100.0% (19/19) #
160mg oncedaily dose
(“QD”)
Objective Response Rate
Disease Control Rate
EGFR TKI naïve
(N=21)
61.9% (13/21) #
90.5% (19/21) #
40
SD
)
%
(
e
n
i
l
e
s
a
B
m
o
r
f
s
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t
n
e
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r
e
P
30
20
10
0
-10
-20
-30
-40
-50
-60
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
Objective Response Rate:
OOObbbjjjbbbjjjeeeccctttttttiiivvveee RRReeessspppooonnnssseee RRRaaattteee:::
18.2% (8/44 patients)
18.2% (8/44 patients)
Note: The two EGFR TKI naïve
patients that progressed were
c-MET +ve
PR PR
*
PR
PR
PR
* PR
PR PR
PR PR
[1] Dose expansion stage – data cut-off Sept 20, 2016; [2] Li B, Bao YC, Chen B, et al. Therapy for non-small cell lung cancer patients with brain
metastasis. Chinese-German J Clin Oncol, 2014, 13: 483–488; * Unconfirmed PR, due to no further assessment at cut-off date; # Includes both
confirmed and unconfirmed PRs; ^ c-MET amplification/high expression identified.
demonstrated brain penetration and efficacy in
both pre-clinical and 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
without an effective targeted therapy. We currently
retain all rights to epitinib worldwide.
TPP 26 – Continues to enroll (NCT02590952) – Phase
Ib epitinib monotherapy in NSCLC patients with
activating EGFR-mutations and brain metastasis
(China) – In December 2016 at the WCLC, we
presented encouraging efficacy data for an open
label, multi-center Phase I dose expansion study. For
EGFR TKI naïve patients treated with epitinib 160mg
QD dose, ORR was in the range of 60-70% (including
confirmed and unconfirmed PRs). During 2017, we
continued to enroll patients in this Phase Ib study
exploring a lower 120mg QD dose in the context of
further optimizing tolerability for long-term usage.
We expect to decide the Phase III dose in early 2018
and initiate Phase III shortly thereafter.
TPP 27 – Enrolling (NCT03231501) – Phase Ib/II
study in glioblastoma – Glioblastoma is a primary
brain cancer that harbors high levels of EGFR gene
amplification. This month, we initiated a Phase Ib/
II study multi-center, single-arm, open-label study
to evaluate the efficacy and safety of epitinib as a
monotherapy in patients with EGFR gene amplified,
histologically confirmed glioblastoma. The primary
endpoint is ORR.
II proof-of-concept study in patients with biliary
Epitinib (HMPL-813): A significant portion of
tract cancer (also known as cholangiocarcinoma),
NSCLC patients, estimated at approximately 10-
a heterogeneous group of rare malignancies
15%, have developed brain metastasis by the time
Theliatinib (HMPL-309): Theliatinib is a novel
molecule EGFR inhibitor under investigation for
arising from the biliary tract epithelia. We see a
of first diagnosis and eventually approximately
the treatment of solid tumors. Tumors with wild-
major unmet medical need for patients who have
50% of NSCLC patients go on to develop brain
progressed on chemotherapy, and sulfatinib may
metastasis. Patients with brain metastasis have a
type EGFR activation, for instance, through gene
amplification or protein over-expression, are less
offer a new targeted treatment option in this
dismal prognosis and a poor quality of life with
sensitive to current EGFR TKIs, Iressa® and Tarceva®,
tumor type.
limited treatment options. Epitinib is a potent
due to their sub-optimal binding affinity. Theliatinib
and highly selective oral EGFR inhibitor which has
has been designed with strong affinity to the wild-
28 HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
Theliatinib – encouraging activity observed
Potent & highly selective TKI – strong affinity to wild-type EGFR kinase
CASE STUDY – EGFR protein over expression
� May 4, 2016: Man, 62, stage IV esophageal squamous cell cancer cT3N0M1with liver
metastasis. High protein overexpression – EGFR IHC local test: >75% of tumor cells 3+.
� May 4 to Sep 23, 2016: nimotuzumab/placebo + paclitaxel + cisplatin – 6 cycles with
best tumor response: PD.
� Oct 11, 2016: Began theliatinib 400mg daily.
� Dec 12, 2016: Cycle 3 Day 1 (C3D1) tumor assessment: Target lesion (liver metastasis)
shrank -33% (36mm to 23mm diameter) – unconfirmed PR.
Operations Review – Innovation Platform
400mg QD amongst esophageal cancer patients with
EGFR over expression was warranted (TPP 29).
TPP 29 – Enrolling (NCT02601274) – Phase Ib
expansion theliatinib monotherapy in esophageal
cancer (China) – In early 2017, we began a Phase Ib
proof-of-concept expansion study of theliatinib in
esophageal cancer patients with EGFR protein over-
expression or gene amplification. This study is now
in the process of expanding through the opening of
further clinical sites in China.
� Jan 23, 2017: Withdrew from study due to AEs – Gr 1 (diarrhea/pruritus/dental ulcer),
HMPL-523: HMPL-523 is a potential first/best-
Gr 2 (epifolliculitis/dermatitis).
9/23/2016 Baseline
12/12/2016 C3D1
in-class oral inhibitor targeting Syk, a key protein
involved in B-cell signaling. Modulation of the B-cell
signaling system has proven to have significant
potential for the treatment of certain chronic
diseases in immunology, such as rheumatoid arthritis
or lupus, as well as hematological cancers. We
currently retain all rights to HMPL-523 worldwide.
TPP 30 and TPP 31 – Complete (NCT02105129) –
Phase I study (healthy volunteers) (Australia/China) –
We believe HMPL-523, as an oral drug candidate, has
advantages over intravenous monoclonal antibody
type EGFR kinase and has been shown to be five to
and well-tolerated, with no dose limiting toxicities or
ten times more potent than Tarceva®. Consequently,
maximum tolerated dose established. PK exposure
we believe that theliatinib could benefit patients
increased with dose, with 300mg QD or more
with tumor-types with a high incidence of wild-
considered sufficient to inhibit EGFR phosphorylation.
type EGFR activation. This is notable in certain cancer
Amongst the 21 patients that received 120mg
types such as esophageal cancer, where 8-30%
harbors EGFR gene amplification and 30-90% EGFR
overexpression. We currently retain all rights to
to 500mg QD, there were only four treatment
emergent Grade ≥3 AEs: each of gastrointestinal
bleeding, decreased white blood cell count, anemia
theliatinib worldwide.
TPP 28 – Complete (NCT02601274) – Phase I study
or decreased platelet count of 4.8% (1/21 each). There
were no incidences of Grade ≥3 rash or diarrhea.
Amongst seven esophageal cancer patients, five
of theliatinib monotherapy in solid tumors (China) –
had measurable lesions and could be evaluated for
At the 2017 CSCO conference, we presented results
response, with all five achieving SD. Of the efficacy
from the Phase I study of the safety and preliminary
evaluable patients in the 120mg to 500mg cohorts,
anti-tumor activity of theliatinib. Results showed that
44.4% (8/18) had SD after 12 weeks. The study
doses up to 500mg QD were determined to be safe
concluded that further development of theliatinib
HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
29
completed five dose cohorts. In both Australia and
China, we have established both efficacious QD and
twice daily dose regimens. We are now in the process
of increasing the number of clinical sites in Australia
and China to support Phase Ib/II expansion in a
broad range of indolent non-Hodgkin’s lymphoma
sub-types. We target to present dose escalation and
expansion results, including preliminary proof-of-
concept data, at a major scientific conference later
in 2018.
HMPL-689: HMPL-689 is a novel, potential best-
in-class, highly selective and potent small molecule
inhibitor targeting the isoform PI3Kδ, a key
component in the B-cell receptor signaling pathway.
We have designed HMPL-689 with superior PI3Kδ
isoform selectivity, in particular to not inhibit PI3Kγ
(gamma), to minimize the risk of serious infection
caused by immune suppression. HMPL-689’s PK
properties have been found to be favorable with
good oral absorption, moderate tissue distribution
and low clearance in preclinical PK studies. We also
expect that HMPL-689 will have low risk of drug
accumulation and drug-to-drug interaction. We
currently retain all rights to HMPL-689 worldwide.
Operations Review – Innovation Platform
HMPL-523 – hematological malignancies
Syk exciting target emerging – Lymphoma PoC ongoing
The B-cell signaling is critical in hematological cancer with three
breakthrough therapies recently approved.
� Sales in 2017 of Imbruvica® were $1.9 billion; Zydelig® $0.5 billion;
Jakafi® $1.1 billion; & Rituxan® $6.0 billion[1].
Rituxan®
TNFα
IL-6 Receptor
CD79
A B
P
P
LYN
S
Y
K
P
PIP2
PIP3
PI3Kδ
P
BTK
P
TNFα Receptor
Cell Membrane
AKT
P
mTOR
P
PLCγ2
Entospletinib
Zydelig®
Imbruvica®
PKCβ
HMPL-523
HMPL-689
9 Acalabrutinib
IKK
TAK-659
BGB-3111
TNF receptor
associated
factors
(TRAFs)
Jakafi®
J
A
K
1
J
A
K
2
STAT
P
P
STAT
Legend [2]
Legend [2]
Legend
)
Hematological Cancer (Onc.))
g
Hematological Cancer (Onc.)
(
Immunology (Imm.)
NF-κB
Pro-inflammatory
cytokines
[1] Rituxan® 2017 sales in oncology only; [2] Approved Drug = ®; All others are clinical candidates.
immune modulators in rheumatoid arthritis in that
pharmacodynamic (“PD”) profile of HMPL-523. We
small molecule compounds can be taken orally and
have submitted IND applications for autoimmune
have shorter half-lives, thereby reducing the risk of
diseases and expect, pending the imminent
infections from sustained suppression of the immune
submission of additional data requested by the U.S.
system. The Phase I dose escalation study showed
FDA, to progress into a Phase II proof-of-concept
HMPL-523 exhibited a tolerable safety profile, with
study in immunology in late 2018 or early 2019.
data presented in full at the 2016 American College
of Rheumatology conference. Off-target toxicities
TPP 32 and TPP 33 – Enrolling (NCT02503033/
such as diarrhea and hypertension, seen with the
NCT02857998) – Phase I study of HMPL-523 in
first-generation Syk inhibitor fostamatinib, were
hematological cancers (Australia/China) – In early
not observed.
2016, we initiated a Phase I dose escalation study
of HMPL-523 in Australia in hematological cancer
In addition to tolerable safety, this Phase I
patients and have completed seven dose cohorts.
dose escalation study evaluated the PK and
China Phase I began in early 2017 and has now
30 HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
HMPL-689 – Phase I Australia & China started
Designed to be a best-in-class inhibitor of PI3Kδ
More potent / more selective than Zydelig®, duvelisib & Aliqopa®.
HMPL-689
Enzyme IC50 (nM)
Zydelig®
duvelisib
PI3Kδ
0.8 (n = 3)
2
1
PI3Kγ (fold vs. PI3Kδ)
114 (142x)
104 (52x)
2 (2x)
PI3Kα (fold vs. PI3Kδ)
>1,000 (>1,250x)
866 (433x)
143 (143x)
PI3Kδ
human whole blood CD63+
3
14
15
Aliqopa®
0.7
6.4 (9x)
0.5 (1x)
n/a
PI3Kβ (fold vs. PI3K )
δ
87 (109x)
293 (147x)
8 (8x)
3.7 (5x)
Operations Review – Innovation Platform
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.
TPP 36 and TPP 37 – Enrolling (NCT02966171)/
NCT03160833) – Phase I dose escalation (Australia/
China) – In early 2017, we initiated first-in-human
Phase I dose escalation studies in both Australia
and China to evaluate safety, tolerability, PK, PD
and preliminary anti-tumor activity in patients with
advanced or metastatic solid tumors.
HM004-6599: HM004-6599 is a proprietary
botanical drug for the treatment of inflammatory
TPP 34 and TPP 35 – Enrolling (NCT02631642/
HMPL-453: HMPL-453 is a novel, potentially first-
bowel diseases, which we are developing through
NCT03128164) – Phase I dose escalation (Australia/
in-class, highly selective and potent small molecule
NSP, a 50/50 joint venture with Nestlé. In the first
China) – In 2016, we completed a Phase I dose
inhibitor that targets FGFR 1/2/3, a sub-family of
half of 2017, we submitted our IND application for
escalation study in Australia in healthy adult
receptor tyrosine kinases. Aberrant FGFR signaling
HM004-6599 in China and we now await clearance
volunteers to evaluate HMPL-689’s PK and safety
has been found to be a driving force in tumor
to proceed into Phase I clinical studies. We also target
profile following single oral dosing. Results were as
growth, promotion of angiogenesis and resistance
to initiate Phase I clinical studies in Australia in 2018.
expected with linear PK properties and good safety
to anti-tumor therapies. To date, there are no
HM004-6599 is an enriched/purified re-formulation
profile. We subsequently received IND clearance in
approved therapies specifically targeting the FGFR
of HMPL-004, our drug candidate that reported
China and then initiated a Phase I dose escalation
signaling pathway. In pre-clinical studies, HMPL-453
positive Phase II results in ulcerative colitis in 2010
and expansion study in patients with hematologic
demonstrated excellent kinase selectivity as well as
but then went on to prove futile in an interim analysis
malignancies in August 2017.
strong anti-tumor potency. Abnormal FGFR gene
of the subsequent Phase III study in 2014.
HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
31
Operations Review – Commercial Platform
A powerful Rx Commercial Platform in China
Chi-Med management run all day-to-day operations
~2,300 Rx
Sales People
NORTH
Pop’n: 320m (23%)
CV Medical Reps:
532 (25%)
CNS Medical Reps:
25 (22%)
HSP Sales Staff:
0 (0%)
557
(24%)
WEST
Pop’n:
CV Medical Reps:
CNS Medical Reps:
HSP Sales Staff:
100m (7%)
79 (3%)
5 (4%)
0 (0%)
84
(4%)
SOUTHWEST
Pop’n: 190m (14%)
CV Medical Reps:
121 (6%)
CNS Medical Reps:
9 (8%)
HSP Sales Staff:
0 (0%)
Notes: 2010 Population – China State Census.
Chi-Med Rx sales team data = December 31, 2017.
2017 Sales*:
US$411m
up 10%
* Sales of Prescription Drugs subsidiary and non-consolidated
joint venture.
32 HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
130
(6%)
580
(25%)
EAST
Pop’n: 393m (28%)
CV Medical Reps:
855 (40%)
CNS Medical Reps:
50 (43%)
HSP Sales Staff:
31 (100%)
936
(41%)
CENTRAL-SOUTH
Pop’n: 383m (28%)
CV Medical Reps:
553 (26%)
CNS Medical Reps:
27 (23%)
HSP Sales Staff:
0 (0%)
n National Coverage:
Over 300 cities & towns.
~22,500 hospitals.
~98,000 doctors.
n Medical representatives covering
cardiovascular & central nervous
system nationally.
Operations Review – Commercial Platform
SHPL – New factory in Fengpu District, Shanghai
COMMERCIAL PLATFORM
The Commercial Platform, which has been built
Prescription Drugs business:
In 2017, sales of our Prescription Drugs subsidiaries
SXBX pill: SHPL’s main product is SXBX pill, an oral
vasodilator and pro-angiogenesis prescription
over the past 17 years, is focused on two business
grew by 11% to $166.4 million (2016: $149.9m),
therapy approved to treat coronary artery disease,
areas. First is our core Prescription Drugs business,
and sales of our non-consolidated Prescription Drugs
which includes stable/unstable angina, myocardial
a high-margin/profit business operated through our
joint venture (SHPL) grew by 10% to $244.6 million
infarction and sudden cardiac death. There are over
joint ventures SHPL and Hutchison Sinopharm, in
(2016: $222.4m). The consolidated net income
1 million deaths due to coronary artery disease per
which we nominate management and run the day-
attributable to Chi-Med from our Prescription Drugs
year in China, with this number set to rise due to an
to-day operations. Our Prescription Drugs business
business was $29.0 million (2016: $61.1m). Adjusted
aging population with high levels of smoking (34%
is a platform that we plan to use to launch our
(non-GAAP) consolidated net income attributable to
of adults), increasing levels of obesity (28% of adults
Innovation Platform drugs once approved in China.
Chi-Med grew 28% to $26.5 million (2016: $20.7m),
overweight) and hypertension (26% of adults). SXBX
Second is our Consumer Health business, which
when excluding one-time gains of $2.5 million in
pill is the third largest botanical prescription drug in
is a profitable and cash flow generating business
2017 from research and development subsidies
this indication in China, with a market share of 15.4%
selling primarily market-leading, household-name
and $40.4 million in 2016 primarily from property
nationally and 47.0% in Shanghai. Sales of SXBX pill
OTC pharmaceutical products through our non-
compensation. The Prescription Drugs business
have grown more than twenty-fold since 2001 due to
consolidated joint venture HBYS.
represented 72% of our overall Commercial Platform
continued geographical expansion of sales coverage,
net income in 2017.
In 2017, sales of our Commercial Platform’s
subsidiaries grew by 13% to $205.2 million (2016:
SHPL: Our own-brand Prescription Drugs business,
$180.9m), and sales of our Commercial Platform’s
operated through our non-consolidated joint
non-consolidated joint ventures, SHPL and HBYS,
venture SHPL, is a well-established and stable-
grew by 6% to $472.0 million (2016: $446.5m)
growth business. In 2016, SHPL delivered sales
resulting in consolidated net income attributable
growth of 23%. However, sales in the first half of
to Chi-Med from our Commercial Platform of
2017 were subdued at $129.7 million (up 2% versus
$40.0 million (2016: $70.3m). Stripping out one-
H1 2016) as a result of an 11% price increase on our
time gains, adjusted (non-GAAP) consolidated
main product SXBX pill, which occurred in December
net income attributable to Chi-Med from our
2016. As expected, SHPL sales performance, as
Commercial Platform grew by 25% to $37.5 million
well as gross margins, materially improved as 2017
(2016: $29.9m).
progressed. Sales in the second half were $114.9
million (up 20% versus H2 2016).
including 7% to $209.2 million in 2017 despite the
aforementioned late 2016 price increase.
She Xiang Bao Xin pills
Coronary artery disease (Rx)
HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
33
Operations Review – Commercial Platform
SXBX pill is protected by a formulation patent that
and medium-sized cities, but also in the majority of
expires in 2029 and is one of less than two dozen
county-level hospitals in China. SHPL’s new, GMP-
proprietary prescription drugs represented on China’s
certified factory is located 40 kilometers south of
National Essential Medicines List, which means that
Shanghai in Fengpu district, which holds 74 drug
all Chinese state-owned health care institutions
product manufacturing licenses and is operated by
are required to carry the drug. SXBX pill is a low-
about 550 manufacturing staff. This new factory has
cost drug, fully reimbursed in all provinces in China,
approximately tripled SHPL’s capacity and therefore
listed on China’s Low Price Drug List with an average
positions us well for continued long-term growth.
daily cost of RMB4.00, or approximately $0.60
(2016: RMB3.30). In the coming years, we anticipate
Hutchison Sinopharm: Our Prescription Drugs
stable growth in sales and profit for SXBX pill given
commercial services business, which is operated
the strength of its proposition and the expected
through Hutchison Sinopharm, focuses on providing
Seroquel® or quetiapine, is a second-
generation antipsychotic approved for the
treatment of schizophrenia, bipolar disorder
and as adjunct treatment of major depressive
disorder.
expansion of the coronary artery disease market in
logistics services to, and distributing and marketing
schizophrenia, conditions that are under-diagnosed in
China driven by an aging population and trends in
prescription drugs manufactured by, third-party
China. Seroquel® holds a 5.6% market share in China’s
diet leading to increasing obesity.
pharmaceutical companies in China. In 2017,
approximately $0.9 billion atypical anti-psychotic
Hutchison Sinopharm made continued progress with
prescription drug market, and 45% of China’s generic
The SHPL operation is large-scale in both the
sales up 11% to $166.4 million (2016: $149.9m) as
quetiapine market, primarily as a result of being the
commercial and manufacturing areas. The
a result of growth in the third-party drug distribution
first-mover and original patent holder on quetiapine.
commercial team now has about 2,300 medical
businesses and Seroquel®.
sales representatives which allows for the promotion
Seroquel® is the only brand in China to have an XR
(extended release) formulation, which in 2017 was
and scientific detailing of our prescription drug
Seroquel®: Seroquel® (quetiapine tablets) is an anti-
included on the NDRL, thereby providing us with major
products not just in hospitals in provincial capitals
psychotic therapy approved for bi-polar disorder and
competitive advantage over quetiapine generics.
34 HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
Operations Review – Commercial Platform
Hutchison Sinopharm is the exclusive marketing
Concor®: Concor® (bisoprolol tablets) is a cardiac
(2017: $166.4m). Importantly, however, this drop in
agent for Seroquel® tablets in China and through
beta1-receptor blocker, relieving hypertension and
reported sales will have no impact on profitability,
a team of about 120 dedicated medical sales
reducing high blood pressure. Concor® is the number
the service fees paid to Hutchison Sinopharm, or our
representatives reported sales in 2017 of $35.4
two beta-blocker in China with an approximately 18%
commercial team operations and expansion plans.
million (2016: $34.4m). The new China TIS (two-
national market share in China’s beta-blocker drug
invoice system), explained in more detail below,
market and 70% of China’s generic bisoprolol market.
came into effect in October 2017, at which point
Hutchison Sinopharm is now the exclusive marketing
Consumer Health business:
During 2017, sales of our Consumer Health
Hutchison Sinopharm’s Seroquel® operating model
agent in six provinces, markets that contain over
subsidiaries increased by 25% to $38.8 million (2016:
began progressively switching to a fee-for-service
360 million people. We have created synergy with
$31.0m) and sales of our non-consolidated Consumer
model. This change in business model has limited
SHPL’s existing cardiovascular medical sales team by
Health joint venture (HBYS) were flat at $227.4
effect on the past or future service fees paid by
detailing Concor® alongside SXBX pill on a fee-for-
million (2016: $224.1m). Consolidated net income
AstraZeneca to Hutchison Sinopharm for marketing
service basis. In 2017, we grew Concor® sales by 90%,
attributable to Chi-Med from our Consumer Health
Seroquel®, which in 2017 increased 22% to $11.4
resulting in service fees of $1.8 million (2016: $1.4m)
business grew by 20% to $11.0 million (2016: $9.2m)
million (2016: $9.3m).
to Hutchison Sinopharm and SHPL in aggregate.
as a result of several factors that are detailed below.
We expect growth in these fees will continue to be
The Consumer Heath business represented 28% of our
Subject to Hutchison Sinopharm’s continued delivery
driven by cardiovascular market expansion as well as
overall Commercial Platform net income in 2017.
of pre-specified annual sales targets, which would
potential further territorial expansion.
require approximately 22% sales growth in 2018
HBYS: Our OTC business operated through our non-
and 15% per year thereafter, we can continue to
Regulatory reform in the China pharmaceutical
consolidated joint venture, HBYS, focuses on the
retain exclusive commercial rights to Seroquel® in
distribution system – The new TIS has now been
manufacture, marketing and distribution of OTC
China until 2025. Notwithstanding potential changes
mostly rolled-out across China. In principle, the
pharmaceutical products. Its Bai Yun Shan brand
in government pricing policy, we expect Seroquel®
purpose of the TIS is to restrict the number of layers
is a market-leading, household name, established
to have a reasonable chance to meet these annual
in the drug distribution system in China, in order to
over 40 years ago, and is known by the majority
sales targets over the next several years due to the
improve transparency, compliant business conduct,
of Chinese consumers. In addition to over 1,000
XR formulation, its recent inclusion in the NDRL, as
and efficiency and thereby lower the cost of drugs.
manufacturing staff, in Guangdong and Anhui, and
well as expansion in diagnosis and treatment of anti-
The impact to us is that, starting in October 2017, the
189 drug product licenses, HBYS has a commercial
psychotic diseases in China.
Seroquel® sales model, in which our consolidated
team of about 1,000 sales staff that covers the
revenues historically reflected total gross sales of
national retail pharmacy channel in China.
Seroquel®, began to shift to a fee-for-service model
similar to that used all along on Concor®. This change
2017 was a year of major change for HBYS with the
will reduce the top-line revenues that Hutchison
move of the majority of our production to a new
Sinopharm will in the future be able to record from
low-cost factory over 1,400 kilometers away from
sales of Seroquel® as well as many of our other third-
its home base in Guangdong province. HBYS sales
party customers. Therefore, as a direct result of TIS,
had grown over five-fold since its establishment in
sales guidance for Hutchison Sinopharm for 2018
2005 and, during that period, HBYS had used third-
is now estimated at approximately $75-85 million
party contract manufacturers to support expansion,
Concor® or bisoprolol hemifumarate, is
a beta-blocker approved for the treatment of
hypertension.
HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
35
Operations Review – Commercial Platform
a strategy no longer possible under CFDA policy.
value. Guanbao was a Good Supply Practice (GSP)
$94.3 million (H2 2016: $78.5m). HBYS net income
In early 2017, we secured GMP-certification of our
distribution company which had been established
attributable to Chi-Med also rebounded strongly in
new factory in Bozhou, Anhui province, however,
via a joint venture in 2012. Sales reported under
the second half of 2017 increasing 185% to $3.7
final clearance to formally begin production from
HBYS for Guanbao in 2017 were $38.6 million (2016:
million (H2 2016: $1.3m) driven by the available
the local Guangdong and Anhui province FDAs only
$45.0m) as a result of partial year reporting due to
capacity and a decline in the prices of certain key
came in August 2017. This regulatory pause led HBYS
the divestiture. This low margin, primarily third-party
raw materials.
to have to continue to use contract manufacturers
OTC logistics business, with operations limited mainly
during the first half of 2017 while at the same time
to Henan province, had proven to be a business with
FFDS tablets and Banlangen granules: FFDS tablets
having to start recording depreciation charges for
no strategic value to Chi-Med.
our new factory. The delay also led to some short-
(angina) and Banlangen granules (anti-viral cold/
flu), the two main products of HBYS, are generic
term production capacity constraints.
Once the Bozhou factory began production, capacity
OTC drugs with leading national market share in
constraints were eliminated and the performance of
China of 38% (2016: 32%) and 53% (2016: 51%),
A further change came on September 1, 2017 when
HBYS, excluding the divested Guanbao, in the second
respectively. The first half of 2017 was a challenging
HBYS divested its 60% shareholding in Guanbao for
half of 2017 was particularly strong with revenue
period for FFDS and Banlangen with sales totaling
a consideration approximately equal to its carrying
on an adjusted (non-GAAP) basis increasing 20% to
$64.3 million (down 8% versus H1 2016) due to the
HBYS – New factory in Bozhou
36 HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
Operations Review – Commercial Platform
Banlangen granules
Anti-viral cold/flu (OTC)
aforementioned capacity constraints; unusually high
Guangzhou, and based on precedent land transactions
raw material prices on both Banlangen and Sanqi,
in the vicinity, we expect the auction value for Plot 2
the main raw material in FFDS; and a relatively quiet
to be over $100 million of which 40 to 50% would be
influenza season which held back Banlangen demand.
paid to HBYS as compensation for return of the land
In contrast, the second half of 2017 saw FFDS and
use rights. In addition, the move away from HBYS’s
Banlangen’s sales rebound to $54.5 million (up 17%
larger Plot 1 (59,400 sqm.) will be contingent on how
versus H2 2016) as all first half headwinds were either
the Bozhou factory develops, but, when auctioned,
entirely eliminated or materially reversed.
Plot 1 could bring HBYS compensation per square
In the mid- to longer-term, while profitability of
meter comparable to Plot 2.
Fu Fang Dan Shen tablets
Angina (OTC)
both FFDS tablets and Banlangen granules in any
Hutchison Healthcare Limited (“HHL”) and
since 2005, of which a total of $316.2 million has
given year will vary based on the severity of the
Hutchison Hain Organic Holdings Limited
been paid in dividends to Chi-Med and its partners,
climate/influenza season, which affect both raw
(“HHOH”): HHL, HHOH and other minor entities
with the balance retained by the joint ventures as
material prices and demand, we anticipate that cost
are subsidiaries involved in the commercialization
cash or used primarily to fund factory upgrades and
efficiencies in the new Bozhou factory will enhance
of health related consumer products. Sales of such
expansion. As of December 31, 2017, SHPL and HBYS
gross margins. Furthermore, we expect to benefit
products in 2017 grew by 25% to $38.8 million (2016:
held in aggregate $57.4 million in cash and cash
from the underlying general OTC market expansion
$31.0m) driven in part by good progress on the Zhi
equivalents, with no outstanding bank borrowings.
and the low risk of price erosion due to our focus on
Ling Tong® and Earth’s Best® infant nutrition business.
the retail pharmacy channel.
Commercial Platform dividends: The profits
HBYS property update – HBYS’s vacant Plot 2 (26,700
of the Commercial Platform continue to pass on
sqm.) in Guangzhou has been listed for sale as part
to the Chi-Med Group through dividend payments
of the Guangzhou municipal government’s urban
primarily from our non-consolidated joint ventures,
redevelopment scheme plan since 2016. The date
SHPL and HBYS. Dividends of $55.6 million (2016:
of this public auction will be determined by the
$30.5m) were paid from these joint ventures to
Guangzhou government, but we are actively working
the Chi-Med Group level during 2017. Net income
Christian Hogg
Chief Executive Officer
to trigger the process. Land prices continue to rise in
from SHPL and HBYS has totaled $465.4 million
March 12, 2018
HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
37
Operations Review
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;
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; and
Adjusted revenue of HBYS.
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 on 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 and adjusted
consolidated net income attributable to Chi-Med
from our Prescription Drugs business: We exclude
the impact of one-time gains which were triggered
by the payment of land compensation and subsidies
from the Shanghai government to SHPL.
Adjusted HBYS revenue: We exclude the sales of
Guanbao because Guanbao was divested by HBYS in
September 2017.
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, 2017
Year Ended
December 31, 2016
(51,986)
(35,997)
(87,983)
(40,837)
(35,228)
(76,065)
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 and subsidies
Adjusted consolidated net income attributable to Chi-Med – Commercial Platform
Year Ended
December 31, 2017
Year Ended
December 31, 2016
40,033
(2,494)
37,539
70,337
(40,416)
29,921
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 and subsidies
Adjusted consolidated net income attributable to Chi-Med – Prescription Drugs business
Reconciliation of GAAP to adjusted HYBS revenue:
$’000
HBYS revenue – Year ended December 31
Less: HBYS revenue – Six months ended June 30
Less: Guanbao revenue – Six months ended December 31
Adjusted HBYS revenue – Six months ended December 31
38 HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
Year Ended
December 31, 2017
Year Ended
December 31, 2016
28,999
(2,494)
26,505
2017
227,422
(123,408)
(9,680)
94,334
61,120
(40,416)
20,704
2016
224,131
(122,746)
(22,901)
78,484
Biographical Details of Directors
Simon TO
Executive Director
and Chairman
Mr To, aged 66, has
been a Director since
2000 and an Executive
Director and Chairman
o f H u t c h i s o n C h i n a
MediTech Limited (the
“Company”) since 2006.
He is also Chairman of the Remuneration Committee
and a member of the Technical Committee of the
Company. He is managing director of Hutchison
Whampoa (China) Limited (“Hutchison China”) and has
been with Hutchison China for over 37 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. He is currently a director of
Gama Aviation Plc.
Mr To’s career in China spans more than 37 years. He is
the original founder of Hutchison Whampoa Limited’s
(currently a subsidiary of CK Hutchison Holdings
Limited (“CKHH”)) China Healthcare businesses 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 2 ,
has been an Executive
D i r e c t o r a n d C h i e f
Executive Officer of the
Company since 2006.
He is also a member of
the Technical Committee of the Company. He joined
Hutchison China in 2000 and has since led all aspects
of the creation, implementation and management
of the Company’s strategy, business and listing.
This includes the creation of the Company’s start-
up businesses and the acquisition and operational
integration of assets that led to the formation of the
Company’s China joint ventures.
Prior to joining Hutchison China, Mr Hogg spent ten
years with P&G starting in the 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 1 ,
has been an Executive
Director since 2011 and
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.
HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
39
Biographical Details of Directors
Weiguo SU
Executive Director
and Chief Scientific
Officer
Dan ELDAR
Non-executive
Director
5
Dr Eldar, aged 64, has
been a Non-executive
Director of the Company
s i n c e 2 0 1 6 . H e h a s
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 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.
Dr Su, aged 60, has been
an Executive Director
of the Company 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 Leaders 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
M s S h i h , a g e d 6 6 ,
h a s b e e n a N o n -
executive Director and
C o m p a n y S e c r e t a r y
of the Company since
2 0 0 6 a n d c o m p a n y
secretary of Group companies since 2000. She is also
an executive director and company secretary of CKHH,
a group she has been with since 1989, acting in the
capacity of director, head group general counsel and
company secretary of its subsidiaries and associated
companies. Ms Shih is 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. She has over 35 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 solicitor
qualified 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.
4
3
7
2
6
1
8
5
9
10
40 HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
Biographical Details of Directors
Tony MOK
Independent Non-
executive Director
10
Professor Mok, aged 57,
has been an Independent
Non-executive Director
of the Company since
October 12, 2017. He is
also a member of the
Technical Committee
of the Company. He has more than 30 years of
experience in clinical oncology with his main research
interest focusing on biomarker and molecular targeted
therapy in lung cancer. He is currently Li Shu Fan
Medical Foundation Named Professor and Chairman
of Department of Clinical Oncology at The Chinese
University of Hong Kong. He has contributed to over
200 articles in international peer-reviewed journals, as
well as multiple editorials and textbooks.
Professor Mok is a director of the American Society
of Clinical Oncology (“ASCO”), a member of the ASCO
Publications Committee and Vice Secretary of the
Chinese Society of Clinical Oncology (CSCO). He is Past
Chair of the ASCO International Affairs Committee.
Professor Mok is closely affiliated with the oncology
community in China and has been awarded an
Honorary Professorship at Guangdong Province
People’s Hospital, Guest Professorship at Peking
University School of Oncology and Visiting
Professorship at Shanghai Jiao Tong University and
West China School of Medicine/West China Hospital,
Sichuan University.
Professor Mok received his Bachelor of Medical
Science degree and Doctor of Medicine from the
University of Alberta, Canada. He is also a Fellow of
Royal College of Physicians and Surgeons of Canada,
Hong Kong College of Physicians, Hong Kong Academy
of Medicine, Royal College of Physicians of Edinburgh
and ASCO.
Paul CARTER
Senior Independent
Non-executive
Director
7
Mr Carter, aged 57,
h a s b e e n S e n i o r
I n d e p e n d e n t N o n -
executive Director of
t h e C o m p a n y s i n c e
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 a 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
8
Dr Ferrante, aged 60, has
been an Independent Non-
executive Director of the
Company since February 1,
2017. She is also 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.,
MacroGenics, Inc. and Unum Therapeutics 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
Independent Non-
executive Director
9
Mr Jack, aged 67, has
been an Independent
Non-executive Director
of the Company since
March 1, 2017. He is also
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.
HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
41
Report of the Directors
The Directors have pleasure in submitting to shareholders their report and the audited financial statements for the year ended December 31, 2017.
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-5 of Form 20-F and show the Group’s results for the year ended December 31, 2017.
DIVIDENDS
No interim dividend for the year ended December 31, 2017 was declared and the Directors do not recommend the payment of a final dividend for the year ended
December 31, 2017.
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-7 of Form 20-F.
PROPERTY, PLANT AND EQUIPMENT
Particulars of the movements of property, plant and equipment of the Group are set out in note 10 to the Consolidated Financial Statements on page F-25 of Form 20-F.
SHARE CAPITAL
The share capital of the Company is set out in the Consolidated Balance Sheets on page F-4 of Form 20-F. Details of the ordinary shares of the Company are set out in
note 17 to the Consolidated Financial Statements on page F-32 of Form 20-F.
42 HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
Report of the Directors
DIRECTORS
The Directors of the Company as of December 31, 2017 were:
Executive Directors:
Simon To
Christian Hogg
Johnny Cheng
Weiguo Su
Non-executive Directors:
Dan Eldar
Edith Shih
Independent Non-executive Directors:
Paul Carter
Karen Ferrante
Graeme Jack
Tony Mok
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.
On March 27, 2017, Dr Weiguo Su was appointed as Executive Director.
On October 12, 2017, Professor Tony Mok was appointed as Independent Non-executive Director.
Mr Simon To, Mr Christian Hogg, Professor Tony Mok 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 39 to 41.
DIRECTORS’ INTERESTS IN SHARES
As of December 31, 2017, 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
Edith Shih
Weiguo Su
Dan Eldar
Tony Mok
Paul Carter
Karen Ferrante
Number of ordinary
shares held
Number of American
depositary shares held
1,093,802
256,146
180,000
70,000
-
1,900
-
3,524
-
40,356
4,626
133,237
100,000
56,546
6,225
10,002
-
5,785
HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
43
Report of the Directors
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, 2017:
Date of
Number of share
Granted
Exercised Expired/lapsed/
Number of share
Name or category
grant of share
options held at
during
during
canceled
options held at
Exercise period of
Exercise price of
of participants
options
January 1, 2017
2017
2017
during 2017 December 31, 2017
share options
share options
Employees in aggregate
18.5.2007 (1)
24.6.2011 (2)
20.12.2013 (2)
Total:
Notes:
11,656
75,000
259,254
345,910
–
–
–
–
(11,656)
–
(44,653)
–
–
–
18.5.2007 to 17.5.2017
75,000
24.6.2011 to 23.6.2021
(6,875)
207,726
20.12.2013 to 19.12.2023
(56,309)
(6,875)
282,726
£
1.535
4.405
6.100
(1)
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.
(2)
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.
44 HUTCHISON CHINA MEDITECH LIMITED 2017 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, 2017:
Date of
Number of share
Granted
Exercised Expired/lapsed/
Number of share
Name or category
grant of share
options held at
during
during
canceled
options held at
Exercise period of
Exercise price of
of participants
options
January 1, 2017
2017
2017
during 2017 December 31, 2017
share options
share options
Executive Director
Weiguo Su
Employees in aggregate
15.6.2016 (1)
27.3.2017 (2)
15.6.2016 (1)
15.6.2016 (3)
27.3.2017 (2)
Total:
Notes:
300,000
–
–
100,000
293,686
100,000
–
–
–
50,000
693,686
150,000
–
–
–
–
–
–
–
–
–
–
–
–
300,000
15.6.2016 to 19.12.2023
100,000
27.3.2017 to 26.3.2027
293,686
15.6.2016 to 19.12.2023
100,000
15.6.2016 to 27.6.2024
50,000
27.3.2017 to 26.3.2027
843,686
£
19.700
31.050
19.700
19.700
31.050
(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 25% on each of the first, second, third and fourth
anniversaries of the date of grant on March 27, 2017.
(3)
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.
There were no share options outstanding under the HMHL Share Option Scheme during the financial year of December 31, 2017 nor any share option was
granted, exercised, canceled or lapsed.
HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
45
Report of the Directors
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 Company and its subsidiaries and affiliates are eligible to participate in
the LTIP. The LTIP awards grant participating directors or employees a conditional right to receive ordinary shares of the Company or the equivalent American depositary
shares (collectively the “Awarded Shares”), to be purchased by an independent third party trustee (the “Trustee”) according to the predetermined awards or 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.
(i)
Grant of LTIP
On March 15, 2017, the Company granted awards under the LTIP to 2 Executive Directors and 87 senior managers and executives (including Dr Weiguo Su who
has become an Executive Director with effect from March 27, 2017), giving each a conditional right to a cash amount which is used to purchase Awarded Shares
in the Company, on market by the Trustee up to a certain maximum cash amount depending upon the achievement of annual performance targets from 2017 to
2019. Details of the grants are as follows:
Name or category of participants
period stipulated in the LTIP awards
Maximum amount per annum for the LTIP
Executive Directors
Christian Hogg
Johnny Cheng
Weiguo Su
US$523,615
US$204,808
US$366,255
Senior managers and executives in aggregate
US$4,824,867
Total:
US$5,919,545
Vesting will occur two business days after the date of announcement of the annual results for the financial year falling two years after the financial year to
which the LTIP award relates.
On March 15, 2017, the Company also granted a non-performance LTIP awards to 2 Executive Directors and 29 senior managers and executives (including Dr
Weiguo Su who has become an Executive Director with effect from March 27, 2017). It is a one-off cash amount to be allocated to each grantee and used by the
Trustee to purchase Awarded Shares which will be subject to a vesting period of one year. Details of the grants are as follows:
Name or category of participants
Amount for the LTIP period stipulated in the LTIP awards
Executive Directors
Christian Hogg
Johnny Cheng
Weiguo Su
US$82,346
US$25,405
US$30,077
Senior managers and executives in aggregate
US$215,415
Total:
US$353,243
46 HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
Report of the Directors
On August 2, 2017, the Company granted awards under the LTIP to 2 senior executives, giving each a conditional right to a cash amount which is used to
purchase Awarded Shares in the Company, on market by the Trustee up to a maximum cash amount per annum of US$64,827 depending upon the achievement
of annual performance targets from 2017 to 2019. Vesting will occur two business days after the date of announcement of the annual results for the financial
year falling two years after the financial year to which the LTIP award relates.
On December 15, 2017, the Company granted awards under the LTIP to 10 senior executives, giving each a conditional right to a cash amount which is used
to purchase Awarded Shares in the Company, on market by the Trustee up to a maximum cash amount per annum of US$529,477 depending upon the
achievement of annual performance targets from 2018 to 2019. Vesting will occur two business days after the date of announcement of the annual results for
the financial year falling two years after the financial year to which the LTIP award relates.
Any Awarded 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.
(ii)
Vesting of LTIP
On March 28, 2017, awards granted under the LTIP on October 19, 2015 in respect of the annual performance targets for the financial year 2014 were vested.
Details of the vesting are as follows:
Name or category of participants
Executive Directors
Christian Hogg
Johnny Cheng
Weiguo Su
Senior managers and executives in aggregate
Total:
Number of
Number of American
ordinary shares
depositary shares
5,620
–
–
22,647
28,267
3,756
4,626
5,476
7,888
21,746
On March 24, 2017, awards granted under the LTIP on March 24, 2016 which do not stipulate performance targets, were vested. Details of the vesting are as
follows:
Name or category of participants
Senior managers and executives in aggregate
Number of
Number of American
ordinary shares
depositary shares
580
4,636
HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
47
Report of the Directors
SIGNIFICANT SHAREHOLDINGS
As of March 2, 2018, 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)
Notes:
Number of
Number of ordinary
American depositary
shares held
shares held
36,666,667
3,214,404
2,560,184
6,862,420
–
–
Approximate
% of issued
share capital
60.35%
4.84%
3.85%
(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 Friday, April 27, 2018 at 11:00 am at 4th Floor, Hutchison House, 5 Hester Road, Battersea, London
SW11 4AN. Details of the resolutions proposed are set out in the Notice of the AGM.
By Order of the Board
Edith Shih
Director and Company Secretary
March 12, 2018
48 HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
Corporate Governance Report
The Company strives to attain and maintain high standards of corporate governance best suited to the needs and interests of the Company and its subsidiaries
(the “Group”) as it believes that effective corporate governance practices are fundamental to safeguarding shareholder interests and enhancing shareholder value.
Accordingly, the Company has adopted corporate governance principles that 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 being traded on AIM, and hence not subject to the Code. Although the Company’s American depositary
shares are listed on NASDAQ Global Select 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, 2017, the Board comprised ten Directors, including the Chairman, Chief Executive Officer, Chief Financial Officer, Chief Scientific Officer, two Non-
executive Directors and four 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 39 to 41 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, 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.
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.
HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
49
Corporate Governance Report
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 this 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.
50 HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
The Company held eight Board meetings in 2017 with 100% attendance of its members.
Corporate Governance Report
Name of Director
Attended/Eligible to attend
Simon To
Christian Hogg
Johnny Cheng
Weiguo Su (1)
Dan Eldar
Shigeru Endo (2)
Edith Shih
Paul Carter (3)
Karen Ferrante (3)
Michael Howell (4)
Christopher Huang (2)
Graeme Jack (5)
Christopher Nash (2)
Tony Mok (6)
8/8
8/8
8/8
4/4
8/8
1/1
8/8
7/7
7/7
2/2
1/1
6/6
1/1
1/1
Position
Chairman
Executive Directors:
Non-executive Directors:
Independent Non-executive Directors:
Notes:
(1)
(2)
(3)
(4)
(5)
(6)
Appointed on March 27, 2017
Resigned on February 1, 2017
Appointed on February 1, 2017
Resigned on March 1, 2017
Appointed on March 1, 2017
Appointed on October 12, 2017
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 Paul Carter, 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.
HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
51
Corporate Governance Report
Upon appointment to the Board, Directors receive a package of orientation materials on the Group and are provided with a comprehensive induction to the Group’s
businesses by senior executives. Continuing education and relevant reading materials are provided to Directors regularly to help ensure that they are apprised of the
latest changes in the commercial, legal and regulatory environment in which the Group conducts its businesses.
BOARD COMMITTEES
The Company has established three permanent board committees: an Audit Committee, a Remuneration Committee and a Technical Committee, details of which are
described later in this report. Other board committees are established by the Board as and when warranted to take charge of 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 Report of
Independent Auditor on pages F-2 and F-3 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.
52 HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
Corporate Governance Report
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 changes 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 2017 with 100% attendance of its members.
Name of Member
Graeme Jack (Chairman)
Paul Carter
Karen Ferrante
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 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.
HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
53
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, and approves its fees and the scope and appropriateness of non-audit services, if any, to be provided by it. The Audit Committee also makes
recommendation 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, 2017, fees of US$2.5 million paid to PwC in total were for both audit and non-audit services. The non-audit services, which amounted
to approximately US$0.3 million, were mainly related to the provision of IT system and security assessment and non-audit advisory services for Nasdaq follow-on
offering. 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.
54 HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
Corporate Governance Report
RISK MANAGEMENT, INTERNAL CONTROL AND LEGAL & REGULATORY COMPLIANCE
The Board has overall responsibility for the Group’s systems of risk management, internal control and legal and regulatory compliance.
In meeting its responsibility, the Board seeks to inculcate 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. The Board evaluates and determines the nature and
extent of the risks that the Company is willing to accept in pursuit of the Group’s strategic and business objectives. It also reviews and monitors the effectiveness of
the systems of risk management and internal control on an ongoing basis. 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 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.
Risk Management
Risk management is integrated into the day-to-day operations of the Group, and is a continuous and proactive process carried out at all levels. Coupled with a strong
internal control environment, the Group is committed to effectively manage the risks it faces, be they strategic, financial, operational or compliance, by adopting an
Enterprise Risk Management (ERM) framework based on the COSO (the Committee of Sponsoring Organizations of the Treadway Commission) model.
The ERM framework facilitates a systematic approach in identifying, assessing and managing risks within the Group. There are ongoing dialogues between the Executive
Directors and the management team of each core business division to assess the plausible impact of current and emerging risks and their mitigation measures so as
to institute additional controls and deploy appropriate insurance instruments, such as Directors and Officers Liability Insurance, in minimizing or eliminating potential
financial, compliance or other risks to the Group’s businesses.
The Group adopts a “top-down and bottom-up” approach with respect to formal risk review and reporting. Such approach involves regular input from each core business
unit as well as discussions and reviews by the Executive Directors. On a half-yearly basis, each core business unit is responsible for formally identifying the significant
risks their business faces and considering the likelihood of occurrence and potential impact to the business, whilst the Executive Directors provide input after taking a
holistic assessment of all the significant risks that the Group faces. Relevant risk information including key mitigation measures and plans are recorded in a risk register
to facilitate the ongoing review and tracking of progress.
The review of the risk management system is overseen by the Board through the Audit Committee. The Audit Committee reviews the composite Risk Register together
with the related risk assessment report every six months, and provides input as and where appropriate so as to ensure the effectiveness of the Group’s risk management
system.
Pages 11 to 55 of Form 20-F provide a description of the Group’s risk factors which could affect the Group’s financial condition or results of operations that differ
materially from expected or historical results.
HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
55
Corporate Governance Report
Internal Control Environment
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 division 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, 2017 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.
56 HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
Corporate Governance Report
Legal and Regulatory Control Compliance
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 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.
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 changes 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 2017 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 2018 directors’ fees, year-end bonus and 2018 remuneration package of Executive Directors and senior executives of the Company. Executive Directors do not
participate in the determination on their own remuneration.
HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
57
Corporate Governance Report
Remuneration Policy
The remuneration of Mr Hogg, Mr Johnny Cheng and Dr Weiguo Su, 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 that were paid to a subsidiary or an intermediate holding company of the Company. The amounts paid to each Director for 2017 are as
Taxable benefits
Pension contributions
Share option benefits
below:
Name of Director
Executive Directors:
Simon To
Christian Hogg
Johnny Cheng
Weiguo Su(7)
Non-executive Directors:
Dan Eldar
Shigeru Endo(8)
Edith Shih
Independent Non-executive Directors:
Michael Howell(9)
Christopher Huang(8)
Christopher Nash(8)
Paul Carter(10)
Karen Ferrante(10)
Graeme Jack(11)
Tony Mok(12)
Salary and fees
US$
Bonus
US$
85,000 (1) (6)
431,862 (2) (6)
347,758 (3)
310,296 (4)
–
769,231
284,872
1,222,071 (15)
70,000
5,833 (5)
70,000 (5) (6)
15,000
7,291
6,875
102,667
93,958
86,667
18,641
–
–
–
–
–
–
–
–
–
–
US$
–
15,768
–
10,000
–
–
–
–
–
–
–
–
–
–
US$
–
26,748
24,086
21,132
–
–
–
–
–
–
–
–
–
–
Total
US$
US$
–
85,000
– (13) (14) 1,243,609
– (13) (14)
656,716
641,206 (14)
2,204,705
–
–
–
–
–
–
–
–
–
–
70,000
5,833
70,000
15,000
7,291
6,875
102,667
93,958
86,667
18,641
Aggregate emoluments
1,651,848
2,276,174
25,768
71,966
641,206
4,666,962
58 HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
Corporate Governance Report
Such Director’s fees were paid to Hutchison Whampoa (China) Limited.
Emoluments paid include Director’s fees of US$75,000.
Emoluments paid include Director’s fees of US$70,000.
Emoluments paid include Director’s fees of US$57,534.
Such Director’s fees were paid to Hutchison International 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 March 27, 2017.
Resigned on February 1, 2017.
Resigned on March 1, 2017.
Appointed on February 1, 2017.
Appointed on March 1, 2017.
Appointed on October 12, 2017.
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 2017.
For the year ended December 31, 2017, the Group accrued US$392,922, US$138,687 and US$217,730 with respect to the awards of Long Term Incentive Plan of the Company
Notes:
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
granted to Mr Hogg, Mr Cheng and Dr Su respectively, for which such amounts are not included in the table above.
(15)
Such amount comprising US$651,273 year-end bonus and US$570,798 bonus under the 2013 Retention Cash Bonus Program of Hutchison MediPharma Limited.
TECHNICAL COMMITTEE
The Technical Committee was chaired by Professor Huang with Mr To and Mr Hogg, both Executive Directors, as members. After the changes of Directors on February 1,
2017, March 27, 2017 and October 12, 2017, the Technical Committee comprises six members and is chaired by Dr Ferrante with Mr To, Mr Hogg, Mr Carter, Professor
Mok and Dr Su as members. The Committee considers from time to time matters relating to the technical aspects of the business and 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 two meetings in 2017 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.
HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
59
Corporate Governance Report
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 2017 Annual General Meeting was held on April 27, 2017 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 12, 2018
60 HUTCHISON CHINA MEDITECH LIMITED 2017 Annual Report
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
� REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
� ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2017
OR
� TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
OR
� SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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
Securities registered or to be registered pursuant to Section 12(b) of the Act:
(Name, telephone, email and/or facsimile number and address of Company contact person)
Title of each class
Name of each exchange on which registered
American depositary shares, each representing one-half of one
ordinary share, par value $1.00 per share
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Nasdaq Global Select Market
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
None
(Title of Class)
(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:
66,447,037 ordinary shares were issued and outstanding as of December 31, 2017.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
� Yes � No
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.
� Yes � 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.
� Yes � 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).
� Yes � No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See
definition of ‘‘large accelerated filer,’’‘‘accelerated filer,’’ and ‘‘emerging growth company’’ in Rule 12b-2 of the Exchange Act.
Emerging growth company �
Large accelerated filer �
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to
use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange
Act. �
†The term ‘‘new or revised financial accounting standard’’ refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards
Codification after April 5, 2012.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
Non-accelerated filer �
Accelerated filer �
U.S. GAAP �
International Financial Reporting Standards as issued
by the International Accounting Standards Board �
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.
� Item 17 � Item 18
Other �
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). �
� Yes � No
Hutchison China MediTech Limited
Table of Contents
Introduction
Forward-Looking Statements
PART I
Item 1.
Item 2.
Item 3.
Item 4.
Item 4A.
Item 5.
Item 6.
Item 7.
Item 8.
Item 9.
Item 10.
Item 11.
Item 12.
PART II
Identity of Directors, Senior Management and Advisers
Offer Statistics and Expected Timetable
Key Information
Information on the Company
Unresolved Staff Comments
Operating and Financial Review and Prospects
Directors, Senior Management and Employees
Major Shareholders and Related Party Transactions
Financial Information
The Offer and Listing
Additional Information
Quantitative and Qualitative Disclosures About Market Risk
Description of Securities Other Than Equity Securities
Defaults, Dividend Arrearages and Delinquencies
Material Modifications to the Rights of Security Holders and Use of Proceeds
Controls and Procedures
Reserved
Item 13.
Item 14.
Item 15.
Item 16.
Item 16A. Audit Committee Financial Experts
Item 16B. Code of Ethics
Item 16C.
Item 16D. Exemptions From The Listing Standards For Audit Committees
Item 16E.
Item 16F.
Item 16G. Corporate Governance
Item 16H. Mine Safety Disclosure
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Change In Registrant’s Certifying Accountant
Principal Accountant Fees and Services
PART III
Item 17.
Item 18.
Item 19.
Financial Statements
Financial Statements
Exhibits
SIGNATURES
3
4
7
7
7
7
55
164
164
201
217
222
223
224
236
237
238
238
238
240
241
241
241
241
242
242
242
242
242
243
243
243
244
247
Introduction
This annual report on Form 20-F contains our audited consolidated statements of operations data for
the years ended December 31, 2017, 2016 and 2015 and our audited consolidated balance sheet data as of
December 31, 2017 and 2016. 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, 2017, 2016 and 2015 and the audited consolidated statements of financial position data as of
December 31, 2017 and 2016 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:
• ‘‘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;
3
• ‘‘Hutchison MediPharma’’ are to Hutchison MediPharma Limited, our subsidiary through which we
operate our Innovation Platform in which we have a 99.8% interest;
• ‘‘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 Nestl´e Health Science S.A. in which we have a 50% interest;
• ‘‘ordinary shares’’ or ‘‘shares’’ are to our ordinary shares, par value $1.00 per share;
• ‘‘RMB’’ or ‘‘renminbi’’ are to the legal currency of the PRC;
• ‘‘Shanghai Hutchison Pharmaceuticals’’ are to Shanghai Hutchison Pharmaceuticals Limited, our
non-consolidated joint venture with Shanghai Pharmaceuticals in which we have a 50% interest;
• ‘‘Shanghai Pharmaceuticals’’ are to Shanghai Pharmaceuticals Holding Co., Ltd., a leading
pharmaceutical company in China listed on the Shanghai Stock Exchange and the Hong Kong Stock
Exchange;
• ‘‘Sinopharm’’ are to Sinopharm Group Co. Ltd., a leading distributor of pharmaceutical and
healthcare products and a leading supply chain service provider in China listed on the Hong Kong
Stock Exchange;
• ‘‘United States’’ or ‘‘U.S.’’ are to the United States of America;
• ‘‘$’’ or ‘‘U.S. dollars’’ are to the legal currency of the United States; and
• ‘‘£’’ or ‘‘pound sterling’’ are to the legal currency of the United Kingdom.
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 $1.34 and all translations of
HK dollars into U.S. dollars were made at HK$7.80 to $1.00, which are the exchange rates used in our
audited consolidated financial statements as of and for the year ended December 31, 2017. We make no
representation that the pound sterling, 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 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.
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
4
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:
• 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 contract research organizations, or
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, Lilly (Shanghai)
Management Company Limited (formerly known as Eli Lilly Trading (Shanghai) Company
Limited), or Eli Lilly, and Nestl´e Health Science S.A., or Nestl´e Health Science, as applicable;
• the rate and degree of market acceptance of our drug candidates;
• our financial performance;
• our ability to attract and retain key scientific and management personnel;
5
• our relationship with our joint venture and collaboration partners;
• developments relating to our competitors and our industry, including competing drug products; and
• changes in our tax status or the 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.
In addition, this annual report contains statistical data and estimates that we have obtained from
industry publications and reports generated by third-party market research firms. Although we believe that
the publications, reports and surveys are reliable, we have not independently verified the data and cannot
guarantee the accuracy or completeness of such data. You are cautioned not to give undue weight to this
data. Such data involves risks and uncertainties and are subject to change based on various factors,
including those discussed above.
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 statements of operations data for the years ended December 31, 2017, 2016 and 2015 and the
selected consolidated balance sheet data as of December 31, 2017 and 2016 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.
The following selected consolidated financial data for the years ended December 31, 2014 and 2013
and as of December 31, 2015 and 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.
7
Consolidated statements of operations data:
Revenues
Sales—third parties
Sales—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—third parties
Costs of sales—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 (loss)/income from continuing operations
Income/(loss) from discontinued operations, net of tax
Net (loss)/income
Less: Net income attributable to non-controlling
interests
Net (loss)/income attributable to the company
Accretion on redeemable non-controlling interests
Net (loss)/income attributable to ordinary shareholders
of the company
(Losses)/earnings per share attributable to ordinary
shareholders of the company—basic ($ per share)
Continuing operations
Discontinued operations
(Losses)/earnings 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 (loss)/income
Other comprehensive income/(loss):
Foreign currency translation gain/(loss)
$
$
$
$
$
$
Total comprehensive (loss)/income
Less: Comprehensive income attributable to
non-controlling interests
Total comprehensive (loss)/income attributable to the
Year Ended December 31,
2017
2016
2015
2014
2013
(in thousands, except share and per share data)
$
196,720
8,486
$
171,058
9,794
$
118,113
8,074
$
59,162
7,823
$
26,315
26,444
44,060
—
355
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
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)
9,682
241,203
(169,764)
(6,056)
(75,523)
(19,322)
(23,955)
(294,620)
(53,417)
1,220
—
808
(1,455)
(692)
(119)
(53,536)
(3,080)
33,653
(22,963)
—
(22,963)
(3,774)
(26,737)
—
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
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
—
—
(43,001)
(25,510)
(26,737) $
11,698
$
(35,008) $
(32,816) $
23,942
(0.43) $
— $
0.20
$
— $
(0.64) $
— $
(0.64) $
$
0.02
0.49
(0.03)
(0.43) $
— $
0.20
$
— $
(0.64) $
— $
61,717,171
61,717,171
(22,963) $
59,715,173
59,971,050
14,557
$
54,659,315
54,659,315
10,427
$
(0.64) $
0.02
$
52,563,387
52,563,387
(4,086) $
0.44
(0.03)
52,050,988
52,878,426
24,925
10,964
(11,999)
(10,722)
3,835
(5,033)
(1,427)
(5,557)
4,870
(1,732)
(2,712)
(6,798)
(2,944)
3,243
28,168
(1,296)
company
$
(17,032) $
2,408
$
3,138
$
(9,742) $
26,872
8
Consolidated balance sheet data:
Cash and cash equivalents
Total assets
Total current liabilities
Total non-current liabilities
Total shareholders’ equity
As of December 31,
2017
2016
2015
2014
(in thousands)
$ 85,265
$ 597,932
$ 104,600
$
8,366
$ 484,966
$ 79,431
$ 342,437
$ 95,119
$ 43,258
$ 204,060
$ 31,941
$ 229,599
$ 81,062
$ 46,260
$ 102,277
$ 38,946
$ 210,617
$ 75,299
$ 37,367
$ 56,915
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 comprehensive income
and cash flow data of each such joint venture for the years ended December 31, 2017, 2016 and 2015 and
the following selected consolidated statements of financial position of each such joint venture as of
December 31, 2017 and 2016 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 years ended
December 31, 2014 and 2013 and as of December 31, 2015 and 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
Income statement and cash flow data:
Revenue
Profit for the year
Dividends paid to shareholders
2017
2016
2014
2013
Year Ended December 31,
2015
(in thousands)
$ 138,160
$ 181,140
$ 244,557
$ 55,623
$ 22,424
$ 31,307
$ (81,299) $ (55,057) $ (6,410) $ (19,077) $ (17,162)
$ 222,368
$ 120,499
$ 154,703
$ 26,402
Our equity in earnings of Shanghai Hutchison Pharmaceuticals reported under U.S. GAAP was
$27.8 million, $60.3 million, $15.7 million, $13.2 million and $11.2 million for the years ended
December 31, 2017, 2016, 2015, 2014 and 2013, respectively.
Financial position data:
Cash and cash equivalents
Total assets
Total liabilities
Total shareholders’ equity
2017
As of December 31,
2015
2016
(in thousands)
2014
$ 43,527
$ 233,012
$ 100,281
$ 132,731
$ 20,292
$ 244,006
$ 93,872
$ 150,134
$ 43,141
$ 224,969
$ 131,706
$ 93,263
$ 16,575
$ 143,174
$ 71,268
$ 71,906
9
Hutchison Baiyunshan
2017
Year Ended December 31,
2015
2014
2016
2013
Income statement and cash flow data:
Revenue
Profit for the year
Profit for the year attributable to shareholders
of Hutchison Baiyunshan
Dividends paid to shareholders
(in thousands)
$ 227,422
$ 20,805
$ 224,131
$ 20,128
$ 211,603
$ 21,216
$ 243,746
$ 20,865
$ 247,626
$ 17,361
$ 17,165
$ 21,376
$ 20,776
$ (29,872)* $ (6,000) $ (6,410) $ (12,820) $ (6,462)
$ 20,376
$ 20,775
* Dividends paid to shareholders exclude an additional $15.3 million of dividends declared but unpaid
as of December 31, 2017.
Our equity in earnings of Hutchison Baiyunshan reported under U.S. GAAP was $10.4 million,
$10.2 million, $10.7 million, $10.4 million and $8.6 million for the years ended December 31, 2017, 2016,
2015, 2014 and 2013, respectively.
Financial position data:
Cash and cash equivalents
Total assets
Total liabilities
Total shareholders’ equity
Nutrition Science Partners
Income statement data:
Revenue
Loss for the year
2017
As of December 31,
2015
2016
(in thousands)
2014
$ 13,843
$ 208,796
$ 94,535
$ 114,261
$ 23,448
$ 221,735
$ 88,366
$ 133,369
$ 31,155
$ 202,646
$ 77,583
$ 125,063
$ 31,004
$ 217,171
$ 101,863
$ 115,308
2017
Year Ended December 31,
2015
2014
2016
2013
(in thousands)
— $
—
$
$ (9,210) $ (8,482) $ (7,552) $ (16,812) $ (17,543)
— $
— $
— $
Our equity in loss of Nutrition Science Partners reported under U.S. GAAP was $4.6 million,
$4.2 million, $3.8 million, $8.4 million and $8.8 million for the years ended December 31, 2017, 2016, 2015,
2014 and 2013, respectively.
2017
As of December 31,
2015
2016
(in thousands)
2014
$
9,640
$ 39,640
$
1,239
$ 38,401
$
5,393
$ 35,393
$
1,782
$ 33,611
$
2,624
$ 33,034
$ 14,941
$ 18,093
$
6,249
$ 38,548
$ 12,903
$ 25,645
Financial position data:
Cash and cash equivalents
Total assets
Total liabilities
Total shareholders’ equity
B. Capitalization and Indebtedness.
Not applicable.
C. Reasons for the Offer and Use of Proceeds.
Not applicable.
10
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 active or completed clinical studies in 36 target patient populations in various
countries, including six Phase III studies on savolitinib, fruquintinib and sulfatinib, 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 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, 2017, as well as (i) the HK$234.0 million ($30.0 million) revolving credit facility with The
Hongkong and Shanghai Banking Corporation Limited, or HSBC, (ii) the aggregate HK$351.0 million
($45.0 million) in credit facilities entered into with Bank of America N.A., (iii) the aggregate
HK$195.0 million ($25.0 million) in credit facilities entered into with Deutsche Bank AG, Hong Kong
Branch and (iv) the HK$210.0 million ($26.9 million) three-year term loan and HK$190.0 million
($24.4 million) 18-month revolving loan facility from Scotiabank (Hong Kong) Limited, or Scotiabank, 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:
• 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;
11
• 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 ceases to own a majority stake in our company, we may incur significantly higher
borrowing costs.
Hutchison Whampoa Limited, a wholly owned subsidiary of CK Hutchison, has historically
guaranteed certain of our bank borrowings. The CK Hutchison group does not currently guarantee any of
our loans and has no obligation to enter into new guarantees in the future. CK Hutchison has, however,
issued letters of awareness to certain of our current lenders and committed not to reduce its shareholding
to less than 40% of our issued share capital while such loans are outstanding. We may incur higher funding
costs if we do not have the benefit of the CK Hutchison group guarantees or other similar arrangements by
the CK Hutchison group.
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.
12
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:
• 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 and short-term investments. 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.
If we are unable to generate drug sales, 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. In June
2017, we completed our first new drug application, or NDA, submission in China, which was for
fruquintinib in patients with third-line colorectal cancer. 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
13
before we generate any revenue from product sales. The success of our drug candidates will depend on
several factors, including the following:
• 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
• 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 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
14
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 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
15
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 insufficient for approval and require additional pre-clinical, clinical or other studies. Our drug
candidates, including fruquintinib for which we submitted our first NDA in June 2017, could be delayed in
receiving, or fail to receive, regulatory approval for many reasons, including the following:
• the FDA, CFDA or comparable regulatory authorities may disagree with the number, design, size,
conduct or implementation of our clinical trials;
• 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;
• the results of clinical trials may not meet the level of statistical significance required by the FDA,
CFDA or comparable regulatory authorities for approval;
• we may be unable to demonstrate that a drug candidate’s clinical and other benefits outweigh its
safety risks;
• 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 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 Imfinzi (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 targeted therapies (Iressa (gefitinib)), 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 Imfinzi or any other therapeutic we use in
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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, Imfinzi 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 in a supply shortage of
Tagrisso, Iressa, Taxotere, Taxol, Imfinzi 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, Imfinzi 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
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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 current or 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 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 an 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 Nestl´e 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:
• 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;
• we may experience delays in reaching, or we may fail to reach, agreement on acceptable terms with
prospective trial sites and prospective 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;
• 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;
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• 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;
• 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 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:
• 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.
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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:
• 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;
• 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
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drug candidates for some 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:
• 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;
• we may be required to create a medication guide outlining the risks of such side effects for
distribution to patients;
• we may be required to change the way such drug candidates are distributed or administered,
conduct additional clinical trials or change the labeling of the drug candidates;
• 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;
• we may be subject to regulatory investigations and government enforcement actions;
• we may decide to remove such drug candidates from the marketplace;
• we could be sued and held liable for injury caused to individuals exposed to or taking our drug
candidates; and
• 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.
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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, Canada, Korea, U.K. and Spain.
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
fruquintinib, sulfatinib, epitinib or theliatinib in China, savolitinib in the U.K., Spain, South Korea, Canada
and 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:
• 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;
• manufacturing, customs, shipment and storage requirements;
• 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 possibly 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 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
22
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 diseases such 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
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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 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:
• 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 and director. Although we have
entered into employment agreements with our executive officers, each of them may terminate their
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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.
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 Shanghai Pharmaceuticals and Guangzhou Baiyunshan,
relating to our non-consolidated joint ventures, which together form part of our Commercial Platform
business. Our equity in the earnings of these non-consolidated joint ventures was $26.3 million,
$70.5 million and $38.2 million for the years ended December 31, 2015, 2016 and 2017, 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, 2015, 2016 and 2017.
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
respective 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.
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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:
• 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.
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.
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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 Human Resources and Social Security of the PRC or provincial
or local human resources 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, and if our revenue 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
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
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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 2016 presidential election and Republicans maintaining control of Congress,
consistent with statements made by President 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:
• 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
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ventures are invited to submit the 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:
• 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, 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.
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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
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:
• 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’ 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
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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 2017. Our Commercial Platform sources Sanqi and other necessary raw materials on a
purchase order basis and does not have long-term supply contracts 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 Bozhou, 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 Bozhou, 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
31
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 Nestl´e 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.
Collaborations with pharmaceutical or biotechnology companies and other third parties, including our
existing agreements with AstraZeneca, Eli Lilly and Nestl´e Health Science, are often terminable by the
other party for any reason with certain advance notice. 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 Nestl´e 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
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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, AstraZeneca,
Eli Lilly, Nestl´e 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 Nestl´e 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.
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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.
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.
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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:
• 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 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.
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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 March 1, 2018, 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
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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, 2015, 2016 and 2017, we paid a
management fee of approximately $845,000, $874,000 and $897,000, respectively. In addition, we benefit
from the 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, 2015, 2016 and 2017, sales of our products to members of the
CK Hutchison group amounted to $8.1 million, $9.8 million and $8.5 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 40 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 ventures’
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.
37
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.
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
38
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:
• decreased demand for any products sold through our Commercial Platform;
• significant negative media attention and reputational damage;
• withdrawal of clinical trial participants;
• 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 cost or otherwise to
protect against potential product liability claims could prevent or inhibit the commercialization of products
that we or our collaborators develop.
We rely significantly on information technology and any failure, inadequacy, interruption or security lapse of that
technology, including any cybersecurity incidents, could harm our ability to operate our business effectively.
We are heavily dependent on critical, complex and interdependent information technology systems,
including internet-based systems, to support our business processes. Our information technology system
security is continuously reviewed, maintained and upgraded in response to possible security breach
incidents. Despite the implementation of these measures, our information technology systems and those of
third parties with which we contract are vulnerable to damage from external or internal security incidents,
breakdowns, malicious intrusions, cybercrimes, including State-sponsored cybercrimes, malware, misplaced
or lost data, programming or human errors or other similar events. System failures, accidents or security
breaches could cause interruptions in our operations and could result in inappropriately accessed,
tampered with, modified or stolen scientific data or a material disruption of our clinical activities and
business operations, in addition to possibly requiring substantial expenditures of resources to remedy. Such
event could significantly harm our Innovation Platform’s operations, including resulting in the loss of
clinical trial data which could result in delays in our regulatory approval efforts and significantly increase
our costs to recover or reproduce the data. Such events could also lead to the loss of important information
such as trade secrets or other intellectual property and could accelerate the development or manufacturing
of competing products by third parties. To the extent that any disruption or security breach were to result
in a loss of, or damage to, our data or applications, or inappropriate disclosure of confidential or
proprietary information, we could incur liability and our research and development programs and the
development of our drug candidates could be delayed.
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
39
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, recent regulatory reform in the China pharmaceutical industry will
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, our
collaboration partners’ or our joint ventures’ violation of these policies and rules until sometime 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 is 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
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not allowed to exceed either the cross-border financing risk weighted balance calculated based on a
formula by the PBOC or the difference between the amount of total investment and the amount of the
registered capital as acknowledged by the Ministry of Commerce, or MOFCOM, and the SAFE. Further,
such loans must be filed with and registered with the SAFE or their local branches and the National
Development and Reform Commission (if applicable). If we finance our PRC subsidiaries or joint ventures
by means of additional capital contributions, the amount of these capital contributions must first be filed
with 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 successful in their respective
applications to renew the special High and New Technology Enterprise, or HNTE, status (since 2005, 2008
or 2014) and/or granted 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
2019 (for HNTE, renewal is done every three years) or 2018 (for TASE, renewal is done every three years
in general) 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.’’
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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 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 by PRC resident enterprises to beneficial owners of the dividends that are Hong Kong tax
residents 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.
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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 19.25%, 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.
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 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, our joint ventures or our collaboration partners 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, our joint venture partners’ and our collaboration partners’
ability to protect our and our joint ventures’ and our collaboration partners’ products and drug candidates
from competition by establishing, maintaining and enforcing our or their intellectual property rights. We,
our joint ventures and our collaboration partners 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, 2017, we had 151 issued patents, including 18 Chinese patents, 19 U.S. patents and eight
European patents, 146 patent applications pending in the above major market jurisdictions, and two
pending Patent Cooperation Treaty, or PCT, patent applications relating to the drug candidates of our
Innovation Platform. Our collaboration partner AstraZeneca is responsible for maintaining and enforcing
our intellectual property rights in relation to savolitinib. As of the same date, our joint venture Nutrition
Science Partners had 24 issued patents and three pending patent applications relating to HMPL-004 and
its reformulation HM004-6599. Additionally, our joint ventures collectively had 119 issued patents and 10
patent applications in China and other jurisdictions relating to our Commercial Platform’s products as of
December 31, 2017. 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
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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, our joint ventures and/or our collaboration partners 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, our joint ventures or our collaboration partners 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, our joint ventures or our collaboration partners 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, our joint ventures or our collaboration partners 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 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.
44
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.
45
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:
• 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.
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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:
• 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;
• 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;
• 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
• 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, our joint ventures and our collaboration partners 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, our joint ventures’ or
our collaboration partners’ 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, our joint ventures’ or our collaboration partners’ 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. 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. Furthermore, as
AstraZeneca is responsible for enforcing our intellectual property rights with respect to savolitinib on our
behalf, we may be unable to ensure that such rights are enforced or maintained in all jurisdictions.
Accordingly, our efforts to protect the intellectual property rights of our drug candidates in such countries
may be inadequate.
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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 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 March 1, 2018, 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.
Substantial future sales or perceived potential sales of our ADSs, ordinary shares or other equity or equity-linked
securities in the public market could cause the price of our ADSs to decline significantly.
Sales of our ADSs, ordinary shares or other equity or equity-linked securities in the public market, or
the perception that these sales could occur, could cause the market price of our ADSs to decline
significantly. All of our ordinary shares represented by ADSs are freely transferable by persons other than
our affiliates without restriction or additional registration under the Securities Act of 1933, or the
Securities Act. The ordinary shares held by our affiliates are also available for sale, subject to volume and
other restrictions as applicable under Rules 144 and 701 under the Securities Act, under sales plans
adopted pursuant to Rule 10b5-1 or otherwise.
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We have filed with the SEC a Registration Statement on Form F-3, commonly referred to as a ‘‘shelf
registration,’’ that permits us to sell any number of ADSs in a registered offering at our discretion. The
shelf registration was automatically effective as of the filing date, April 3, 2017. On October 30, 2017, we
completed a registered offering of 11,369,810 ADSs under the shelf registration statement, raising total
gross proceeds of approximately $301.3 million. We may decide to conduct future offerings from time to
time, and such sales could cause the price of our ADSs to decline significantly.
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.
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
49
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, 2018. 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, 2018 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, 2019, 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.
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, or MOF, 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
MOF in the United States and the PRC, respectively. The PCAOB continues to be in discussions with the
CSRC and the MOF 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
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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 1, 2018, the closing
sale price of our ADSs ranged from a high of $41.14 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:
• 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.
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
51
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. In
2016, the renminbi further depreciated against the U.S. dollar by approximately 6.7%, and from January 1,
2017 to December 31, 2017, the renminbi appreciated against the U.S. dollar by 6.0%.
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.
52
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. 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:
• we do not wish a discretionary proxy to be given;
• 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
• 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
53
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.
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 U.S. 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
54
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 our ordinary shares and 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. Furthermore, if we are treated as a PFIC, then one or more of
our subsidiaries may also be treated as PFICs.
If we are or become a PFIC, and, if so, if one or more of our subsidiaries are treated as PFICs, 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.
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.
55
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
toxicology, chemistry and
development operation covering chemistry, biology, pharmacology,
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, 2017, we and
our collaboration partners discussed below have invested about $500 million in the discovery and
development activities of our Innovation Platform. This has resulted in a significant clinical pipeline
consisting of eight small molecule tyrosine kinase inhibitors, which are currently being investigated in
clinical studies in 36 target patient populations around the world.
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, and we completed another underwritten public offering of
securities in 2017, raising gross proceeds of approximately $301.3 million. We have also utilized bank
facilities in the aggregate principal amount of approximately $30.0 million as of December 31, 2017. In
addition, we have received government grants totaling approximately $16.7 million and investments from
other parties since our establishment, including investments by Mitsui & Co. Ltd., or Mitsui, one of our
shareholders, 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
(subsequently terminated in 2015), AstraZeneca in 2011 and Eli Lilly in 2013. In 2012, we also entered into
a joint venture collaboration with Nestl´e 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 have made certain upfront, milestone and service fee payments, clinical cost reimbursements
and equity contributions, totaling approximately $260.0 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 to December 31, 2017, we have also developed a profitable Commercial Platform in China,
which includes our non-consolidated joint ventures Shanghai Hutchison Pharmaceuticals and Hutchison
Baiyunshan, which have paid out dividends to our company and our partners totaling approximately
$316.2 million. Our Commercial Platform encompasses two core areas: Prescription Drugs and Consumer
Health products.
Our core Prescription Drugs business is conducted through the following two joint ventures for which
we nominate the management and run the day-to-day operations:
• 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, 2017, it held
74 registered drug licenses in China. 50% of this joint venture is owned by us and 50% by Shanghai
56
Pharmaceuticals, a leading pharmaceutical company in China listed on the Shanghai Stock
Exchange and the Hong Kong Stock Exchange, and
• 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 2,300 medical sales representatives as of December 31, 2017. Net income
attributable to our company from our Prescription Drugs business was $15.9 million, $61.1 million and
$29.0 million for the years ended December 31, 2015, 2016 and 2017, respectively. Net income attributable
to our company from our Prescription Drugs business included one-time gains of $40.4 million in 2016,
primarily from land compensation received by Shanghai Hutchison Pharmaceuticals from the Shanghai
government. In 2017, net income attributable to our company from our Prescription Drugs business
included one-time gains of $2.5 million in government subsidies received by Shanghai Hutchison
Pharmaceuticals from the Shanghai government.
Our Consumer Health business, which we do not consider to be core to our overall business and
strategy, includes two 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
our Consumer Health business subsidiaries and joint ventures decreased marginally from $9.3 million in
2015 to $9.2 million in 2016 and increased by 19.7% to $11.0 million in 2017.
As of December 31, 2017, we were the second largest AIM-listed company in terms of market
capitalization.
57
The chart below shows our principal subsidiaries and joint ventures as of March 1, 2018.
Our Organizational Structure
CK Hutchison
CK Hutchison
Other AIM/Nasdaq
Other AIM/Nasdaq
Shareholders
Shareholders
Subsidiaries
Subsidiaries
Joint Ventures
Joint Ventures
60.4%
60.4%
39.6%
39.6%
Non-consolidated Entities
Non-consolidated Entities
Hutchison China
Hutchison China
MediTech Limited
MediTech Limited
(Cayman Islands)
(Cayman Islands)
Innovation Platform
Innovation Platform
Commercial Platform
Commercial Platform
99.8%(1)
99.8%(1)
Hutchison
Hutchison
MediPharma
MediPharma
Holdings Limited
Holdings Limited
(Cayman Islands)
(Cayman Islands)
Prescription Drugs
Prescription Drugs
Consumer Health
Consumer Health
80.0%(5)
80.0%(5)
50.0%(7)
50.0%(7)
Hutchison BYS
Hutchison BYS
(Guangzhou)
(Guangzhou)
Holding Limited
Holding Limited
(BVI)
(BVI)
Hutchison Hain
Hutchison Hain
Organic Holdings
Organic Holdings
Limited
Limited
(BVI)
(BVI)
100.0%
100.0%
50.0%(2)
50.0%(2)
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
Hutchison
Hutchison
MediPharma (HK)
MediPharma (HK)
Investment Limited
Investment Limited
(Hong Kong)
(Hong Kong)
Nutrition Science
Nutrition Science
Partners Limited
Partners Limited
(Hong Kong)
(Hong Kong)
Shanghai
Shanghai
Hutchison
Hutchison
Chinese
Chinese
Medicine (HK)
Medicine (HK)
Investment
Investment
Limited
Limited
(Hong Kong)
(Hong Kong)
Hutchison
Hutchison
Chinese
Chinese
Medicine GSP
Medicine GSP
(HK) Holdings
(HK) Holdings
Limited
Limited
(Hong Kong)
(Hong Kong)
Guangzhou
Guangzhou
Hutchison
Hutchison
Chinese
Chinese
Medicine (HK)
Medicine (HK)
Investment
Investment
Limited
Limited
(Hong Kong)
(Hong Kong)
Hutchison Hain
Hutchison Hain
Organic
Organic
(Hong Kong)
(Hong Kong)
Limited
Limited
(Hong Kong)
(Hong Kong)
Outside the PRC
Outside the PRC
Inside the PRC
Inside the PRC
100.0%
100.0%
Hutchison
Hutchison
MediPharma
MediPharma
Limited
Limited
(PRC)
(PRC)
50.0%(3)
50.0%(3)
51.0%(4)
51.0%(4)
50.0%(6)
50.0%(6)
100.0%
100.0%
Shanghai
Shanghai
Hutchison
Hutchison
Pharmaceuticals
Pharmaceuticals
Limited
Limited
(PRC)
(PRC)
Hutchison
Hutchison
Whampoa
Whampoa
Sinopharm
Sinopharm
Pharmaceuticals
Pharmaceuticals
(Shanghai)
(Shanghai)
Company Limited
Company Limited
(PRC)
(PRC)
Hutchison
Hutchison
Whampoa
Whampoa
Guangzhou
Guangzhou
Baiyunshan
Baiyunshan
Chinese Medicine
Chinese Medicine
Company Limited
Company Limited
(PRC)
(PRC)
Hutchison Hain
Hutchison Hain
Organic
Organic
(Guangzhou)
(Guangzhou)
Limited
Limited
(PRC)
(PRC)
5MAR201810420038
Notes:
(1) Employees of Hutchison MediPharma Limited hold the remaining 0.2% shareholding.
(2) Nestl´e Health Science S.A. is the other 50% joint venture partner.
(3) Shanghai Pharmaceuticals Holding Co., Ltd. is the other 50% joint venture partner.
(4) Sinopharm Group Co. Ltd. is the other 49% joint venture partner.
(5) Dian Son Development Limited holds the other 20% interest.
(6) Guangzhou Baiyunshan Pharmaceutical Holdings Company Limited is the other 50% joint venture
partner.
(7) The Hain Celestial Group, Inc. is the other 50% joint venture partner.
58
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. Our approximately 360-person strong scientific team has created and developed a deep portfolio
of eight drug candidates that are being investigated in active or completed clinical studies in 36 target
patient populations around the world. These drug candidates are being developed to treat a wide spectrum
of diseases, including solid tumors, hematological malignancies, and cover immunology applications which
we believe address significant unmet medical needs and represent large commercial opportunities. Many
of these drugs have the potential to be first-in-class or best-in-class. Our success in research and
development has
including
AstraZeneca, Eli Lilly and Nestl´e Health Science.
leading global pharmaceutical companies,
led to partnerships with
For seventeen years, we and our partners have invested about $500 million in building our Innovation
Platform. Since inception to December 31, 2017, our Innovation Platform’s drug pipeline has dosed over
3,500 patients/subjects in clinical trials of our drug candidates, with over 700 dosed in 2017, primarily
driven by the enrollment of the six Phase III studies on savolitinib, fruquintinib, and sulfatinib.
Our core research and development strategy has been to take a highly rigorous and focused cross-
disciplinary approach to design uniquely selective small molecule tyrosine kinase inhibitors deliberately
engineered to improve drug efficacy and reduce known side effects. Accordingly, we believe our drug
candidates such as savolitinib (targeting the mesenchymal epithelial transition factor, or c-Met),
HMPL-523 (targeting the spleen tyrosine kinase, or Syk) and HMPL-453 (targeting fibroblast growth
factor receptors, or FGFR1/2/3) have the potential to be global first-in-class therapies. In the cases of
fruquintinib (targeting vascular endothelial growth factor receptor, or VEGFR 1/2/3), sulfatinib (targeting
VEGFR/FGFR1/colony stimulating factor-1 receptor, or CSF-1R), epitinib (targeting epidermal growth
factor receptor activating mutations, or EGFRm+, with brain metastasis), theliatinib (targeting EGFR
wild-type) and HMPL-689 (targeting phosphoinositide 3-kinase �, or PI3K�), we believe our drug
candidates are sufficiently selective and/or differentiated to be potential global best-in-class,
next-generation therapies. We also continue to focus on maximizing patient outcomes through clinical
studies involving combinations or rotations of treatment of our drug candidates with other targeted
therapies, immuno-oncology agents and chemotherapies.
In June 2017, we completed our first NDA submission, which was for fruquintinib in patients with
third-line colorectal cancer in China. We also initiated our first global Phase III study in oncology, for
savolitinib in patients with papillary renal cell carcinoma. Each triggered milestone payments from our
partners Eli Lilly and AstraZeneca, respectively, and each represents a major achievement for Chi-Med
and for the biotechnology industry in China.
In our view, the China oncology market represents a substantial and fast-growing market opportunity
expected to be supported by China’s increasing emphasis on innovation combined with its rapidly
improving regulatory environment. We believe our well-established presence in China, combined with our
ability to deliver global-quality innovation, positions us well to address the major unmet medical needs in
the China oncology market as well as to identify opportunities for our differentiated assets in the global
market.
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 been built over the past 17 years and focuses on two business areas. The first is
our core Prescription Drugs business operated by joint ventures, Shanghai Hutchison Pharmaceuticals and
Hutchison Sinopharm, which operate a network of approximately 2,300 medical sales representatives
covering about 22,500 hospitals in over 300 cities and towns in China as of December 31, 2017. The second
59
is our Consumer Health business primarily operated by our joint venture, Hutchison Baiyunshan, which is
a profitable and cash-generating business selling household-name, over-the-counter pharmaceutical
products. Our Commercial Platform’s total consolidated sales were $205.2 million in 2017, an increase of
13.5% compared to $180.9 million in 2016, mainly resulting from growth in Hutchison Sinopharm’s
Prescription Drug commercial services business. We and our joint ventures manufacture and sell about
4.6 billion doses of medicines a year, in the aggregate, through our well-established GMP-certified
manufacturing bases. 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.
Our Innovation Platform
Figure 1: Pipeline Chart
Notes: TPP = target patient population (TPP numbers are included for reference throughout the
discussion below); 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 receptor; TKI = tyrosine kinase inhibitor; EGFR = epidermal growth factor receptor;
11MAR201806565628
60
NET = neuroendocrine tumors; ref = refractory, which means resistant to prior treatment;
T790M= EGFR resistance mutation; EGFRm+ = EGFR activating mutations; EGFR+ = EGFR gene
amplification; EGFR WT = EGFR wild-type; 5ASA = 5-aminosalicylic acids; chemo = chemotherapy;
c-Met+ = c-Met gene amplification; c-Met O/E = c-Met over-expression; FGFR = fibroblast growth
factor receptor; CSF-1R = colony stimulating factor-1 receptor; NCI = U.S. National Cancer Institute;
CCTG = Canadian Cancer Trial Group; Aus = Australia; Can = Canada; SK = South Korea; PRC =
People’s Republic of China; Sp = Spain; UK = United Kingdom; US = United States; Global = >2
countries.
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 addresses renal toxicity, the primary issue that halted development of
several other selective c-Met inhibitors. In clinical studies to date, involving over 500 patients, savolitinib
has shown promising signs of clinical efficacy and acceptable safety profile in patients with c-Met gene
alterations 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 Phase Ib/II studies,
both as a monotherapy and in combination with other targeted therapies. In June 2017, we initiated
SAVOIR, a global pivotal Phase III, open-label, randomized multi-center registration study of savolitinib
in c-Met driven metastatic papillary renal cell carcinoma. This is the first pivotal study ever conducted in
c-Met driven papillary renal cell carcinoma and the first molecularly selected trial in renal cell carcinoma.
We expect to complete enrollment in late 2019.
At the 2017 World Conference on Lung Cancer, we presented preliminary safety and clinical activity
data of savolitinib when given in combination with either Tagrisso or Iressa in two Phase Ib/II
proof-of-concept trials conducted
lung cancer with
Met-amplification who had progressed following first-line treatment with an EGFR inhibitor. In both
trials, the addition of savolitinib (600 mg once daily) to Tagrisso (80 mg once daily) or Iressa (250 mg once
daily) demonstrated preliminary anti-tumor activity. We and AstraZeneca have now agreed on the next
stage of development in non-small cell lung cancer patients as discussed below.
in patients with EGFRm+ non-small cell
Phase II gastric cancer studies are ongoing in China, and a multi-arm Phase II study, named the
VIKTORY study, is being conducted at Samsung Medical Center in South Korea. Over 850 gastric cancer
patients have been screened in these studies, and those patients with confirmed c-Met driven disease are
being treated with either savolitinib monotherapy or savolitinib in combination with Taxotere. We
presented preliminary data from these studies in 2017, and the China study concluded that savolitinib
monotherapy demonstrated promising anti-tumor efficacy. We believe the potential benefit to the patients
warrants further exploration with Phase II enrollment continuing in China. The VIKTORY Phase II study
is ongoing, and we expect to present preliminary data at a major scientific conference in 2018.
The terms of our collaboration with AstraZeneca are governed by a December 2011 agreement under
which we granted 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
61
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
buildup of new blood vessels around a tumor, thereby contributing to the growth of tumors, and use in
potential combinations with other agents such as chemotherapies,
therapies and
immunotherapies. We believe these are points of meaningful differentiation versus other small molecule
VEGFR inhibitors that have already been approved, such as Sutent, Nexavar and Stivarga, and can
potentially significantly expand the use and market potential of fruquintinib.
targeted
In partnership with Eli Lilly, we are currently studying fruquintinib in colorectal cancer, non-small cell
lung cancer and gastric cancer in China.
In June 2017, the CFDA acknowledged acceptance of the NDA for fruquintinib for the treatment of
patients with advanced colorectal cancer. Fruquintinib was subsequently awarded priority review status in
view of its significant clinical value, according to a CFDA announcement in September 2017. The NDA is
supported by data from the successful FRESCO study, a Phase III pivotal registration trial of fruquintinib
in 416 patients with locally advanced or metastatic colorectal cancer in China, which was highlighted in an
oral presentation at the American Society of Clinical Oncology Annual Meeting in June 2017.
In February 2018, we completed patient enrollment of the FALUCA study, a Phase III pivotal trial of
fruquintinib in 527 advanced, third-line, non-small cell lung cancer patients in China. Top-line data are
expected to be reported in late 2018 when the overall survival data are mature, and subject to a positive
outcome, would be followed by a second NDA submission thereafter. The FALUCA study was initiated
following a similar Phase II clinical trial in 91 third-line non-small cell lung cancer patients that succeeded
in meeting its primary efficacy endpoint of progression-free survival reporting only one treatment-related
adverse event greater than or equal to grade 3, or 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), which was hypertension (8.2%). Results were highlighted in
an oral presentation at the World Conference on Lung Cancer in December 2016.
We believe the most significant global market opportunity for fruquintinib will come by combining it
with other oncology therapies such as chemotherapy, immunotherapy and other tyrosine kinase inhibitors
for use in earlier-line treatments. Along with the FALUCA study, fruquintinib is concurrently being
studied in a Phase II study in combination with Iressa in a first-line setting for patients with advanced or
metastatic non-small cell lung cancer. In October 2017, we reported preliminary clinical activity, safety and
tolerability data of fruquintinib in combination with Iressa in patients with EGFRm+ non-small cell lung
cancer. These data were from an ongoing Phase II proof-of-concept trial which was initiated in January
2017 and presented at the World Conference on Lung Cancer in October 2017.
62
In October 2017, we initiated the FRUTIGA study, a pivotal Phase III clinical trial of fruquintinib in
combination with Taxol in second-line gastric cancer. The FRUTIGA study was initiated following the
results of an open-label, multi-center, Phase Ib dose finding/expansion study of fruquintinib in combination
with Taxol in second-line gastric cancer, which established a well-tolerated combination dose with
encouraging efficacy.
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.
In December 2017, we also initiated a multi-center, open-label, Phase I clinical study to evaluate the
safety, tolerability and pharmacokinetics of fruquintinib in U.S. patients with advanced solid tumors.
Sulfatinib (HMPL-012)
Sulfatinib is an oral drug candidate with a unique angio-immuno kinase profile which provides both
anti-angiogenesis effect and, we believe, activates and effectively enhances the body’s immune system,
specifically T-cells. Importantly, in 2016 we presented pre-clinical data that show sulfatinib, in addition to
inhibiting VEGFR and FGFR1, is a potent inhibitor of CSF-1R, a signaling pathway involved in blocking
the activation of tumor-associated macrophages, which cloak cancer cells from attack from T-cells.
We are currently conducting six clinical trials of sulfatinib and retain all rights to sulfatinib worldwide.
In early 2017, we completed a Phase II study in neuroendocrine tumor patients in China and 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 14 patients who had progressed after treatment with systemic therapies (e.g., Sutent and
Afinitor) and all benefited from sulfatinib treatment. Based on the promising Phase II efficacy data and
tolerability in patients with advanced neuroendocrine tumors, we initiated two randomized Phase III trials
in China along with development in the United States.
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. A Phase I study in cancer patients in the United States is now
close to completion. Having established that the 300 mg once daily dose used in China is safe in U.S.
patients, we are now also enrolling a final cohort to establish that a 400 mg dose is also safe in U.S.
patients. We are currently in final planning stage for an expansion of sulfatinib development in the
United States into a multi-arm proof-of-concept study to explore efficacy and safety in both Sutent and
Afinitor refractory pancreatic neuroendocrine tumor patients as well as patients with biliary tract cancer
(also known as cholangiocarcinoma).
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.
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. 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.
63
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 expect to decide the
Phase III dose in early 2018 and initiate Phase III shortly thereafter. 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 medical need.
Additionally, in March 2018, we initiated a Phase Ib/II proof-of-concept study of epitinib in
glioblastoma patients with EGFR gene amplification in China. Glioblastoma is a primary brain cancer that
harbors high levels of EGFR gene amplification. This Phase Ib/II study will be a multi-center, single-arm,
open-label study to evaluate the efficacy and safety of epitinib as a monotherapy in patients with EGFR
gene amplified, histologically confirmed glioblastoma.
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 Ib study in patients with esophageal cancer with a high level of EGFR
activation.
HMPL-523
We believe HMPL-523 is a potential global first/best-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. The data are 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 �, or
PI3K�. While these BTK and PI3K� inhibitors 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.
64
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 Investigational New
Drug, or 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. We are now in the process of increasing the number
of clinical sites in Australia and China to support Phase Ib/II expansion in a broad range of indolent
non-Hodgkin’s lymphoma sub-types. We target to present dose escalation and expansion results, including
preliminary proof-of-concept data, at a major scientific conference later in 2018.
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.
HMPL-689
HMPL-689 is a novel, highly selective and potent small molecule inhibitor targeting the isoform
PI3K�, a key component in the B-cell receptor signaling pathway. We have designed HMPL-689 with
superior PI3K� isoform selectivity, in particular to not inhibit PI3K� (gamma), to minimize the risk of
serious infection caused by 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 with the first-generation PI3K� inhibitor Zydelig. HMPL-689’s
pharmacokinetic properties have been found to be favorable with good oral absorption, moderate tissue
distribution and low clearance in pre-clinical 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-class PI3K� agent. We currently retain all rights to HMPL-689 worldwide.
In 2016, we completed a Phase I, first-in-human, dose escalation study in healthy adult volunteers in
Australia to evaluate the pharmacokinetics and safety profile following single oral dosing HMPL-689.
Results were as expected with linear pharmacokinetics properties and good safety profile.
We subsequently received IND clearance in China and then initiated a Phase I dose escalation and
expansion study in patients with hematologic malignancies in August 2017.
HMPL-453
HMPL-453 is a novel, potentially first-in-class, highly selective and potent small molecule inhibitor
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.
65
In June 2017, we initiated a Phase I/II clinical trial in China to evaluate safety, tolerability,
pharmacokinetics and preliminary efficacy of HMPL-453 monotherapy in patients with solid tumors
harboring FGFR genetic alterations. This study complements the first-in-human Phase I clinical trial in
Australia that was initiated in February 2017.
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 our
Commercial Platform was $25.2 million $70.3 million and $40.0 million for the years ended December 31,
2015, 2016 and 2017, respectively. Net income attributable to our company from our Prescription Drugs
business included one-time gains of $40.4 million and $2.5 million in the years ended December 31, 2016
and 2017, respectively, net of tax, from land compensation and other government 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:
• unique selectivity to limit target-based toxicity,
• 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
• 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/CSF-1R), epitinib
(targeting EGFRm+ brain metastasis), theliatinib (targeting EGFR wild type) and HMPL-689 (targeting
PI3K�).
We are developing many of our drug candidates against multiple indications, which in some cases are
common to one or more of our drug candidates.
Our Clinical Pipeline
66
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 biotechnology 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.
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.
67
Figure 2: Chemical structures of selective c-Met inhibitors versus
savolitinib chemical structure, showing replacement of the quinoline group
PF-04217903 (Pfizer)
PF-04217903 (Pfizer)
JNJ-38877605 (Janssen)
JNJ-38877605 (Janssen)
SGX-523 (Lilly)
SGX-523 (Lilly)
INC-280 (Novartis/Incyte)
INC-280 (Novartis/Incyte)
savolitinib (Chi-Med)
savolitinib (Chi-Med)
11MAR201804271251
Sources:
1. Zou H, et al, 99th Annual Meeting for American Association for Cancer Research (AACR);
2.
12 – 16 April 2008; San Diego, USA
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 for American Association for Cancer Research (AACR);
5.
12 – 16 April 2008; San Diego, USA
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 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
68
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
9MAR201807164005
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 � 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) and 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, savolitinib demonstrated IC50s of 3 nM and 5 nM, respectively.
69
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
Vehicle
Vehicle
savolitinib-3 mpk
savolitinib-3 mpk
savolitinib-10 mpk
savolitinib-10 mpk
gefitinib-50 mpk
gefitinib-50 mpk
gefitinib-100 mpk
gefitinib-100 mpk
gefitinib-50/Savolitinib-3 mpk
gefitinib-50/Savolitinib-3 mpk
gefitinib-50/Savolitinib-10 mpk
gefitinib-50/Savolitinib-10 mpk
1800
1800
1500
1500
1200
1200
900
900
600
600
300
300
)
3
)
3
m
m
m
m
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(
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o
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m
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T
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0
0
0
0
3
3
6
6
12
9
12
9
Days of Treatment
Days of Treatment
15
15
18
18
21
21
9MAR201807163398
Source: Chi-Med pre-clinical data for savolitinib
Note: mpk = mg per kg of animal
70
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. CTC grade �3 adverse events 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 confirmed 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
71
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 (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 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, 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 early 2017, we presented the results of our 109-patient global Phase II study in papillary renal cell
carcinoma at the American Society of Clinical Oncology Genitourinary Cancers Symposium as well as in
the Journal of Clinical Oncology as a Rapid Communication Manuscript. This Phase II study was the
largest and most comprehensive clinical study in papillary renal cell carcinoma ever conducted. Of 109
patients treated with savolitinib, papillary renal cell carcinoma was c-Met driven in 44 patients (40%),
c-Met independent in 46 patients (42%) and Met status unknown in 19 patients (17%). c-Met driven
papillary renal cell carcinoma was strongly associated with encouragingly durable response to savolitinib
with an objective response rate in the c-Met driven group of 18.2% (8/44) as compared to 0% (0/46) in the
c-Met independent group (p=0.002), based on confirmed partial responses. Median progression-free
survival for patients with c-Met driven and c-Met independent papillary renal cell carcinoma patients was
6.2 months (95% confidence interval: 4.1-7.0) and 1.4 months (95% confidence interval: 1.4-2.7),
respectively (hazard ratio=0.33; 95% confidence interval: 0.20-0.52; log-rank p<0.0001). Savolitinib was
well tolerated, with no reported treatment related CTC grade �3 adverse events with greater than 5%
incidence. Total aggregate savolitinib treatment-related CTC grade �3 adverse events occurred in just 19%
of patients comparing very well to the 70-75% CTC grade �3 adverse event level recorded in VEGFR
inhibitors such as Sutent and Votrient (pazopanib) in multiple renal cell carcinoma studies (N Eng J Med
369;8, R J Motzer et al).
72
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.
28FEB201804504260
Non-Small Cell Lung Cancer
Phase I study of savolitinib in combination with Tagrisso T790M(+/�) non-small cell lung cancer
(AstraZeneca TATTON (Part A) dose finding study)
In November 2015, AstraZeneca received FDA approval for Tagrisso, its drug candidate for the
treatment of T790M+ 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 a 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 progresses because of c-Met gene amplification. The TATTON (Part A) Phase I
study of 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 TATTON (Part B)
Phase IIb proof-of-concept study was initiated to confirm safety and efficacy.
73
The primary objective of the TATTON Phase I (Part A) 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 confirmed 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 (Part A) study, by T790M status when available
r
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-20%
-20%
-40%
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-60%
-60%
-80%
-80%
- 100%
- 100%
Objective Response Rate:
Objective Response Rate:
Disease Control Rate:
Disease Control Rate:
55%
55%
100%
100%
Unknown
Unknown
T790M-
T790M-
T790M+
T790M+
9MAR201807165283
Source: Oxnard et al, Preliminary results of TATTON (Part A), a multi-arm Phase I 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, and only two in the 800 mg dose
were CTC grade �3. 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 expanded the TATTON Phase Ib study to
demonstrate broader proof-of-concept, as discussed below in Target Patient Population 6 in the pipeline
chart.
Savolitinib Current Clinical Development and Near-Term Plans
We are currently testing savolitinib in partnership with AstraZeneca in multiple Phase Ib/II studies,
both as a monotherapy and in combination with other targeted therapies. In June 2017, we initiated our
74
first global Phase III registration study in papillary renal cell carcinoma. In late 2017, we presented positive
Phase Ib/II data at the World Conference on Lung Cancer on savolitinib in combination with Tagrisso and
Iressa, in both second- and third-line non-small cell lung cancer and are now working closely with
AstraZeneca on next steps for development as discussed below.
Kidney Cancer
Phase III papillary renal cell carcinoma, savolitinib (600 mg once daily) monotherapy—Global (Target
Patient Population 1 in pipeline chart; Status: enrolling; NCT03091192)
Papillary renal cell carcinoma is the most common of the non-clear cell renal cell carcinomas
representing about 14% of kidney cancer. Approximately 366,000 new cases of kidney cancer were
diagnosed globally in 2015, equating to about 50,000 cases of papillary renal cell carcinoma, with
approximately half harboring c-Met driven disease. No targeted therapies have been approved specifically
for papillary renal cell carcinoma, and to date only modest efficacy in non-clear cell renal cell carcinoma
has been reported in sub-group analyses of broader renal cell carcinoma studies of VEGFR (e.g., Sutent)
and mammalian target of rapamycin (e.g., Afinitor) tyrosine kinase inhibitors, with objective response rates
of <10% and median progression-free survival in first-line setting of four to six months and second-line
setting of only one to three months (ESPN study, Tannir N. M. et al.).
Based on the Phase II results we presented in early 2017, we initiated the SAVOIR study in June 2017.
The SAVOIR study is a global Phase III, open-label, randomized, controlled trial evaluating the efficacy
and safety of savolitinib, compared with sunitinib, in patients with c-Met driven, unresectable, locally
advanced or metastatic papillary renal cell carcinoma. C-Met status is confirmed by the novel targeted
next-generation sequencing assay developed for savolitinib. Patients will be randomized in a 1:1 ratio to
receive either continuous treatment with savolitinib 600 mg (400 mg if <50 kg) orally, once daily, or
intermittent treatment with sunitinib 50 mg orally once daily (four weeks on/two weeks off), on a six-week
cycle. The primary endpoint for efficacy in the SAVOIR study is median progression-free survival, with
secondary endpoints of overall survival, objective response rate, duration of response, best percentage
change in tumor size, disease control rate, and safety and tolerability. We expect to complete enrollment in
late 2019.
Furthermore, in order to fully understand the role of c-Met driven disease in papillary renal cell
carcinoma, we are currently conducting a global molecular epidemiology study. The molecular
epidemiology study is in the process of screening, using our companion diagnostic, archived tissue samples
from over 300 papillary renal cell carcinoma patients to identify c-Met driven disease. Historical medical
records from these patients will then be used to determine if c-Met driven disease is predictive of worse
outcome, in terms of progression-free survival and overall survival, in papillary renal cell carcinoma
patients. If this is proven to be the case, we will consider engaging in discussions regarding Breakthrough
Therapy potential with the U.S. FDA.
Phase II study of multiple tyrosine kinase inhibitors in metastatic papillary renal cell carcinoma—
United States (Target Patient Population 2 in pipeline chart; Status: enrolling; NCT02761057)
A Phase II study, sponsored by the U.S. National Cancer Institute, and named the PAPMET study, to
assess the efficacy of multiple tyrosine kinase inhibitors in metastatic papillary renal cell carcinoma
patients including Sutent, Cabometyx (cabozantinib), Xalkori (crizotinib) and savolitinib. PAPMET began
enrolling patients in 2016. The PAPMET study is expected to enroll about 180 patients in over 70 locations
in the United States with top-line data targeted for reporting in 2019.
Phase II study of savolitinib (600 mg once daily) monotherapy and in combination with Imfinzi
(anti-programmed death-ligand 1) in both papillary renal cell carcinoma and clear cell renal cell carcinoma
patients—U.K./Spain (Target Patient Populations 3, 4 and 5 in pipeline chart; Status: enrolling; NCT02819596)
75
The CALYPSO study, a dose finding study to assess safety/tolerability of savolitinib and Imfinzi
combination therapy as well as preliminary efficacy of savolitinib as a monotherapy or combination therapy
in several c-Met driven kidney cancer patient populations, began at St. Bartholomew’s Hospital in London
in 2016. In 2016, the dose-finding phase of the CALYPSO study successfully established the combination
dose of savolitinib and Imfinzi and the study moved on to the Phase II expansion stage in papillary renal
cell carcinoma and clear cell renal cell carcinoma patients in the United Kingdom and Spain to further
explore efficacy in 2017.
Non-small Cell Lung Cancer
Phase Ib/II expansion non-small cell lung cancer (second-line), EGFR tyrosine kinase inhibitor-
refractory, savolitinib (600 mg once daily) in combination with Tagrisso—Global (Target Patient
Population 6 in pipeline chart; Status: enrolling; NCT02143466)
In October 2016, at the European Society for Medical Oncology meeting, AstraZeneca presented
preliminary proof-of-concept data from the TATTON study (Part A) on 17 evaluable first-generation
EGFR tyrosine kinase inhibitor (Iressa/Tarceva) refractory second-line non-small cell lung cancer patients
who had no prior exposure to third-generation EGFR tyrosine kinase inhibitors (Tagrisso/rocelitinib).
Molecular analysis of both c-Met and T790M status was completed for patients with sufficient available
tumor tissue. Of patients treated with the savolitinib and Tagrisso combination, confirmed partial
responses were reported in 4/5 (80% objective response rate) c-Met positive/T790M negative patients and
in 6/10 (60% objective response rate) c-Met positive patients regardless of T790M status.
In 2016, we initiated a global Phase Ib/II expansion study in second-line non-small cell lung cancer,
called the TATTON study (Part B), aiming to recruit sufficient c-Met gene amplified patients who had
progressed after prior treatment with a first-generation EGFR inhibitor (Iressa/Tarceva) to support a
decision on global Phase II/III registration strategy. In this first-generation EGFR tyrosine kinase inhibitor
refractory non-small cell lung cancer population, we estimate that c-Met gene amplification occurs in
15-20% of patients. Preliminary data from TATTON (Part B), in 34 evaluable patients, were presented at
the 2017 World Conference on Lung Cancer and showed confirmed partial responses in 14/23 (61%
objective response rate) of T790M mutation negative patients, as well as confirmed partial responses in
6/11 (55% objective response rate) of T790M mutation positive patients. AstraZeneca has recently decided
to progress into the next stage of development in this indication, with plans outlined below.
76
Figure 7: Preliminary data from TATTON study (Part B) were compelling and consistent with the TATTON
study (Part A)
9MAR201810203515
Note:
*Centrally confirmed MET-amplification (fluorescence in-situ hybridization, MET gene copy �5 or
MET/CEP7 ratio �2)
Phase Ib/II non-small cell lung cancer (third-line), EGFR/T790M tyrosine kinase inhibitor-refractory,
savolitinib (600 mg once daily) in combination with Tagrisso—Global (Target Patient Population 7 in
pipeline chart; Status: enrolling; NCT02143466)
The TATTON study (Part B) also enrolled third-line non-small cell lung cancer patients that had
progressed after treatment with Tagrisso as a result of c-Met gene amplification acquired resistance. Data
presented in June 2017 at the American Society of Clinical Oncology, by Harvard Medical School and
Massachusetts General Hospital Cancer Center showed that about 30% (7/23 patients) of Tagrisso-
resistant third-line non-small cell lung cancer patients harbor c-Met gene amplification. This third-line
patient population is generally heavily pre-treated and highly complex from a molecular analysis
standpoint, with the study showing that more than half of the c-Met gene amplification patients also
harbored additional genetic alterations, including but not limited to, EGFR gene amplification and K-Ras
mutations.
The TATTON (Part B) study, presented at the 2017 World Conference on Lung Cancer, also included
preliminary data in 30 evaluable patients previously treated with third-generation T790M-directed EGFR
inhibitors, primarily Tagrisso. Confirmed partial responses were observed in 10/30 (33% objective response
77
rate) of these patients, and while this is lower than the 55-61% objective response rate in Target Patient
Population 6, it was as expected given the additional driver genes at work post-Tagrisso monotherapy
failure. We believe that the savolitinib/Tagrisso combination is an important treatment option for these
late-stage patients who have no remaining targeted treatment alternatives.
Tagrisso sales in 2017, only the second year since its launch, were $955 million. At current pricing, this
would indicate that over 5,000 patients were treated with Tagrisso during 2017, thereby indicating that the
market potential for savolitinib in third-line, Tagrisso resistant, non-small cell lung cancer could be
material.
Figure 8: The savolitinib/Tagrisso combination could be an important treatment option for the third-line or
above non-small cell lung cancer patients who have no remaining targeted treatment alternatives
2MAR201805095850
Note:
*Centrally confirmed MET-amplification (fluorescence in-situ hybridization, MET gene copy �5 or
MET/CEP7 ratio �2)
AstraZeneca decision on further development in Target Patient Populations 6 and 7
In December 2017, AstraZeneca’s governance committee in oncology reviewed the TATTON (Part B)
data that had been presented at the 2017 World Conference on Lung Cancer, to decide strategy for further
development of the savolitinib and Tagrisso combination in first-generation (Iressa/Tarceva) and third-
generation (Tagrisso) EGFR-tyrosine kinase inhibitor refractory non-small cell lung cancer.
At that time, while the above strong objective response rate data was available for the savolitinib (600
mg once daily) plus Tagrisso (80 mg once daily) combination dose regimen, neither median
progression-free survival nor duration of response had been reached. Since then, both progression-free
survival and duration of response have continued to mature. The safety profile of the combination is in line
with previous reports for savolitinib (600 mg once daily) plus Tagrisso (80 mg once daily) and going
forward, AstraZeneca has concluded that a weight-based dosing algorithm will be applied for the
combination, similar to the dosing algorithm used in the SAVOIR Phase III study in papillary renal cell
carcinoma.
78
Encouraged by the TATTON (Part B) data, AstraZeneca has decided to proceed with development in
second-line non-small cell lung cancer (Target Patient Population 6 in the pipeline chart). Planning is now
underway to initiate a global randomized chemotherapy-doublet (platinum plus Alimta) controlled study
of the savolitinib plus Tagrisso combination in first-generation (Iressa/Tarceva) EGFR-tyrosine kinase
inhibitor refractory, c-Met driven and T790M negative non-small cell lung cancer patients. This
second-line non-small cell lung cancer study, currently targeted to start in the second half of 2018, will start
as a Phase II study until such time that regulatory discussions have taken place on dosing approach, and
will be powered based on TATTON (Part B) for objective response rate and progression-free survival.
To further support dosing approach ahead of regulatory discussions, AstraZeneca has already initiated
TATTON (Part D), exploring savolitinib (300 mg once daily) dose combined with Tagrisso (80 mg once
daily), to explore the lower dose in the context of maximizing tolerability of the combination for patients
who could be on the combination for long periods of time. A second supporting study, a Phase II, aiming at
strengthening the dose justification in EGFR-tyrosine kinase inhibitor refractory, c-Met driven non-small
cell lung cancer will also start in the second half of 2018, randomizing to either 300 mg savolitinib once
daily plus Tagrisso (80 mg once daily) or 600 mg savolitinib (with weight-based dosing) once daily plus
Tagrisso (80 mg once daily) with a primary endpoint of tolerability.
Late in 2018 or early in 2019, and subject to the outcome of the mature TATTON (Part B) data as well
as preliminary TATTON (Part D) results, we expect AstraZeneca to engage in regulatory discussions
regarding our dosing approach for the savolitinib and Tagrisso combination as well as potential
Breakthrough Therapy. These regulatory discussions will also enable AstraZeneca to decide development
strategy in third-line non-small cell lung cancer (Target Patient Population 7 in the pipeline chart), defined
as third-generation (Tagrisso) EGFR-tyrosine kinase inhibitor refractory, c-Met gene amplified non-small
cell lung cancer patients.
Phase II non-small cell lung cancer (second-line), EGFR tyrosine kinase inhibitor-refractory, savolitinib
(600 mg once daily) in combination with Iressa—China (Target Patient Population 8 in pipeline chart;
Status: completed; NCT02374645)
At the 2017 World Conference on Lung Cancer, we presented Phase II proof-of-concept data
assessing savolitinib in combination with Iressa in patients in China with EGFRm+ advanced non-small
cell lung cancer with centrally confirmed c-Met gene amplification who had progressed following first-
generation EGFR inhibitor therapy. Preliminary results showed confirmed partial responses in 12/23 (52%
objective response rate) of T790M mutation negative patients, as well as confirmed partial responses in
2/23 (9% objective response rate) of T790M mutation positive patients. The 52% objective response rate in
T790M mutation negative patients was as expected and similar to that recorded in TATTON (Part B) for
this target patient population, indicating that for these patients Iressa might be the most cost-efficient
combination partner for savolitinib. The low 9% objective response rate in T790M mutation positive
patients was also as expected, as Iressa does not effectively address T790M mutants. In terms of safety, the
savolitinib plus Iressa combination dose was safe and well tolerated.
With the launch of multiple lower-priced and reimbursed generic first-generation EGFR tyrosine
kinase inhibitors in China in 2017, combined with the approximately 50% proportion of non-small cell lung
cancer patients who harbor the EGFRm+, we believe there may be a surge in c-Met gene amplified
second-line non-small cell lung cancer patients in China over the coming years. We continue to discuss
Phase III plans in this target patient population for the savolitinib/Iressa combination in China with
AstraZeneca and expect to reach agreement in 2018.
79
Figure 9: The savolitinib/Iressa combination has demonstrated strong and durable response
in Met+ (T790M-) patients
MET testing
MET testing
confirmation
confirmation
Objective response
Objective response
rate, n (%)
rate, n (%)
Central
Central
Confirmed partial response
Confirmed partial response
Stable disease 6 weeks
Stable disease 6 weeks
Progressive disease/death
Progressive disease/death
Not evaluable
Not evaluable
MET+ /
MET+ /
T790M+
T790M+
(n = 23)
(n = 23)
2 (9%)
2 (9%)
9 (39%)
9 (39%)
7 (30%)
7 (30%)
5 (22%)
5 (22%)
MET+
MET+
(T790M-)
(T790M-)
(n = 23)
(n = 23)
12 (52%)
12 (52%)
7 (30%)
7 (30%)
3 (13%)
3 (13%)
1 (4%)
1 (4%)
MET+ / T790M
MET+ / T790M
unknown
unknown
(n = 5)
(n = 5)
2 (40%)
2 (40%)
2 (40%)
2 (40%)
0
0
1 (20%)
1 (20%)
Total
Total
(n = 51)
(n = 51)
16 (31%)
16 (31%)
18 (35%)
18 (35%)
10 (20%)
10 (20%)
7 (14%)
7 (14%)
)
-
)
-
M
M
0
0
9
9
7
7
T
T
(
(
+
+
T
T
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+
+
M
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0
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9
9
7
7
T
T
/
/
+
+
T
T
E
E
M
M
PR
PR
PR
PR
PR
PR
PR
PR
PR
PR
PR
PR
PR
PR
PR
PR
PR
PR
PR
PR
PR
PR
PR
PR
PR
PR
PR
PR
• 12 patients had PRs
• 12 patients had PRs
• 7 patients were on
• 7 patients were on
treatment beyond 6 months
treatment beyond 6 months
• 7 patients remain on
• 7 patients remain on
treatment at cut-off
treatment at cut-off
• 2 patients show PRs
• 2 patients show PRs
• 3 patients were on
• 3 patients were on
treatment beyond 6 months
treatment beyond 6 months
• 0 patients remain on
• 0 patients remain on
treatment at cut-off
treatment at cut-off
0
0
2
2
4
4
6
6
8
8
10
10
Months on treatment
Months on treatment
12
12
14
14
8MAR201809244776
Note:
1. Cut-off as of August 21, 2017
Phase II c-Met driven non-small cell lung cancer, savolitinib (600 mg once daily) monotherapy—China
(Target Patient Populations 9 and 10 in pipeline chart; Status: enrolling; NCT01935555/NCT02897479)
Phase II studies of savolitinib are also ongoing in non-small cell lung cancer and other lung cancer
patient populations, focusing on those with c-Met driven disease.
Gastric Cancer
Phase II gastric cancer studies are ongoing in China as well as the Phase II VIKTORY study, being
conducted at Samsung Medical Center in South Korea, in which savolitinib is represented in two out of the
80
ten treatment arms. As of the latest report in 2017, a total of over 850 gastric cancer patients have been
screened in these studies and those patients with confirmed c-Met driven disease are being treated with
either savolitinib monotherapy or savolitinib in combination with Taxotere. Presentations of preliminary
data from these studies were made in 2017 at the Chinese Society of Clinical Oncology (China Phase II)
and the American Society of Clinical Oncology (VIKTORY Phase II).
In China as of June 2017, a total of 441 metastatic gastric cancer patients had been screened with
13.2% (58/441) determined to have aberrant c-Met, of which 5.3% (23/438) were c-Met gene amplified. A
total of 31 patients in China have been enrolled to date in Target Patient Population 11 in the pipeline
chart as discussed below. In South Korea as of January 2017, a total of 438 metastatic gastric cancer
patients had been screened with 5.3% (23/438) being patients with c-Met driven (gene amplification or
over-expression) disease. A total of 23 patients in South Korea have been enrolled to date in Target Patient
Populations 11, 12 and 13 in the pipeline chart as discussed below.
Phase Ib gastric cancer, savolitinib monotherapy, patients with c-Met gene amplification—China and South
Korea (Target Patient Population 11 in pipeline chart; Status: enrolling; NCT01985555/NCT02449551)
Preliminary results were presented at the 2017 Chinese Society of Clinical Oncology for the efficacy
evaluable c-Met gene amplified patients in China. Based on confirmed and unconfirmed partial responses,
the objective response rate was 42.9% (3/7) and disease control rate was 85.7% (6/7), with objective
response rate of 13.6% (3/22) and disease control rate of 40.9% (9/22) among the overall efficacy evaluable
aberrant c-Met set. As of data cut-off, the longest duration of treatment was in excess of two years.
Savolitinib monotherapy was determined to be safe and well tolerated in patients with advanced gastric
cancer. CTC grade �3 treatment emergent adverse events with greater than 5% incidence included
abnormal hepatic function in 12.9% (4/31), gastrointestinal bleeding or decreased appetite in 9.7% (3/31
each), and diarrhea or gastrointestinal perforation in 6.4% (2/31 each). This China study concluded that
savolitinib monotherapy demonstrated promising anti-tumor efficacy in gastric cancer patients with c-Met
gene amplification. We believe the potential benefit to these patients warrants further exploration, with
Phase II enrollment continuing in China. The VIKTORY Phase II study is ongoing in c-Met gene
amplified patients in South Korea, with preliminary data likely to be presented at a major scientific
conference in 2018.
Phase II gastric cancer, savolitinib (600 mg once daily) in combination with Taxotere in c-Met
over-expression or c-Met gene amplification—South Korea (Target Patient Populations 12 and 13 in
pipeline chart; Status: enrolling; NCT02447380/NCT02447406)
Phase II studies are underway to assess safety/tolerability of savolitinib and Taxotere combination as
well as preliminary efficacy of the combination therapy in both c-Met gene amplified patients and the
approximately 40% of gastric cancer patients that harbor c-Met over-expression. The VIKTORY Phase II
study is ongoing in South Korea in Target Patient Populations 12 and 13, with preliminary data likely to be
presented at a major scientific conference in 2018.
Phase II metastatic castration-resistant prostate cancer, savolitinib monotherapy—Canada (Target Patient
Populations 14 in pipeline chart; Status: enrolling; NCT03385655)
A Phase II study is sponsored by the Canadian Cancer Trials Group to determine the effect of
savolitinib on prostate-specific antigen decline and time to prostate-specific antigen progression. The study
will assess the objective response rate as determined by RECIST 1.1 criteria, evaluate the safety and
toxicity profile of savolitinib in metastatic castration-resistant prostate cancer patients and identify
potential predictive and prognostic factors. The umbrella study targets to enroll around 500 patients into
six treatment arms based on molecular status, with patients with c-Met-driven disease receiving savolitinib.
High levels of c-Met over expression can be prevalent in prostate cancer patients.
81
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
Imfinzi. 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 better target coverage, as well as possible use
in combination with other agents such as chemotherapies, targeted therapies and immunotherapies.
We believe these are meaningful points of differentiation compared to other approved small molecule
VEGFR inhibitors such as Sutent, Nexavar and Stivarga, and can potentially significantly expand the use
and market potential of fruquintinib. 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.
82
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 be dosed 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 be managed 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 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 results were presented at the American Association for
Cancer Research’s meeting in 2013 and subsequently published in Cancer Chemotherapy and
Pharmacology in August 2016. 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.
Most adverse events were considered mild and graded as CTC grade 1 or 2. Adverse events CTC
grade �3 with greater than 5% incidence related to fruquintinib treatment were hypertension (17.5%),
hand-foot syndrome (17.5%), thrombocytopenia (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.
83
Figure 10: 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
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Day=28, 2mg QD
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Time (h)
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EC50 (>50% pVEGFR inhibition)
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Day=14, 2mg QD
Day=14, 6mg QD
Day=14, 6mg QD
Day=14, 4mg QD
Day=14, 4mg QD
9MAR201807160224
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
Tumor response and progression were evaluated using the Response Evaluation Criteria in Solid
Tumors version 1.0. In terms of efficacy, in the entire intent-to-treat population of 40 subjects, 14 had
confirmed partial response, 14 had stable disease, six had progressed disease, and six were not evaluable.
The objective response rate was 41% in the 34 evaluable patients and 35% 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.
84
Studies in Colorectal Cancer
Phase Ib and II studies 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 progression-free survival, 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 progression-free survival
was 4.7 months in the fruquintinib arm compared to median progression-free survival 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 progression-free survival. The result of 4.7 months in median
progression-free survival 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.
Phase III study in colorectal cancer (third-line), fruquintinib monotherapy—China (Target Patient
Population 15 in pipeline chart; Status: NDA submitted in June 2017; NCT02314819)
In December 2014, we initiated the FRESCO trial, which is a randomized, double-blind, placebo-
controlled, multi-center, Phase III pivotal trial in patients with locally advanced or metastatic colorectal
cancer who have failed at least two prior systemic antineoplastic therapies, including fluoropyrimidine,
oxaliplatin and irinotecan. No drugs had been approved in third-line colorectal cancer in China with best
supportive care being the general standard of care. Enrollment was completed in May 2016 and 519
patients were screened. The intent-to-treat population of 416 patients was randomized at a 2:1 ratio to
receive either: 5 mg of fruquintinib orally once daily, on a three-weeks-on/one-week-off cycle, plus best
supportive care (278 patients) or placebo plus best supportive care (138 patients). Randomization was
stratified for prior anti-VEGF therapy and K-Ras gene status. The trial concluded in January 2017.
85
In June 2017, we highlighted the results of the FRESCO study in an oral presentation during the
American Society of Clinical Oncology Annual Meeting held in Chicago. Results showed that FRESCO
met all primary and secondary endpoints including significant improvements in overall survival and
progression-free survival with a manageable safety profile and lower off-target toxicities compared to other
targeted therapies. The primary endpoint of median overall survival was 9.30 months (95% confidence
interval: 8.18-10.45) in the fruquintinib group versus 6.57 months (95% confidence interval: 5.88-8.11) in
the placebo group, with a hazard ratio of 0.65 (95% confidence interval: 0.51-0.83; two-sided p<0.001).
The secondary endpoint of median progression-free survival was 3.71 months (95% confidence interval:
3.65-4.63) in the fruquintinib group versus 1.84 months (95% confidence interval: 1.81-1.84) in the placebo
group, with a hazard ratio of 0.26 (95% confidence interval: 0.21-0.34; two-sided p<0.001). Significant
benefits were also seen in other secondary endpoints. The disease control rate in the fruquintinib group
was 62.2% versus 12.3% for placebo (p<0.001), while the objective response rate based on confirmed
responses was 4.7% versus 0% for placebo (p=0.012).
Figure 11: Phase III study in China of fruquintinib monotherapy in third-line colorectal cancer.
FRESCO clearly succeeded in meeting the primary efficacy endpoint of OS.
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Median (months)
Median (months)
95% CI
95% CI
Stratified HR (95% CI)
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Fruquintinib + BSC
Fruquintinib + BSC
(N=278)
(N=278)
9.30
9.30
8.18 – 10.45
8.18 – 10.45
Placebo + BSC
Placebo + BSC
(N=138)
(N=138)
6.57
6.57
5.88 – 8.11
5.88 – 8.11
0.65 (0.51 – 0.83)
0.65 (0.51 – 0.83)
p-value <0.001
p-value <0.001
1.00
1.00
0.75
0.75
0.50
0.50
0.25
0.25
0.00
0.00
Fruquintinib + BSC
Fruquintinib + BSC
Placebo + BSC
Placebo + BSC
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28FEB201805090278
Months
Months
In terms of safety, results showed that fruquintinib had a manageable safety profile with lower
off-target toxicities compared to other VEGFR tyrosine kinase inhibitors. Of particular interest was that
the CTC grade �3 hepatotoxicity was similar for the fruquintinib group as compared to the placebo group,
which is in contrast to Stivarga which was markedly worse and often difficult to manage in this patient
population in the CONCUR study. The most frequently reported fruquintinib-related CTC grade �3
adverse events included hypertension (21.2%), hand-foot skin reaction (10.8%), proteinuria (3.2%) and
diarrhea (2.9%), all possibly associated with VEGFR inhibition. No other CTC grade �3 adverse events
exceeded 1.4% in the fruquintinib population, including hepatic function adverse events such as elevations
in bilirubin (1.4%), alanine aminotransferase (0.7%) or aspartate aminotransferase (0.4%). In terms of
tolerability, dose interruptions or reductions occurred in only 35.3% and 24.1% of patients in the
fruquintinib arm, respectively, and only 15.1% of patients discontinued treatment of fruquintinib due to
adverse events versus 5.8% for placebo.
In June 2017, the CFDA acknowledged acceptance of the NDA for fruquintinib for the treatment of
patients with advanced colorectal cancer. Fruquintinib was subsequently awarded priority review status in
view of its clinical value, according to a CFDA announcement in September 2017.
86
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 progression-free survival versus placebo in this study, and in December 2016, we reported the full
data from this study at the 2016 World Conference on Lung Cancer, which showed median
progression-free survival of 3.8 months for the fruquintinib group compared with 1.1 months for the
placebo group (hazard ratio=0.34; 95% confidence interval: 0.20-0.57; p<0.001), an objective response
rate based on confirmed partial responses of 13.1% for the fruquintinib group compared with 0.0% for the
placebo group (p=0.041), and a 47.5% increase in disease control rate for the fruquintinib group
compared with the placebo group (p<0.001). All were assessed by blinded independent clinical review.
Fruquintinib was well tolerated with treatment related CTC grade �3 adverse events with greater than 5%
incidence being hypertension (8.1%).
Figure 12: Phase II study in China of fruquintinib monotherapy in third-line non-small cell lung cancer.
This study clearly met the median progression-free survival primary endpoint.
Source: Chi-Med
Studies in Gastric Cancer
Phase Ib/II study of fruquintinib combined with Taxol in second-line gastric cancer patients in China
In early 2017, we completed an open label, multi-center Phase Ib dose finding/expansion study of
fruquintinib in combination with Taxol in second-line gastric cancer. As of September 10, 2016, a total of
32 patients were enrolled in the study and the recommended dose was determined to be 4 mg once daily on
28FEB201804511222
87
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% (10/28, based on
confirmed partial responses) and a disease control rate of 68% (19/28). At the recommended dose,
progression-free survival of �16 weeks was 50% of and overall survival of �7 months was 50%. Tolerability
of the recommended dose combination was as expected. In the drug expansion stage, CTC grade �3
adverse events with greater than 5% incidence related to the treatment were neutropenia (57.9%),
leukopenia (21.0%), hypertension (10.6%), decreased platelet count (5.3%), anemia (5.3%), hand-foot
skin reaction (5.3%), mucositis oral (5.3%), hepatic disorder (5.3%), and upper gastrointestinal
hemorrhage (5.3%), while 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. In October 2017, based on the
Phase Ib data, we initiated FRUTIGA, a pivotal Phase III clinical trial of fruquintinib in combination with
Taxol in second-line gastric cancer. Updated results are expected to be published in an upcoming scientific
journal.
Figure 13: Phase Ib/II study of fruquintinib combined with Taxol in gastric cancer. Phase III initiation made
on the basis of these encouraging efficacy data.
Source: Chi-Med
Note: As of November 30, 2016
8MAR201820504207
Fruquintinib Current Clinical Development and Near-Term Plans
As discussed below, we currently have various clinical trials of fruquintinib ongoing in China and the
United States.
In partnership with Eli Lilly in China, we are conducting a Phase III study of fruquintinib in third-line
non-small cell lung cancer patients, a Phase II study of fruquintinib in combination with Iressa in first-line
non-small cell lung cancer patients, and a Phase III study of fruquintinib in combination with Taxol in
second-line gastric cancer patients. In the United States, we have initiated Phase I study to evaluate the
safety, tolerability and pharmacokinetics of fruquintinib in U.S. patients with advanced solid tumors.
88
Studies in Colorectal Cancer
Since completing submission of the NDA to the CFDA in early June 2017, we have engaged with the
Center for Drug Evaluation to conduct reviews in the areas of (i) pharmacology and toxicity, (ii) clinical
data and statistical analysis, and (iii) chemistry, manufacturing and control of standards and process. We
have also facilitated the conduct of clinical site visits including GCP and good laboratory practice
inspections. We are currently entering in the pre-approval inspection process for our active pharmaceutical
ingredient contract manufacturer as well as the pre-approval inspection and GMP-certification process for
our Suzhou formulation facility.
Studies in Non-small Cell Lung Cancer
Phase III fruquintinib monotherapy in non-small cell lung cancer (third-line)—China (Target Patient
Population 16 in pipeline chart; Status: enrollment complete; NCT02691299)
Following a positive Phase II study comparing fruquintinib with placebo in advanced non-squamous
non-small cell lung cancer patients who have failed two prior systemic chemotherapies, or third-line
non-small cell lung cancer, we initiated a Phase III registration study, the FALUCA study, in December
2015. In February 2018, we completed enrollment of the FALUCA study in China, in which a total of 527
patients were randomized at a 2:1 ratio to receive either 5 mg of fruquintinib orally once daily, on a
3-weeks-on/1-week-off cycle plus best supportive care, or placebo plus best supportive care. The primary
endpoint for FALUCA is overall survival, with secondary endpoints including progression-free survival,
objective response rate, disease control rate and duration of response. We expect to reach median overall
survival endpoint maturity and report top-line results in late 2018.
Phase II study of fruquintinib in combination with Iressa in non-small cell lung cancer (first-line)—
China (Target Patient Population 17 in pipeline chart; Status: enrolling; NCT02976116)
In early 2017, we initiated a multi-center, single-arm, open-label, dose-finding, 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 EGFRm+. We have enrolled about 50 patients in this study with the
objective to evaluate the safety and tolerability as well as efficacy of the combination therapy. Preliminary
data were presented at the 2017 World Conference on Lung Cancer, with the 8 (31%) CTC grade �3
treatment emergent adverse events being increased alanine aminotransferase (19%), increased aspartate
aminotransferase (4%), proteinuria (4%) and hypertension (4%). There were no serious adverse events or
those that lead to death. Preliminary results in 17 efficacy evaluable patients showed an objective response
rate of 76% (13/17), including 9 confirmed and 4 unconfirmed partial responses at the time of data cut-off,
as well as a disease control rate of 100% (17/17).
Fruquintinib’s safety and tolerability profile, resulting from its high kinase selectivity, combined with
flexibility to adjust dosage to manage treatment emergent toxicities due to its shorter half-life versus
monoclonal antibody therapies, along with its potent anti-angiogenic effect, makes it a high potential
combination partner for EGFR tyrosine kinase inhibitors. Subject to continued positive data in Target
Patient Population 17, we will consider Phase III registration studies both inside and outside of China.
89
Figure 14: Phase II study of fruquintinib combined with Iressa in non-small cell lung cancer. Preliminary
data showed promising efficacy in the first-line setting.
4MAR201823021112
Phase I fruquintinib monotherapy in advanced solid tumors—United States (Target Patient Population
18 in pipeline chart; Status: enrolling; NCT03251378)
In December 2017, we initiated a multi-center, open-label, Phase I clinical study to evaluate the safety,
tolerability and pharmacokinetics of fruquintinib in U.S. patients with advanced solid tumors. Upon
completion, likely late in 2018, our intention is to begin exploring multiple innovative combination studies
of fruquintinib and other tyrosine kinase inhibitors, chemotherapy and immunotherapy agents in the
United States.
Studies in Gastric Cancer
Phase III study of fruquintinib in combination with Taxol in gastric cancer (second-line)—China
(Target Patient Population 19 in pipeline chart; Status: enrolling)
in advanced gastric or gastroesophageal
In October 2017, we initiated the FRUTIGA study, a pivotal Phase III clinical trial of fruquintinib in
combination with Taxol for the treatment
junction
adenocarcinoma patients in China. This randomized, double-blind, placebo-controlled, multi-center trial is
being conducted in patients with advanced gastric cancer who have progressed after first-line standard
chemotherapy. Over 500 patients will be enrolled in the FRUTIGA study to evaluate the efficacy and
safety of fruquintinib combined with paclitaxel compared with paclitaxel monotherapy for second-line
treatment of advanced gastric or gastroesophageal junction adenocarcinoma. The trial will enroll patients
with disease that has been confirmed through histology or cytology and who did not respond to first-line
standard chemotherapy containing platinum and fluorouracil. All subjects will receive fruquintinib or
placebo combined with paclitaxel. Patients will be randomized at a 1:1 ratio and stratified according to
factors such as stomach versus gastroesophageal junction tumors and ECOG performance status, a scale
established by the Eastern Cooperative Oncology Group which determines ability of patient to tolerate
therapies in serious illness, specifically for chemotherapy. An independent data monitoring committee will
be established to review safety and efficacy data.
The primary efficacy endpoint
include
progression-free survival, objective response rate, disease control rate, duration of response and
quality-of-life score (EORTC QLQ-C30, version 3.0). Biomarkers related to the antitumor activity of
fruquintinib will also be explored. We intend to conduct an interim analysis of the FRUTIGA study for
futility some time during 2019.
is overall survival. Secondary efficacy endpoints
90
Advanced gastric cancer is a major medical need, particularly in Asian populations, with limited
treatment options for patients who have failed first-line standard chemotherapy with 5-fluorouracil and
platinum doublets. For gastric cancer, there are approximately 679,100 new cases and 498,000 deaths in
China each year.
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 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 angio-immuno kinase inhibitor targeting VEGFR, FGFR1 and
CSF-1R kinases that could simultaneously block tumor angiogenesis and immune evasion. Its unique
angio-immuno kinase profile seems to support sulfatinib as an attractive candidate for exploration of
possible combinations with checkpoint inhibitors against various cancers. 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. A U.S. Phase I study is close to completion and we
are planning a proof-of-concept study in neuroendocrine tumors in the United States.
Mechanism of Action
Both VEGFR and FGFR signaling pathways can mediate tumor angiogenesis. CSF-1R plays an
important role on functions of macrophages. Recently, the roles in increasing tumor immune evasion of
VEGFR, FGFR in regulation of T cells, tumor-associated macrophages and myeloid-derived suppressor
cells have been demonstrated. Therefore, blockade of tumor angiogenesis and tumor immune evasion by
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simultaneously targeting VEGFR, FGFR and CSF-1R kinases may represent a promising approach for
anti-cancer therapy.
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
Sulfatinib inhibited VEGFR1, 2, and 3, FGFR1 and CSF-1R kinases with IC50 in a range of 1 nM to
24 nM. It also strongly blocked VEGF-induced VEGFR2 phosphorylation in HEK293KDR cells and
CSF-1R phosphorylation in RAW264.7 cells with an IC50 of 2 nM and 79 nM, respectively. Sulfatinib also
reduced VEGF- or FGF-stimulated human umbilical vein endothelial cell proliferation with an IC50 < 50
nM. In animal studies, a single oral dose of sulfatinib
inhibited VEGF-stimulated VEGFR2
phosphorylation in lung tissues of nude mice in an exposure-dependent manner. Furthermore, elevation of
FGF23 levels in plasma 24 hours post dosing suggested suppression of FGFR signaling.
tumor
Sulfatinib demonstrated potent tumor growth inhibition in multiple human xenograft models and
decreased cluster of differentiation 31 expression remarkably, suggesting strong inhibition on angiogenesis
through VEGFR and FGFR signaling. In a syngeneic murine colon cancer model, sulfatinib demonstrated
and
moderate
immunohistochemistry analysis revealed an increase of certain T cells and a significant reduction in certain
tumor-associated macrophages, including CSF-1R mutation positive tumor-associated macrophages in
tumor tissue, indicating sulfatinib has a strong effect on CSF-1R. Interestingly, a combination of sulfatinib
with a programmed death-ligand 1 antibody resulted in enhanced anti-tumor effect. These results
suggested that sulfatinib has a strong effect in modulating angiogenesis and cancer immunity.
treatment. Flow
single-agent
cytometry
inhibition
growth
after
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. Final results as of July 2015 were published in Oncotarget in February 2017.
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. 23 of the patients were enrolled in the formulation
2 dose escalation study in dose cohorts of 200 mg, 300 mg and 350 mg once daily, and a further 11 were
enrolled in an expansion study in dose cohorts of 300 mg and 350 mg once daily. All 34 patients on
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formulation 2 completed the safety and pharmacokinetic evaluation. The maximum tolerated dose was also
not reached in this formulation.
CTC grade �3 adverse events observed in formulation 2 patients with greater than 5% incidence
include proteinuria (14.7%), hypertension (8.8%), increased aspartate aminotransferase (5.9%), diarrhea
(5.9%), decreased hemoglobin (5.9%), decreased platelet count (5.9%) and hypophosphatemia (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, among 34 patients treated with formulation 2, 28 patients were evaluable
by Response Evaluation Criteria in Solid Tumors Version 1.0 criteria, of which nine achieved confirmed
partial response, including one patient with hepatocellular carcinoma receiving sulfatinib 200 mg once
daily, and eight with neuroendocrine tumors receiving sulfatinib 300 or 350 mg once daily. There were
15 patients with stable disease (10 with neuroendocrine tumors, three with hepatocellular carcinoma, one
with gastrointestinal stromal tumors, and one with an abdominal malignancy) and four patients with
progressive disease. Based on confirmed responses, the objective response rate amongst all patients
treated with sulfatinib formulation 2 was 26.5% (9/34) and the disease control rate was 70.6% (24/34), or
an objective response rate of 32.1% (9/28) and a disease control rate was 85.7% (24/28) amongst efficacy
evaluable formulation 2 patients. 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 confirmed partial response patients, 10 stable disease
patients, and three patients were not evaluable for response. This 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 formulation 2 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 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. The somatostatin analogues
octreotide and lanreotide are also approved for narrow subsets of gastrointestinal neuroendocrine tumors,
but their objective response rate is less than 5%. In January 2018, the FDA approved Lutathera (lutetium
Lu 177 dotatate) injection, a radiolabeled somatostatin analog which, like octreotide and lanreotide, is
tumors
indicated
(gastroenteropancreatic in the case of Lutathera), and has a half-life of less than seven days. Sulfatinib’s
receptor-positive
neuroendocrine
somatostatin
treatment
the
for
of
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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 diseases (79%) and had failed
previous systemic treatments (65%). We reported the results of this Phase II study at the 2017 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 progression-free survival has not been
reached, but is estimated to be 16.6 months, with as-expected, longer median progression-free survival in
pancreatic neuroendocrine tumors estimated to be 19.4 months and shorter median progression-free
survival in extra-pancreatic neuroendocrine tumors estimated to be 13.4 months. Importantly, in the
context of our potential global development strategy, there were 14 patients who had progressed after
treatment with systemic therapies (Sutent and Afinitor) and all benefited from the sulfatinib treatment
(four patients with partial response and 10 patients with stable disease). Sulfatinib was well tolerated with
adverse events CTC grade �3 with greater than 5% incidence being hypertension (30.9%), proteinuria
(13.6%), hyperuricemia
(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.
(9.9%), hypertriglyceridemia
(8.6%), diarrhea
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Figure 15: Phase II study in China of sulfatinib monotherapy in neuroendocrine tumors.
Interim data demonstrates promising efficacy.
4MAR201823021713
Source: European Neuroendocrine Tumour Society Annual Conference 2017. Data cut-off as of
January 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
China and the United States. 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
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 in the United States is close to completion.
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.
tumor patients and one
Studies in Neuroendocrine Tumors
Phase III study in pancreatic neuroendocrine tumors, sulfatinib monotherapy—China (Target Patient
Population 20 in pipeline chart; Status: enrolling; NCT02589821)
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 progression-free survival, 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 2019 and present top-line results
thereafter. If the SANET-p Phase III data is consistent with the 17.1% objective response rate and
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estimated 19.4 month median progression-free survival 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.
Phase III study in extra-pancreatic neuroendocrine tumors, sulfatinib monotherapy—China (Target
Patient Population 21 in pipeline chart; Status: enrolling; NCT02588170)
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 progression-free survival, 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 2019 and present top-line results thereafter. If the
SANET-ep Phase III data is consistent with the 15.0% objective response rate and estimated 13.4 month
median progression-free survival 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—United States (Target Patient Population 22
in pipeline chart; Status: enrolling; NCT02549937)
A Phase I study in cancer patients in the United States is now close to completion, having confirmed
the Recommended Phase 2 dose.
We are currently in final planning for an expansion of sulfatinib development in the United States into
a multi-arm Phase IIa study to explore efficacy and safety in both neuroendocrine tumor patients and solid
tumor cancer patients.
Phase II sulfatinib monotherapy in recurrent/refractory thyroid cancer—China (Target Patient
Populations 23 and 24 in pipeline chart; Status: enrollment complete; NCT02614495)
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.
In June 2017, we presented preliminary results of the Phase II studies at the 2017 American Society of
Clinical Oncology Annual Meeting and at the American Thyroid Association Annual Meetings. The
preliminary data in 16 efficacy evaluable patients showed an objective response rate based on confirmed
responses of 30% (3/10) in differentiated thyroid cancer and an objective response rate of 16.7% (1/6) in
medullary thyroid cancer, with all other patients reporting stable disease.
Phase II sulfatinib monotherapy in chemotherapy refractory biliary tract cancer—China (Target Patient
Population 25 in pipeline chart; Status: enrolling NCT02966821)
In January 2017, we began a Phase II study in patients with biliary tract cancer (also known as
cholangiocarcinoma), a heterogeneous group of rare 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.
96
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 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.
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.
97
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 33 non-small cell lung cancer patients, of which 12 had previously
received EGFR tyrosine kinase inhibitor treatment and 21 were EGFR tyrosine kinase inhibitor treatment
na¨ıve, were efficacy evaluable with an objective response rate of 39%, including 10 confirmed and three
unconfirmed partial responses. All responses occurred in EGFR tyrosine kinase inhibitor treatment na¨ıve
patients resulting in an objective response rate of 62% and in the 11 EGFR tyrosine kinase inhibitor na¨ıve
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 na¨ıve 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 CTC grade �3 with greater than 10% incidence were elevations in alanine transaminase (18.9%),
elevations in gamma-glutamyltransferase (10.8%), and aspartate transaminase (10.8%).
Figure 16: 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
Dose expansion stage—data cut-off Sept 20, 2016; * Unconfirmed partial response, due to no further
assessment at cut-off date; # Includes both confirmed and unconfirmed partial response; ^ c-MET
amplification/high expression identified
Source: Chi-Med
Epitinib Current Clinical Development and Near-Term Plans
As discussed below, are currently planning to initiate two clinical studies of epitinib in China,
including one Phase III trial.
28FEB201804510227
98
Phase Ib epitinib monotherapy in non-small cell lung cancer, EGFRm+ with brain metastasis—China
(Target Patient Population 26 in pipeline chart; Status: continues to enroll; NCT02590952)
In December 2016 at the World Conference on Lung Cancer, we presented encouraging efficacy data
for an open label, multi-center, Phase I dose expansion study. Patients treated with epitinib at a 160 mg
once daily dose (detailed above). During 2017, we continued to enroll patients in this Phase Ib study
exploring a lower 120 mg once daily dose in the context of further optimizing tolerability for long-term
usage. We expect to decide the Phase III dose in early 2018 and initiate Phase III shortly thereafter.
Phase Ib/II epitinib monotherapy in glioblastoma—China (Target Patient Population 27 in pipeline
chart; Status: enrolling; NCT03231501)
Glioblastoma is the most aggressive of the gliomas, which are tumors that arise from glial cells or their
precursors within the central nervous system. Glioblastoma is classified as grade IV under the World
Health Organization grading of central nervous system tumors, and is the most common brain and central
nervous system malignancy, accounting for 46.6% of such tumors. In 2017, there were approximately
12,000 new glioblastoma cases in the United States, according to the Central Brain Tumor Registry of the
United States. In 2015, there were approximately 101,600 new brain or central nervous system cancer cases
in China. The standard of care for treatment is surgery, followed by radiotherapy and chemotherapy.
Median survival is approximately 15 months, and the 5-year survival rate is 5.5%. There are limited
treatment options for glioblastoma patients, particularly for patients with recurrent glioblastoma.
Epitinib is a highly differentiated EGFR inhibitor designed for optimal blood-brain barrier
penetration. EGFR gene amplification has been identified in about half of glioblastoma patients,
according to The Cancer Genome Atlas Research Network, and hence is a potential therapeutic target in
glioblastoma.
In March 2018, we initiated a Phase Ib/II proof-of-concept study of epitinib in glioblastoma patients
with EGFR gene amplification in China. This Phase Ib/II study will be a multi-center, single-arm,
open-label study to evaluate the efficacy and safety of epitinib as a monotherapy in patients with EGFR
gene amplified, histologically confirmed glioblastoma. The primary endpoint is objective response rate.
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. This holds importance because tumors with wild-type EGFR
activation have been found to be less sensitive to current EGFR inhibitors. This is notable in certain cancer
types such as esophageal cancer, where 8-30% have EGFR gene amplification and 30-90% have EGFR
over-expression. 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 wild-type EGFR activation. We currently retain all rights to
theliatinib worldwide.
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
99
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 17 below.
Figure 17: Comparison of binding affinity to wild-type EGFR enzyme
)
)
%
%
(
(
e
d
i
t
p
e
p
-
o
h
p
s
o
h
P
e
d
i
t
p
e
p
-
o
h
p
s
o
h
P
140
140
120
120
100
100
80
80
60
60
40
40
20
20
0
0
0
0
50
50
100
100
150
150
200
200
250
250
300
300
Baseline
Baseline
Theliatinib
Theliatinib
Time (in minutes)
Time (in minutes)
Erlotinib (Tarceva®)
Erlotinib (Tarceva®)
Gefitinib (Iressa®)
Gefitinib (Iressa®)
9MAR201807154695
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 phospho-peptide
levels are correlated with a high level of EGFR inhibition.
Theliatinib Current Clinical Development and Near-Term Plans
As discussed below, we currently have two clinical trials of theliatinib ongoing in China.
100
Phase I study of theliatinib monotherapy in advanced solid tumors—China (Target Patient Population
28 in pipeline chart; Status: enrollment complete; NCT02601274)
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 solid tumors who have failed standard therapy. 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 also evaluated efficacy against non-small cell lung cancer, esophageal cancer and
head and neck squamous cell lung cancer, determined the pharmacokinetics of theliatinib under single
dose and repeat doses; and explored the relationship between the theliatinib’s activity and certain
biomarkers.
In September 2017, new clinical data were presented at the 20th Annual Meeting of the Chinese
Society of Clinical Oncology. Results showed that doses up to 500 mg once daily were determined to be
safe and well-tolerated, with no dose-limiting toxicities and no clear maximum tolerated dose.
Pharmacokinetic exposure increased with dose, with a 300 mg once daily or more considered to be
sufficient to inhibit EGFR phosphorylation. Among the 21 patients that received 120 mg to 500 mg once
daily, there were only four treatment-emergent adverse events of grade �3: gastrointestinal bleeding,
decreased white blood cell count, anemia or decreased platelet count (1/21 = 4.8% each). There were no
incidences of grade �3 rash or diarrhea. Among seven esophageal cancer patients, five had measurable
lesions and could be evaluated for response. All five had stable disease. Of the efficacy evaluable patients
in the 120 mg to 500 mg cohorts, 44.4% (8/18) had stable disease after 12 weeks. The study concluded that
further study of theliatinib at 400 mg once daily among esophageal cancer patients with EGFR activation
was warranted. This study is now in the process of expanding through the opening of further clinical sites in
China.
Phase Ib expansion study of theliatinib monotherapy in esophageal cancer—China (Target Patient
Population 29 in pipeline chart; Status: enrolling; NCT02601274)
In January 2017, 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.
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
101
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� 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� and BTK, and we believe
should therefore be an important target for modulating B-cell signaling.
Figure 18: The B-cell signaling pathway and the approved drugs / drug candidates which target its
component kinases
HMPL-523
HMPL-523
GS-9876
GS-9876
entospletinib
entospletinib
idelalisib
idelalisib
HMPL-689
HMPL-689
ibrutinib
ibrutinib
9MAR201807154230
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
102
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�, BTK and Phospholipase C�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,
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� 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�, 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� (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.
103
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 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.
Figure 19: 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.
Selectivity
Selectivity
Syk enzyme
Syk enzyme
HMPL-523 IC50 (nM)
HMPL-523 IC50 (nM)
25 ± 5 (n=10)[a]
25 ± 5 (n=10)[a]
R406 IC50 (nM)
R406 IC50 (nM)
54 ± 16 (n=10)[a]
54 ± 16 (n=10)[a]
JAK 1,2,3 enzyme
JAK 1,2,3 enzyme
>300, >300, >300[a]
>300, >300, >300[a]
120, 30, 480[a]
120, 30, 480[a]
FGFR 1,2,3
FGFR 1,2,3
FLT3 enzyme
FLT3 enzyme
LYN enzyme
LYN enzyme
Ret enzyme
Ret enzyme
KDR enzyme
KDR enzyme
KDR cell
KDR cell
>3,000, >3,000, >3,000[a]
>3,000, >3,000, >3,000[a]
89, 22, 32[a]
89, 22, 32[a]
63[a]
63[a]
921[a]
921[a]
>3,000[a]
>3,000[a]
9[a]
9[a]
160[a]
160[a]
5[b]
5[b]
390 ± 38 (n=3)[a]
390 ± 38 (n=3)[a]
61 ± 2 (n=3)[a]
61 ± 2 (n=3)[a]
5,501 ± 1,607 (n=3)[a]
5,501 ± 1,607 (n=3)[a]
422 ± 126 (n=3)[a]
422 ± 126 (n=3)[a]
9MAR201807160626
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
104
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 20 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).
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 PI3K� inhibitors, B-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.
105
Figure 20: HMPL-523 in hematological malignancies. Pre-clinical superiority versus both BTK/PI3K�
tyrosine kinase inhibitors as well as entospletinib (GS-9973)
28FEB201804505477
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
versus ibrutinib (BTK) & idelalisib (PI3K�) inhibitors.
C. Combination of HMPL-523 with other drugs (PI3K� tyrosine kinase inhibitor; 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 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.
106
Phase I study of HMPL-523 in healthy volunteers in Australia and China (Target Patient Populations
30 and 31 in pipeline chart; Status: complete; NCT02105129)
In November 2016, we reported results of the Phase I dose-escalation study on HMPL-523 in healthy
volunteers in Australia, in which a total of 118 adult male healthy subjects were enrolled at baseline and
114 (96.6%) subjects completed the study. The Phase I study showed HMPL-523 exhibited a tolerable
safety profile. 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 serious adverse
events were resolved. Off-target toxicities such as diarrhea and hypertension, seen with the 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 pre-clinical
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. The
data were presented at the annual meeting of the American College of Rheumatology/Association of
Rheumatology Health Professionals in 2016. We have submitted IND applications for autoimmune
diseases and expect, pending the imminent submission of additional data requested by the FDA, to
progress into a Phase II proof-of-concept study in immunology in late 2018 or early 2019.
Phase I study of HMPL-523 in hematological cancer—Australia/China (Target Patient Populations 32
and 33 in pipeline chart; Status: enrolling; NCT02503033/NCT02857998)
In early 2016, we initiated a Phase I dose escalation study of HMPL-523 in Australia in hematological
cancer patients and have completed seven dose cohorts. The Phase I study in China began in early 2017
and has now completed five dose cohorts. In both Australia and China, we have established both
efficacious once daily and twice daily dose regimens. We are now in the process of increasing the number
of clinical sites in Australia and China to support Phase Ib/II expansion in a broad range of indolent
non-Hodgkin’s lymphoma sub-types. We target to present dose escalation and expansion results, including
preliminary proof-of-concept data, at a major scientific conference later in 2018.
HMPL-689 PI3K� Inhibitor
HMPL-689 is a novel, highly selective and potent small molecule inhibitor targeting the isoform
PI3K�, a key component in the B-cell receptor signaling pathway. We have designed HMPL-689 with
superior PI3K� isoform selectivity, in particular to not inhibit PI3K� (gamma), offering advantages over
Zydelig to minimize the risk of serious infection caused by 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 with the first-generation PI3K� inhibitor
Zydelig. HMPL-689’s pharmacokinetic properties have been found to be favorable with good oral
absorption, moderate tissue distribution and low clearance in pre-clinical pharmacokinetic studies. We also
expect that 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-class PI3K� agent. We
currently retain all rights to HMPL-689 worldwide.
107
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 18 (‘‘The B-cell signaling pathway’’).
There are multiple sub-families of PI3K kinases, and PI3K� plays important roles in B-cell activation,
development, survival and migration. PI3K� is mainly expressed in circulating leukocytes and lymphoid
tissues and plays critical roles in B-cell activation and proliferation. PI3K� is the central signaling enzyme
that mediates the effects of multiple receptors on B-cells. Upon an antigen binding to B-cell receptors,
PI3K� 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� 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 Pre-clinical Evidence
Compared to other PI3K� inhibitors, HMPL-689 shows higher potency and selectivity.
Figure 21: Enzyme selectivity (IC50, in nM) of HMPL-689 versus competing PI3K� 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�.
IC50(nM)
IC50(nM)
PI3K
PI3K
PI3K enzyme level
PI3K(cid:31) enzyme level
(fold vs.PI3Kδ)
(fold vs.PI3Kδ)
enzyme level
enzyme level
PI3K
PI3K(cid:31)
(fold vs.PI3Kδ)
(fold vs.PI3Kδ)
PI3Kδ human whole
PI3Kδ human whole
blood CD63+
blood CD63+
enzyme level
enzyme level
PI3K
PI3K(cid:31)
(fold vs.PI3Kδ)
(fold vs.PI3Kδ)
HMPL-689
HMPL-689
idelalisib
idelalisib
duvelisib
duvelisib
0.8 (n=3)
0.8 (n=3)
2
2
114 (142x)
114 (142x)
104 (52x)
104 (52x)
1
1
2 (2x)
2 (2x)
>1,000 (>1,250x)
>1,000 (>1,250x)
866 (433x)
866 (433x)
143 (143x)
143 (143x)
3
3
14
14
15
15
87 (109x)
87 (109x)
293 (147x)
293 (147x)
8 (8x)
8 (8x)
9MAR201807160748
Source: Chi-Med
HMPL-689 Clinical Development
Phase I dose escalation study of HMPL-689—Australia and China (Target Patient Populations 34 and
35 in pipeline chart; Status: enrolling; NCT02631642/NCT03128164)
In 2016, we completed a Phase I, first-in-human, dose escalation study in healthy adult volunteers in
Australia to evaluate the pharmacokinetics and safety profile following single oral dosing HMPL-689.
Results were as expected with linear pharmacokinetics properties and good safety profile.
We subsequently received IND clearance in China and then initiated a Phase I dose escalation and
expansion study in patients with hematologic malignancies in August 2017.
108
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 22 below.
Gene
Gene
FGFR1
FGFR1
Amplification
Amplification
Mutation
Mutation
Translocation
Translocation
FGFR2
FGFR2
Amplification
Amplification
Mutation
Mutation
Translocation
Translocation
FGFR3
FGFR3
Amplification
Amplification
Mutation
Mutation
Translocation
Translocation
FGFR4
FGFR4
Mutation
Mutation
Figure 22: Common genetic alterations in FGFRs related to cancer
Cancer type (incidence)
Cancer type (incidence)
Lung squamous cell (7-15%), Head and neck squamous (10-17%), Esophageal
Lung squamous cell (7-15%), Head and neck squamous (10-17%), Esophageal
squamous carcinoma (9%), Small cell lung (6%), Osteosarcoma (17%), Breast (10-
squamous carcinoma (9%), Small cell lung (6%), Osteosarcoma (17%), Breast (10-
15%), Ovarian (5%)
15%), Ovarian (5%)
Pilocytic astrocytoma (5%–8%), Gastric cancer (4%)
Pilocytic astrocytoma (5%–8%), Gastric cancer (4%)
Glioblastoma (na), Breast cancer (na), Lung squamous cell carcinoma (na)
Glioblastoma (na), Breast cancer (na), Lung squamous cell carcinoma (na)
Gastric cancer (5%–10%), Breast cancer (4%)
Gastric cancer (5%–10%), Breast cancer (4%)
Endometrial cancer (12%–14%), Lung squamous cell carcinoma(5%)
Endometrial cancer (12%–14%), Lung squamous cell carcinoma(5%)
Intrahepatic cholangiocarcinoma (14%), Prostate cancer (na), Breast cancer (na)
Intrahepatic cholangiocarcinoma (14%), Prostate cancer (na), Breast cancer (na)
Bladder carcinoma (na), Salivary adenoid cystic cancer (na)
Bladder carcinoma (na), Salivary adenoid cystic cancer (na)
Bladder carcinomas (60%–80% in non-muscle-invasive, 15–20% in muscle-invasive),
Bladder carcinomas (60%–80% in non-muscle-invasive, 15–20% in muscle-invasive),
Cervical cancer (5%)
Cervical cancer (5%)
Bladder carcinoma (3%–6%), Glioblastoma (3%), Myeloma (15%–20%), Lung
Bladder carcinoma (3%–6%), Glioblastoma (3%), Myeloma (15%–20%), Lung
adenocarcinoma (0. 5%), Lung squamous cell carcinomas (3%), Head and neck (na)
adenocarcinoma (0. 5%), Lung squamous cell carcinomas (3%), Head and neck (na)
Rhabdomyosarcoma (6%–8%)
Rhabdomyosarcoma (6%–8%)
9MAR201807154959
Source: M. Touat et al, ‘‘Targeting FGFR Signaling in Cancer,’’ Clinical Cancer Research (2015); 21(12);
2684-94
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.
109
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.
HMPL-453 Clinical Development
Phase I dose escalation study of HMPL-453 in solid tumors—Australia and China (Target Patient
Populations 36 and 37 in pipeline chart; Status: enrolling; NCT02966171/NCT03160833)
In June 2017, we initiated a Phase I/II clinical trial of HMPL-453 in China. This Phase I/II study is a
multi-center, single-arm, open-label, two-stage study to evaluate safety, tolerability, pharmacokinetics and
preliminary efficacy of HMPL-453 monotherapy in patients with solid tumors harboring FGFR genetic
alterations. The dose-escalation stage will enroll patients with locally advanced or metastatic solid tumors,
for whom standard therapy either does not exist or has proven to be ineffective or intolerable, regardless
genetic status, to determine the maximum tolerated dose and recommended Phase II dose. The
dose-escalation will be followed by a dose-expansion stage, which will further evaluate safety, tolerability
and pharmacokinetics as well as preliminary anti-tumor efficacy at the recommended Phase II dose. This
stage will enroll primarily cancer patients harboring FGFR dysregulated tumors, including those with
advanced bladder cancer, advanced cholangiocarcinoma and other solid tumors. For this second stage, the
primary endpoint is objective response rate, with secondary endpoints including duration of response,
disease control rate, progression-free survival, overall survival and safety.
This study complements the first-in-human Phase I clinical trial in Australia that was initiated in
February 2017. The first-in-human dose-escalation trial aims to evaluate the safety, tolerability,
pharmacokinetics and preliminary anti-tumor activity of HMPL-453 in patients with advanced or
metastatic solid malignancies, who have failed or are unable to tolerate standard therapies or for whom no
standard therapies exist. This open-label study consists of two preliminary phases, a dose-escalation
(stage 1) and a dose-expansion stage (stage 2).
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HMPL-004/HM004-6599 Botanical NF-kB Modulator
In November 2012, we established Nutrition Science Partners, a joint venture with Nestl´e 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.
We have worked with Nestl´e Health Science to prepare an IND application for HM004-6599, which
was submitted in China in March 2017, and to prepare for a Phase I study of HM004-6599 in Australia in
2018. HM004-6599 is an enriched / purified re-formulation of HMPL-004, our drug candidate that
reported positive Phase II results in ulcerative colitis in 2010 but then went on to prove futile in an interim
analysis of the subsequent Phase III study in 2014. HM004-6599 has a higher level of biologically active
components and improved manufacturing control, as compared to HMPL-004.
For more information regarding our partnership with Nestl´e Health Science, see ‘‘—Overview of Our
Collaborations.’’
HMPL-004/HM004-6599 Research Background
HMPL-004, and the newer, enriched version HM004-6599 discussed below, are proprietary botanical
drugs for the treatment of inflammatory bowel diseases, namely ulcerative colitis and Crohn’s disease.
The current standard of care for inflammatory bowel disease starts with 5-aminosalicylic 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
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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, Nestl´e 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.
Subsequent post-hoc analysis of the un-blinded NATRUL-3 data 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 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 diterpenoids, 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% diterpenoids. 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� inhibitors 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 800 mg daily versus the 2,400 mg daily usage of HMPL-004.
In the first half of 2017, we submitted our IND application for HM004-6599 in China and we now
await clearance to proceed into Phase I clinical studies. We also target to initiate Phase I clinical studies in
Australia in 2018.
Nutrition Science Partners has additional gastrointestinal drug candidates in research and pre-clinical
development.
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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 our joint venture partner Nestl´e 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 $135.5 million mainly from
our collaborations with AstraZeneca, Eli Lilly, Nestl´e Health Science as of December 31, 2017. We and
Nutrition Science Partners, in the aggregate, may potentially receive up to $340.0 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, 2017, we had received $24.9 million in milestone payments in addition to approximately
$19.4 million in reimbursements for certain development costs. We may potentially receive future clinical
development and first sales milestones payments of up to $95.0 million for clinical development and initial
sales of savolitinib, plus significant further milestone payments based on sales. AstraZeneca also
reimburses us for certain 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
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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, 2017, Eli Lilly had
paid us $23.7 million in milestone payments in addition to approximately $38.1 million in reimbursements
for certain development costs. We may potentially receive future milestone payments of up to $55.0 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, 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
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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.
Nestl´e Health Science
Nutrition Science Partners Joint Venture Agreement
In November 2012, we entered into a joint venture agreement with Nestl´e Health Science to form
Nutrition Science Partners, a joint venture whose shares are owned in equal portions by us and Nestl´e
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,
Nestl´e 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 Nestl´e 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 Nestl´e 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 Nestl´e 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 Nestl´e Health Science agreed to waive $7.0 million
each 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
Nestl´e Health Science providing the same amount. In February 2017, we and Nestl´e 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 Nestl´e 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 management; and (iv) ongoing discovery
research and non-clinical support for the development of HMPL-004/HM004-6599.
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.
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Nutrition Science Partners Research and Collaboration Agreement
In March 2013, we also entered into a research and collaboration agreement with Nestl´e 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 Nestl´e
Health Science, to use commercially reasonable efforts to conduct the activities designated to us and
Nestl´e 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, 2015,
2016 and 2017, we received approximately $5.1 million, $8.1 million and $8.9 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 Nestl´e 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 Nestl´e Health Science’s
non-cancellable costs.
Nutrition Science Partners Option Agreement
In March 2013, Nestec Ltd., which is an affiliate of Nestl´e 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 businesses: our Prescription Drugs and Consumer Health businesses. The continuing operations of our
Commercial Platform generated $40.0 million in net income attributable to our company in 2017, 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. In total, net income
attributable to our company from the continuing operations of our Commercial Platform was
$25.2 million, $70.3 million and $40.0 million for the years ended December 31, 2015, 2016 and 2017,
respectively. Net income attributable to our company from our Commercial Platform included one-time
gains of $40.4 million and $2.5 million in the years ended December 31, 2016 and 2017, respectively, net of
tax, from land compensation and other government subsidies paid to Shanghai Hutchison Pharmaceuticals
by the Shanghai government.
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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 and central nervous system 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, 2017, Shanghai Hutchison Pharmaceuticals had a dedicated medical sales
team of about 120 people in this new therapeutic area.
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:
• 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
• 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.
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 2,300
medical sales representatives as of December 31, 2017. These medical sales representatives covered about
22,500 hospitals and about 98,000 physicians in over 300 cities and towns in China as of December 31,
2017. Approximately 66% of these medical sales representatives cover eastern and central-southern China.
Of the remaining medical sale representatives, approximately 24% 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, 2017, 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 China’s low price drug list, or LPDL, and fully reimbursed in all provinces in China.
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She Xiang Bao Xin pills’ sales represented 86% of all Shanghai Hutchison Pharmaceuticals sales in 2017.
She Xiang Bao Xin pills accounted for 15.4% of China’s rapidly growing botanical coronary artery disease
prescription drug market, which is approximately $2.0 billion in 2017. During late 2016 and early 2017, we
were able to effectively implement a pricing strategy that led to a 20.2% growth in second half 2017 sales of
Shanghai Hutchison Pharmaceuticals (to $114.9 million) and materially improved margins. The average
daily cost of She Xiang Bao Xin pills is RMB4.00, or approximately $0.60.
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. Shanghai Hutchison
Pharmaceuticals holds 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 receipt of compensation for the land use rights where
the old facility was located, Shanghai Hutchison Pharmaceuticals was able to distribute dividends of
$81.3 million in 2017 equally to us and Shanghai Pharmaceuticals.
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 and is paid a fee for its services provided.
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 December 31, 2017, Shanghai Hutchison
Pharmaceuticals had approximately 2,300 medical sales representatives and about 550 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
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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 two
prescription products. The primary product is:
• 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. Seroquel holds a 5.6% market share in China’s approximately
$0.9 billion atypical anti-psychotic prescription drug market and 45% of China’s generic quetiapine
market, primarily as a result of being the first-mover and original patent holder on quetiapine.
Seroquel is the only brand in China to have an extended release formulation, which in 2017 was
included on China’s National Drug reimbursement List, thereby providing us with major
competitive advantage over quetiapine generics.
Hutchison Sinopharm is the exclusive marketing agent for Seroquel tablets in China. As of
December 31, 2017, Shanghai Hutchison Pharmaceuticals had a dedicated medical sales team of
about 120 people to support Hutchison Sinopharm’s commercialization of Seroquel. The new China
two-invoice system, explained in more detail below, came into effect in October 2017, at which point
the Seroquel operating model began progressively switching to a fee-for-service model.
Subject to Hutchison Sinopharm’s continued delivery of pre-specified annual sales targets, which
would require approximately 22% sales growth in 2018 and 15% per year thereafter, we can
continue to retain exclusive commercial rights to Seroquel in China until 2025.
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 the number two beta-blocker
in China with an approximately 18% national market share in China’s beta-blocker drug market and 70%
of China’s generic bisoprolol market. Hutchison Sinopharm was the exclusive marketing agent in six
provinces, markets that contain over 360 million people. Hutchison Sinopharm created synergy with
Shanghai Hutchison Pharmaceuticals’s existing cardiovascular medical sales team who now details Concor
alongside its She Xiang Bao Xin pills on a fee-for-service basis.
China has begun implementing a new regulatory two-invoice system on a province-by-province basis.
In principle, the purpose of the two-invoice system is to restrict the number of layers in the drug
distribution system in China, in order to improve transparency, compliant business conduct and efficiency.
The impact to us is that, starting in October 2017, the Seroquel sales model, in which our consolidated
revenues historically reflected total gross sales of Seroquel, began to shift to a fee-for-service model similar
to that used all along on Concor. This change will reduce the top-line revenues that Hutchison Sinopharm
will in the future be able to record from sales of Seroquel as well as many of our other third-party
customers. Importantly however, this drop in reported sales will have no material impact on profitability,
the service fees paid to Hutchison Sinopharm, and will have limited impact to our commercial team
operations and expansion plans.
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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:
• 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,
• 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,
• 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
• Hutchison Consumer Products, a wholly owned subsidiary which was established in 2007 that
distributes and markets certain third-party health-related 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. Its ‘‘Bai Yun Shan’’ brand is a market-leading
household-name, established over 40 years ago and is known by the majority of Chinese consumers. As of
December 31, 2017, Hutchison Baiyunshan held 189 registered drug licenses in China, of which 82 are
included in the National Medicines Catalogue. In addition, 31 of Hutchison Baiyunshan’s products, of
which 12 are in active production, are represented on China’s National Essential Medicines List. As of the
end of 2017, substantially all pharmaceutical products manufactured and sold by Hutchison Baiyunshan in
2017 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:
• Fu Fang Dan Shen tablets—generic over-the-counter drugs for the treatment of chest congestion
and angina pectoris to promote blood circulation and relieve pain, which represented approximately
26% of the sales of Hutchison Baiyunshan in 2017; and
• Banlangen granules—for the treatment of viral flu, fever, and respiratory tract infections which
represented approximately 26% of the sales of Hutchison Baiyunshan in 2017.
Hutchison Baiyunshan’s products are manufactured in-house at its GMP-certified facilities in
Guangzhou, Guangdong province and Bozhou, Anhui province. A portion of Hutchison Baiyunshan’s
products had historically been manufactured by third-party contract manufacturers until its new higher
capacity facility in Bozhou became operational in August 2017. Hutchison Baiyunshan is also in the process
of negotiating the return of its land use rights for the approximately 30,000 square meter unused plot of
land in Guangzhou, which has been listed for sale as part of the Guangzhou municipal government’s urban
redevelopment scheme plan since 2016.
Hutchison Baiyunshan also operates two Chinese good agriculture practice, or GAP, certified
cultivation sites through its subsidiaries for growing the herbs used in its over-the-counter products in
Heilongjiang and Henan provinces in China. In addition, Hutchison Baiyunshan generates revenue by
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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.
In September 2017, Hutchison Baiyunshan divested its 60% shareholding in Nanyang Baiyunshan
Hutchison Whampoa Guanbao Pharmaceutical Company Limited, or Guanbao, for consideration
approximately equal to its carrying value. Guanbao was a GSP distribution company which had been
established via a joint venture in 2012. It was a low margin, primarily third-party over-the-counter logistics
business, with operations limited mainly to Henan province, and had proven to be a business with no
strategic value to our company.
As of December 31, 2017, Hutchison Baiyunshan had approximately 1,000 sales representatives and
over 1,000 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.
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,
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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 Cabometyx (cabozantinib) (VEGFR/c-Met/Ret inhibitor
approved for renal cell carcinoma and in development for non-small cell lung cancer), tepotinib (c-Met
inhibitor in development for non-small cell lung cancer), glesatinib (c-Met and Axl tyrosine kinase
inhibitor in development for non-small cell lung cancer), emibetuzumab (MET inhibitor in development
for non-small cell lung cancer) and AMG 337 (c-Met kinase inhibitor in development for stomach cancer).
Xalkori (ALK, ROS1 and c-Met inhibitor marketed for non-small cell lung cancer) is a multi-kinase
inhibitor that less selectively inhibits c-Met. Merestinib (MST1R, FLT3, AXL, MERTK, TEK, ROS1,
DDR1/2, MKNK1/2 and c-Met inhibitor in development for non-small cell lung cancer) is also a multi-
kinase inhibitor.
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, Lenvima (lenvatinib), lucitanib and Caprelsa. 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 and anlotinib has an NDA under review for the
treatment of third-line non-small cell lung cancer.
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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
received NDA approval from the FDA for the treatment of somatostatin receptor positive
gastroenteropancreatic neuroendocrine tumors. 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� 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� 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� 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� are in clinical
including duvelisib, copanlisib, gedatolisib, INCB040093, GS-9901, umbralisib and
development,
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, infigratinib, rogaratinib, BLU-554, erdafitinib, TAS-120, Debio 1347, INCB054828, and
LY3076226. Similarly, FGFR specific monoclonal antibodies in development include MFGR1877S and
B-701.
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� 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�
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.
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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.
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, 2017, we had 151 issued patents, including 18 Chinese patents, 19 U.S. patents
and eight European patents, 146 patent applications pending in the above major market jurisdictions, and
two 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 24 issued
patents and three 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, 2017, we owned 20 patents in this family, including patents in the United
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States, Europe and Japan, and we had 30 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. Our collaboration partner AstraZeneca is responsible for maintaining and enforcing the intellectual
property portfolio for savolitinib.
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, 2017,
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 13 other jurisdictions expiring in 2029 and had
two patent applications pending in 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, 2017, 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.
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 four 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, 2017, in this
patent family we owned one Chinese patent expiring in 2027 and 12 patents in various other jurisdictions,
including the United States expiring in 2031, and Europe and Japan, each expiring in 2028. As of
December 31, 2017, we also had one patent application pending in Brazil.
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, 2017, in this patent
family we owned two patents in China expiring in 2029 and 2030, respectively, and we owned 14 patents in
other countries, including the United States which will expire in 2031 and Europe which will expire in 2030.
As of December 31, 2017, we also had two patent applications pending in other jurisdictions.
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 17 patent applications pending in various
jurisdictions, including China, the U.S. and Europe.
The fourth patent family was filed in 2016 and is subject to confidential review by the patent
authorities.
HMPL-523 Syk Inhibitor—The intellectual property portfolio for HMPL-523 contains two patent
families.
The first patent family is 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, 2017, we owned 16 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,
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2017, we also had nine patent applications in this family pending in jurisdictions including the United
States.
The second patent family was filed in 2017 and is subject to confidential review by the patent
authorities.
Epitinib—The intellectual property portfolio for epitinib contains three patent families.
The first patent family is directed to novel small molecule compounds as well as methods of treating
cancers with such compounds. As of December 31, 2017, we owned patents in China and Taiwan expiring
in 2028, a patent in the United States expiring in 2031 and patents in 12 other jurisdictions, including
Europe, each expiring in 2029. As of December 31, 2017, we also had two patent applications in this family
pending in other jurisdictions.
The second and third patent families were filed in 2017 and are subject to confidential review by the
patent authorities.
Theliatinib—The intellectual property portfolio for theliatinib contains two patent families.
The first patent family is directed to novel small molecule compounds as well as methods of treating
cancers with such compounds. As of December 31, 2017, 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, 2017, we
also had four patent applications in this family pending in various jurisdictions. Our Chinese patent was
also registered in Hong Kong and Macau.
The second patent family was filed in 2017 and is subject to confidential review by the patent
authorities.
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, 2017, we had
filed 24 patent applications pending in various jurisdictions, including Argentinean, Chinese, and
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 four 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, 2017, 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, 2017, 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 colitis, with such andrographolides. As of December 31, 2017, we owned one Chinese patent
expiring in 2027, two U.S. patents expiring in 2027 and 2029, respectively, and seven patents in various
other jurisdictions, each expiring in 2028.
The fourth patent family was filed in 2016 and is subject to confidential review by the patent
authorities.
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We had also taken steps to seek patent protection for a sustainable release formulation of
andrographolides, but that was abandoned as of December 31, 2017.
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, 2017, we owned 6 patents in this family in various jurisdictions, including Japan and the
United States, each of which will expire in 2034. As of December 31, 2017, we had 18 patent applications
pending in various jurisdictions, including China.
Our Commercial Platform Patents
Prescription Drugs Patents
As of December 31, 2017, our Prescription Drugs joint venture Shanghai Hutchison Pharmaceuticals
had 43 issued patents and ten pending patent applications in China, including patents for its key
prescription products described below.
She Xiang Bao Xin Pills. As of December 31, 2017, 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, 2017, Shanghai Hutchison Pharmaceuticals was
in the process of renewing such protection status.
Danning Tablets. As of December 31, 2017, 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, 2017, Hutchison Baiyunshan had
74 issued patents in China and one in each of Australia and Singapore.
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
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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 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, 2017, our joint ventures Shanghai Hutchison Pharmaceuticals and
Hutchison Baiyunshan owned a total of 183 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.
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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 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, 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.
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
three GMP certificates issued by its local regulatory authority and the CFDA. The three GMP certificates
will expire on November 16, 2021, August 14, 2021 and December 3, 2022, 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.
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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.
Hutchison Whampoa Guangzhou Baiyunshan Chinese Medicine (Bozhou) Company Limited, a
subsidiary of Hutchison Baiyunshan, holds a GMP certificate issued by its local regulatory authority
expiring January 18, 2022. It also holds a pharmaceutical manufacturing license issued by its local
regulatory authority expiring on December 31, 2020.
Hutchison Whampoa Baiyunshan Lai Da Pharmaceutical (Shan Tou) Company Limited, a subsidiary
of Hutchison Baiyunshan, holds a GMP certificate issued by its local regulatory authority expiring
February 28, 2021. It also holds a pharmaceutical manufacturing license issued by its local regulatory
authority expiring December 31, 2020.
Nanyang Baiyunshan Hutchison Whampoa Guanbao Pharmaceutical Company Limited, which was
divested by Hutchison Baiyunshan in September 2017, held a pharmaceutical trading license and a GSP
certificate from its local regulatory authority.
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.
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:
• monitoring and supervising the administration of pharmaceutical products, medical appliances and
equipment as well as food, health food and cosmetics in the PRC;
• 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.
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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:
• 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.
• 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.
• 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.
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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 and were later amended on February 6, 2016 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:
• 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;
• 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;
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• 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:
• 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.
• 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.
• 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.
• 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 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;
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• 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).
Any applicant who is not satisfied with the CFDA’s decision to deny an 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.
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In addition, on December 21, 2017, the CFDA released the Opinions on Priority Review and
Approval for Encouraging Drug Innovation, which further clarified that a fast track for drug registration
will be available to:
• the following drugs with distinctive clinical value: (1) innovative drugs not sold within or outside
China; (2) innovative drug transferred to be manufactured locally in China; (3) drugs using
advanced technology, innovative treatment methods, or having distinctive treatment advantages;
(4) traditional Chinese medicines (including ethnic medicines) with clear clinical position in
treatment of serious diseases; and (5) new drugs listed in national major science and technology
projects or national key research and development plans, and recognized by national clinical
medicine research centers which conducted clinical trials of such drugs;
• drugs with distinctive clinical advantages for the prevention and treatment of the following diseases:
HIV, phthisis, viral hepatitis, orphan diseases, malignant tumors, children’s diseases, and
characteristic and prevalent diseases in elders; and
• drugs which have been concurrently filed with the competent drug approval authorities in the
United States or European Union for marketing authorization and passed such authorities’ onsite
inspections and are manufactured using the same production line in China.
It also specified that fast track status would be given to clinical trial applications for drugs with patent
expiry within three years and manufacturing authorization applications for drugs with patent expiry within
one year. Concurrent applications for new drug clinical trials which are already approved in the United
States or European Union are also eligible for fast track CFDA approval.
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, 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:
• 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:
• 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;
• 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
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interests in the other, or both of which are majority-owned subsidiaries of the same drug
manufacturing enterprise;
• 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 transferor 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. Medical examination institutes are responsible for testing three batches of drug samples.
The Drug Review Center 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 Drug Review Center 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.
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.
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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 specific term 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.
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:
• wholesalers and distributors holding Pharmaceutical Distribution Permits;
• other holders of Pharmaceutical Manufacturing Permits; or
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• 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:
• 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.
On December 26, 2016, the Medical Reform Office of the State Council, the National Health and
Family Planning Commission, the CFDA and other five government authorities promulgated the
‘‘Two-Invoice System’’ Opinions, which became effective on the same date. On April 25, 2017, the General
Office of the State Council further promulgated the Notice on Issuing the Key Working Tasks for
Deepening the Reform of Medicine and Health System in 2017. According to these rules, a two-invoice
system is encouraged to be gradually adopted for drug procurement. The two-invoice system generally
requires a drug manufacturer to issue only one invoice to its distributor followed by the distributor issuing
a second invoice directly to the end customer hospital. Only one distributor is permitted to distribute drug
products between the manufacturer and the hospital. The system also encourages manufacturers to sell
drug products directly to hospitals. Public medical institutions are required to adopt the two-invoice
system, and its full implementation nationwide is targeted for 2018. Pharmaceutical manufacturers and
distributors who fail to implement the two-invoice system may be disqualified from attending future
bidding events or providing distribution for hospitals and blacklisted for drug procurement practices.
These rules aim to consolidate drug distribution and reduce drug prices.
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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.
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 the Public Health Service Act, or PHSA, and their 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 enforcement correspondence,
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:
• 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;
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• submission to the FDA of an IND application 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 study
protocols, the 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 whether the NDA is acceptable
for filing; if the FDA determines that the NDA is not sufficiently complete to permit substantive
review, it may request additional information and decline to accept the application for filing until
the information is provided;
• in-depth review of the NDA by FDA, which may include review by a scientific advisory committee;
• 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;
• 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, such as 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.
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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.
• 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.
• Phase Ib: Although Phase I clinical trials are not intended to treat disease or illness, a Phase Ib
trial is 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.
• Phase I/II: 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.
• 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.
• 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
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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, are conducted after initial
regulatory approval, and they are used to collect additional information from the treatment of
patients in the intended therapeutic indication or to meet other regulatory requirements. 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 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 of 2003, or PREA, 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
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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, 2018, the user fee for an application requiring clinical
data, such as an NDA, is $2,421,495. PDUFA also imposes a program fee for prescription human drugs
$304,162. 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
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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 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, which authorizes FDA to approve an NDA based on safety and
effectiveness data that were not developed by the applicant. Section 505(b)(2) 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 relied upon to show
that the drug is safe and effective for the intended use ‘‘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 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.’’ The Generic Drug User Fee Act (GDUFA), as reauthorized, sets forth
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performance goals for FDA to review standard ANDA’s within 10 months of their submission, and priority
ANDA’s within 8 months of their submission if they satisfy certain requirements.
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. While these pathways can reduce the time it takes for the FDA to review an NDA, they
do not guarantee that a product will receive FDA approval.
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. A fast track drug also may be eligible for accelerated approval and priority
review. 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
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‘‘breakthrough therapy,’’ typically by the end of the drug’s Phase II trials. 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. For breakthrough therapies, the FDA
may take certain actions, such as intensive and early guidance on the drug development program, that are
intended to expedite the development and review of an application for approval.
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 an intermediate 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. A surrogate endpoint is a marker that does not itself measure clinical benefit but is
believed to predict 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.
Pediatric Trials
Under PREA, 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.
The law requires the FDA to send a non-compliance letters to sponsors who do not submit their pediatric
assessments as required.
Under the Best Pharmaceuticals for Children Act, or BPCA, certain therapeutic candidates may
obtain an additional six months of exclusivity if the sponsor submits information requested by the FDA,
relating to the use of the active moiety of the product candidate in children. Although the FDA may issue a
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written request for studies on either approved or unapproved indications, it may only do so where it
determines that information relating to that use of a product candidate in a pediatric population, or part of
the pediatric population, may produce health benefits in that population.
FDASIA permanently reauthorized PREA and BPCA, modifying some of the requirements under
these laws, and established priority review vouchers for rare pediatric diseases.
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. The 21st Century Cures Act, which became law in
December 2016, expanded the types of studies that qualify for orphan drug grants. Orphan drug
designation also may qualify an applicant for federal tax credits relating to research and development costs.
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 also 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
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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 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
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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.
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. To the extent that
the Section 505(b)(2) applicant relies on prior FDA findings of safety and efficacy, the applicant is
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required to certify to the FDA concerning any patents listed for the previously approved product in the
Orange Book to the same extent that an ANDA applicant would.
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.
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, 2016, 744 million employees and residents in China were enrolled
in the national medical insurance program, representing an increase of 78.1 million from December 31,
2015. 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.
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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 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:
• 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 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.
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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, 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 fixed by the producers and
operators based on the drug production costs, market supply and demand and 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
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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 institutions. 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 Centralized
Tender Procurement of Drugs by Medical Institutions promulgated on July 7, 2000 and the Notice on
Further Improvement on the Implementation of Centralized 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 centralized tender procurement of drugs.
The MOH promulgated the Working Regulations of Medical Institutions for Procurement of Drugs
by Centralized Tender and Price Negotiations (for Trial Implementation), or the Centralized Procurement
Regulations, on March 13, 2002, and promulgated Sample Document for Medical Institutions for
Procurement of Drugs by Centralized Tender and Price Negotiations (for Trial Implementation), or the
Centralized 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
Centralized Tender Regulations and the Centralized 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
Centralized 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 centralized
procurement. Each provincial government shall formulate its catalogue of drugs subject to centralized
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 centralized procurement. On July 7, 2010, the MOH and six
other ministries and commissions jointly promulgated the Working Regulations of Medical Institutions for
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Centralized Procurement of Drugs to further regulate the centralized procurement of drugs and clarify the
code of conduct of the parties in centralized drug procurement.
The centralized tender process takes the form of public tender operated and organized by provincial
or municipal government agencies. The centralized 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 centralized tender process. Such intermediaries are 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 centralized 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 success. 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.
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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 are 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 created 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. The Bipartisan Budget Act of 2018 made certain changes to Medicare Part D
coverage, including changing the date when the Medicare Part D coverage gap is eliminated from 2020 to
2019, sunsetting the exclusion of biosimilars from the Medicare Part D coverage gap discount program in
2019 and reallocating responsibility for discounted pricing under the Medicare Part D coverage gap
discount program from third-party payors to pharmaceutical companies. In December 2017, Congress also
repealed the ‘‘individual mandate,’’ which was an Affordable Care Act requirement that individuals obtain
healthcare insurance coverage or face a penalty. This repeal could affect the total number of patients who
have coverage from third-party payors that reimburse for use of our products.
In addition, other legislative changes have been proposed and adopted in the United States since the
Affordable Care Act was enacted that affect reimbursement for prescription drugs. 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.
In addition, other proposed legislative and regulatory changes could affect reimbursement for
prescription drugs. In January 2017, the Medicare Prescription Drug Price Negotiation Act was proposed
in Congress, which would require the government to negotiate Medicare prescription drug prices with
pharmaceutical companies. In October 2017, a similar bill, the Medicare Drug Price Negotiation Act of
2017 was proposed in Congress. In November 2017, the Centers for Medicare & Medicaid Services
announced a Final Rule that would adjust the applicable payment rate as necessary for certain separately
payable drugs and biologicals acquired under the 340B Program from average sales price plus 6% to
average sales price minus 22.5%. Congress and the U.S. administration continue to evaluate other
proposals that could affect third-party reimbursement for our drug candidates, if approved.
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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 PRC Healthcare Laws
Advertising of Pharmaceutical Products
Other Healthcare Laws
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, 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.
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.
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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 which became effective on January 1, 1995 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 are 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 institutions, and medical and health institutions receiving financial subsidies in other provinces
shall lower their rating in bidding or purchasing process. If medical production and operation enterprises
are 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
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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 and was later amended by the Eleventh National People’s
Congress on August 27, 2009. 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.
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 effective 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 made
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.
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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.
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
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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.
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:
• Foreign Currency Administration Rules (1996), as last amended on August 5, 2008, or the Exchange
Rules; and
• 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 MOFCOM, 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.
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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 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 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 or filed with 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 or the cross-border financing risk weighted balance calculated based on a formula by the PBOC
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 or file with the MOFCOM or its local counterpart for any increases to its total investment
limit. In accordance with these regulations, we and our joint venture partners have contributed financing to
our PRC subsidiaries and joint ventures in the form of capital contributions up to the registered capital
amount and/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.
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Regulation on Dividend Distribution
The principal regulations governing distribution of dividends paid by wholly foreign-owned
enterprises include:
• Company Law of the PRC (1993), as amended in 1999, 2004, 2005 and 2013;
• Foreign Investment Enterprise Law of the PRC (1986), as amended in 2000 and 2016; and
• 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.
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.
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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
two Chinese GAP-certified cultivation sites through its subsidiaries in Heilongjiang and Henan provinces
in China. In December 2016, its subsidiary completed construction of new production facilities in Bozhou
and production commenced in 2017.
Our and our joint ventures’ manufacturing operations consist of bulk manufacturing and formulation,
fill, and finishing 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 4.6 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. In 2017, we entered into a new lease for a
6,129 square meter combined office and lab space in Shanghai to accommodate the anticipated growth of
Hutchison MediPharma’s management and staff and for a 2,246 square foot facility in Florham Park, New
Jersey where we intend to house clinical and regulatory 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 ‘‘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.
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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. Our approximately 360-person strong scientific team has created and developed a deep portfolio
of eight drug candidates that are being investigated in active or completed clinical studies in 36 target
patient populations around the world. These drug candidates are being developed to treat a wide spectrum
of diseases, including solid tumors, hematological malignancies and cover immunology applications which
we believe address significant unmet medical needs and represent large commercial opportunities. Many
of these drugs have the potential to be first-in-class or best-in-class. Our success in research and
development has
including
AstraZeneca, Eli Lilly and Nestl´e Health Science.
leading global pharmaceutical companies,
led to partnerships with
As of December 31, 2017, we and our partners have invested about $500 million in building our
Innovation Platform. Since inception to December 31, 2017, our Innovation Platform’s drug pipeline has
dosed over 3,500 patients/subjects in clinical trials of our drug candidates as of December 31, 2017, with
over 700 dosed in 2017, primarily driven by the six Phase III studies of savolitinib, fruquintinib and
sulfatinib.
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 our Commercial Platform was $25.2 million, $70.3 million and $40.0 million for
the years ended December 31, 2015, 2016 and 2017, respectively. Net income attributable to our company
generated from our Commercial Platform included one-time gains of $40.4 million and $2.5 million in the
years ended December 31, 2016 and 2017, respectively, net of tax, from land compensation and other
government 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 $178.2 million, $216.1 million and $241.2 million for the years ended
December 31, 2015, 2016 and 2017, respectively. Net income attributable to our company was $8.0 million
and $11.7 million for the years ended December 31, 2015 and 2016, respectively, compared to a net loss
attributable to our company of $26.7 million for the year ended December 31, 2017.
Basis of Presentation
Our consolidated statements of operations data presented herein for the years ended December 31,
2017, 2016 and 2015 and our consolidated balance sheet data presented herein as of December 31, 2017
and 2016 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
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financial statements, and their consolidated financial statements were prepared in accordance with IFRS
as issued by the IASB and included 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.’’
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 active or completed clinical studies in 36 target patient populations in various countries,
including six Phase III studies on savolitinib, fruquintinib and sulfatinib, and further clinical studies
targeted to start in 2018. 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 about $500 million in our Innovation Platform as of
December 31, 2017, 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:
• employee compensation related expenses, including salaries, benefits and equity compensation
expense;
• expenses incurred for payments to CROs, 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 $47.4 million,
$66.9 million and $75.5 million for the years ended December 31, 2015, 2016 and 2017, respectively,
representing 26.6%, 31.0% and 31.3% 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.
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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 offering on the AIM market of the London Stock Exchange, our initial public offering and
follow-on offering on the Nasdaq Global Select Market, banks loans (some of which have been subject to
guarantees or certain other arrangements 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.’’
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 $9.8 million in
capital expenditures between 2013 and 2017 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 our drug candidates where 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 are 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
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(collaboration with Eli Lilly) and HM004-6599, a reformulation of HMPL-004 (collaboration with our
joint venture partner Nestl´e 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 Nestl´e Health Science through our non-consolidated joint venture Nutrition
Science Partners.
In addition, under our licensing, co-development and commercialization agreements, we received
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 $44.1 million,
$26.4 million and $26.3 million for the years ended December 31, 2015, 2016 and 2017, respectively. In
addition, income from research and development services from both third parties and related parties
totaled $8.0 million, $8.8 million and $9.7 million for the years ended December 31, 2015, 2016 and 2017,
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 milestone payments, or at all. For more information on our revenue
recognition policies, see ‘‘—Critical Accounting Policies and Significant Judgments 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.
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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. 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.
Substantially all pharmaceutical products manufactured and sold by Shanghai Hutchison Pharmaceuticals
and Hutchison Baiyunshan in 2017 were capable of being reimbursed under the National Medicines
Catalogue as of December 31, 2017.
In addition, among these two joint ventures an aggregate of 48 drugs, of which 15 were in active
production as of December 31, 2017, 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 2017, Hutchison Baiyunshan’s two top-selling products, Fu Fang Dan
Shen tablets and Banlangen, cost consumers RMB1.7 per day and RMB1.6 per day, respectively, and
Shanghai Hutchison Pharmaceuticals’ two top-selling products, She Xiang Bao Xin pills and Danning
tablets, cost RMB4.0 per day 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 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 and in 2017 we
further increased the price to RMB4.0 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 2,300 medical sales staff covering approximately 22,500 hospitals
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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, which
represented approximately 88% of its total revenue for the years ended December 31, 2015 and 2016 and
approximately 86% of its total revenue for the year ended December 31, 2017.
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. Under this arrangement, Hutchison Sinopharm
manages the distribution and logistics for this drug and Shanghai Hutchison Pharmaceuticals markets it. 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. 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 in
the limited time since we commenced our services for these drugs, we have been successful in generating
sales. During 2017, Shanghai Hutchison Pharmaceuticals had a dedicated medical sales team of about 120
people to support the commercialization of Seroquel.
China has begun implementing a new regulatory two-invoice system on a province-by-province basis.
In principle, the purpose of the two-invoice system is to restrict the number of layers in the drug
distribution system in China, in order to improve transparency, compliant business conduct and efficiency.
The impact to us is that, starting in October 2017 and by the end of 2018, the original Seroquel sales
model, in which our consolidated revenues reflect total gross sales of Seroquel, has begun to shift to a
fee-for-service model similar to that used all along on Concor. Transactions under the fee-for-service
model applies net accounting as Hutchison Sinopharm acts as a service provider and does not bear
inventory risk as it no longer takes delivery of Seroquel. We expect that this change will reduce the top-line
revenues Hutchison Sinopharm records from sales of Seroquel in future periods; but it will have no
material impact on profitability and limited impact to our commercial team operations and expansion
plans.
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
170
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 in recent periods, it achieved an annual growth rate in real gross domestic
product of approximately 6.8% in 2017 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 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.
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
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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.
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.
We estimate the fair value of share options to employees and directors using the Polynomial 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. The assumptions in determining the fair
value of share options 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 have adopted Accounting
Standards Update, or ASU, 2016-09, Improvements to Employee Share-Based Payment Accounting on
January 1, 2017. This guidance permitted us to make an accounting policy election to account for
forfeitures as they occur. We have adopted using the modified retrospective approach as required, and
there was no cumulative effect adjustment. Prior to January 1, 2017, we applied an estimated forfeiture
rate derived from historical and expected future employee termination behavior.
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.
172
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 perform the 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 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. If the carrying
value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, an
impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of
goodwill allocated to that reporting unit.
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 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.
We have adopted ASU 2017-04, Simplifying the Accounting for Goodwill Impairment for annual
goodwill impairment tests performed on testing dates after January 1, 2017. This guidance removes Step 2
of the goodwill impairment test, which required the estimation of an implied fair value of goodwill in the
same manner as the amount of goodwill recognized in a business combination. For prior years’ annual
goodwill impairment tests, we determined that the fair values of the reporting units exceeded their carrying
values and Step 2 has never been required.
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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. We performed the qualitative and quantitative analysis and
determined that events or circumstances did not suggest that the carrying amount of each of our equity
method investments may not be recoverable and that impairment was not necessary.
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 by our Commercial Platform, which
generates revenue from the distribution and 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 to related
parties is attributable to sales 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
174
and development services that we receive primarily from Nutrition Science Partners, our non-consolidated
joint venture with Nestl´e 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—third parties
Sales—related parties
Total
Total
Year Ended December 31,
2017
2016
2015
$’000
%
$’000
%
$’000
%
26,315
—
9,682
35,997
196,720
8,486
205,206
241,203
10.9
—
4.0
14.9
81.6
3.5
85.1
26,444
355
8,429
35,228
171,058
9,794
180,852
12.2
0.2
3.9
16.3
79.2
4.5
83.7
44,060
2,573
5,383
52,016
118,113
8,074
126,187
24.7
1.5
3.0
29.2
66.3
4.5
70.8
100.0
216,080
100.0
178,203
100.0
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 Nestl´e 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.
2017
Year Ended December 31,
2016
2015
$’000
%
$’000
%
$’000
%
Revenue from Commercial Platform
Prescription Drugs
Consumer Health
Total
166,435
38,771
205,206
81.1
18.9
149,861
30,991
82.9
17.1
105,478
20,709
83.6
16.4
100.0
180,852
100.0
126,187
100.0
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.
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 is not included in our consolidated revenue, was $181.1 million, $222.4 million and
$244.6 million for the years ended December 31, 2015, 2016 and 2017, respectively. Shanghai Hutchison
Pharmaceuticals is a joint venture with Shanghai Pharmaceuticals, a leading pharmaceuticals company in
175
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. Our Consumer Health business’s revenue is also comprised of revenue
from sales of Zhi Ling Tong infant nutrition products manufactured by Hutchison Healthcare, our wholly
owned subsidiary, and distributed through Hutchison Sinopharm, and certain third-party consumer
products distributed and marketed by Hutchison Consumer Products, a wholly owned subsidiary.
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 $211.6 million, $224.1 million and $227.4 million
for the years ended December 31, 2015, 2016 and 2017, respectively. Hutchison Baiyunshan is a joint
venture with Guangzhou Baiyunshan, a leading China-based pharmaceutical company, 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
Our cost of sales are primarily attributable to the cost of sales of our Prescription Drugs business’s
consolidated Hutchison Sinopharm joint venture as well as the cost of sales of our Consumer Health
business. Our cost of sales to related parties is attributable to sales by our Consumer Health business to
indirect subsidiaries of CK Hutchison. The following table sets forth the components of our cost of sales
attributable to third parties and related parties for the years indicated.
2017
Year Ended December 31,
2016
2015
$’000
%
$’000
%
$’000
%
Cost of Sales
Costs of sales—third
parties
169,764
96.6
149,132
95.4
104,859
94.7
Costs of sales—related
parties
Total
6,056
3.4
7,196
4.6
5,918
5.3
175,820
100.0
156,328
100.0
110,777
100.0
176
The following table sets forth the components of our cost of sales attributable to the two core business
areas of our Commercial Platform, namely Prescription Drugs and Consumer Health, for the years
indicated.
2017
Year Ended December 31,
2016
2015
$’000
%
$’000
%
$’000
%
Cost of Sales
Prescription Drugs
Consumer Health
Total
151,521
24,299
175,820
86.2
13.8
136,090
20,238
87.1
12.9
96,927
13,850
87.5
12.5
100.0
156,328
100.0
110,777
100.0
Our Prescription Drugs business’s cost of sales primarily comprises the cost of sales and
transportation costs incurred by the legacy logistics and distribution activities of Hutchison Sinopharm,
which commenced 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 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 CROs, and other research and development costs. The following table sets forth the
components of our research and development expenses for the years indicated.
2017
Year Ended December 31,
2016
2015
$’000
%
$’000
%
$’000
%
R&D Expenses
Innovation Platform:
Personnel compensation and related costs
Clinical trial related costs
Other costs
Total
24,848
45,250
5,425
75,523
32.9
59.9
7.2
21,698
38,589
6,584
32.4
57.7
9.9
17,339
24,690
5,339
36.6
52.1
11.3
100.0
66,871
100.0
47,368
100.0
177
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.
Savolitinib (targeting c-Met)
Fruquintinib (targeting VEGFR1/2/3)
Sulfatinib (targeting VEGFR/FGFR1/CSF-1R)
Epitinib (targeting EGFRm+ with brain
metastasis)
Theliatinib (targeting EGFR wild-type)
HMPL-523 (targeting Syk)
HMPL-689 (targeting PI3K�)
HMPL-453 (targeting FGFR)
Others and government grant
Total clinical trial related costs
Personnel compensation and related costs
Other costs
Total R&D expenses
2017
Year Ended December 31,
2016
2015
$’000
9,146
15,660
7,726
3,141
1,023
1,875
1,140
1,558
3,981
45,250
24,848
5,425
75,523
%
12.1
20.7
10.2
4.2
1.4
2.5
1.5
2.1
5.2
$’000
4,945
12,908
10,815
1,994
699
4,112
2,084
1,231
(199)
59.9
32.9
7.2
38,589
21,698
6,584
%
7.4
19.3
16.2
3.0
1.0
6.2
3.1
1.8
(0.3)
57.7
32.4
9.9
$’000
2,419
12,951
6,105
629
397
2,880
1,587
593
(2,871)
24,690
17,339
5,339
%
5.1
27.3
12.9
1.3
0.8
6.1
3.4
1.3
(6.1)
52.1
36.6
11.3
100.0
66,871
100.0
47,368
100.0
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.’’
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 our company
2017
Year Ended December 31,
2016
2015
$’000
%
$’000
%
$’000
%
(1,844)
(7,366)
20.0
80.0
(1,180)
(7,302)
16.0
84.0
(3,512)
(4,040)
46.5
53.5
(9,210)
100.0
(8,482)
100.0
(7,552)
100.0
(4,605)
50.0
(4,241)
50.0
(3,776)
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
178
duration, costs, and timing of clinical studies and development of our drug candidates will depend on a
variety of factors, including:
• 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
2017
Year Ended December 31,
2016
2015
$’000
%
$’000
%
$’000
%
9,981
9,341
51.7
48.3
9,592
8,406
53.3
46.7
6,635
3,574
19,322
100.0
17,998
100.0
10,209
65.0
35.0
100.0
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.
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.
Year Ended December 31,
2017
2016
2015
$’000
%
$’000
%
$’000
%
Administrative Expenses
Innovation Platform
Commercial Platform:
Prescription Drugs
Consumer Health
Corporate Head Office
Total
6,617
27.6
5,373
24.9
5,116
7.8
6.8
57.8
1,856
1,418
12,933
8.6
6.6
59.9
1,465
2,301
10,738
100.0
21,580
100.0
19,620
100.0
26.1
7.5
11.7
54.7
1,863
1,640
13,835
23,955
179
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.
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
Hutchison Healthcare and, to a lesser extent, Hutchison Consumer Products.
Our corporate head office administrative expenses, which are not allocated to our business units,
primarily comprise 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 $26.3 million, $70.5 million and $38.2 million for the years ended
December 31, 2015, 2016 and 2017, respectively. Equity
in earnings of Shanghai Hutchison
Pharmaceuticals included one-time gains of $40.4 million and $2.5 million in the years ended
December 31, 2016 and 2017, respectively, net of tax, from land compensation and other government
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 $3.8 million, $4.2 million and $4.5 million for the years ended December 31, 2015, 2016 and 2017,
respectively, which were primarily 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, 2015, 2016 and 2017. The consolidated financial statements of Shanghai Hutchison
Pharmaceuticals, Hutchison Baiyunshan and Nutrition Science Partners are presented separately
elsewhere in this annual report.
180
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.
2017
Year Ended December 31,
2016
2015
$’000
%
$’000
%
$’000
%
Revenue
Innovation Platform:
Nutrition Science Partners
Commercial Platform:
—
—
—
—
—
Shanghai Hutchison Pharmaceuticals
Hutchison Baiyunshan
Total
244,557
227,422
471,979
51.8
48.2
222,368
224,131
49.8
50.2
181,140
211,603
100.0
446,499
100.0
392,743
100.0
—
46.1
53.9
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.
2017
Year Ended December 31,
2016
2015
$’000
%
$’000
%
$’000
%
Equity in earnings of equity investees,
net of tax
Innovation Platform:
Nutrition Science Partners
Others
Commercial Platform:
(4,605)
58
(1.9)
0.0
(4,241)
47
(1.9)
0.0
(3,776)
6
Shanghai Hutchison Pharmaceuticals
Hutchison Baiyunshan
Total
27,812
10,388
33,653
11.5
4.3
13.9
60,250
10,188
66,244
27.9
4.7
30.7
15,654
10,688
22,572
(2.1)
0.0
8.8
6.0
12.7
Operating Profit/(Loss)
Our operating profit/(loss) represents the sum of (i) earnings/(losses) 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 25 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
‘‘Taxation—Overview of Tax Implications of Various Other
Jurisdictions—Cayman Islands Taxation.’’
information, see Item 10.E.
181
People’s Republic of China
Our subsidiaries and joint ventures incorporated in the PRC are governed by the PRC EIT Law and
regulations. Under the EIT Law, the standard 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 TASE status from January 1, 2010 to December 31,
2018, and has been successful in its application to renew its HNTE status from January 1, 2017 to
December 31, 2019; whereas our non-consolidated joint ventures, Hutchison Baiyunshan and Shanghai
Hutchison Pharmaceuticals, have been successful in their respective applications to renew their HNTE
status from January 1, 2017 to December 31, 2019. Accordingly, these entities were subject to a
preferential EIT rate of 15% for the years ended December 31, 2015, 2016 and 2017.
For more information, see Item 10.E. ‘‘Taxation—Taxation in the PRC.’’ Please also see Item. 3 ‘‘Key
Information—Risk Factors—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.’’
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, 2015, 2016 and 2017.
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 a tax resident
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, 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.’’
182
Results of Operations
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 any future period.
2017
Year Ended December 31,
2016
2015
$’000
%
$’000
%
$’000
%
Revenues
Cost of sales
Research and development expenses
Selling expenses
Administrative expenses
Total other expense
Income tax expense
Equity in earnings of equity
investees, net of tax
Net (loss)/income
Net (loss)/income attributable to
241,203
(175,820)
(75,523)
(19,322)
(23,955)
(119)
(3,080)
33,653
(22,963)
100.0
(72.9)
(31.3)
(8.0)
(9.9)
(0.0)
(1.3)
216,080
(156,328)
(66,871)
(17,998)
(21,580)
(659)
(4,331)
100.0
(72.4)
(31.0)
(8.3)
(10.0)
(0.3)
(2.0)
178,203
(110,777)
(47,368)
(10,209)
(19,620)
(769)
(1,605)
13.9
(9.5)
66,244
14,557
30.7
6.7
22,572
10,427
100.0
(62.2)
(26.6)
(5.7)
(11.0)
(0.4)
(0.9)
12.7
5.9
our company
(26,737)
(11.1)
11,698
5.4
7,993
4.5
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Revenues
Our revenues increased by 11.6% from $216.1 million for the year ended December 31, 2016 to
$241.2 million for the year ended December 31, 2017.
This increase was driven by a $24.4 million increase in revenue for the year ended December 31, 2017
from our Commercial Platform, representing a 13.5% increase from the revenue of $180.9 million for the
year ended December 31, 2016. The consolidated revenue from our Prescription Drugs business increased
by $16.6 million from $149.8 million for the year ended December 31, 2016 to $166.4 million for the year
ended December 31, 2017. The increase was primarily attributable to the growth in our third-party drug
distribution business. The consolidated revenue from our Consumer Health business also increased by
$7.8 million from $31.0 million for the year ended December 31, 2016 to $38.8 million for the year ended
December 31, 2017. The increase was primarily attributable to higher levels of infant nutrition products
and personal care products sold in 2017. The consolidated revenue from our Innovation Platform
increased slightly by $0.8 million from $35.2 million for the year ended December 31, 2016 to $36.0 million
for the year ended December 31, 2017. The increase was attributable to a higher level of service fees that
we received from our joint ventures.
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
Our cost of sales increased by 12.5% from $156.3 million for the year ended December 31, 2016 to
$175.8 million for the year ended December 31, 2017. This increase was primarily driven by a $15.4 million
increase in cost of sales from Hutchison Sinopharm under our Prescription Drugs business, as well as a
$4.0 million increase in cost of sales from Hutchison Hain Organic under our Consumer Health business.
Cost of sales as a percentage of our revenue from our Commercial Platform decreased from 86.4% to
183
85.7% across these periods, primarily due to product mix resulting in an increased proportion of sales of
higher margin products.
Research and Development Expenses
Our research and development expenses increased by 12.9% from $66.9 million for the year ended
December 31, 2016 to $75.5 million for the year ended December 31, 2017, which was primarily
attributable to a $5.5 million increase in payments to CROs and other clinical trial related costs and a
$3.1 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 studies in 30 target patient populations as of December 31, 2016 to studies in 36 target
patient populations as of December 31, 2017. In particular, this increase was attributable to the expansion
of the savolitinib and fruquintinib development programs. As a result, research and development expenses
as a percentage of our total revenue increased from 31.0% in the year ended December 31, 2016 to 31.3%
in the year ended December 31, 2017.
Selling Expenses
Our selling expenses increased by 7.4% from $18.0 million for the year ended December 31, 2016 to
$19.3 million for the year ended December 31, 2017. This increase was primarily driven by a $0.9 million
increase in selling expenses under our Consumer Health business and a $0.4 million increase in selling
expenses under our Prescription Drugs business. Selling expenses as a percentage of our revenue from our
Commercial Platform decreased from 10.0% to 9.4% across these periods, primarily due to increased sales
by our third-party Prescription Drug distribution and Consumer Health businesses.
Administrative Expenses
Our administrative expenses increased by 11.0% from $21.6 million for the year ended December 31,
2016 to $24.0 million for the year ended December 31, 2017. This increase was primarily due to a
$1.2 million and $0.9 million increase in administrative expenses incurred by our Innovation Platform and
corporate head office, mainly related to the increased staff cost, office expenses and organization and
third-party advisor costs as a result of operating as a U.S. public company for a full calendar year.
Administrative expenses had remained relatively stable as a percentage of our total revenue.
Other Expenses
Total other expenses decreased from $0.7 million for the year ended December 31, 2016 to
$0.1 million for the year ended December 31, 2017, primarily due to higher interest income offset by higher
foreign currency translation loss.
Our interest income increased from $0.5 million for the year ended December 31, 2016 to $1.2 million
for the year ended December 31, 2017. The increase was attributable to a higher level of bank deposits
after receiving proceeds from our follow-on offering in October 2017. Our interest expense decreased
slightly from $1.6 million for the year ended December 31, 2016 to $1.5 million for the year ended
December 31, 2017. These interest expenses primarily comprised interest and guarantee fee payments on
bank loans in 2016 and 2017.
Income Tax Expense
Our income tax expense decreased by 28.9% from $4.3 million for the year ended December 31, 2016
to $3.1 million for the year ended December 31, 2017 due to a decrease in withholding taxes accrued on
the net income from our Commercial Platform businesses for the year ended December 31, 2017. The
higher withholding tax accrued for the year ended December 31, 2016 was due to equity in earnings of
184
Shanghai Hutchison Pharmaceuticals including a one-time gain of $40.4 million relating to land
compensation and other government subsidies.
Equity in Earnings of Equity Investees
Our equity in earnings of equity investees, net of tax, decreased by 49.2% from $66.2 million for the
year ended December 31, 2016 to $33.7 million for the year ended December 31, 2017. This decrease was
primarily due to a decrease in net income at our Commercial Platform’s non-consolidated joint ventures as
well as an increase in net loss at Nutrition Science Partners, our Innovation Platform’s non-consolidated
joint venture. Our equity in earnings of Shanghai Hutchison Pharmaceuticals included one-time gains, net
of tax, of $40.4 million from land compensation and other government subsidies in the year ended
December 31, 2016 and $2.5 million from government subsidies in the year ended December 31, 2017 in
each case paid to Shanghai Hutchison Pharmaceuticals by the Shanghai government.
Shanghai Hutchison Pharmaceuticals
The following table shows a summary of the results of operations of Shanghai Hutchison
Pharmaceuticals for the years indicated. The consolidated financial statements of Shanghai Hutchison
Pharmaceuticals are prepared in accordance with IFRS as issued by the IASB and are presented separately
elsewhere in this annual report.
Year Ended December 31,
2017
2016
($’000)
%
($’000)
%
Revenue
Cost of sales
Selling expenses
Administrative expenses
Gain on disposal of assets held for sale
Taxation charge
Profit for the year
244,557
(68,592)
(104,504)
(13,257)
—
(10,874)
55,623
100.0
(28.0)
(42.7)
(5.4)
—
(4.4)
22.7
222,368
(64,237)
(92,487)
(13,278)
88,536
(27,645)
120,499
Equity in earnings of equity investee attributable to our company
27,812
11.4
60,250
100.0
(28.9)
(41.6)
(6.0)
39.8
(12.4)
54.2
27.1
Shanghai Hutchison Pharmaceuticals’ revenue increased by 10.0% from $222.4 million for the year
ended December 31, 2016 to $244.6 million for the year ended December 31, 2017, 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 7.1% from $195.4 million for the year ended December 31, 2016
to $209.2 million for the year ended December 31, 2017, primarily due to continued price increases and
geographical expansion of sales coverage.
Cost of sales increased by 6.8% from $64.2 million for the year ended December 31, 2016 to
$68.6 million for the year ended December 31, 2017, 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 13.0% from $92.5 million for the year ended
December 31, 2016 to $104.5 million for the year ended December 31, 2017 as a result of increased
spending on marketing and promotional activities to support the increase in sales.
Administrative expenses remained relatively stable at $13.3 million for the years ended December 31,
2016 and 2017.
Taxation charge decreased by 60.7% from $27.6 million for the year ended December 31, 2016 to
$10.9 million for the year ended December 31, 2017, which was primarily due to the decrease in profit
before taxation between these periods.
185
As a result of the foregoing and the one-time gain of $40.4 million from land compensation and other
government subsidies received from the Shanghai government in 2016 which did not occur in 2017, profit
decreased by 53.8% from $120.5 million for the year ended December 31, 2016 to $55.6 million for the
year ended December 31, 2017. Our equity in earnings of equity investees contributed by this joint venture
was $60.3 million and $27.8 million for the years ended December 31, 2016 and 2017, respectively.
Hutchison Baiyunshan
The following table shows a summary of the results of operations of Hutchison Baiyunshan for the
years indicated. The consolidated financial statements of Hutchison Baiyunshan are prepared in
accordance with IFRS as issued by the IASB and are presented separately elsewhere in this annual report.
Year Ended December 31,
2017
2016
($’000)
%
($’000)
%
Revenue
Cost of sales
Selling expenses
Administrative expenses
Taxation charge
Profit attributable to equity holders of Hutchison Baiyunshan
227,422
(135,964)
(45,262)
(24,541)
(3,629)
20,776
100.0
224,131
(59.8) (134,776)
(46,873)
(19.9)
(21,716)
(10.8)
(3,631)
(1.6)
20,376
9.1
Equity in earnings of equity investee attributable to our company
10,388
4.6
10,188
100.0
(60.1)
(20.9)
(9.7)
(1.6)
9.1
4.5
Hutchison Baiyunshan’s revenue increased slightly by 1.5% from $224.1 million for the year ended
December 31, 2016 to $227.4 million for the year ended December 31, 2017, which was primarily due to
increased sales of certain of its drug products.
Cost of sales increased by 0.9% from $134.8 million for the year ended December 31, 2016 to
$136.0 million for the year ended December 31, 2017, primarily due to increased sales. The increase in cost
of sales was smaller than the increase in revenues due to a change in product mix resulting in a higher
proportion of sales of higher margin products.
Selling expenses during these periods decreased by 3.4% from $46.9 million for the year ended
December 31, 2016 to $45.3 million for the year ended December 31, 2017 due to less sales and marketing
activities.
Administrative expenses increased by 13.0% from $21.7 million for the year ended December 31, 2016
to $24.5 million for the year ended December 31, 2017 due to an increase in general overhead costs
incurred.
Taxation charge remained relatively stable at $3.6 million for the years ended December 31, 2016 and
2017 due to relatively stable profit before taxation across these periods.
As a result of the foregoing, profit attributable to equity holders of Hutchison Baiyunshan increased
by 2.0% from $20.4 million for the year ended December 31, 2016 to $20.8 million for the year ended
December 31, 2017. Our equity in earnings of equity investees contributed by this joint venture was
$10.2 million and $10.4 million for the years ended December 31, 2016 and 2017, respectively.
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Nutrition Science Partners
The following table shows a summary of the results of operations of Nutrition Science Partners for the
years indicated. The consolidated financial statements of Nutrition Science Partners are prepared in
accordance with IFRS as issued by the IASB and are presented separately elsewhere in this annual report.
Revenue
Loss for the year
Year Ended December 31,
2017
2016
($’000)
%
($’000)
%
—
(9,210)
—
100.0
—
(8,482)
—
100.0
Equity in earnings of equity investee attributable to our company
(4,605)
50.0
(4,241)
50.0
Nutrition Science Partners had losses of $8.5 million and $9.2 million for the years ended
December 31, 2016 and 2017, 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
$4.2 million and $4.6 million for the years ended December 31, 2016 and 2017, 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 (Loss)/Income
As a result of the foregoing, our net income decreased from a net income of $14.6 million for the year
ended December 31, 2016 to a net loss of $23.0 million for the year ended December 31, 2017. Net income
attributable to our company decreased from a net income of $11.7 million for the year ended
December 31, 2016 to a net loss of $26.7 million for the year ended December 31, 2017.
Operating Profit/(Loss)
Our operating profit decreased from an operating profit of $20.5 million for the year ended
December 31, 2016 to an operating loss of $18.4 million for the year ended December 31, 2017 as a result
of a significant decrease in operating profit of our Commercial Platform from $74.3 million for the year
ended December 31, 2016 to $45.1 million for the year ended December 31, 2017 as well as an increase in
operating loss of our Innovative Platform from $40.8 million for the year ended December 31, 2016 to
$52.0 million for the year ended December 31, 2017. The decrease in operating profit of our Commercial
Platform across these periods was primarily due to equity in earnings of Shanghai Hutchison
Pharmaceuticals including a one-time gain of $40.4 million relating to land compensation and other
government subsidies in 2016 which did not occur in 2017. 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 investment in the expansion of small molecule manufacturing operations.
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Revenues
Our revenues increased by 21.3% from $178.2 million for the year ended December 31, 2015 to
$216.1 million for the year ended December 31, 2016.
This increase was driven by a $54.7 million increase in revenue for the year ended December 31, 2016
from our Commercial Platform, representing a 43.3% increase from the revenue of $126.2 million for the
year ended December 31, 2015. The increase was partially offset by a 32.3% decrease in revenue from our
187
Innovation Platform for the year ended December 31, 2016 to $35.2 million from $52.0 million in the year
ended December 31, 2015. The growth in revenue from our Commercial Platform was driven by the
inclusion of a full 12-month period of Seroquel sales in China for the year ended December 31, 2016,
which our consolidated joint venture Hutchison Sinopharm began marketing under an exclusive license
from AstraZeneca in the second quarter of 2015. The decrease in the revenue from our Innovation
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
Our cost of sales 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 from Hutchison Sinopharm under our Prescription Drugs business, as well as a
$4.0 million increase in cost of sales from Hutchison Hain Organic under our Consumer Health business.
Cost of sales 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 CROs 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.
188
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.
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
$40.4 million, net of tax, relating to land compensation and other subsidies paid to Shanghai Hutchison
Pharmaceuticals by the Shanghai government and an increase in net loss at Nutrition Science Partners, our
Innovation Platform’s non-consolidated joint venture.
Shanghai Hutchison Pharmaceuticals
The following table shows a summary of the results of operations of Shanghai Hutchison
Pharmaceuticals for the years indicated. The consolidated financial statements of Shanghai Hutchison
189
Pharmaceuticals are prepared in accordance with IFRS as issued by the IASB and are presented separately
elsewhere in this annual report.
Revenue
Cost of sales
Selling expenses
Administrative expenses
Gain on disposal of assets held for sale
Taxation charge
Profit for the year
Year Ended December 31,
2016
2015
($’000)
%
($’000)
%
222,368
(64,237)
(92,487)
(13,278)
88,536
(27,645)
120,499
100.0
181,140
(28.9) (53,532)
(41.6) (78,429)
(6.0) (12,317)
39.8
—
(6,094)
(12.4)
31,307
54.2
100.0
(29.6)
(43.3)
(6.8)
—
(3.4)
17.3
Equity in earnings of equity investee attributable to our company
60,250
27.1
15,654
8.6
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.
Taxation charge increased by 353.6% from $6.1 million for the year ended December 31, 2015 to
$27.6 million for the year ended December 31, 2016, which was primarily due to the increase in profit
before taxation between these periods.
As a result of the foregoing and the one-time gain on disposal of assets held for sale of $88.5 million
related to 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 investees contributed by this joint venture was $15.7 million and
$60.3 million for the years ended December 31, 2015 and 2016, respectively.
190
Hutchison Baiyunshan
The following table shows a summary of the results of operations of Hutchison Baiyunshan for the
years indicated. The consolidated financial statements of Hutchison Baiyunshan are prepared in
accordance with IFRS as issued by the IASB and are presented separately elsewhere in this annual report.
Year Ended December 31,
2016
2015
($’000)
%
($’000)
%
Revenue
Cost of sales
Selling expenses
Administrative expenses
Taxation charge
Profit attributable to equity holders of Hutchison Baiyunshan
224,131
(134,776)
(46,873)
(21,716)
(3,631)
20,376
211,603
100.0
(60.1) (120,142)
(45,325)
(20.9)
(23,722)
(9.7)
(3,948)
(1.6)
21,376
9.1
Equity in earnings of equity investee attributable to our company
10,188
4.5
10,688
100.0
(56.8)
(21.4)
(11.2)
(1.9)
10.1
5.1
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 $10.2 million for the years ended December 31, 2015 and 2016, respectively.
Nutrition Science Partners
The following table shows a summary of the results of operations of Nutrition Science Partners for the
years indicated. The consolidated financial statements of Nutrition Science Partners are prepared in
accordance with IFRS as issued by the IASB and are presented separately elsewhere in this annual report.
Revenue
Loss for the year
Equity in earnings of equity investee attributable to our company
Year Ended December 31,
2016
2015
($’000)
—
(8,482)
(4,241)
%
—
100.0
($’000)
—
(7,552)
50.0
(3,776)
%
—
100.0
50.0
191
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.
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 and undertakings 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 and follow-on offering in 2017.
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, 2017, we had cash and cash equivalents and short-term investments of
$358.3 million and unutilized bank facilities of $121.3 million. Substantially all of our bank deposits are at
major financial institutions, which we believe are of high credit quality. As of December 31, 2017, we had
$30.0 million in bank loans, including (i) a $20.0 million term loan from Bank of America N.A. and a
$10.0 million term loan from Deutsche Bank AG, Hong Kong Branch, both of which will expire in August
2018. Our total weighted average cost of bank borrowings, including all interest and guarantee fees payable
192
with respect to our prior loan with Scotiabank, was 2.7% as of December 31, 2017. 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. In
November 2017, we entered into a new credit facility agreement with Scotiabank for the provision of
unsecured credit facilities in the aggregate amount of $51.3 million. The credit facility includes (i) a
$26.9 million 3-year term loan facility; and (ii) a $24.4 million 18-month revolving loan facility, which
replaced the previous four-year Scotiabank loan entered in December 2011 and subsequently renewed in
June 2014.
Certain of our subsidiaries and non-consolidated joint ventures, 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 and non-consolidated joint ventures
incorporated in the PRC was approximately $24,000, $15,000 and $10,000 for the years ended
December 31, 2015, 2016 and 2017, 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 to $7.3 million as of December 31, 2017.
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 $67.0 million in cash and cash
equivalents and bank deposits maturing over three months and no bank borrowings as of December 31,
2017. 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, 2017, 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
193
to accelerate the development of our clinical-stage drug candidates. For more information, see Item 3.D.
‘‘Risk Factors—Risks Related to Our Financial Position and Need for Additional Capital.’’
Cash Flow Data:
Net cash used in 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 Operating Activities
Year Ended December 31,
2017
(8,943)
(260,780)
273,196
3,473
2,361
79,431
85,265
2016
($’000)
(9,569)
(33,597)
92,435
49,269
(1,779)
31,941
79,431
2015
(9,385)
8,855
(5,471)
(6,001)
(1,004)
38,946
31,941
Net cash used in operating activities was $9.6 million for the year ended December 31, 2016 compared
to net cash used in operating activities of $8.9 million for the year ended December 31, 2017. The net
change was primarily attributable to a $25.1 million increase in dividends received from our equity
investees from $30.5 million for the year ended December 31, 2016 to $55.6 million for the year ended
December 31, 2017 which was the result of increased revenue and funds available from land compensation
paid to our equity investees in 2016. This increase was partially offset by an increase in research and
development spending in our Innovation Platform as well as the effects of changes in working capital,
namely an aggregate decrease of $14.5 million in the year ended December 31, 2017 primarily due to
delayed payments from 2016 which were settled in 2017, as compared to an aggregate increase of
$3.4 million in the year ended December 31, 2016.
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 (used in)/generated from Investing Activities
Net cash used in investing activities was $33.6 million for the year ended December 31, 2016,
compared to net cash used in investing activities of $260.8 million for the year ended December 31, 2017.
This change was primarily attributable to net deposits in short-term investments of $248.8 million for the
year ended December 31, 2017 compared to $24.3 million for the year ended December 31, 2016. This
change was also attributable to an additional $7.0 million share capital contribution to Nutrition Science
Partners in 2017 compared to $5.0 million in 2016.
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
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$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 generated from/(used in) Financing Activities
Net cash generated from financing activities was $92.4 million for the year ended December 31, 2016,
compared to net cash generated from financing activities of $273.2 million for the year ended
December 31, 2017. This change was primarily attributable to net proceeds of $292.7 million from the
issuance of ordinary shares in the form of ADS upon our follow-on offering in the United States in
October 2017 as compared to net proceeds of $97.3 million from the issuance of ordinary shares in the
form of ADS upon our initial public offering in the United States in 2016. The change was also attributable
to a net decrease in bank borrowings of $16.9 million for the year ended December 31, 2017 as compared
to a net decrease of $3.1 million for the year ended December 31, 2016.
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 attributable to net proceeds of $97.3 million from the issuance of ordinary shares in
the form of ADS upon our initial public offering in the United States in 2016.
Loan Facilities
In November 2015, we renewed a three-year revolving loan facility with HSBC with an annual interest
rate of 1.25% over the Hong Kong Inter-bank Offered Rate, or HIBOR. This facility will expire in
November 2018. The credit limit of this loan is HK$234.0 million ($30.0 million). In February 2017,
$2.5 million was drawn from this facility, and the amount was fully repaid in March 2017. As of
December 31, 2017, 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 approximately $295,000, $243,000 and $3,000 for the years ended December 31,
2015, 2016 and 2017, 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 ($60.0 million). These
credit facilities included (i) a HK$156.0 million ($20.0 million) 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 ($40.0 million) revolving
loan facility with a term of 12 months and an annual interest rate of 1.30% over HIBOR. In March 2017,
the term loan facility of HK$156.0 million ($20.0 million) as part of the unsecured credit facilities was fully
repaid and the unsecured credit facilities were terminated.
In February 2017, our subsidiary Hutchison China MediTech (HK) Limited entered into new credit
facility agreements with each of 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$546.0 million ($70.0 million).
The credit facility with Bank of America N.A. includes (i) a HK$156.0 million ($20.0 million) term loan
facility and (ii) a HK$195.0 million ($25.0 million) revolving loan facility, both with a term of 18 months
and an annual interest rate of 1.25% over HIBOR. The term loan was drawn from this credit facility in
March 2017 and is due in August 2018. The credit facility with Deutsche Bank AG, Hong Kong Branch
includes (i) a HK$78.0 million ($10.0 million) term loan facility and (ii) a HK$117.0 million ($15.0 million)
revolving loan facility, both with a term of 18 months and an annual interest rate of 1.25% over HIBOR.
The term loan was drawn from this credit facility in August 2017 and is due in August 2018. The two new
credit facility agreements replaced the previous credit facility agreement with these two banks. As of
December 31, 2017, no amounts were drawn from the revolving loan facilities and HK$156.0 million
($20.0 million) and HK$78.0 million ($10.0 million) was outstanding on the term loan facilities,
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respectively. These credit facilities are guaranteed by Chi-Med and include certain financial covenant
requirements.
In November 2017, our subsidiary Hutchison China MediTech Finance Holdings Limited entered into
a HK$210.0 million ($26.9 million) three-year term loan and HK$190.0 million ($24.4 million) 18-month
revolving loan facility with Scotiabank. The new term loan facility bears an annual interest rate of 1.50%
over HIBOR and the new revolving loan facility bears an annual interest rate of 1.25% over HIBOR. The
new term loan and revolving loan facility will expire in November 2020 and May 2019, respectively. As of
December 31, 2017, no amounts have been drawn from the term loan or the revolving loan facilities. Our
previous four-year term loan with Scotiabank entered in June 2014 was fully repaid in November 2017. The
previous term loan was guaranteed by Hutchison Whampoa Limited for an annual guarantee fee of 1.75%.
Interest expenses accrued and paid for this loan were $0.4 million, $0.4 million and $0.3 million for the
years ended December 31, 2015, 2016 and 2017, respectively. Guarantee fees accrued and paid for these
loans with Scotiabank were $0.5 million, $0.5 million and $0.3 million for the years ended December 31,
2015, 2016 and 2017, respectively.
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, 2017.
Capital Expenditures
We had capital expenditures of $3.3 million, $4.3 million and $5.0 million for the years ended
December 31, 2015, 2016 and 2017, 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, 2017, we had commitments for capital expenditures of approximately $0.2 million,
primarily for purchases of property, plant and equipment to expand the Hutchison MediPharma research
facilities and the new 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 $42.1 million, $11.0 million and $6.2 million for the years ended
December 31, 2015, 2016 and 2017, 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 $21.7 million,
$13.2 million and $7.2 million for the years ended December 31, 2015, 2016 and 2017, respectively. These
capital expenditures were primarily related to the acquisition of leasehold land in Guangzhou and Bozhou
as well as the construction of the new production facilities in Bozhou and an office building in Guangzhou.
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.
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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, 2017. 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.
Bank borrowings
Loan from a non-controlling shareholder of a
subsidiary
Interest on bank borrowings
Interest on loan from a non-controlling
shareholder of a subsidiary
Purchase obligations
Operating lease obligations
Total
Shanghai Hutchison Pharmaceuticals
Payment Due by Period
Total
Less Than
1 Year
30,000
30,000
1,550
480
55
161
8,860
1,550
480
55
161
3,330
41,106
35,576
1-3 Years
($’000)
—
—
—
—
—
5,007
5,007
3-5 Years
More Than
5 Years
—
—
—
—
—
506
506
—
—
—
—
—
17
17
The following table sets forth the contractual obligations of our non-consolidated joint venture
Shanghai Hutchison Pharmaceuticals as of December 31, 2017. 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.
Purchase obligations
Operating lease obligations
Total
Payment Due by Period
Total
Less Than
1 Year
574
314
888
574
283
857
1-3 Years
3-5 Years
($’000)
—
31
31
—
—
—
More Than
5 Years
—
—
—
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Hutchison Baiyunshan
The following table sets forth the contractual obligations of our non-consolidated joint venture
Hutchison Baiyunshan as of December 31, 2017. Hutchison Baiyunshan’s purchase obligations comprise
capital commitments for property, plant and equipment contracted for but not yet paid, which mainly
relate to the construction in progress of the new production facilities at Bozhou in Anhui province.
Hutchison Baiyunshan’s finance and operating lease obligations primarily comprise future aggregate
minimum lease payments in respect of various factories, warehouses and equipment under non-cancellable
lease agreements.
Purchase obligations
Finance lease obligations
Operating lease obligations
Total
Payment Due by Period
Total
Less Than
1 Year
1-3 Years
3-5 Years
($’000)
More Than
5 Years
460
543
1,707
2,710
460
125
999
1,584
—
250
520
770
—
168
188
356
—
—
—
—
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.
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
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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 results for the
year from changes in interest rates on floating rate borrowings. The sensitivity to interest rates 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 loss of a 1.0% interest rate shift would be a maximum increase/decrease of $0.4 million
for the year ended December 31, 2017.
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 1.4%, 2.0% and 1.8% in 2015, 2016 and 2017, 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), or ASU 2014-09, to clarify the principles of recognizing
revenue and create common revenue recognition guidance for U.S. GAAP and International Financial
Reporting Standards. 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,
judgments and additional disclosures.
We adopted the new standard using the modified retrospective method on January 1, 2018 and have
assessed the impact on revenue from customers. Our revenue from contracts with customers comprises of
research and development projects in our Innovation Platform and sales of goods and services in our
Commercial Platform operating segments. We expect the changes from applying the new guidance will
primarily impact the Innovation Platform.
Innovation Platform—We have reviewed our research and development contracts and identified two
contracts related to our license and collaboration arrangements that will be impacted by the application of
ASU 2014-09. The license and collaboration arrangements contain multiple performance obligations:
(1) the license to the drug compound; and (2) the research and development services for each specified
treatment indication. The transaction price includes fixed and variable consideration in the form of upfront
payment, research and development costs reimbursements, contingent milestone payments and sales-based
royalties. The allocation of the transaction price to each performance obligation is based on the relative
standalone selling price of each performance obligation. We have determined that control of the license to
the drug compound was transferred as of the inception date of the collaboration agreements and
consequently, amounts allocated to this performance obligation are recognized at a point in time.
Conversely, control of the research and development services for each specified indication is transferred
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over time and amounts allocated to these performance obligations are recognized over time using cost
inputs as a measure of progress. In addition, royalty revenues will be recognized as future sales occur as
they meet the requirements for the sales-usage based royalty exception. We expect US$1.1 million deferral
of revenue as a cumulative adjustment to opening accumulated loss upon adoption.
Commercial Platform—For sales of goods and services, we have applied a portfolio approach to
aggregate contracts into portfolios whose performance obligations do not differ materially from each
other. In our assessment of each portfolio, we have assessed the contracts under the new five-step model
and do not expect a significant impact to the timing or amount of revenue recognition under the new
guidance. Control of the goods passes to the customer when the goods are delivered, which matches the
timing of revenue recognition under the our existing accounting policy.
We have applied updates to the new guidance in our assessment including ASU 2016-08, Principal
versus Agent Considerations, ASU 2016-10, Identifying Performance Obligations and Licensing.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), or ASU 2016-02. The core
principle of ASU 2016-02 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. We expect to
adopt the new standard using the modified retrospective method on January 1, 2019 with a retrospective
adjustment to comparable periods presented starting from January 1, 2017. We are currently determining
the potential impact ASU 2016-02 will have on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the
Definition of a Business, or ASU 2017-01, 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 May 2017, the FASB issued ASU 2017-09, Scope of Modification Accounting (Topic 718), or ASU
2017-09, which provides guidance on the types of changes to the terms or conditions of share-based
payment awards to which an entity would be required to apply modification accounting under share-based
payment accounting. The guidance clarifies that no new measurement date will be required if there is no
change to the fair value, vesting conditions, and classification, and in effect simplifies the accounting for
non-substantive changes to share-based payment awards. ASU 2017-09 is effective for fiscal years and
interim periods within those years beginning after December 15, 2017. We shall apply the guidance upon
adoption to share-based payment modifications, if any.
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.
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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, 2018, 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
Weiguo Su, Ph.D.
Dan Eldar, Ph.D.
Edith Shih
Paul Carter
Karen Ferrante, M.D.
Graeme Jack
Tony Mok, M.D.
Ye Hua, M.D.
May Wang, Ph.D.
Zhenping Wu, Ph.D.
Mark Lee
Age
Position
66 Executive Director and Chairman
52 Executive Director and Chief Executive Officer
51 Executive Director and Chief Financial Officer
60 Executive Director and Chief Scientific Officer
64 Non-executive Director
66 Non-executive Director and Company Secretary
57
60
67
57
50
54
58
40
Senior Independent Non-executive Director
Independent Non-executive Director
Independent Non-executive Director
Independent Non-executive Director
Senior Vice President, Head of Clinical
Development & Regulatory Affairs
Senior Vice President, Business
Development & Strategic Alliances
Senior Vice President, Pharmaceutical Sciences
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 37 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. He is currently a director of Gama
Aviation Plc. Mr. To’s career in China spans more than 37 years. He is the original founder of Hutchison
Whampoa Limited’s (currently a subsidiary of CK Hutchison) China healthcare businesses 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
201
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 Nestl´e
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.
Weiguo Su has been an executive director since 2017 and has been our chief scientific officer since
2012. He is also a member of our technical committee. Dr. Su has headed all drug discovery and research
since he joined our company, including master-minding our scientific strategy, being a key leader of the
Innovation Platform, and responsible for the discovery of each and every small molecule drug candidate in
our pipeline. 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. 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 Leaders in China. Dr. Su
received a Bachelor of Science 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.
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 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 and company secretary of CK
Hutchison, a group she has been with since 1989, acting in the capacity of director, head group general
counsel and company secretary of its subsidiaries and associated companies. Ms. Shih is 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. She has over 35 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.
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 solicitor qualified 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.
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Paul Carter has been a senior independent non-executive director since 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
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 University of West London) and is a Fellow of the Chartered Institute
of Management Accountants in the United Kingdom.
international business
in Asia. He
the
Karen Ferrante has been an independent non-executive director since 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 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
the board of directors of Progenics
Pharmaceuticals, Inc., MacroGenics, Inc. and Unum Therapeutics 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.
is currently a member of
Graeme Jack has been an independent non-executive director since 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 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.
Tony Mok has been an independent non-executive director since 2017. He is also a member of our
technical committee. Professor Mok has more than 30 years of experience in clinical oncology with his
main research interest focusing on biomarker and molecular targeted therapy in lung cancer. He is
currently Li Shu Fan Medical Foundation named professor and chairman of department of clinical
oncology at The Chinese University of Hong Kong. Professor Mok has contributed to over 200 articles in
international peer-reviewed journals, as well as multiple editorials and textbooks. He is a director of the
American Society of Clinical Oncology (ASCO), a member of the ASCO Publications Committee and vice
secretary of the Chinese Society of Clinical Oncology (CSCO). He also formerly chaired the ASCO
International Affairs Committee. Professor Mok is closely affiliated with the oncology community in China
and has been awarded an Honorary Professorship at Guangdong Province People’s Hospital, Guest
Professorship at Peking University School of Oncology and Visiting Professorship at Shanghai Jiao Tong
University and West China School of Medicine/West China Hospital, Sichuan University. He received his
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bachelor of medical science degree and a Doctor of Medicine from University of Alberta, Canada. He is
also a fellow of the Royal College of Physicians and Surgeons of Canada, Hong Kong College of
Physicians, Hong Kong Academy of Medicine, Royal College of Physicians of Edinburgh and ASCO.
Ye Hua has been our senior vice president and head of our clinical development & regulatory affairs
group since 2014. He has 19 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 global 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 25 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.
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.
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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, 2017 to our chief executive officer, chief financial officer, chief scientific officer and 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
Weiguo Su
Chief Scientific Officer and Executive
Director
Other Executive Officers in the
Aggregate
Salary
and fees ($)
Bonus
($)
Taxable
benefits
($)
Pension
contributions
($)
Total
($)
431,862(1)(2)
769,231
15,768
26,748
1,243,609
347,758(3)
284,872
—
24,086
656,716
310,296(4)
1,222,071(5)
10,000
21,132
1,563,499
980,912
1,536,307(6)
15,291
68,450
2,600,960
(1) Director’s fees received from the subsidiaries of the Company during the period he served as director that
were paid to a subsidiary or an intermediate holding company of the Company are not included in the
amounts above.
(2) Amount includes director’s fees of $75,000.
(3) Amount includes director’s fees of $70,000.
(4) Amount includes director’s fees of $57,534.
(5) Amount includes a $651,273 year-end bonus and a $570,798 cash retention bonus (see footnote (6) below).
(6)
In December 2013 and March 2014, we awarded cash retention bonuses to certain of our executive officers
in the 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, an aggregate amount of $640,399 was paid in 2016,
and another aggregate amount of $1,088,876 was paid in 2017, and such paid amount in 2017 is included in
the bonus amount stated in the table above.
During the fiscal year ended December 31, 2017, we also granted share option awards representing
100,000 ordinary shares to Dr. Weiguo Su. The options have an exercise price of £31.05 ($41.61) per share
and expire on March 26, 2027. During the fiscal year ended December 31, 2017, we also granted executive
officers awards under our long term incentive scheme, or LTIP, giving them a conditional right to receive
ordinary shares or ADSs to be purchased by an independent third-party trustee up to a certain maximum
cash amount of $5,669,348 in the aggregate. See ‘‘Long Term Incentive Compensation’’ and ‘‘Outstanding
Awards’’ for more details.
Employment Arrangements with our Executive Officers
Offer Letters for Executive Officers at Hutchison China MediTech Limited and Hutchison
MediPharma (Hong Kong) Limited
We have entered into employment offer letters with each of our executive officers who is employed by
our Hong Kong subsidiaries, Hutchison China MediTech (HK) Limited and Hutchison MediPharma
(Hong Kong) Limited, namely Mr. Christian Hogg, Mr. Johnny Cheng and Mr. Mark Lee. Under these
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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 officer may also voluntarily terminate his 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 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 and
Dr. Zhenping Wu. 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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Share Options
The following table sets forth information concerning the outstanding equity awards held by our chief
executive officer, chief financial officer, chief scientific officer and other executive officers on an aggregate
basis as of December 31, 2017.
Name and Principal Position
Christian Hogg
Chief Executive Officer and Executive Director
Johnny Cheng
Chief Financial Officer and Executive Director
Weiguo Su
Chief Scientific Officer and Executive Director
Other Executive Officers in the Aggregate
Number of
securities
underlying
unexercised
Number of
securities
underlying
unexercised
options which are options which are
exercisable
(#)
unexercisable
(#)
Option
exercise
price
(£/share)
—
—
Option
expiration
date
—
—
—
—
100,000
— 19.70 Dec. 19, 2023
31.05 Mar. 26, 2027
— 19.70 Dec. 19, 2023
25,000
19.70
Jun. 27, 2024
—
—
300,000
—
293,686
75,000
—
50,000
31.05 Mar. 26, 2027
Long-Term Incentive Compensation
The following table sets forth information concerning the outstanding LTIP grants held by our chief
executive officer, chief financial officer, chief scientific officer and other executive officers on an aggregate
basis as of December 31, 2017.
Name and Principal Position
Christian Hogg
Chief Executive Officer and Executive Director
Johnny Cheng
Chief Financial Officer and Executive Director
Weiguo Su
Chief Scientific Officer and Executive Director
Other Executive Officers in the Aggregate
Maximum
Aggregate
Value of
LTIP awards(1)
$
$
$
$
1,817,884
690,639
1,188,995
1,971,830
(1) The amounts reflected in the table above represent the maximum aggregate value of all
LTIP awards outstanding as of December 31, 2017, which include LTIP awards for the fiscal
years 2015 to 2019. Certain of the LTIP awards are conditional upon the achievement of
annual performance targets for the fiscal years 2017, 2018 and 2019. The amounts reflected
in the table above assume the maximum amount that may be paid under these contingent
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 either the AIM and Nasdaq market which will be used to settle the
LTIP awards. See ‘‘Outstanding Awards’’ for more details.
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Director Compensation
The following table sets forth a summary of the compensation we paid to our directors other than
Christian Hogg, Johnny Cheng and Weiguo Su during 2017. 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
Dan Eldar
Edith Shih
Paul Carter(3)
Karen Ferrante(3)
Graeme Jack(4)
Tony Mok(5)
Christopher Huang(6)
Christopher Nash(6)
Shigeru Endo(6)
Michael Howell(8)
Fees Earned or Share option
Paid in Cash
($)
benefits
($)
All other
compensation
($)
Total
($)
85,000(1)
70,000
70,000(2)
102,667
93,958
86,667
18,641
7,291
6,875
5,833(7)
15,000
—
—
—
—
—
—
—
—
—
—
—
— 85,000
— 70,000
— 70,000
— 102,667
— 93,958
— 86,667
— 18,641
7,291
—
—
6,875
5,833
—
— 15,000
(1) Such director’s fees were paid to Hutchison Whampoa (China) Limited, a wholly owned
subsidiary of CK Hutchison. 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.
(2) Such director’s fees were paid to Hutchison International Limited, a wholly owned subsidiary
of CK Hutchison. 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.
(3) Appointed on February 1, 2017.
(4) Appointed on March 1, 2017.
(5) Appointed on October 12, 2017.
(6) Ceased to be a director as of February 1, 2017.
(7) Such director’s fees were paid to Hutchison International Limited, a wholly owned subsidiary
of CK Hutchison.
(8) Ceased to be a director as of March 1, 2017.
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.
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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 Eligible
Employees (as defined in the Chi-Med Option Schemes) 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 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, 2017). 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
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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
defined in the Chi-Med Option Schemes). 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 defined in the Chi-Med Option
Schemes). 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.
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
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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.
Outstanding Awards
As of December 31, 2017, the following options were outstanding:
• options to purchase an aggregate of 282,726 ordinary shares, representing approximately 0.4% of
our outstanding share capital, at a weighted average exercise price of £5.65 per share under the
2005 Chi-Med Option Scheme, and
• options to purchase an aggregate of 843,686 ordinary shares, representing approximately 1.3% of
the outstanding share capital, at a weighted average exercise price of £21.72 per share under the
2015 Chi-Med Option Scheme.
In March 2017, we granted awards under our LTIP to 89 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 of $5,919,545 per annum depending upon the achievement
of annual performance targets from 2017 to 2019. Any ordinary shares purchased on behalf of an LTIP
grantee are to be held by the trustee until they are vested. Vesting will occur two business days after the
date of announcement of the annual results for the financial year falling two years after the financial year
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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 2017, we also granted additional LTIP awards to 31 senior managers, executives and
directors, 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 $353,243. These awards are not related to the
achievement of performance targets. These LTIP awards vest after one year, subject to the continued
employment of the LTIP holder.
In August 2017, we granted awards under our LTIP to two senior executives, giving each a conditional
right to a cash amount which is used to purchase shares by an independent third-party trustee up to a
certain maximum cash amount of $64,827 per annum depending upon the achievement of annual
performance targets from 2017 to 2019. Vesting will occur two business days after the date of
announcement of the annual results for the financial year falling two years after the financial year to which
the LTIP award relates.
In December 2017, we granted awards under our LTIP to ten senior executives, giving each a
conditional right to a cash amount which is used to purchase ordinary shares by an independent third-party
trustee up to a certain maximum cash amount of $529,477 per annum depending upon the achievement of
annual performance targets from 2018 to 2019. Vesting will occur two business days after the date of
announcement of the annual results for the financial year falling two years after the financial year to which
the LTIP award relates.
C. Board Practices.
Our board of directors consists of ten directors including four executive directors, two non-executive
directors and four 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
Board Committees
committee.
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
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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.
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:
• monitor the integrity of our financial statements, our annual and half-year reports and accounts and
our announcements of interim or final results;
• 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:
• 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;
• whether our company has followed appropriate accounting standards and made appropriate
estimates and judgments, taking into account the views of the external auditor;
• 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:
• 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;
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• 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;
• 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:
• 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 March 1, 2017 and February 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, Tony Mok, Simon To, Christian
Hogg and Weiguo Su, 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.
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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 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.
Code of Ethics for Business Partners
Our board of directors has adopted a code of ethics for our business partners, including our suppliers,
vendors, customers, agents, contractors, joint venture partners and representatives. This code of ethics contains
general guidelines to promote the standards outlined in our internal code of ethics as described above.
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.
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Code on Dealings in Shares
Our board of directors has adopted a policy on the handling of material inside information, consisting
of information which is either ‘‘inside information’’ under the EU Market Abuse Regulation (Regulation
(EU) 596/2014), or MAR, or ‘‘material non-public information’’ under U.S. law. This policy, among other
things, prohibits any employees, directors, other persons discharging managerial responsibilities or their
connected persons dealing in our securities or their derivatives, or those of our collaborators, business
partners, suppliers and customers, while in possession of material inside information. Certain members of
our senior management or staff, including persons discharging managerial responsibilities, and their
connected persons are subject to additional compliance requirements which are outlined in the code
(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 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, 2015, 2016 and 2017, we had 451, 563 and 590 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,
2015, 2016 and 2017 was as follows:
By Function:
Innovation Platform
Commercial Platform
Corporate Head Office
Total
2017
2016
2015
358
205
27
590
329
209
25
563
281
149
21
451
As of December 31, 2017, 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 2,911 full-time employees, and Hutchison
Baiyunshan employed a total of 1,711 full-time employees and 1,688 outsourced contract staff, who are
mostly sales representatives and manufacturing employees as of December 31, 2017. 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 6 B. ‘‘Compensation’’ and 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 66,447,037 ordinary shares outstanding as of December 31, 2017. The following table and
accompanying footnotes set forth information relating to the beneficial ownership of our ordinary shares
as of December 31, 2017 by:
• 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:**
Christian Hogg
Johnny Cheng
Simon To
Edith Shih
Weiguo Su
Dan Eldar
Tony Mok
Paul Carter
Karen Ferrante
Graeme Jack
Ye Hua
May Wang
Zhenping Wu
Mark Lee
All Executive Officers and Directors as a Group
Principal Shareholder:
Hutchison Healthcare Holdings Limited(3)
Number of
Ordinary
Shares Held
Number of
American
Depositary
Shares Held
Approximate
Percent of
Issued Share
Capital†
1,093,802
256,146
180,000
70,000
300,000(1)
1,900
—
3,524
—
—
*
*
*
*
2,280,665(2)
40,356
4,626
133,237
100,000
56,546
6,225
10,002
—
5,785
—
*
*
*
*
364,665
1.7%
*
*
*
*
*
*
*
*
—
*
*
*
*
3.7%
36,666,667
6,862,420
60.4%
*
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 66,447,037 ordinary
shares outstanding as of December 31, 2017.
(1) Amount includes ordinary shares issuable upon vesting of options within 60 days of December 31,
2017.
(2) Amount includes ordinary shares and ordinary shares issuable upon vesting of options within 60 days
of December 31, 2017 held by our executive officers and directors as group.
(3) 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
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Vistra Corporate Services Centre, Wickhams Cay II, Road Town, Tortola VG1110, British Virgin
Islands.
As of December 31, 2017, 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, 2017, there was one ordinary shareholder of record with an address
in the United States. Deutsche Bank Trust Company America, the depositary of our ADS program, held
11,708,338 ordinary shares as of that date in the name of DB London (Investors Services) Nominees
Limited and Deutsche Bank AG.
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.
Letters of awareness with respect to loans
Relationship with CK Hutchison
CK Hutchison has issued letters of awareness to our lenders Scotiabank (Hong Kong) Limited, Bank
of America N.A. and Deutsche Bank AG, Hong Kong Branch, and committed not to reduce its
shareholding to less than 40% of our issued share capital while such loans are outstanding. Hutchison
Whampoa Limited, a wholly owned subsidiary of CK Hutchison, guaranteed our previous term loan with
Scotiabank until such loan was fully repaid in November 2017. For the year ended December 31, 2017, we
paid a guarantee fee of $0.3 million to Hutchison Whampoa Limited.
See Item 3.D. ‘‘Risk Factors—Risks Related to Our Financial Position and Need for Additional
Capital—If the CK Hutchison group ceases to own a majority stake in our company, 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 is 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
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
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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, 2017, sales of our products to members
of the CK Hutchison group amounted to $8.5 million. In addition, for the year ended December 31, 2017,
we paid approximately $0.4 million 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
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award is issued against Hutchison Baiyunshan, the joint venture agreement terminates, or our company’s
interest in Hutchison Baiyunshan falls below 50%.
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, 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, 2017, we paid a management fee of approximately $0.9 million under the Services
Agreement. As of December 31, 2017, we had $0.5 million in unpaid fees outstanding to Hutchison
Whampoa (China) Limited. In the year ended December 31, 2017, we paid interest in respect of unpaid
fees amounting to $0.1 million.
Subscription for ADSs by Hutchison Healthcare
In connection with our underwritten public offering in 2017, Hutchison Healthcare Holdings Limited
subscribed for 6,862,420 ADSs for gross consideration of approximately $181.9 million.
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 Nestl´e 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, 2017, we
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received approximately $8.9 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 Nestl´e 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, 2016. In addition, we and Nestl´e 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 Nestl´e 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 Nestl´e Health Science providing
the same amount. In February 2017, we and Nestl´e Health Science each contributed an additional
$7.0 million share capital funding to Nutrition Science Partners.
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, 2017, Hutchison Sinopharm paid Shanghai Hutchison
Pharmaceuticals $10.2 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, 2017, Hutchison Sinopharm purchased products from Hutchison
Baiyunshan for an amount totaling $0.9 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
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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 Celestial, 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,
2017, all such principal amounts remained outstanding to us and Hain Celestial, and we and Hain Celestial
are entitled to interest receivables of $80,000 each.
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.’’
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
There are no material legal proceedings pending or, to our knowledge, threatened against us. From
time to time we become subject to legal proceedings and claims in the ordinary course of our business,
including claims of alleged infringement of patents and other intellectual property rights. Such legal
proceedings or claims, even if not meritorious, could result in the expenditure of significant financial and
management resources.
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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.
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
2018 (through March 1, 2018)
Quarterly:
First Quarter 2016 (since March 17, 2016)
Second Quarter 2016
Third Quarter 2016
Fourth Quarter 2016
First Quarter 2017
Second Quarter 2017
Third Quarter 2017
Fourth Quarter 2017
First Quarter 2018 (through March 1, 2018)
Most Recent Six Months:
September 2017
October 2017
November 2017
December 2017
January 2018
February 2018
March 2018 (through March 1, 2018)
Price Per ADS
High
Low
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
14.94
39.42
41.14
13.50
14.18
13.76
14.94
20.57
23.69
27.50
39.42
41.14
27.27
31.74
35.42
39.42
41.14
37.08
34.80
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
11.26
12.74
30.62
13.20
12.32
11.90
11.26
12.74
18.30
22.15
27.41
30.62
25.02
27.41
29.49
30.26
36.01
30.62
34.80
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
223
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 at £1.00=$1.34.
Annual:
2013
2014
2015
2016
2017
2018 (through March 1, 2018)
Quarterly:
First Quarter 2016
Second Quarter 2016
Third Quarter 2016
Fourth Quarter 2016
First Quarter 2017
Second Quarter 2017
Third Quarter 2017
Fourth Quarter 2017
First Quarter 2018 (through March 1, 2018)
Most Recent Six Months:
September 2017
October 2017
November 2017
December 2017
January 2018
February 2018
March 2018 (through March 1, 2018)
Price Per Ordinary
Share
Price Per Ordinary
Share
High
Low
High
Low
£ 6.39
£ 15.30
£ 28.35
£ 27.90
£ 56.00
£ 59.00
£ 27.90
£ 24.08
£ 19.58
£ 23.70
£ 32.53
£ 36.58
£ 40.50
£ 56.00
£ 59.00
£ 40.25
£ 48.13
£ 52.63
£ 56.00
£ 59.00
£ 51.80
£ 47.75
£ 4.15
£ 6.21
£ 11.80
£ 16.85
£ 20.82
£ 43.05
£ 18.50
£ 16.80
£ 17.88
£ 17.85
£ 20.82
£ 29.10
£ 33.88
£ 40.18
£ 43.05
£ 36.48
£ 40.18
£ 44.95
£ 46.13
£ 50.80
£ 43.05
£ 47.75
$ 8.56
$ 20.50
$ 37.99
$ 37.39
$ 75.04
$ 79.06
$ 37.39
$ 32.27
$ 26.24
$ 31.76
$ 43.59
$ 49.02
$ 54.27
$ 75.04
$ 79.06
$ 53.94
$ 64.49
$ 70.52
$ 75.04
$ 79.06
$ 69.41
$ 63.99
$ 5.56
$ 8.32
$ 15.81
$ 22.58
$ 27.90
$ 57.69
$ 24.79
$ 22.51
$ 23.96
$ 23.92
$ 27.90
$ 38.99
$ 45.40
$ 53.84
$ 57.69
$ 48.88
$ 53.84
$ 60.23
$ 61.81
$ 68.07
$ 57.69
$ 63.99
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
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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.
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 MOFCOM, the SAFE and the NDRC.
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 March 1,
225
2018, 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.
PRC Enterprise Income Tax
Taxation in the PRC
Under the EIT Law and its implementation rules which became effective on January 1, 2008 and was
later amended on February 24, 2017, the standard tax rate of 25% applies to all enterprises (including
FIEs) 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.
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According to the EIT Law, dividends declared after January 1, 2008 and paid by PRC FIEs 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 a tax resident 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, 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 upon the assessment of beneficial ownership.
Business Tax
A business which provides certain services or sells/transfers immovable or 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 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, or VAT.
Value Added Tax
The Interim Regulations of the PRC on VAT, or the VAT Regulations, came into effect on January 1,
2009 (subsequently amended on February 6, 2016 and November 19, 2017). 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 MOF, and the SAT jointly promulgated the Circular on Comprehensively Promoting the Pilot
Program of the Collection of VAT 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.
227
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 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.
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 under certain specified situations.
LAT Rate
30%
40%
50%
60%
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 square meter.
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.
228
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 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 U.S. 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 ordinary shares and 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:
• 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;
229
• 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:
• banks or other financial institutions;
• insurance companies;
• real estate investment trusts;
• 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 equity (by vote or value).
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.
230
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 of 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. For purposes of the discussion below,
we assume that intermediaries in the chain of ownership between the holder of an ADS and us are acting
consistently with the claim of U.S. foreign tax credits by U.S. Holders.
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 Considerations’’ 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
231
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 unless, under certain circumstances, the ‘‘deemed sale election’’ described
below under ‘‘—Passive Foreign Investment Company Considerations—Status as a PFIC’’ has been made.
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 in an amount equal to the difference between the amount realized on such sale or
exchange (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
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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 result in adverse tax consequences to 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. Under this rule, we should be deemed to own a proportionate share of the assets and to have
received a proportionate share of the income of our principal subsidiaries, including Hutchison Whampoa
Guangzhou Baiyunshan Chinese Medicine Company Limited, Shanghai Hutchison Pharmaceuticals
Limited and Nutrition Science Partners Limited, for purpose of the PFIC determination.
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. Furthermore, if we are
treated as a PFIC, then one or more of our subsidiaries may also be treated as PFICs.
Based on certain estimates of our gross income and gross assets (which estimates are inherently
imprecise) and the nature of our business, 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 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.
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Under these 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
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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.
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 tax
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
IN LIGHT OF THEIR PARTICULAR
RELATED REPORTING REQUIREMENTS
CIRCUMSTANCES, INCLUDING THE ADVISABILITY AND EFFECTS OF MAKING ANY
ELECTION THAT MAY BE AVAILABLE.
U.S. Backup Withholding and Information Reporting and Filing Requirements
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 withhold tax on such payments made within the United States, or by a U.S. payor
or 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 returns for each year in which they hold such interests. 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
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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.
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.’’
236
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.
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
• To any person to which ADSs are issued or to any person to which Up to $0.05 per ADS issued
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)
• Cancellation or withdrawal of ADSs, including the case of
Up to $0.05 per ADS cancelled
termination of the deposit agreement
• Distribution of cash dividends
Up to $0.05 per ADS held
• Distribution of cash entitlements (other than cash dividends)
Up to $0.05 per ADS held
and/or cash proceeds from the sale of rights, securities and other
entitlements
• Distribution of ADSs pursuant to exercise of rights
Up to $0.05 per ADS held
• 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:
• 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).
• Expenses incurred for converting foreign currency into U.S. dollars.
• Expenses for cable, telex and fax transmissions and for delivery of securities.
237
• 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).
• Fees and expenses incurred in connection with the delivery or servicing of ordinary shares on
deposit.
• 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.
• 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 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. In 2017, we did not collect any
reimbursements from the depositary for expenses related to the administration and maintenance of the
facility.
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. Material Modifications to the Rights of Security Holders
None.
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B. Use of Proceeds
U.S. Initial Public Offering
As of December 31, 2017, we have used all of the approximately $96.0 million of the net proceeds
from our U.S. initial public offering as follows:
• approximately $40.8 million to accelerate and broaden clinical development of the drug candidates
for which we retain all worldwide rights, specifically:
i approximately $6.6 million to advance HMPL-523 including the Phase I trial in healthy
volunteers in Australia & China and the two Phase I studies in hematological cancer in China and
Australia;
ii approximately $20.9 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 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;
iii approximately $5.0 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;
iv approximately $1.4 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;
v approximately $3.9 million to advance HMPL-689 including the Phase I dose escalation trial in
healthy volunteers in Australia & China; and
vi approximately $3.0 million to advance HMPL-453 including initiating the Phase I dose escalation
trials in China and Australia.
• approximately $31.8 million to support our share of the research and development costs of our
partnered drug candidates, including:
i approximately $11.5 million to advance savolitinib including preparations to initiate a Phase III
study in papillary renal cell carcinoma, the Phase Ib study in second-line, EGFR tyrosine kinase
inhibitor refractory non-small cell lung cancer in combination with Iressa, the two Phase Ib 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;
ii approximately $19.0 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 $1.3 million to advance new formulations of HMPL-004, including HM004-6599,
and other botanical drug candidates.
• approximately $18.6 million from the net proceeds to support our discovery platform:
i approximately $8.3 million for external research services and supplies; and
ii approximately $10.3 million for our development and discovery research team.
• approximately $4.8 million to build production facilities to produce both clinical and commercial
supply of our drug candidates.
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C-D. Assets Securing Securities; Trustees; Paying Agents
None.
ITEM 15. CONTROLS AND PROCEDURES
A. Evaluation of 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. Based on such
evaluation, our management has concluded that, as of December 31, 2017, our disclosure controls and
procedures were effective.
B. Management’s Annual Report on Internal Control over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange
Act of 1934. Internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of consolidated financial statements in
accordance with U.S. GAAP and includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of a company’s assets; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of consolidated financial statements in accordance with generally accepted
accounting principles, and that a company’s receipts and expenditures are being made only in accordance
with authorizations of a company’s management and directors; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of a company’s
assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Projections of any evaluation of effectiveness of our internal control over financial
reporting to future periods are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management, with the participation of our chief executive officer and chief financial officer, has
assessed the effectiveness of our internal control over financial reporting as of December 31, 2017. In
making this assessment, our management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013
Framework). Based on this assessment, management concluded that our internal control over financial
reporting was effective as of December 31, 2017.
C. Attestation Report of the Independent Registered Public Accounting Firm.
Our independent registered public accounting firm, PricewaterhouseCoopers, has audited the
effectiveness of our internal control over financial reporting as of December 31, 2017, as stated in its
report, which appears on page F-2 of this annual report.
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D. Changes in Internal Control over Financial Reporting.
There were no changes in our internal controls over financial reporting during fiscal 2017 that have
materially and adversely affected, or are reasonably likely to materially and adversely 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 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 2016 and 2017.
Audit fees(1)
Tax fees(2)
Other service fees(3)
Total(4)
For the year ended
December 31,
2017
2016
(in thousands)
2,360
—
105
2,115
30
—
2,465
2,145
(1) ‘‘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 and follow-on offering in
the United States.
(2) ‘‘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.
241
(3) ‘‘Other service fees’’ means the aggregate fees billed in 2017 for professional services
rendered by PricewaterhouseCoopers for IT system and security assessment.
(4) The fees disclosed are exclusive of out-of-pocket expenses and taxes on the amounts paid,
which totaled approximately $82,000 and $139,000 in 2016 and 2017, 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.
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) 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.
ITEM 16H. MINE SAFETY DISCLOSURE
Not applicable.
242
PART III
ITEM 17. FINANCIAL STATEMENTS
See Item 18 ‘‘Financial Statements.’’
ITEM 18. FINANCIAL STATEMENTS
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, 2017 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.
243
ITEM 19. EXHIBITS
EXHIBIT INDEX
1.1* 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)
2.1*
2.2*
2.3*
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)
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)
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)
4.1*+ 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)
4.2*+ 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)
4.3*+ 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)
4.4*+ Joint Venture Agreement by and among Hutchison MediPharma (Hong Kong) Limited,
Nestl´e 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 November 13, 2015)
4.5*+ 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)
4.6*+ 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)
244
4.7*
4.8*
4.9*
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)
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)
4.10*+ 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)
4.11*
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)
4.12* Revolving Loan Facility Agreement by and between Hutchison China MediTech (HK)
Limited as borrower and The Hongkong and Shanghai Banking Corporation Limited as
lender 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)
4.13*
4.14*
4.15*
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)
4.16*+ First Amendment to License and Collaboration Agreement by and between Hutchison
MediPharma Limited and AstraZeneca (publ) dated as of August 1, 2016 (incorporated
by reference to Exhibit 4.19 to our annual report on Form 20-F filed with the SEC on
March 13, 2017)
245
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)
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, independent accountants,
regarding the consolidated financial statements of Hutchison Whampoa Guangzhou
Baiyunshan Chinese Medicine Company Limited
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.
246
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
By: /s/ CHRISTIAN HOGG
Name: Christian Hogg
Title: Chief Executive Officer
Date: March 12, 2018
247
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Audited Consolidated Financial Statements of Hutchison China MediTech Limited
Report of Independent Registered Public Accounting Firm
As at December 31, 2017 and December 31, 2016:
Consolidated Balance Sheets
For the Years Ended December 31, 2017, 2016 and 2015:
Consolidated Statements of Operations
Consolidated Statements of Comprehensive (Loss)/Income
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
Report of Independent Auditors
For the Years Ended December 31, 2017, 2016 and 2015:
Consolidated Income Statements
Consolidated Statements of Comprehensive Income
As at December 31, 2017 and December 31, 2016:
Consolidated Statements of Financial Position
For the Years Ended December 31, 2017, 2016 and 2015:
Consolidated Statements of Changes in Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
Audited Consolidated Financial Statements of Hutchison Whampoa Guangzhou Baiyunshan
Chinese Medicine Company Limited
Report of Independent Auditors
For the Years Ended December 31, 2017, 2016 and 2015:
Consolidated Income Statements
Consolidated Statements of Comprehensive Income
As at December 31, 2017 and December 31, 2016:
Consolidated Statements of Financial Position
For the Years Ended December 31, 2017, 2016 and 2015:
Consolidated Statements of Changes in Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
Audited Consolidated Financial Statements of Nutrition Science Partners Limited
Report of Independent Auditors
For the Years Ended December 31, 2017, 2016 and 2015:
Consolidated Income Statements
Consolidated Statements of Comprehensive Income
As at December 31, 2017 and December 31, 2016:
Consolidated Statements of Financial Position
For the Years Ended December 31, 2017, 2016 and 2015:
Consolidated Statements of Changes in Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
F-2
F-4
F-5
F-6
F-7
F-8
F-9
F-54
F-55
F-56
F-57
F-58
F-59
F-60
F-83
F-84
F-85
F-86
F-87
F-88
F-89
F-116
F-117
F-118
F-119
F-120
F-121
F-122
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Hutchison China MediTech Limited
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Hutchison China MediTech
Limited and its subsidiaries as of December 31, 2017 and 2016, and the related consolidated statements of
operations, of comprehensive (loss)/income, of changes in shareholders’ equity and of cash flows for each
of the three years in the period ended December 31, 2017, including the related notes (collectively referred
to as the ‘‘consolidated financial statements’’). We also have audited the Company’s internal control over
financial reporting as of December 31, 2017, based on criteria established in Internal Control—Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of their
operations and their cash flows for each of the three years in the period ended December 31, 2017 in
conformity with accounting principles generally accepted in the United States of America. Also in our
opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework
(2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 23 (ii) to the consolidated financial statements, the Company changed the
manner in which it classifies deferred income tax assets and liabilities in 2017.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for
maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting, included in Management’s Annual Report on Internal Control
over Financial Reporting appearing under Item 15 of Form 20-F. Our responsibility is to express opinions
on the Company’s consolidated financial statements and on the Company’s internal control over financial
reporting based on our audits. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (‘‘PCAOB’’) and are required to be independent with respect
to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due to error or fraud, and whether
effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks
of material misstatement of the consolidated financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also
included evaluating the accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the consolidated financial statements. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our audits also included performing
F-2
such other procedures as we considered necessary in the circumstances. We believe that our audits provide
a reasonable basis for our opinions.
such other procedures as we considered necessary in the circumstances. We believe that our audits provide
a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
A company’s internal control over financial reporting is a process designed to provide reasonable
external purposes in accordance with generally accepted accounting principles. A company’s internal
assurance regarding the reliability of financial reporting and the preparation of financial statements for
control over financial reporting includes those policies and procedures that (i) pertain to the maintenance
external purposes in accordance with generally accepted accounting principles. A company’s internal
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
control over financial reporting includes those policies and procedures that (i) pertain to the maintenance
assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
permit preparation of financial statements in accordance with generally accepted accounting principles,
assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to
and that receipts and expenditures of the company are being made only in accordance with authorizations
permit preparation of financial statements in accordance with generally accepted accounting principles,
of management and directors of the company; and (iii) provide reasonable assurance regarding prevention
and that receipts and expenditures of the company are being made only in accordance with authorizations
or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have
of management and directors of the company; and (iii) provide reasonable assurance regarding prevention
a material effect on the financial statements.
or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
that controls may become inadequate because of changes in conditions, or that the degree of compliance
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
with the policies or procedures may deteriorate.
that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers
Hong Kong
/s/ PricewaterhouseCoopers
March 12, 2018
Hong Kong
March 12, 2018
We have served as the Company’s auditor since 2005, which includes periods before the Company
became subject to SEC reporting requirements.
We have served as the Company’s auditor since 2005, which includes periods before the Company
became subject to SEC reporting requirements.
F-3
F-3
Hutchison China MediTech Limited
Consolidated Balance Sheets
(in US$’000)
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
Leasehold land
Goodwill
Other intangible asset
Deferred tax assets
Long-term prepayment
Investments in equity investees
Total assets
Liabilities and shareholders’ equity
Current liabilities
Accounts payable
Other payables, accruals and advance receipts
Income tax payable
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; $1.00 par value; 75,000,000 shares authorized; 66,447,037 and
60,705,823 shares issued at December 31, 2017 and 2016 respectively
Additional paid-in capital
Accumulated losses
Accumulated other comprehensive income/(loss)
Total Company’s shareholders’ equity
Non-controlling interests
Total shareholders’ equity
Total liabilities and shareholders’ equity
December 31,
Note
2017
2016
5
6
7
22(ii)
8
22(ii)
9
23(ii)
10
23(ii)
11
12
13
23(iii)
22(ii)
14
23(ii)
23(ii)
14
15
17
85,265
273,031
38,410
3,860
11,296
8,544
11,789
—
432,195
14,220
1,261
3,308
430
633
1,648
144,237
597,932
24,365
40,953
979
1,295
7,021
29,987
—
104,600
4,452
—
809
1,988
1,117
112,966
79,431
24,270
40,812
4,223
4,314
1,136
12,822
372
167,380
9,954
1,220
3,137
469
—
1,771
158,506
342,437
35,538
31,716
274
962
5,308
19,957
1,364
95,119
3,997
26,830
2,039
2,263
8,129
138,377
66,447
496,960
(107,104)
5,430
461,733
23,233
484,966
597,932
60,706
208,196
(80,357)
(4,275)
184,270
19,790
204,060
342,437
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Hutchison China MediTech Limited
Consolidated Statements of Operations
(in US$’000, except share and per share data)
Note
2017
Year Ended December 31,
2016
2015
Revenues
Sales—third parties
Sales—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—third parties
Costs of sales—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)
22(i)
19
22(i)
25
20
25
25
Loss before income taxes and equity in earnings of equity
investees
Income tax expense
Equity in earnings of equity investees, net of tax
23(i)
11
Net (loss)/income
Less: Net income attributable to non-controlling interests
Net (loss)/income attributable to the Company
Accretion on redeemable non-controlling interests
Net (loss)/income attributable to ordinary shareholders of
the Company
196,720
8,486
171,058
9,794
118,113
8,074
26,315
26,444
44,060
—
355
2,573
9,682
241,203
8,429
216,080
5,383
178,203
(169,764)
(6,056)
(75,523)
(19,322)
(23,955)
(294,620)
(53,417)
1,220
808
(1,455)
(692)
(119)
(53,536)
(3,080)
33,653
(22,963)
(3,774)
(26,737)
—
(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
(2,859)
11,698
—
(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
(2,434)
7,993
(43,001)
(26,737)
11,698
(35,008)
(Losses)/earnings per share attributable to ordinary
shareholders of the Company—basic (US$ per share)
(Losses)/earnings per share attributable to ordinary
shareholders of the Company—diluted (US$ per share)
Number of shares used in per share calculation—basic
Number of shares used in per share calculation—diluted
24(i)
24(ii)
24(i)
24(ii)
(0.43)
0.20
(0.64)
(0.43)
61,717,171
61,717,171
0.20
59,715,173
59,971,050
(0.64)
54,659,315
54,659,315
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Hutchison China MediTech Limited
Consolidated Statements of Comprehensive (Loss)/Income
(in US$’000)
Net (loss)/income
Other comprehensive income/(loss)
Foreign currency translation gain/(loss)
Total comprehensive (loss)/income
Less: Comprehensive income attributable to non-controlling interests
Total comprehensive (loss)/income attributable to the Company
Year Ended December 31,
2017
2016
2015
(22,963)
14,557
10,427
10,964
(10,722)
(11,999)
(5,033)
(17,032)
3,835
(1,427)
2,408
(5,557)
4,870
(1,732)
3,138
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Hutchison China MediTech Limited
Consolidated Statements of Changes in Shareholders’ Equity
(in US$’000, except share data in ‘000)
Ordinary Ordinary Additional
Shares
Value
Shares
Number
Paid-in
Capital
Accumulated
Other
Total
Company’s
Non-
Accumulated Comprehensive Shareholders’ controlling
Interests
Income/(Loss)
Losses
Equity
Total
Equity
53,076
—
53,076
—
76,256
—
(100,051)
7,993
9,870
—
39,151
7,993
17,764
2,434
56,915
10,427
As at December 31, 2014
Net income
Accretion to redemption value of
redeemable non-controlling interests
Issuance in exchange for redeemable
non-controlling interest
Issuances in relation to share option
exercises
Share-based compensation
Share options
Long-term incentive plan (‘‘LTIP’’)
LTIP—treasury shares acquired and held
by Trustee
Dividend paid to a non-controlling
shareholder of a subsidiary
Dilution of interests in a subsidiary in
relation to exercise of share options of
a subsidiary
Transfer between reserves
Foreign currency translation adjustments
—
—
(43,001)
3,214
3,214
80,823
243
243
1,131
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
168
233
401
(1,786)
—
—
24
—
—
—
—
—
—
—
—
—
42
(24)
—
As at December 31, 2015
56,533
56,533
113,848
(92,040)
Net income
Issuance in relation to public offering
Issuance costs
Issuances in relation to share option
exercises
Share-based compensation
Share options
LTIP
LTIP—treasury shares acquired and held
by Trustee
Dividend paid to a non-controlling
shareholder of a subsidiary
Transfer between reserves
Foreign currency translation adjustments
—
4,080
—
—
4,080
—
—
106,080
(14,227)
11,698
—
—
93
—
—
—
—
—
—
—
93
—
—
—
—
—
—
—
333
1,373
1,378
2,751
(604)
—
15
—
—
—
—
—
—
—
(15)
—
As at December 31, 2016
60,706
60,706
208,196
(80,357)
Net loss
Issuance in relation to public offering
Issuance costs
Issuances in relation to share option
exercises
Share-based compensation
Share options
LTIP
LTIP—treasury shares acquired and held
by Trustee
Dividends paid to non-controlling
shareholders of subsidiaries
Transfer between reserves
Foreign currency translation adjustments
—
5,685
—
—
5,685
—
—
295,615
(8,610)
(26,737)
—
—
56
—
—
—
—
—
—
—
56
—
—
—
—
—
—
—
324
1,255
1,537
2,792
(1,367)
—
10
—
—
—
—
—
—
—
(10)
—
As at December 31, 2017
66,447
66,447
496,960
(107,104)
—
—
—
—
—
—
—
—
—
—
(4,855)
5,015
—
—
—
—
—
—
—
—
—
—
(9,290)
(4,275)
—
—
—
—
—
—
—
—
(43,001)
— (43,001)
84,037
1,374
168
233
401
(1,786)
—
—
—
—
—
—
84,037
1,374
168
233
401
(1,786)
—
(590)
(590)
42
—
(4,855)
15
—
(702)
57
—
(5,557)
83,356
18,921
102,277
11,698
110,160
(14,227)
2,859
14,557
— 110,160
— (14,227)
426
1,373
1,378
2,751
—
4
2
6
426
1,377
1,380
2,757
(604)
—
(604)
—
—
(9,290)
(564)
—
(1,432)
(564)
—
(10,722)
184,270
19,790
204,060
(26,737)
301,300
(8,610)
3,774
(22,963)
— 301,300
(8,610)
—
380
1,255
1,537
2,792
—
3
1
4
380
1,258
1,538
2,796
(1,367)
—
(1,367)
—
—
9,705
5,430
—
—
9,705
(1,594)
—
1,259
(1,594)
—
10,964
461,733
23,233
484,966
The accompanying notes are an integral part of these consolidated financial statements.
F-7
Hutchison China MediTech Limited
Consolidated Statements of Cash Flows
(in US$’000)
Net cash used in operating activities
Investing activities
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 non-controlling shareholders of
subsidiaries
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
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
Accruals made for purchases of property, plant and
equipment
Accrued issuance costs for public offering
Vesting of treasury shares for LTIP
Capitalization of amounts due from related parties to
investments in equity investees
Issuance of ordinary shares in exchange of redeemable
non-controlling interests
18 (iii)
16
Note
26
10
11
Year Ended December 31,
2017
2016
2015
(8,943)
(9,569)
(9,385)
(5,019)
(325,032)
76,271
(7,000)
(260,780)
(4,327)
(80,857)
56,587
(5,000)
(33,597)
301,680
—
(1,367)
110,586
—
(604)
(3,324)
—
12,179
—
8,855
1,374
57
(1,786)
(1,594)
(564)
(590)
—
32,540
(49,487)
(8,576)
273,196
3,473
2,361
5,834
79,431
85,265
763
3,836
1,054
34
1,800
—
—
(1,000)
25,128
(28,205)
(12,906)
92,435
49,269
(1,779)
47,490
31,941
79,431
1,570
2,664
—
—
—
7,000
—
3,205
(6,410)
(1,321)
(5,471)
(6,001)
(1,004)
(7,005)
38,946
31,941
1,220
510
—
3,125
—
—
—
84,037
The accompanying notes are an integral part of these consolidated financial statements.
F-8
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 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.
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.
The Company’s ordinary shares are listed on the AIM market of the London Stock Exchange, and its
American depositary shares (‘‘ADS’’), each representing one-half of one ordinary share, are traded on the
Nasdaq Global Select Market.
Liquidity
As at December 31, 2017, the Group had accumulated losses of US$107,104,000, primarily due to its
significant spending 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 at December 31, 2017, the Group
had cash and cash equivalents of US$85,265,000, short-term investments of US$273,031,000 and unutilized
bank borrowing facilities of US$121,282,000. Short-term investments comprised of bank deposits maturing
over three months. As at 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. The
Group’s operating plan includes the continued receipt of dividends from certain of its equity investees. The
increase in cash balances is primarily due to a public follow-on offering of the Company’s ADS in
October 2017, which raised net proceeds of US$292,690,000. Additionally, dividends received from equity
investees for the years ended December 31, 2017, 2016 and 2015 were US$55,586,000, US$30,528,000 and
US$6,410,000 respectively.
Based on the Group’s operating plan, the existing cash and cash equivalents, short-term investments
and unutilized bank borrowing facilities 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).
F-9
2. Particulars of Principal Subsidiaries and Equity Investees
Equity interest
attributable to
the Group
As at
December 31,
2017
2016
Principal activities
Place of
establishment
and operations
PRC
99.75% 99.75%
Research and development of
pharmaceutical products
PRC
51%
51%
Hong Kong
50%
50%
PRC
PRC
50%
50%
100%
100%
Hong Kong
100%
100%
Provision of sales, distribution
and marketing services to
pharmaceutical manufacturers
Wholesale and trading of
healthcare and consumer
products
Wholesale and trading of
healthcare and consumer
products
Manufacture and distribution of
healthcare products
Wholesale and trading of
healthcare and consumer
products
PRC
50%
50%
Manufacture and distribution of
prescription drug products
Name
Subsidiaries
Hutchison MediPharma Limited
(‘‘HMPL’’)
Hutchison Whampoa Sinopharm
Pharmaceuticals (Shanghai)
Company Limited (‘‘Hutchison
Sinopharm’’)
Hutchison Hain Organic (Hong
Kong) Limited (‘‘HHOL’’)
(note (a))
Hutchison Hain Organic
(Guangzhou) Limited
(‘‘HHOGZL’’) (note (a))
Hutchison Healthcare Limited
(‘‘HHL’’)
Hutchison Consumer Products
Limited
Equity investees
Shanghai Hutchison
Pharmaceuticals Limited
(‘‘SHPL’’)
Hutchison Whampoa Guangzhou
Baiyunshan Chinese Medicine
Company Limited (‘‘HBYS’’)
(note (b))
Nutrition Science Partners
Limited (‘‘NSPL’’) (note (c))
Hong Kong
Notes:
49.88% 49.88%
PRC
40%
Manufacture and distribution of
40% over-the-counter drug products
Research and development of
pharmaceutical products
(a) HHOL and HHOGZL are regarded as subsidiaries of the Company, as while both shareholders of
these subsidiaries have equal representation at their respective boards, 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.
(b) The 50% equity interest in HBYS is held by an 80% owned subsidiary of the Group. The effective
equity interest of the Group in HBYS is therefore 40% for the years presented.
(c) 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 the years presented.
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
F-10
prepared in conformity with generally accepted accounting principles in the United States of America
(‘‘U.S. GAAP’’).
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
initial fair value
accounting for amounts recorded
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.
in connection with acquisitions,
including
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/(loss) in shareholders’ equity.
Net foreign currency exchange losses of US$316,000, US$109,000 and US$79,000 were recorded in
other expense in the consolidated statements of operations for the years ended December 31, 2017, 2016
and 2015 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 bank
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 a
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 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.
F-11
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. In the PRC, the Group’s cash and cash equivalents
denominated in RMB are subject to such government controls. The value of the RMB is subject to
international economic and political
fluctuations from central government policy changes and
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 complete
the remittance.
Fair Value of Financial Instruments
The fair value of 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.
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.
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.
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 forecasts of product demand
F-12
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.
Property, Plant and Equipment
Property, plant and equipment consist of buildings, leasehold improvements, plant and equipment,
furniture and 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 motor
vehicles
Leasehold improvements
20 years
5-10 years
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 exceeds the undiscounted cash flows of the assets. If yes, 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
the straight-line basis over the lease period of 50 years.
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 quantitative fair value test is performed to determine
if the fair value of the reporting unit exceeds its carrying value. No impairment of goodwill occurred in the
years presented.
F-13
The Group has adopted Accounting Standards Update (‘‘ASU’’) 2017-04, Simplifying the Test for
Goodwill Impairment, for annual goodwill impairment tests performed on testing dates after January 1,
2017. This guidance removes Step 2 of the goodwill impairment test, which required the estimation of an
implied fair value of goodwill in the same manner as the calculation of goodwill upon a business
combination. For prior years’ annual goodwill impairment tests, the Group determined that the fair values
of their reporting units exceeded their carrying values and Step 2 has never been required.
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 the straight-line basis over the estimated useful
lives of the assets.
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.
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.
Treasury Shares
The Group accounts for treasury shares under the cost method. The treasury shares were purchased
for the purpose of the LTIP.
Convertible Preferred Shares
When the Company or its subsidiaries issue preferred shares, the Group assesses whether such
instruments should be liabilities, 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, embodying 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 in 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 to
F-14
trigger 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.
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 Polynomial model. This Polynomial
pricing model uses various inputs to measure fair value, including estimated market value of the
Company’s underlying ordinary shares at the grant date, contractual terms, estimated volatility, risk-free
interest rates and expected dividend yields. The Group recognizes share-based compensation expense in
the consolidated statements of operations on a graded vesting basis over the requisite service period.
The Group has adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting
on January 1, 2017. This guidance permitted the Group to make an accounting policy election to account
for forfeitures as they occur. The Group has elected to account for forfeitures as they occur and adopted
this election using the modified retrospective approach as required with no cumulative effect adjustment.
Prior to January 1, 2017, the Group applied an estimated forfeiture rate derived from historical and
expected future employee termination behavior.
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.
LTIP
The Group recognizes the share-based compensation expense on the LTIP awards based on a fixed or
determinable monetary amount on a straight line basis for each annual tranche awarded over the requisite
period. For LTIP awards with performance targets, prior to their determination date, the amount of LTIP
awards that is expected to vest takes into consideration the achievement of the performance conditions and
the extent to which the performance conditions are likely to be met. Performance conditions vary by
awards, including targets for shareholder returns, free cash flows, revenues, net profit after taxes and/or
the achievement of clinical and regulatory milestones.
These LTIP awards are classified as liability-settled awards before the determination date (i.e. the date
when the achievement of any performance conditions are known), as they settle in a variable number of
shares based on a determinable monetary amount, which is determined upon the actual achievement of
performance targets. As the extent of achievement of the performance targets is uncertain prior to the
determination date, a probability based on management’s assessment of the achievement of the
performance targets has been assigned to calculate the amount to be recognized as an expense over the
requisite period.
After the determination date or if the LTIP awards have no performance conditions, the LTIP awards are
classified as equity-settled awards. If the performance target is achieved, the Group will pay the determined
monetary amount to a trustee appointed by the Group (the ‘‘Trustee’’) to purchase ordinary shares of the
Company or the equivalent ADS. Any cumulative compensation expense previously recognized as a liability
will be transferred to additional paid in capital, as an equity-settled award. If the performance target is not
achieved, no ordinary shares or ADS of the Company will be purchased and the amount previously recorded in
the liability will be reversed and included in the consolidated statements of operations.
F-15
Defined Contribution Plans
The Group’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 Group’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 Group’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.
The Group’s contributions to defined contribution plans for the years ended December 31, 2017, 2016
and 2015 amounted to US$2,092,000, US$2,286,000 and US$1,653,000 respectively.
Revenue Recognition—Accounting Standard Codification 605
Sales
Revenue from sales of goods in the Commercial Platform segment 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.
Revenue from sales of services in the Commercial Platform segment are recognized based on amounts
that can be invoiced to the customer. The amount that can be invoiced corresponds directly with the value
to the customer for performance completed to date.
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.
F-16
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 Group 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 Group’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 Group typically uses its best estimate of a selling price to estimate the
selling price for licenses to development work, since it often does not have VSOE or third-party evidence
of selling price for these deliverables. In those circumstances where the Group 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 Group
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 Group
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 will recognize revenue attributed
to the license ratably 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 a collaborator’s performance are recognized when earned.
The Group’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.
F-17
At the inception of each arrangement that includes milestone payments, the Group 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 Group 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.
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.
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 met. Non-refundable incentives received without any further obligations or conditions attached
are recognized immediately in the consolidated statements of operations.
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, 2017, 2016 and 2015
amounted to US$2,285,000, US$1,838,000 and US$1,426,000 respectively. Sub-lease rentals for the years
ended December 31, 2017, 2016 and 2015 amounted to US$274,000, US$228,000 and US$229,000
respectively.
Interest Income
Interest generated from cash and cash equivalents and short-term investments is recorded over the
period earned. It is measured based on the actual amount of interest the Group earns.
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 income tax 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-18
The Group accounts for 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 the largest amount of tax benefit that is greater than 50 percent likely
to be realized upon ultimate settlement.
Comprehensive (Loss)/Income
Comprehensive (loss)/income 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 (loss)/income and foreign currency translation gain/(loss) related to the Company’s
subsidiaries.
(Losses)/Earnings per Share
Basic (losses)/earnings per share is computed by dividing net (loss)/income attributable to ordinary
shareholders by the weighted average number of ordinary shares outstanding during the year. Weighted
average number of ordinary shares outstanding during the period excludes treasury shares. In addition,
periodic accretion on preferred shares of Hutchison MediPharma Holdings Limited (‘‘HMHL’’) (Note 16)
is recorded as a deduction to consolidated net (loss)/income to arrive at net (loss)/income attributable to
ordinary shareholders of the Company for purposes of calculating the consolidated basic (losses)/earnings
per share.
Diluted (losses)/earnings per share is computed by dividing net (loss)/income 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 ordinary shares and treasury
shares issuable upon the exercise or settlement of share-based awards issued by the Company using the
treasury stock method. 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 (losses)/earnings per share the amount based on the diluted
earnings per share of HMHL multiplied by the number of shares owned by the Company. The
computation of diluted (losses)/earnings per share does not assume conversion, exercise, or contingent
issuance of securities that would have an anti-dilutive effect.
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 and allocate resources and
determined that the Group’s reportable segments are as disclosed in Note 25.
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 statements of
operations, which comprises the post tax profit or loss of the discontinued operation.
Profit Appropriation and Statutory Reserves
The Group’s subsidiaries and equity investees established in the PRC are required to make
appropriations to certain non-distributable reserve funds.
F-19
In accordance with the laws applicable to the Foreign Investment Enterprises established in the PRC,
the Group’s subsidiaries and equity investees 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.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (‘‘FASB’’) issued ASU 2014-09, Revenue
from Contracts with Customers (Topic 606) (‘‘ASU 2014-09’’), to clarify the principles of recognizing
revenue and create common revenue recognition guidance for U.S. GAAP and International Financial
Reporting Standards. 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,
judgements and additional disclosures.
The Group will adopt the new standard using the modified retrospective method on January 1, 2018
and has assessed the impact on revenue from customers. The Group’s revenue from contracts with
customers comprises of research and development projects in its Innovation Platform and sales of goods
and services in its Commercial Platform operating segments. The Group expects the changes from
applying the new guidance will primarily impact the Innovation Platform.
Innovation Platform—The Group has reviewed its research and development contracts and identified
two contracts related to the Group’s license and collaboration arrangements that will be impacted by the
application of ASU 2014-09. The license and collaboration arrangements contain multiple performance
obligations: (1) the license to the drug compound and (2) the research and development services for each
specified treatment indication. The transaction price includes fixed and variable consideration in the form
of upfront payment, research and development costs reimbursements, contingent milestone payments and
sales-based royalties. The allocation of the transaction price to each performance obligation is based on
the relative standalone selling price of each performance obligation. The Group has determined that
control of the license to the drug compound was transferred as of the inception date of the collaboration
agreements and consequently, amounts allocated to this performance obligation are recognized at a point
in time. Conversely, control of the research and development services for each specified indication is
transferred over time and amounts allocated to these performance obligations are recognized over time
using cost inputs as a measure of progress. In addition, royalty revenues will be recognized as future sales
occur as they meet the requirements for the sales-usage based royalty exception. The Group expects
US$1.1 million deferral of revenue as a cumulative adjustment to opening accumulated
loss
upon adoption.
Commercial Platform—For sales of goods and services, the Group has applied a portfolio approach to
aggregate contracts into portfolios whose performance obligations do not differ materially from each
F-20
other. In its assessment of each portfolio, the Group has assessed the contracts under the new five-step
model and does not expect a significant impact to the timing or amount of revenue recognition under the
new guidance. Control of the goods passes to the customer when the goods are delivered, which matches
the timing of revenue recognition under the Group’s existing accounting policy.
The Group has applied updates to the new guidance in its assessment including ASU 2016-08,
Principal versus Agent Considerations, ASU 2016-10, Identifying Performance Obligations and Licensing.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (‘‘ASU 2016-02’’). The core
principle of ASU 2016-02 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. The Group
expects to adopt the new standard using the modified retrospective method on January 1, 2019 with a
retrospective adjustment to comparable periods presented starting from January 1, 2017. The Group is
currently determining the potential impact ASU 2016-02 will have on 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 (‘‘ASU 2017-01’’), 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 on the Group’s consolidated financial statements, but will apply the guidance upon adoption to
business acquisitions, disposals and segment changes, if any.
In May 2017, the FASB issued ASU 2017-09, Scope of Modification Accounting (Topic 718)
(‘‘ASU 2017-09’’), which provides guidance on the types of changes to the terms or conditions of share-
based payment awards to which an entity would be required to apply modification accounting under share-
based payment accounting. The guidance clarifies that no new measurement date will be required if there
is no change to the fair value, vesting conditions, and classification, and in effect simplifies the accounting
for non-substantive changes to share-based payment awards. ASU 2017-09 is effective for fiscal years and
interim periods within those years beginning after December 15, 2017. The Group shall apply the guidance
upon adoption to share-based payment modifications, if any.
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.
F-21
4. Fair Value Disclosures
The following table presents the Group’s financial instruments by level within the fair value hierarchy:
As at December 31, 2017
Cash and cash equivalents
Short-term investments
As at December 31, 2016
Cash and cash equivalents
Short-term investments
Fair Value Measurement Using
Level 1
Level 2
Level 3
Total
(in US$’000)
85,265
273,031
79,431
24,270
—
—
—
—
—
85,265
— 273,031
—
—
79,431
24,270
Accounts receivable, other receivables, amounts due from related parties, accounts payable, other
payables 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. Bank
borrowings are floating rate instruments and carried at amortized cost, which approximates their fair
values, and are therefore excluded from the above table.
5. Cash and Cash Equivalents
Cash at bank and on hand
Bank deposits maturing in three months or less (note (a))
Denominated in:
US$(note (b))
RMB (note (b))
UK Pound Sterling (‘‘£’’) (note (b))
Hong Kong dollar (‘‘HK$’’)
Notes:
December 31,
2017
2016
(in US$’000)
30,018
55,247
85,265
66,381
15,140
295
3,449
85,265
31,218
48,213
79,431
65,509
9,505
408
4,009
79,431
(a) The weighted average effective interest rate on bank deposits for the years ended
December 31, 2017 and 2016 was 1.06% and 0.58% per annum respectively (with maturity
ranging from 7 to 90 days).
(b) Certain cash and bank balances denominated in RMB, US$ and £ were deposited with banks
in the PRC. The conversion of these RMB, US$ and £ denominated balances into foreign
currencies is subject to the rules and regulations of foreign exchange control promulgated by
the PRC government.
F-22
6. Short-term Investments
Bank deposits maturing over three months (note)
Denominated in:
US$
HK$
December 31,
2017
2016
(in US$’000)
272,659
372
273,031
24,270
—
24,270
Note:
The weighted average effective interest rate on bank deposits for the years ended December 31,
2017 and 2016 was 1.32% and 0.71% per annum respectively (with maturity ranging from 91 to
183 days, and 91 to 186 days respectively).
7. Accounts Receivable—Third Parties
Accounts receivable, gross
Allowance for doubtful accounts
Accounts receivable, net
December 31,
2017
2016
(in US$’000)
38,668
(258)
43,532
(2,720)
38,410
40,812
Substantially all the accounts receivable are denominated in RMB, US$ and HK$ and are due within
one year from the end of the reporting periods. The carrying values of accounts receivable approximates
their fair values due to their short-term maturities.
Movements on the allowance for doubtful accounts:
As at January 1
Increase in allowance for doubtful accounts
Decrease in allowance due to subsequent collection
Write-off
Exchange difference
As at December 31
2017
2,720
242
—
(2,874)
170
2016
(in US$’000)
3,127
29
(237)
—
(199)
258
2,720
2015
1,793
1,408
—
—
(74)
3,127
In December 2015, the Group recorded a provision amounting to approximately US$1,322,000 which
represented an outstanding balance due from a distributor. In January 2016, the Group terminated the
distributor’s exclusive distribution rights and in December 2017, the amount due was written off along with
other allowance for doubtful accounts balances.
F-23
8. Other Receivables, Prepayments and Deposits
Other receivables, prepayments and deposits consisted of the following:
Prepayments
Purchase rebates
Other service receivables
Deposits
Value-added tax receivables
Interest receivables
Others
December 31,
2017
2016
(in US$’000)
2,565
284
490
932
5,436
506
1,083
11,296
699
238
756
620
1,380
63
558
4,314
9. Inventories
Inventories, net of provision for excess and obsolete inventories, consisted of the following:
Raw materials
Finished goods
December 31,
2017
2016
(in US$’000)
314
11,475
660
12,162
11,789
12,822
Movements on the provision for excess and obsolete inventories are as follows:
As at January 1
Increase in provision for excess and obsolete inventories
Decrease in provision due to subsequent sale or recovery
Write-off
Exchange difference
As at December 31
2017
160
128
(144)
(32)
9
121
2016
(in US$’000)
25
163
—
(23)
(5)
160
2015
34
37
(33)
(12)
(1)
25
F-24
10. Property, Plant and Equipment
Property, plant and equipment consisted of the following:
Buildings
Leasehold
improvements
Plant
and
equipment
Furniture
and
fixtures,
other
equipment
and motor
vehicles
Construction
in progress
Total
2,232
—
—
—
140
2,372
971
105
—
—
65
1,141
1,231
(in US$’000)
86
155
—
2,321
6
2,568
71
169
—
255
4
499
13,976
1,374
(394)
(722)
920
15,154
9,105
1,441
(337)
(255)
599
10,553
6,296
301
—
2,050
410
9,057
4,249
763
—
—
284
5,296
1,760
4,243
—
(3,649)
204
24,350
6,073
(394)
—
1,680
2,558
31,709
— 14,396
2,478
—
(337)
—
—
—
952
—
— 17,489
3,761
2,069
4,601
2,558
14,220
Buildings
Leasehold
improvements
Plant
and
equipment
Furniture
and
fixtures,
other
equipment
and motor
vehicles
Construction
in progress
Total
2,392
—
—
—
(160)
2,232
932
106
—
(67)
971
5,989
742
(12)
—
(423)
6,296
3,549
977
(12)
(265)
4,249
(in US$’000)
88
—
—
—
(2)
86
70
3
—
(2)
71
15
12,806
1,453
(248)
886
(921)
13,976
8,784
1,153
(218)
(614)
9,105
567
2,132
—
(886)
(53)
1,760
—
—
—
—
—
21,842
4,327
(260)
—
(1,559)
24,350
13,335
2,239
(230)
(948)
14,396
4,871
1,760
9,954
Cost
As at January 1, 2017
Additions
Disposals
Transfers
Exchange differences
As at December 31, 2017
Accumulated depreciation
As at January 1, 2017
Depreciation
Disposals
Transfers
Exchange differences
As at December 31, 2017
Net book value
As at December 31, 2017
Cost
As at January 1, 2016
Additions
Disposals
Transfers
Exchange differences
As at December 31, 2016
Accumulated depreciation
As at January 1, 2016
Depreciation
Disposals
Exchange differences
As at December 31, 2016
Net book value
As at December 31, 2016
1,261
2,047
Depreciation for the year ended December 31, 2015 was US$1,908,000.
F-25
11. Investments in Equity Investees
Investments in equity investees consisted of the following:
HBYS
SHPL
NSPL
Other
December 31,
2017
2016
(in US$’000)
55,308
69,417
19,201
311
63,536
77,939
16,806
225
144,237
158,506
Particulars regarding the principal equity investees are 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 is
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,
2017
2016
2017
2016
2017
2016
(in US$’000)
101,570
107,226
(75,787)
(18,748)
114,261
(3,645)
123,181
98,554
(70,218)
(18,148)
133,369
(6,297)
110,616
127,072
129,535
103,477
(91,665)
(8,616)
132,731
—
132,731
146,350
97,656
(86,946)
(6,926)
150,134
—
150,134
9,640
30,000
(1,239)
—
38,401
—
38,401
5,393
30,000
(1,782)
—
33,611
—
33,611
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Net assets
Non-controlling interests
F-26
(ii) Summarized statements of operations
Commercial Platform
Consumer Health
HBYS
Year Ended December 31,
Prescription Drugs
SHPL
Year Ended December 31,
Innovation Platform
Drug R&D(note (a))
NSPL
Year Ended December 31,
Revenue
Gross profit
Depreciation and
amortization
Interest income
Finance cost
Profit/(loss) before
taxation
Income tax expense
(note (b))
2015
2017
2016
2015
2017
2016
2015
2017
227,422
91,458
224,131
89,355
211,603
91,461
244,557
175,965
2016
(in US$’000)
222,368
158,131
181,140
127,608
(4,985)
220
(117)
(2,958)
238
(123)
(3,274)
628
(158)
(6,942)
757
—
(3,526)
565
—
(2,765)
306
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
24,434
23,759
25,164
66,497
148,144
37,401
(9,210)
(8,482)
(7,552)
(3,629)
(3,631)
(3,948)
(10,874)
(27,645)
(6,094)
—
—
—
Net income/(loss)
Non-controlling interests
20,805
(29)
20,128
248
21,216
160
55,623
—
120,499
—
31,307
—
(9,210)
—
(8,482)
—
(7,552)
—
Net income/(loss)
attributable to the
shareholders of equity
investee
20,776
20,376
21,376
55,623
120,499
31,307
(9,210)
(8,482)
(7,552)
Notes:
(a) NSPL only incurred research and development expenses in the periods presented.
(b) HBYS and SHPL have been successful in their respective applications to renew the High and New Technology
Enterprise (‘‘HNTE’’) status. Accordingly, the companies were eligible to use a preferential income tax rate of
15% for the years ended December 31, 2017, 2016 and 2015.
For the years ended December 31, 2017, 2016 and 2015, other immaterial equity investees had net
income of approximately US$117,000, US$95,000 and US$12,000 respectively.
(iii) Reconciliation of summarized financial information
Reconciliation of the summarized financial information presented to the carrying amount of
investments in equity investees is as follows:
Commercial Platform
Consumer Health
HBYS
2016
2017
2015
2017
2015
2017
Prescription Drugs
SHPL
2016
(in US$’000)
Innovation Platform
Drug R&D
NSPL
2016
2015
Opening net assets after
non-controlling interests as at
January 1
Net income/(loss) attributable to the
shareholders of equity investee
Dividends declared
Other comprehensive income/(loss)
Investments
Capitalization of loans
Closing net assets after
non-controlling interests as at
December 31
Group’s share of net assets
Goodwill
Carrying amount of investments as at
127,072
121,523
111,506
150,134
93,263
71,906
33,611
18,093
25,645
20,776
(45,128)
7,896
—
—
20,376
(6,000)
(8,827)
—
—
21,376
(6,410)
(4,949)
—
—
55,623
(81,299)
8,273
—
—
120,499
(55,057)
(8,571)
—
—
31,307
(6,410)
(3,540)
(9,210)
—
—
— 14,000
—
(8,482)
—
—
10,000
— 14,000
(7,552)
—
—
—
—
110,616
55,308
—
127,072
63,536
—
121,523
60,762
—
132,731
66,365
3,052
150,134
75,067
2,872
93,263
46,632
3,077
38,401
19,201
—
33,611
16,806
—
18,093
9,046
—
December 31
55,308
63,536
60,762
69,417
77,939
49,709
19,201
16,806
9,046
F-27
The equity investees had the following lease commitments and capital commitments:
(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 from 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
Total minimum lease payments
(b) Capital commitments
The equity investees had the following capital commitments:
Property, plant and equipment
Contracted but not provided for
12. Accounts Payable
Accounts payable—third parties
Accounts payable—non-controlling shareholders of subsidiaries
Accounts payable—related party (Note 22 (ii))
December 31,
2017
2016
(in US$’000)
1,282
400
151
141
47
2,021
1,511
1,184
—
—
—
2,695
December 31,
2017
2016
(in US$’000)
1,034
6,162
December 31,
2017
2016
(in US$’000)
17,095
7,250
20
24,365
30,383
5,136
19
35,538
Substantially all the accounts payable are denominated in RMB and US$ and due within one year
from the end of the reporting period. The carrying values of accounts payable approximate their fair values
due to their short-term maturities.
F-28
13. Other Payables, Accruals and Advance Receipts
Other payables, accruals and advance receipts consisted of the following:
Accrued salaries and benefits
Accrued research and development expenses
Accrued selling and marketing expenses
Accrued administrative and other general expenses
Deferred government incentives
Loan from a non-controlling shareholder of a subsidiary
(Note 22 (iv))
Payments in advance from customers
Others
14. Bank Borrowings
Bank borrowings consisted of the following:
Current
Non-current
December 31,
2017
2016
(in US$’000)
9,295
14,613
4,121
4,729
1,790
1,550
1,282
3,573
7,057
11,771
4,340
4,078
1,755
—
899
1,816
40,953
31,716
December 31,
2017
2016
(in US$’000)
29,987
—
29,987
19,957
26,830
46,787
The weighted average interest rate for outstanding bank borrowings for the years ended December 31,
2017, 2016 and 2015 was 1.90%, 1.52% and 1.39% per annum respectively. In addition, the Group incurred
guarantee fees of US$320,000, US$471,000 and US$471,000 respectively for the years ended December 31,
2017, 2016 and 2015, which was 0.76%, 0.94% and 0.95% per annum respectively of the weighted average
outstanding bank borrowings. The carrying amounts of the Group’s bank borrowings are all denominated
in HK$.
3-year term loan and 18-month revolving loan facilities
In November 2017, the Group through its subsidiary, entered into a facility agreement with a bank for
the provision of unsecured credit facilities in the aggregate amount of HK$400,000,000 (US$51,282,000).
The credit facilities include (i) a HK$210,000,000 (US$26,923,000) 3-year term loan facility and (ii) a
HK$190,000,000 (US$24,359,000) 18-month revolving loan facility. The term loan bears interest at 1.50%
over the Hong Kong Interbank Offered Rate (‘‘HIBOR’’) per annum. The revolving loan facility bears
interest at 1.25% over HIBOR per annum. As at December 31, 2017, no amounts have been drawn from
the term loan or the revolving loan facilities. These credit facilities are guaranteed by the Company.
In December 2011, the Group through its subsidiary, entered into a three-year term loan with the
same bank above in the aggregate principal amount of HK$210,000,000 (US$26,923,000). The term loan
bears interest at 1.50% over the HIBOR per annum. In June 2014, the term loan was refinanced into a
four-year term loan due June 2018 which bears interest at 1.35% over the HIBOR per annum. The loan
installments of HK$180,000,000 (US$23,077,000) and HK$30,000,000
was fully repaid
(US$3,846,000) in August 2017 and November 2017 respectively. The term loan was unsecured and
in two
F-29
guaranteed by Hutchison Whampoa Limited, an indirect subsidiary of CK Hutchison. An annual fee was
paid to Hutchison Whampoa Limited for the guarantee (Note 22(i)).
18-month term loan and revolving loan facilities
In February 2017, the Group through its subsidiary, entered into two 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 was drawn from the first credit facility in
March 2017 and is due in August 2018. 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. The term loan was drawn
from the second credit facility in August 2017 and is due in August 2018. Accordingly, the term loans are
recorded as short-term bank borrowings as at December 31, 2017. No amounts have been drawn from the
revolving loan facilities. These credit facilities are guaranteed by the Company.
In March 2017, the Group repaid the HK$156,000,000 (US$20,000,000) term loan facility with the
same banks above, which was part of the unsecured credit facilities in the aggregate amount of
HK$468,000,000 (US$60,000,000) entered in February 2016. These unsecured credit facilities have been
terminated.
3-year revolving loan facility
In November 2015, the Group through its subsidiary renewed a three year revolving loan facility with
a bank in the aggregate amount of HK$234,000,000 (US$30,000,000) with an annual interest rate of 1.25%
over HIBOR. This facility will expire in November 2018. In February 2017, HK$20,000,000 (US$2,564,000)
was drawn from this facility and the amount was fully repaid in March 2017. As at December 31, 2017 and
2016, there were no amounts due under this loan.
The Group’s bank borrowings are repayable as from the dates indicated as follows:
Not later than 1 year
Between 1 to 2 years
December 31,
2017
2016
(in US$’000)
30,000
—
30,000
20,000
26,923
46,923
As at December 31, 2017 and 2016, the Group had unutilized bank borrowing facilities of
HK$946,000,000 (US$121,282,000) and HK$546,000,000 (US$70,000,000) respectively.
F-30
15. Commitments and Contingencies
(i) Lease commitments
The Group leases various factories and offices under non-cancellable operating lease agreements.
Future aggregate minimum payments under non-cancellable operating leases as from the dates indicated
as follows:
Not later than 1 year
Between 1 to 2 years
Between 2 to 3 years
Between 3 to 4 years
Between 4 to 5 years
Later than 5 years
Total minimum lease payments
December 31,
2017
2016
(in US$’000)
3,330
2,875
2,132
345
161
17
8,860
1,711
1,383
1,053
597
108
45
4,897
(ii) Capital commitments
The Group had the following capital commitments as from the dates indicated as follows:
Property, plant and equipment
Contracted but not provided for
December 31,
2017
2016
(in US$’000)
161
2,545
In addition, the Group has also undertaken to provide the necessary additional funds for NSPL to
finance its ongoing operations.
16. Redeemable Non-controlling Interests
As at December 31, 2017 and 2016, 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
issued
‘‘preferred
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.
shareholders’’), whereby HMHL
(collectively,
(‘‘SBCVC’’)
the
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 represented 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 with Mitsui under which the
Company issued 3,214,404 new ordinary shares of the Company 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
F-31
accretion adjustment up to July 23, 2015). The transaction was completed on July 23, 2015 and as a result
of this transaction, Mitsui held approximately 5.69% of the enlarged share capital of the Company at that
time. 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 were redeemable upon occurrence of an event that is not solely within the
control of the issuer. Accordingly, the Preferred Shares were 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 was probable that the Preferred Shares will become redeemable. The
accretion, which increases the carrying value of the redeemable non-controlling interests, was recorded
against retained earnings, or in the absence of retained earnings, by recording against the additional
paid-in capital. During the year ended December 31, 2015, HMHL recorded an accretion of
US$43,001,000 to the Preferred Shares based on such preferred shareholder’s share of the estimated
valuation of HMHL.
17. Ordinary Shares
The Company is authorized to issue 75,000,000 ordinary shares.
On March 17, 2016, the Company’s ADS, each representing one-half of one ordinary share,
commenced trading on the Nasdaq Global Select Market. Concurrently, the Company
issued
3,750,000 ordinary shares in the form of 7,500,000 ADS for gross proceeds of US$101.3 million. 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$8.9 million. Issuance costs totaled US$14.2 million, of which US$12.9 million and
US$1.3 million were paid in the years ended December 31, 2016 and 2015 respectively.
In October 2017, the Company issued 5,684,905 ordinary shares in the form of 11,369,810 ADS for
gross proceeds of US$301.3 million. Issuance costs totaled US$8.6 million.
A summary of ordinary shares transactions (in thousands) is as follows:
As at January 1
Public offering
Share option exercises
Exchange of redeemable non-controlling interest
(Note 16)
As at December 31
2017
2016
2015
60,706
5,685
56
56,533
4,080
93
—
—
66,447
60,706
53,076
—
243
3,214
56,533
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.
18. 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
F-32
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
is
issuable under
2,425,597 ordinary shares. The aggregate number of shares issuable under the prior share option scheme
which expired in 2016 is 282,726 ordinary shares. As at December 31, 2017, the number of shares
authorized but unissued was 8,552,963 ordinary shares.
the HCML Share Option Scheme
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 the 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 June 15, 2016, 1,187,372 share options of a subsidiary were cancelled with the consent of the
relevant eligible employees in exchange for 593,686 new share options of the Company (Note 18(ii)). 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.
A summary of the Company’s share option activity and related information is as follows:
Number of
share
options
Weighted-average
exercise price in
£ per share
Weighted-average
remaining
contractual life
(years)
Aggregate
intrinsic value
(in £’000)
Outstanding at January 1, 2015
Granted
Exercised
Cancelled
Outstanding at December 31, 2015
Granted
Exercised
Cancelled
Outstanding at December 31, 2016
Granted
Exercised
Cancelled
Outstanding at December 31, 2017
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
Vested and expected to vest at
December 31, 2017
Vested and exercisable at December 31,
2017
4.67
—
3.77
—
5.16
19.70
3.54
6.10
15.00
31.05
5.16
6.10
17.69
4.85
4.67
15.00
14.64
17.69
15.52
684,403
—
(242,038)
—
442,365
693,686
(92,705)
(3,750)
1,039,596
150,000
(56,309)
(6,875)
1,126,412
333,393
291,015
1,039,596
767,376
1,126,412
951,412
F-33
6.53
10,061
6.77
7,900
6.29
6.05
5.77
6.77
6.66
6.29
5.81
43,158
7,685
6,762
7,900
6,106
43,158
38,508
The Company uses the Polynomial 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 Polynomial model are with reference to the sovereign yield of
the United Kingdom because the Company’s ordinary shares are currently listed on AIM and
denominated in £.
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 Polynomial model.
In determining the fair value of share options granted, the following assumptions were used in the
Polynomial model for awards granted in the periods indicated:
Value of each share option (in £ per share)
Significant inputs into the valuation model:
Grant date
June 24,
2011
December 20,
2013
June 15,
2016
March 27,
2017
1.84
3.15
8.99
12.69
Exercise price (in £ per share)
Share price at effective date of grant (in £ per share)
Expected volatility
Risk-free interest rate
Contractual life of share options
Expected dividend yield
4.41
4.33
46.6%
3.13%
10 years
0%
The following table summarizes the Company’s share option values:
6.10
6.10
19.70
19.70
36.0% 39.0%
3.16% 1.00%
8 years
0%
10 years
0%
31.05
31.05
36.3%
1.17%
10 years
0%
Weighted-average grant-date fair value of share options
granted during the period (in £ per share)
Total intrinsic value of share options exercised in US$’000
12.69
2,290
8.99
1,907
—
5,020
Year Ended December 31,
2015
2016
2017
Share-based Compensation Expense
The Group 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
F-34
Year Ended December 31,
2017
2016
2015
(in US$’000)
1,278
—
1,278
1,284
—
1,284
74
14
88
As at December 31, 2017, the total unrecognized compensation cost was US$1,539,000, and will be
recognized on a graded vesting approach over the weighted-average remaining service period of 3.1 years.
Cash received from share option exercises under the share option plan for the years ended
December 31, 2017, 2016 and 2015 was approximately US$380,000, US$426,000 and US$1,374,000
respectively.
The Company will issue new shares to satisfy share option 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
is
issuable under
2,144,408 ordinary shares. As at December 31, 2017, the number of shares authorized but unissued was
157,111,839 ordinary shares of HMHL.
the HMHL Share Option Scheme
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 the 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, 2017 and
2016, US$0.2 million and US$1.4 million have been recognized in other payables respectively.
On June 15, 2016, 1,187,372 share options pursuant to the HMHL Share Option Schemes were
cancelled with the consent of the relevant eligible employees in exchange for 593,686 new share options of
the Company pursuant to the HCML Share Option Schemes. This was accounted for as a modification of
the original share options granted which did not result in any incremental fair value to the Group.
F-35
A summary of the HMHL’s share option activity and related information is as follows (with no activity
for the year ended December 31, 2017):
Number of Weighted-average
exercise price in
£ per share
share
options
Weighted-average
remaining
contractual life
(years)
Aggregate
intrinsic value
(in £’000)
Outstanding at January 1, 2015
Granted
Exercised
Cancelled
Outstanding at December 31, 2015
Granted
Exercised
Cancelled
Outstanding at December 31, 2016 and 2017
Vested and expected to vest at December 31,
2015
Vested and exercisable at December 31, 2015
Vested and expected to vest at December 31,
2016 and 2017
Vested and exercisable at December 31, 2016
and 2017
Share-based Compensation Expense
1,211,772
—
(24,400)
—
1,187,372
—
—
(1,187,372)
—
759,918
593,686
—
—
7.71
—
2.34
—
7.82
—
—
7.82
—
7.82
7.82
—
—
7.97
32,292
—
7.97
7.97
—
—
—
20,667
16,146
—
—
The subsidiary recognizes compensation expense for only the portion of options expected to vest, on a
graded vesting approach over the requisite service period. The following table presents share-based
compensation expense included in the Group’s consolidated statements of operations:
Research and development
Year Ended December 31,
2016
2015
2017
(in US$’000)
502
32
1,063
As at December 31, 2017, the total unrecognized compensation cost was nil.
Cash received from option exercises under the share option plan for the year ended December 31,
2015 was US$57,000.
(iii) LTIP
The Company grants awards under the LTIP to participating directors and employees, giving them a
conditional right to receive ordinary shares of the Company or the equivalent ADS (collectively the
‘‘Awarded Shares’’) to be purchased by the Trustee up to a cash amount. Vesting will 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. Additionally, some awards are subject to change based on annual
performance targets prior to their determination date.
LTIP awards prior to the determination date
Performance targets vary by award, and may include targets for shareholder returns, free cash flows,
revenues, net profit after taxes and the achievement of clinical and regulatory milestones. As the extent of
achievement of the performance targets is uncertain prior to the determination date, a probability based
F-36
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 a corresponding entry to liability.
LTIP awards after the determination date
Upon the determination date, the Company will pay a determined monetary amount, up to the
maximum cash amount based on the actual achievement of the performance target specified in the award,
to the Trustee to purchase the Awarded Shares. Any cumulative compensation expense previously
recognized as a liability will be transferred to additional paid-in capital, as an equity-settled award. If the
performance target is not achieved, no Awarded Shares of the Company will be purchased and the amount
previously recorded in the liability will be reversed through profit or loss.
Granted awards under the LTIP are as follows:
On December 15, 2017, the Company granted awards up to a maximum cash amount per annum of
US$0.5 million that stipulated annual performance targets. Shares under such LTIP awards will cover each
financial year from 2018 to 2019. The annual performance target determination date is the date of the
announcement of the Group’s annual results for the covered financial year and vesting occurs two business
days after the announcement of the Group’s annual results for the financial year falling two years after the
covered financial year to which the LTIP award relates.
On March 15, 2017 and August 2, 2017, the Company granted awards up to a maximum cash amount
per annum of US$6.0 million that stipulated annual performance targets. Shares under such LTIP awards
will cover each financial year from 2017 to 2019. The annual performance target determination date is the
date of the announcement of the Group’s annual results for the covered financial year and vesting occurs
two business days after the announcement of the Group’s annual results for the financial year falling two
years after the covered financial year to which the LTIP award relates.
On March 15, 2017, the Company granted awards up to a maximum cash amount of US$0.4 million in
aggregate that did not stipulate performance targets. Shares under such LTIP awards will vest one business
day after the publication date of the annual report for the 2017 financial year.
On March 24, 2016, the Company granted awards up to a maximum cash amount of US$0.3 million 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.
On October 19, 2015, the Company granted initial awards under the LTIP up to a maximum cash
amount per annum of US$1.8 million that stipulated annual performance targets. Shares under such LTIP
awards will cover each financial year from 2014 to 2016. The annual performance target determination
date is the date of the announcement of the Group’s annual results for the covered financial year and
vesting occurs one business day after the publication date of the annual report of the Company for the
financial year falling two years after the covered financial year to which the LTIP award relates.
The Trustee has been set up solely for the purpose of purchasing and holding the Awarded Shares
during the vesting period on behalf of the Group using funds provided by the Group. On the
determination date, if any, the Company will determine the cash amount, based on the actual achievement
of each annual performance target, for the Trustee to purchase the Awarded Shares. The Awarded Shares
will then be held by the Trustee until they are vested.
F-37
The Trustee’s assets include treasury shares and funds for additional treasury shares, trustee fees and
expenses. As at December 31, 2017, the number of treasury shares (in the form of ordinary shares or ADS
of the Company) purchased and held by the Trustee are as follows:
As at January 1, 2017
Purchased
Vested
As at December 31, 2017
Number of
treasury shares
Cost in
US$’000
62,921
35,095
(42,038)
55,978
2,390
1,367
(1,800)
1,957
Based on the actual achievement of performance targets for the 2017 financial year, the Group
expects to purchase up to US$5,621,000 of treasury shares in 2018.
For the year ended December 31, 2017, US$1,800,000 and US$79,000 of the LTIP awards have vested
and been forfeited respectively.
The following table presents the share-based compensation expenses recognized under the
LTIP awards:
2017
Year Ended December 31,
2016
(in US$’000)
2015
Research and development expenses
Selling and administrative expenses
Recorded with a corresponding credit to:
Liability
Additional paid-in capital
1,894
1,529
3,423
2,336
1,087
3,423
850
811
1,661
345
1,316
1,661
156
152
308
75
233
308
For the years ended December 31, 2017, 2016 and 2015, US$451,000, US$64,000 and nil was
reclassified from liability to additional paid-in capital respectively upon LTIP awards reaching the
determination date. As at December 31, 2017 and 2016, US$2,241,000 and US$356,000 was recorded as
liability respectively for LTIP awards prior to the determination date.
As at December 31, 2017, the total unrecognized compensation cost was approximately US$8,681,000,
which considers expected performance targets and the amount expected to vest, and will be recognized
over the requisite periods.
19. Revenue from License and Collaboration Agreements—Third Parties
Milestone revenue
Amortization of upfront payment
Research and development services
Year Ended December 31,
2017
2016
2015
9,457
1,655
15,203
26,315
(in US$’000)
9,931
1,679
14,834
26,444
19,212
1,907
22,941
44,060
F-38
The revenue is mainly from 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, 2017, 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 ratably over the development period. The Group recognizes milestone revenue relating to the
deliverables in the agreement as a single unit of accounting using the milestone method.
Under the terms of this agreement, the Group recognized US$4.5 million milestone revenue for the
year ended December 31, 2017 in relation to the acceptance of a new drug application by the China Food
and Drug Administration for fruquintinib as a treatment of patients with advanced colorectal cancer. For
the year ended December 31, 2016, the Group did not recognize any milestone revenue in relation to this
contract and 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$1.6 million, US$1.7 million and US$1.8 million revenue from amortization of the
upfront payment during the years ended December 31, 2017, 2016 and 2015 respectively. In addition, the
Group recognized US$12.1 million, US$12.1 million and US$19.4 million revenue from research and
development services for the years ended December 31, 2017, 2016 and 2015 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
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
F-39
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 the amount allocated has been deferred and is being recognized ratably over the development
period. The Group recognizes milestone revenue relating to the deliverables in the agreement as a single
unit of accounting using the milestone method.
Under the terms of this agreement, the Group recognized US$5.0 million milestone revenue for the
year ended December 31, 2017 in relation to the Phase III initiation for the secondary indication, papillary
renal cell carcinoma, and US$9.9 million milestone revenue for the year ended December 31, 2016 in
relation to the Phase IIb initiation for the primary indication, non-small cell lung cancer. For the year
ended December 31, 2015, the Group did not recognize any milestone revenue in relation to this contract.
The Group recognized less than US$0.1 million revenue from amortization of the up-front payment for
each of the years ended December 31, 2017, 2016 and 2015. In addition, the Group recognized
US$3.1 million, US$2.7 million and US$3.5 million revenue from research and development services for
the years ended December 31, 2017, 2016 and 2015 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$250 million, after which the additional royalty
decreases to 3% for 24 months and then 1.5% thereafter. The costs of the additional Phase III clinical trial
costs shall be expensed to research and development expense as incurred. Under the current revenue
recognition policy, future royalties shall be recognized as revenue from license and collaboration
agreements—third parties as net sales occur. The amendment does not impact the original accounting for
the AZ Agreement under the milestone method.
20. Research and Development Expenses
Research and development expenses are summarized as follows:
Clinical trial related costs
Personnel compensation and related costs
Other research and development expenses
2015
2017
Year Ended December 31,
2016
(in US$’000)
38,589
21,698
6,584
45,250
24,848
5,425
24,690
17,339
5,339
75,523
66,871
47,368
21. 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 the 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 13) and other non-current liabilities.
F-40
They are refundable to the PRC Government if the related research and development projects are
suspended. For the years ended December 31, 2017, 2016 and 2015, the Group received government grants
of US$1,323,000, US$1,872,000 and US$4,898,000 respectively.
The government grants recorded as a reduction to research and development expenses for the years
ended December 31, 2017, 2016 and 2015 were US$876,000, US$1,269,000 and US$3,664,000 respectively.
22. Significant Transactions with Related Parties and Non-Controlling Shareholders of Subsidiaries
The Group has the following significant transactions with related parties and non-controlling
shareholders of subsidiaries, which were carried out in the normal course of business at terms determined
and agreed by the relevant parties.
(i) Transactions with related parties:
Sales to:
Indirect subsidiaries of CK Hutchison
8,486
9,794
8,074
Revenue from research and development services:
Year Ended December 31,
2017
2016
(in US$’000)
2015
Equity investees
Purchases from:
Equity investees
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:
Immediate holding company
An indirect subsidiary of CK Hutchison
Guarantee fee on bank loan to:
An indirect subsidiary of CK Hutchison
9,682
8,429
5,383
1,182
280
3,701
372
10,195
10,567
741
8,401
9,142
751
5,093
5,844
897
—
132
132
320
874
152
—
152
471
845
144
—
144
471
F-41
(ii) Balances with related parties included in:
Accounts receivable—related parties
Indirect subsidiaries of CK Hutchison (note (a))
Equity investees (note (a))
Accounts payable
An indirect subsidiary of CK Hutchison (note (a))
An equity investee (note (a))
Amounts due from related parties
An indirect subsidiary of CK Hutchison (note (a))
Equity investees (note (a))
Dividend receivable from an equity investee
Amounts due to related parties
Immediate holding company (note (b))
An indirect subsidiary of CK Hutchison (note (b))
An equity investee (note (a))
Other deferred income
An equity investee (note (c))
Other non-current liabilities
Immediate holding company (note (d))
Notes:
December 31,
2017
2016
(in US$’000)
2,761
1,099
3,860
—
20
20
23
893
7,628
8,544
—
454
6,567
7,021
2,589
1,634
4,223
19
—
19
107
1,029
—
1,136
2,086
152
3,070
5,308
1,648
1,771
—
6,000
(a) 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.
(b) Amounts due to immediate holding company and an indirect subsidiary of CK Hutchison are
unsecured and interest-bearing. During the year ended December 31, 2017, amounts due to
immediate holding company were assigned to an indirect subsidiary of CK Hutchison. As at
December 31, 2017, approximately US$454,000 (December 31, 2016: US$2,238,000) of such
balances are repayable within one year or repayable on demand.
(c) Other deferred income represents amounts recognized from granting of promotion and
marketing rights.
(d) In December 2017, the Group repaid the amount due. As at December 31, 2016, this amount
was recorded in non-current liabilities as it was repayable in equal installments of
US$3,000,000 in December 2018 and December 2019.
F-42
(iii) Transactions with non-controlling shareholders of subsidiaries:
Sales
Purchases
Interest expense
Dividend declared
Year Ended December 31,
2017
13,307
21,236
66
1,594
2016
(in US$’000)
12,274
15,225
78
564
2015
6,196
12,169
85
590
(iv) Balances with non-controlling shareholders of subsidiaries included in:
Accounts receivable—third parties
Accounts payable
Other payables, accruals and advance receipts
Loan
Interest payable
Other non-current liabilities
Loans
23. Income Taxes
(i)
Income tax expense
Current tax
HK (note (a))
PRC (note (b))
Deferred income tax
Income tax expense
Notes:
December 31,
2017
2016
(in US$’000)
1,846
7,250
1,550
80
1,630
—
5,136
—
14
14
579
2,129
2017
Year Ended December 31,
2016
(in US$’000)
2015
572
782
1,726
3,080
520
458
3,353
4,331
150
415
1,040
1,605
(a) 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.
(b) Taxation in the PRC has been provided for at the applicable rate on the estimated assessable
profits less estimated available tax losses, if any, 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 qualify as HNTE. HMPL qualifies as a HNTE up to December 31, 2019.
Pursuant to the EIT law, a 10% withholding tax is levied on dividends declared by PRC
F-43
companies to their foreign investors. A lower withholding tax rate of 5% is applicable under
the China-HK Tax Arrangement if direct foreign investors with at least 25% equity interest
in the PRC companies are Hong Kong tax residents, 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 Hong Kong tax residents, 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 at December 31, 2017 and
2016, 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.
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:
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 in 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
2017
Year Ended December 31,
2016
(in US$’000)
(47,356)
2015
(10,540)
(53,536)
(8,833)
(7,814)
(1,739)
2,531
11,410
(3,347)
391
(387)
1,980
(665)
3,080
453
9,886
(3,205)
688
(21)
3,532
812
4,331
(2,953)
6,601
(2,096)
253
(34)
1,216
357
1,605
(ii) Deferred tax assets and liabilities
The significant components of deferred tax assets and liabilities are as follows:
December 31,
2017
2016
(in US$’000)
31,028
1,267
32,295
(31,662)
633
4,332
120
4,452
20,145
372
20,517
(20,145)
372
5,230
131
5,361
Deferred tax assets
Tax losses
Others
Total deferred tax assets
Less: Valuation allowance
Deferred tax assets
Deferred tax liabilities
Undistributed earnings from PRC entities
Others
Deferred tax liabilities
F-44
As at December 31, 2017, all deferred tax assets and liabilities are classified as non-current after
adopting ASU 2015-17. As at December 31, 2016, deferred tax assets and liabilities of US$372,000 and
US$1,364,000 respectively were classified as current, with the remainder as non-current.
The significant components of deferred tax assets and liabilities are as follows:
As at January 1
Utilization of previously recognized withholding tax on undistributed
earnings
(Charged)/Credited to the consolidated statements of operations
Withholding tax on undistributed earnings of PRC entities
Deferred tax on amortization of intangible assets
Deferred tax on provision for assets
Exchange differences
As at December 31
2017
(4,989)
2016
(in US’000)
(3,473)
2015
(2,842)
3,179
1,526
321
(1,980)
18
236
(283)
(3,532)
32
147
311
(1,216)
24
152
88
(3,819)
(4,989)
(3,473)
The deferred tax assets and liabilities are offset when there is a legally enforceable right to set off and
when the deferred income taxes relate to the same fiscal authority.
The tax losses can be carried forward against future taxable income and will expire in the following
years:
No expiry date
2017
2018
2019
2020
2021
2022
December 31,
2017
2016
(in US$’000)
42,385
—
858
4,261
36,188
50,494
65,195
32,859
3,651
807
4,012
34,059
53,194
—
199,381
128,582
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 tax assets. The Company’s subsidiaries have had
sustained tax losses, which will expire within five years if not utilized in the case of PRC subsidiaries, and
which will not be utilized in the case of Hong Kong subsidiaries as they do not generate taxable profits.
Accordingly, a valuation allowance has been recorded against the relevant deferred tax assets arising from
the tax losses.
F-45
The table below summarizes changes in the deferred tax valuation allowance:
As at January 1
Charged to consolidated statements of operations
Utilization of previously unrecognized tax losses
Write-off of expired tax losses
Others
Exchange differences
As at December 31
2017
20,145
11,410
(387)
(558)
(89)
1,141
31,662
2016
(in US$’000)
11,393
9,886
(21)
—
(288)
(825)
2015
7,455
6,601
(34)
(1,493)
(901)
(235)
20,145
11,393
The Group recognizes interest and penalties, if any, under income tax payable on its consolidated
balance sheets and under other expenses in its consolidated statements of operations. As at December 31,
2017 and 2016, the Group did not have any material unrecognized uncertain tax positions.
(iii) Income tax payable
As at January 1
Current tax
Withholding tax upon dividend declaration from PRC entities
Tax paid
Exchange difference
As at December 31
24. (Losses)/Earnings per Share
(i) Basic (losses)/earnings per share
2017
274
1,354
3,179
(3,836)
8
979
2016
(in US$’000)
442
978
1,526
(2,664)
(8)
274
2015
112
565
321
(510)
(46)
442
Basic (losses)/earnings per share is calculated by dividing the net (loss)/income attributable to
ordinary shareholders of the Company by the weighted average number of ordinary shares in issue during
the year. Treasury shares held by the Trustee are excluded from the weighted average number of
outstanding ordinary shares in issue for purposes of calculating basic (losses)/earnings per share.
Year Ended December 31,
2016
2017
2015
Weighted average number of outstanding ordinary shares in issue
61,717,171
59,715,173
54,659,315
Net (loss)/income (US$’000)
Net income attributable to non-controlling interests (US$’000)
Accretion on redeemable non-controlling interests (US$’000)
(22,963)
(3,774)
—
14,557
(2,859)
—
10,427
(2,434)
(43,001)
Net (loss)/income for the year attributable to ordinary
shareholders of the Company (US$’000)
(Losses)/earnings per share attributable to ordinary shareholders
(26,737)
11,698
(35,008)
of the Company (US$ per share)
(0.43)
0.20
(0.64)
(ii) Diluted (losses)/earnings per share
Diluted (losses)/earnings per share is calculated by dividing net (loss)/income attributable to ordinary
shareholders of the Company, by the weighted average number of ordinary and dilutive ordinary share
F-46
equivalents outstanding during the year. Dilutive ordinary share equivalents include shares issuable upon
the exercise or settlement of share-based awards issued by the Company and its subsidiaries using the
treasury stock method.
Year Ended December 31,
2017
2016
2015
Weighted average number of outstanding ordinary shares in issue
Adjustment for share options and LTIP
61,717,171
—
59,715,173
255,877
54,659,315
—
Net (loss)/income for the year attributable to ordinary
shareholders of the Company (US$’000)
(Losses)/earnings per share attributable to ordinary shareholders
61,717,171
59,971,050
54,659,315
(26,737)
11,698
(35,008)
of the Company (US$ per share)
(0.43)
0.20
(0.64)
For the years ended December 31, 2017 and 2015, the share options and LTIP awards issued by the
Company as well as the preferred shares issued by HMHL were not included in the calculation of diluted
losses per share because of their anti-dilutive effect.
25. Segment Reporting
The Group determines its operating segments from both business and geographic perspectives
as follows:
(i) 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
(ii) 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) Prescription Drugs: comprises the development, manufacture, distribution, marketing and
sale of prescription pharmaceuticals; and
(b) Consumer Health: comprises the development, manufacture, distribution, marketing and
sale of over-the-counter pharmaceuticals and consumer health products.
Innovation Platform and Prescription Drugs businesses 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 performance of the reportable segments is assessed based on three measurements: (a) losses or
earnings of subsidiaries before interest income, interest expense, income tax expenses and equity in
earnings of equity investees, net of tax (‘‘Adjusted (LBIT)/EBIT’’ or ‘‘Adjusted LBIT’’), (b) equity in
earnings of equity investees, net of tax and (c) operating (loss)/profit.
F-47
The segment information is as follows:
Innovation
Platform
Drug
R&D
PRC
35,997
(47,503)
64
(4,547)
(51,986)
—
26
Year ended December 31, 2017
Commercial Platform
Prescription
Drugs
Consumer Health
PRC
PRC
Hong
Kong
(in US$’000)
Subtotal
Unallocated
Total
166,435
9,858
28,913
205,206
—
241,203
3,272
37
27,812
31,121
—
934
578
13
10,388
10,979
—
(457)
3,029
13
—
3,042
66
509
6,879
63
38,200
45,142
66
986
(12,677)
1,093
—
(11,584)
1,389
2,068
(53,301)
1,220
33,653
(18,428)
1,455
3,080
(51,880)
2,400
28,999
116
9,773
17
1,261
18
40,033
151
(14,890)
27
(26,737)
2,578
5,936
56
43
8
107
30
6,073
Revenue from external
customers
Adjusted (LBIT)/EBIT
Interest income
Equity in earnings of equity
investees, net of tax
Operating (loss)/profit
Interest expense
Income tax expense
Net (loss)/income
attributable to ordinary
shareholders of the
Company
Depreciation/amortization
Additions to non-current
assets (other than financial
instrument and deferred
tax assets)
Innovation
Platform
Drug
R&D
Prescription
Drugs
PRC
PRC
Total assets
Property, plant and equipment
Leasehold land
Goodwill
Other intangible asset
Investments in equity investees
63,268
13,917
1,261
—
—
19,512
122,665
160
—
2,901
430
69,417
As at December 31, 2017
Commercial Platform
PRC
Subtotal
Consumer Health
Hong
Kong
(in US$’000)
195,420
13,794
251
30
—
—
3,308
—
—
430
— 124,725
58,961
61
—
407
—
55,308
Unallocated
Total
597,932
339,244
14,220
52
1,261
—
3,308
—
—
430
— 144,237
F-48
Year ended December 31, 2016
Innovation
Platform
Drug
R&D
Prescription
Drugs
PRC
PRC
Commercial Platform
Consumer Health
Hong
Kong
(inUS$’000)
PRC
Subtotal
Unallocated
Total
35,228
(36,657)
52
(4,232)
(40,837)
—
—
149,861
6,984
24,007
180,852
—
216,080
2,377
31
60,288
62,696
—
777
(493)
34
10,188
9,729
—
(497)
1,852
1
—
1,853
79
289
3,736
66
70,476
74,278
79
569
(13,306)
384
—
(12,922)
1,552
3,762
(46,227)
502
66,244
20,519
1,631
4,331
(40,735)
2,176
61,120
102
8,384
3
833
19
70,337
124
(17,904)
41
11,698
2,341
4,138
67
20
51
138
51
4,327
Revenue from external
customers
Adjusted (LBIT)/EBIT
Interest income
Equity in earnings of equity
investees, net of tax
Operating (loss)/profit
Interest expense
Income tax expense
Net (loss)/income
attributable to ordinary
shareholders of the
Company
Depreciation/amortization
Additions to non-current
assets (other than financial
instrument and deferred
tax assets)
Innovation
Platform
Drug
R&D
Prescription
Drugs
PRC
PRC
Total assets
Property, plant and equipment
Leasehold land
Goodwill
Other intangible asset
Investments in equity investees
53,774
9,686
1,220
—
—
17,031
134,681
145
—
2,730
469
77,939
As at December 31, 2016
Commercial Platform
PRC
Subtotal
Consumer Health
Hong
Kong
(in US$’000)
212,543
10,701
219
40
—
—
3,137
—
—
469
— 141,475
67,161
34
—
407
—
63,536
Unallocated
Total
342,437
76,120
9,954
49
1,220
—
3,137
—
—
469
— 158,506
F-49
Year ended December 31, 2015
Innovation
Platform
Drug
R&D
PRC
Commercial Platform
Prescription
Drugs
Consumer Health
PRC
PRC
Hong
Kong
(in US$’000)
Subtotal
Unallocated
Total
52,016
105,478
3,028
17,681
126,187
— 178,203
(119)
79
(3,770)
(3,810)
—
—
676
114
(169)
29
15,653
16,443
—
239
10,689
10,549
—
—
1,211
1
—
1,212
85
148
1,718
144
26,342
28,204
85
387
(11,186)
228
(9,587)
451
—
(10,958)
1,319
1,218
22,572
13,436
1,404
1,605
(3,810)
1,864
15,934
94
8,640
11
581
5
25,155
110
(13,352)
41
7,993
2,015
3,218
88
5
4
97
9
3,324
Revenue from external
customers
Adjusted (LBIT)/EBIT
Interest income
Equity in earnings of equity
investees, net of tax
Operating (loss)/profit
Interest expense
Income tax expense
Net (loss)/income attributable
to ordinary shareholders of
the Company
Depreciation/amortization
Additions to non-current assets
(other than financial
instrument and deferred tax
assets)
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 was US$2,536,000,
US$1,306,000 and US$2,874,000 for the years ended December 31, 2017, 2016 and 2015 respectively. Sales
between segments are carried out at mutually agreed terms.
There were no customers who accounted for over 10% of the Group’s revenue for the years ended
December 31, 2017 and 2016. There was one customer under the Innovation Platform which accounted for
23% of the Group’s revenue for the year ended December 31, 2015.
Unallocated expenses mainly represent corporate expenses which include corporate employee benefit
expenses and the relevant share-based compensation expenses. Unallocated assets mainly comprise cash
and cash equivalents and short-term investments.
A reconciliation of Adjusted LBIT to net (loss)/income is as follows:
Adjusted LBIT
Interest income
Equity in earnings of equity investees, net of tax
Interest expense
Income tax expense
2017
Year Ended December 31,
2016
(in US$’000)
(46,227)
502
66,244
(1,631)
(4,331)
(53,301)
1,220
33,653
(1,455)
(3,080)
2015
(9,587)
451
22,572
(1,404)
(1,605)
Net (loss)/income
(22,963)
14,557
10,427
F-50
26. Note to Consolidated Statements of Cash Flows
Reconciliation of net (loss)/income for the year to net cash used in operating activities:
Net (loss)/income
Adjustments to reconcile net (loss)/income to net cash used in
operating activities
Amortization of finance costs
Depreciation and amortization
Loss on retirement of property, plant and equipment
Provision for excess and obsolete inventories
Provision for doubtful accounts
Share-based compensation expense—share options
Share-based compensation expense—LTIP
Equity in earnings of equity investees, net of tax
Dividends received from equity investees
Unrealized currency translation (gain)/loss
Changes in income tax balances
Changes in working capital
Accounts receivable—third parties
Accounts receivable—related parties
Other receivables, prepayments and deposits
Amounts due from related parties
Inventories
Long-term prepayment
Accounts payable
Other payables, accruals and advance receipts
Deferred revenue
Other deferred income
Amounts due to related parties
Total changes in working capital
Net cash used in operating activities
27. Litigation
Year Ended December 31,
2017
(22,963)
2016
(in US$’000)
14,557
2015
10,427
147
2,578
57
(16)
242
1,316
3,423
(33,653)
55,586
(399)
(756)
2,160
363
(6,982)
220
1,049
123
(11,173)
5,194
(897)
(275)
(4,287)
(14,505)
92
2,341
30
163
(208)
1,780
1,661
(66,244)
30,528
633
1,667
(7,258)
(2,354)
(1,129)
1,157
(3,430)
361
11,452
7,554
(1,668)
131
(1,385)
3,431
(8,943)
(9,569)
62
2,015
60
4
1,408
1,151
308
(22,572)
6,410
198
1,093
(12,030)
315
(459)
(3,010)
(5,154)
(2,132)
3,659
4,660
(1,907)
2,132
3,977
(9,949)
(9,385)
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.
28. Restricted Net Assets
Relevant PRC laws and regulations permit payments of dividends by the Company’s subsidiaries in the
PRC 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 the PRC are required to make
F-51
certain appropriations of net after-tax profits or increases 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 the PRC are
restricted in their ability to transfer their net assets to the Group in terms of cash dividends, loans or
advances, with restricted portions amounting to US$7,277,000 and US$6,847,000 as at December 31, 2017
and 2016 respectively, which excludes the Company’s subsidiaries with a shareholders’ deficit. 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 the PRC due to changes in business conditions, to fund future
acquisitions and development, or merely to declare and pay dividends to make distributions to
shareholders.
In addition, the Group has certain investments in equity investees in the PRC, where the Group’s
equity in undistributed earnings amounted to US$85,400,000 and US$116,953,000 as at December 31, 2017
and 2016 respectively.
29. Subsequent Events
The Group evaluated subsequent events through March 12, 2018, which is the date when the
consolidated financial statements were issued.
F-52
SHANGHAI HUTCHISON
PHARMACEUTICALS LIMITED
F-53
Report of Independent Auditors
Report of Independent Auditors
To the Board of Directors and Shareholders of Shanghai Hutchison Pharmaceuticals Limited
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
We have audited the accompanying consolidated financial statements of Shanghai Hutchison
position as of December 31, 2017 and 2016, and the related consolidated income statements, consolidated
Pharmaceuticals Limited and its subsidiaries, which comprise the consolidated statements of financial
statements of comprehensive income, of changes in equity and of cash flows for each of the three years in
position as of December 31, 2017 and 2016, and the related consolidated income statements, consolidated
the period ended December 31, 2017.
statements of comprehensive income, of changes in equity and of cash flows for each of the three years in
the period ended December 31, 2017.
Management’s Responsibility for the Consolidated Financial Statements
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
Management is responsible for the preparation and fair presentation of the consolidated financial
Accounting Standards Board; this includes the design, implementation, and maintenance of internal
statements in accordance with International Financial Reporting Standards as issued by the International
control relevant to the preparation and fair presentation of consolidated financial statements that are free
Accounting Standards Board; this includes the design, implementation, and maintenance of internal
from material misstatement, whether due to fraud or error.
control relevant to the preparation and fair presentation of consolidated financial statements that are free
from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Auditors’ 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
Our responsibility is to express an opinion on the consolidated financial statements based on our
United States of America. Those standards require that we plan and perform the audit to obtain
audits. We conducted our audits in accordance with auditing standards generally accepted in the
reasonable assurance about whether the consolidated financial statements are free from material
United States of America. Those standards require that we plan and perform the audit to obtain
misstatement.
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
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures
assessment of the risks of material misstatement of the consolidated financial statements, whether due to
in the consolidated financial statements. The procedures selected depend on our judgment, including the
fraud or error. In making those risk assessments, we consider internal control relevant to the Company’s
assessment of the risks of material misstatement of the consolidated financial statements, whether due to
preparation and fair presentation of the consolidated financial statements in order to design audit
fraud or error. In making those risk assessments, we consider internal control relevant to the Company’s
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on
preparation and fair presentation of the consolidated financial statements in order to design audit
the effectiveness of the Company’s internal control. Accordingly, we express no such opinion. An audit also
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on
includes evaluating the appropriateness of accounting policies used and the reasonableness of significant
the effectiveness of the Company’s internal control. Accordingly, we express no such opinion. An audit also
accounting estimates made by management, as well as evaluating the overall presentation of the
includes evaluating the appropriateness of accounting policies used and the reasonableness of significant
consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and
accounting estimates made by management, as well as evaluating the overall presentation of the
appropriate to provide a basis for our audit opinion.
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
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 as of
In our opinion, the consolidated financial statements referred to above present fairly, in all material
December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three
respects, the financial position of Shanghai Hutchison Pharmaceuticals Limited and its subsidiaries as of
years in the period ended December 31, 2017 in accordance with International Financial Reporting
December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three
Standards as issued by the International Accounting Standards Board.
years in the period ended December 31, 2017 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
/s/ PricewaterhouseCoopers Zhong Tian LLP
March 9, 2018
Shanghai, the People’s Republic of China
March 9, 2018
F-54
F-54
Shanghai Hutchison Pharmaceuticals Limited
Consolidated Income Statements
(in US$’000)
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
2017
Year Ended December 31,
2016
2015
5
6
7
8
9
244,557
(68,592)
175,965
(104,504)
(13,257)
8,293
—
66,497
(10,874)
222,368
(64,237)
158,131
(92,487)
(13,278)
7,242
88,536
148,144
(27,645)
55,623
120,499
181,140
(53,532)
127,608
(78,429)
(12,317)
539
—
37,401
(6,094)
31,307
The accompanying notes are an integral part of these consolidated financial statements.
F-55
Shanghai Hutchison Pharmaceuticals Limited
Consolidated Statements of Comprehensive Income
(in US$’000)
Profit for the year
Other comprehensive income/(loss) that has been or may be
reclassified subsequently to profit or loss:
Exchange translation differences
Total comprehensive income
Year Ended December 31,
2017
2016
2015
55,623
120,499
31,307
8,273
(8,571)
(3,540)
63,896
111,928
27,767
The accompanying notes are an integral part of these consolidated financial statements.
F-56
Shanghai Hutchison Pharmaceuticals Limited
Consolidated Statements of Financial Position
(in US$’000)
Assets
Current assets
Cash and cash equivalents
Bank deposits maturing over three months
Trade and bills receivables
Other receivables, prepayments and deposits
Inventories
Total current assets
Property, plant and equipment
Leasehold land
Other intangible asset
Deferred tax assets
Total assets
Liabilities and shareholders’ equity
Current liabilities
Trade payables
Other payables, accruals and advance receipts
Current tax liabilities
Total current liabilities
Deferred income
Total liabilities
Shareholders’ equity
Share capital
Reserves
Total shareholder’s equity
Total liabilities and shareholders’ equity
December 31,
Note
2017
2016
11
11
12
13
14
15
16
17
18
19
43,527
—
22,445
2,456
61,107
129,535
90,734
7,528
1,621
3,594
233,012
11,773
74,551
5,341
91,665
8,616
100,281
33,382
99,349
132,731
233,012
20,292
40,205
23,718
11,262
47,844
143,321
88,390
7,244
1,741
3,310
244,006
7,979
65,249
13,718
86,946
6,926
93,872
33,382
116,752
150,134
244,006
The accompanying notes are an integral part of these consolidated financial statements.
F-57
Shanghai Hutchison Pharmaceuticals Limited
Consolidated Statements of Changes in Equity
(in US$’000)
As at January 1, 2015
Profit for the year
Other comprehensive loss
Exchange translation differences
Total comprehensive (loss)/income
Dividends declared to shareholders
As at December 31, 2015
Profit for the year
Other comprehensive loss
Exchange translation differences
Total comprehensive (loss)/income
Transfer between reserves
Dividends declared to shareholders
Share
capital
33,382
—
—
—
—
Exchange
reserve
General
reserves
Retained
earnings
5,781
—
(3,540)
(3,540)
—
925
—
—
—
—
31,818
31,307
—
31,307
Total
equity
71,906
31,307
(3,540)
27,767
(6,410)
(6,410)
33,382
2,241
925
56,715
93,263
—
—
—
—
—
—
(8,571)
(8,571)
—
—
—
—
—
30
—
120,499
120,499
—
(8,571)
120,499
111,928
(30)
(55,057)
—
(55,057)
As at December 31, 2016
33,382
(6,330)
955
122,127
150,134
Profit for the year
Other comprehensive income
Exchange translation differences
Total comprehensive income
Transfer between reserves
Dividends declared to shareholders
—
—
—
—
—
—
8,273
8,273
—
—
—
—
—
15
—
55,623
55,623
—
55,623
(15)
(81,299)
8,273
63,896
—
(81,299)
As at December 31, 2017
33,382
1,943
970
96,436
132,731
The accompanying notes are an integral part of these consolidated financial statements.
F-58
Shanghai Hutchison Pharmaceuticals Limited
Consolidated Statements of Cash Flows
(in US$’000)
Note
20
19
15
7
15
Operating activities
Net cash generated from operations
Interest received
Income tax paid
Net cash generated from operating activities
Investing activities
Purchase of property, plant and equipment
Deposits into bank deposits maturing over three months
Proceeds from bank deposits maturing over three months
Proceeds from disposal of property, plant and equipment
Proceeds from disposal of assets held for sale, net of costs
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
Financing activities
Dividends paid to shareholders
Proceeds from bank borrowings
Repayment of bank borrowings
Net cash used in financing activities
Year Ended December 31,
2016
2015
2017
78,503
844
(19,887)
64,310
467
(15,595)
59,460
49,182
(7,744)
(19,076)
59,281
—
9,776
(11,171)
(57,001)
20,563
4
58,839
51,007
300
(6,199)
45,108
(44,899)
(3,087)
1,619
1
31,146
—
(768)
(1,934)
1,569
43,806
166
2,816
10,632
(14,338)
(81,299)
—
—
(55,057)
—
(25,577)
(81,299)
(80,634)
(6,410)
16,764
(13,176)
(2,822)
27,948
(1,382)
Net increase/(decrease) in cash and cash equivalents
Effect of exchange rate changes on cash and cash equivalents
Cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
21,967
1,268
23,235
20,292
43,527
(20,820)
(2,029)
(22,849)
26,566
43,141
20,292
16,575
43,141
The accompanying notes are an integral part of these consolidated financial statements.
F-59
Shanghai Hutchison Pharmaceuticals Limited
Notes to the Consolidated Financial Statements
1. General Information
Shanghai Hutchison Pharmaceuticals Limited (the ‘‘Company’’) and its subsidiaries (together the
‘‘Group’’) are principally engaged in manufacturing, selling and distribution of prescription drug products.
The Group has manufacturing plants in the People’s Republic of China (the ‘‘PRC’’) and sells 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 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 9, 2018.
2. Summary of Significant Accounting Policies
The consolidated financial statements of the Company have been prepared in accordance with
International Financial Reporting Standards (‘‘IFRS’’) and
issued by the IFRS
Interpretations Committee applicable to companies reporting under IFRS. The consolidated financial
statements comply with IFRS as issued by the International Accounting Standards Board (‘‘IASB’’). These
consolidated financial statements have been prepared under the historical cost convention.
interpretations
During the year, the Group has adopted all of the new standards, amendments and interpretations
issued by the IASB that are relevant to the Group’s operations and mandatory for annual periods
beginning January 1, 2017. The adoption of these new 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, 2017 and have not been early adopted by the Group:
IAS 28 (Amendments)(1)
IAS 40 (Amendments)(1)
IFRS 2 (Amendments)(1)
IFRS 9(1)
IFRS 10 and IAS 28 (Amendments)(3)
IFRS 15(1)
IFRS 15 (Amendments)(1)
IFRS 16(2)
IFRIC 22(1)
IFRIC 23(2)
Annual improvement 2014-2016(1)
Annual improvement 2015-2017(2)
Investments in Associates and Joint Ventures
Transfers of Investment Property
Classification and Measurement of Share-based
Payment Transactions
Financial Instruments
Sale or Contribution of Assets between an
Investor and its Associate or Joint Venture
Revenue from Contracts with Customers
Revenue from Contracts with Customers
Leases
Foreign Currency Transactions and Advance
Consideration
Uncertainty over Income Tax Treatments
Improvements to IFRSs
Improvements to IFRSs
(1) Effective for the Group for annual periods beginning on or after January 1, 2018.
(2) Effective for the Group for annual periods beginning on or after January 1, 2019.
F-60
(3) No mandatory effective date determined yet, but available for adoption.
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 or financial position, except for
the adoption of IFRS 16 for which management is still assessing the impact.
Based on its evaluation of IFRS 15 and its Amendments, the Group expects there will not be a
material impact to the timing of revenue recognition. The Group expects the timing of recognition will be
at the point when the goods have been 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 will adopt the new standard using the modified retrospective method in the
year commencing January 1, 2018.
(a) Basis of Consolidation
The consolidated financial statements of the Group include the financial statements of the Company
and its subsidiaries.
The accounting policies of subsidiaries have been changed where necessary to ensure consistency with
the policies adopted by the Group.
Intercompany transactions, balances and unrealized gains on transactions between group companies
are eliminated. Unrealized losses are also eliminated unless the transaction provides evidence of an
impairment of the transferred asset.
(b) Subsidiaries
Subsidiaries are all entities over which the Group has control. The Group controls an entity when the
Group is exposed to, or has rights, to variable return from its involvement with the entity and has the
ability to affect those returns through its power over the entity. In the consolidated financial statements,
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 financial statements 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 financial statements are presented in US$, which is the Company’s presentation currency.
Foreign currency transactions are translated into the functional currency using the exchange rates at
the dates of the transactions. Foreign currency gains and losses resulting from the settlement of such
transactions and from the translation of monetary assets and liabilities denominated in foreign currencies
at year end exchange rates are generally recognized in the income statement.
The financial statements of the Company and its subsidiaries are translated into the Company’s
presentation currency using the year end rates of exchange for the statements of financial position items
and the average rates of exchange for the year for the income statement items. Exchange translation
differences are recognized directly in other comprehensive income/(loss).
(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
F-61
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 asset costs less accumulated
impairment losses over their estimated useful lives. The principal estimated useful lives are as follows:
Buildings
Leasehold improvements
Plant and equipment
Furniture and fixtures, other equipment
30 years
Over the unexpired period of the lease
or 5 years, whichever is shorter
10 years
and motor vehicles
5 years
The assets’ useful lives are reviewed and adjusted, if appropriate, at the 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.
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.
(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 a definite useful life and is carried at historical cost less accumulated amortization and accumulated
impairment losses, if any. Amortization is calculated using the straight-line method to allocate its cost over
its estimated useful life 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
F-62
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 an asset 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 classified as held for sale are not depreciated and amortized.
(k) 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.
(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 statements of cash flows, cash and cash equivalents include cash on hand, bank
deposits and 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.
F-63
(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 a 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 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, except for deferred income tax liabilities 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 managed by
the relevant municipal and provincial governments in the PRC. The assets of these plans are held
separately from those of the Group. The Group is required to make monthly contributions to the plans
calculated as a percentage of the employees’ salaries. The municipal and provincial governments
F-64
undertake to assume the retirement benefit obligations to all existing and future retired employees under
the plans 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.
(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 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 an agreed period
within the year and the whole year meets certain criteria. Sales rebates are recognized in profit or loss
based on management’s estimation at each year end.
F-65
(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 Reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the
chief operating decision makers. The Board of Directors, which is responsible for allocating resources and
assessing performance of the operating segments, has been identified as the steering committee that makes
strategic decisions.
(x) General Reserves
In accordance with the laws applicable to Foreign Investment Enterprises established in the PRC, the
Company makes appropriations to certain non-distributable reserve funds including the general reserve
fund, the enterprise expansion fund and the staff bonus and welfare fund. The amount of appropriations to
these funds are made at the discretion of the Company’s Board of Directors.
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
purposes.
(i) Credit risk
The carrying amounts of cash at bank, bank deposits, trade receivables (including bills receivables)
and other receivables 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 assets.
Substantially all of the Group’s cash at banks is 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 settled by state-owned banks or other reputable 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.
Management periodically assesses the recoverability of trade receivables and other receivables. The
Group’s historical experience collecting receivables falls within the recorded allowances.
(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 11. The Group’s exposure to interest rate risk would mainly be to
bank borrowings which bear interest at fixed rates.
F-66
(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, 2017 and 2016, the Group’s current financial liabilities were mainly due for
settlement within twelve months and the Group expects to meet all liquidity requirements.
(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 an optimal balance between
higher shareholders’ return that might be possible with higher levels of borrowings and the 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 statements 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, 2017 and 2016 was as follows:
Total liabilities
Total assets
Liabilities to assets ratio
(c) Fair value estimation
December 31,
2017
2016
(in US$’000)
100,281
233,012
93,872
244,006
43.0%
38.5%
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 and other
payables and accruals 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 includes a summary of the significant accounting policies used in the preparation of the
financial statements. The preparation of financial statements 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 financial statements. The Group bases its estimates and judgements on historical
F-67
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 consolidated financial statements.
(a) Sales rebates
Certain sales rebates are provided to customers when their business performance for an agreed period
within the year and the whole year meets certain criteria as stipulated in the contracts. The estimate of
sales rebates during the year is based on estimated sales transactions for the entire period stipulated and is
subject to change based on actual performance and collection status.
(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
On October 20, 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. 90% of the consideration
had been collected as of December 31, 2016, and the remaining 10% was collected in February 2017. 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 and there was no receivable
recoverability risk.
5. Revenue and Segment Information
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 business—manufacture and distribution of drug products
F-68
—Distribution business—provision of sales, distribution and marketing services to pharmaceutical
manufacturers
The operating segments are strategic business units that offer different products and services. They
are managed separately because each business requires different technology and marketing approaches.
The performance of each of the reportable segments is assessed based on a measure of earnings or losses
before interest income, finance costs and taxation charge (‘‘Adjusted EBIT/(LBIT)’’). The aggregate
amount of operating profit/(loss) for the two operating segments is the same as profit before taxation in
the consolidated income statements for each of the years presented.
The segment information for the reportable segments for the year is as follows:
Revenue from external customers
Adjusted EBIT/(LBIT)
Interest income
Operating profit/(loss)
Depreciation/amortization
Additions to non-current assets (other
than financial instrument and
deferred tax assets)
Total segment assets
Revenue from external customers
Adjusted EBIT/(LBIT)
Interest income
Operating profit/(loss)
Depreciation/amortization
Impairment of property, plant and
equipment
Additions to non-current assets (other
than financial instrument and
deferred tax assets)
Year Ended December 31, 2017
Manufacturing
business
PRC
226,429
65,920
603
66,523
6,917
Distribution
business
PRC
(in US$’000)
18,128
(180)
154
(26)
25
Total
244,557
65,740
757
66,497
6,942
3,469
3
3,472
As at December 31, 2017
(in US$’000)
11,015
221,997
233,012
Manufacturing
business
PRC
205,809
Year Ended December 31, 2016
Distribution
business
PRC
(in US$’000)
16,559
169,312
562
169,874
3,503
1,174
11,919
(21,733)
3
(21,730)
23
—
20
Total
222,368
147,579
565
148,144
3,526
1,174
11,939
Total segment assets
As at December 31, 2016
239,843
(in US$’000)
4,163
244,006
F-69
Revenue from external customers
Adjusted EBIT/(LBIT)
Interest income
Operating profit/(loss)
Depreciation/amortization
Additions to non-current assets (other than
Year Ended December 31, 2015
Manufacturing
business
PRC
Distribution
business
PRC
174,821
(in US$’000)
6,319
39,387
301
39,688
2,742
(2,292)
5
(2,287)
23
Total
181,140
37,095
306
37,401
2,765
financial instrument and deferred tax assets)
49,231
6
49,237
6. Other Net Operating Income
Interest income
Net foreign exchange gain/(losses)
Other government subsidy (Note 18)
Other operating income
Year Ended December 31,
2017
2016
2015
(in US$’000)
565
(51)
6,560
168
7,242
757
45
6,388
1,103
8,293
306
(25)
—
258
539
7. Gain on disposal of Assets Held for Sale
The Company’s prior manufacturing facilities and factory site (‘‘the Site’’) was located in Putuo
District, Shanghai, an area of Shanghai 12 kilometers from the city centre. The area was re-zoned in 2014
from industrial usage into a new science and technology, commercial and residential development area
called Smart City.
On December 9, 2015, the Company entered into an agreement (‘‘the Agreement’’) with the relevant
Shanghai government authorities for the surrender of its then remaining 36 years land-use right in respect
of the Site. Under the Agreement, the Company received cash compensation in three installments. As at
December 31, 2015, the Company received the first installment of approximately US$ 31.1 million of the
compensation (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. 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. 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) was recorded as a current asset as at
December 31, 2016. In February 2017, the Company received the final installment of the land
compensation (which was equivalent to US$9.8 million based on the prevailing exchange rate at that time).
F-70
8. Profit before taxation
Profit before taxation
66,497
(in US$’000)
148,144
37,401
Profit before taxation is stated after charging/(crediting) the following:
Year Ended December 31,
2016
2015
2017
Year Ended December 31,
2016
2015
2017
Cost of inventories recognized as expense
Depreciation of property, plant and equipment
Impairment of property, plant and equipment
Loss on disposal of property, plant and equipment
Amortization of leasehold land
Amortization of other intangible asset
Operating lease rentals in respect of land and
buildings
Reversal of provision for trade receivables
Provision for excess and obsolete inventories
Research and development expense
Auditor’s remuneration
Employee benefit expenses (Note 10)
45,683
6,556
—
2
164
222
856
—
994
3,414
163
70,401
(in US$’000)
47,047
3,135
1,174
179
166
225
737
(81)
1,236
1,753
138
61,092
32,378
2,277
—
34
271
217
670
—
1,569
1,442
71
49,398
9. Taxation Charge
Current tax
Deferred income tax (Note 16)
Taxation charge
2017
Year Ended December 31,
2016
(in US$’000)
26,709
936
10,949
(75)
2015
7,928
(1,834)
10,874
27,645
6,094
F-71
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 for which no deferred
tax assets were recognized
Tax concession (note)
(Over)/under provision in prior years
Tax benefits from change in tax law
Rate change on deferred tax assets
Tax losses for which no deferred tax assets
were recognized
Taxation charge
Year Ended December 31,
2016
2015
2017
66,497
(in US$’000)
148,144
37,401
16,624
37,036
9,351
3,361
8,124
389
555
(8,497)
(5)
(1,538)
113
—
(18,203)
237
—
—
261
451
10,874
27,645
—
(4,101)
(98)
—
—
553
6,094
Note: The Company has been granted the High and New Technology Enterprise status.
Accordingly, the Company is subjected to a preferential income tax rate of 15.0% in 2017 and up
to 2019 (2016: 15.0%; 2015: 15.0%). Certain research and development expenses are also eligible
for super-deduction such that 150% of qualified expenses incurred are deductible for
tax purposes.
The weighted average tax rate calculated at the statutory tax rates of respective companies for the year
was 25.0% (2016: 25.0%; 2015: 25.0%). The effective tax rate for the year was 16.4% (2016: 18.7%;
2015: 16.3%).
10. Employee Benefit Expenses
Wages, salaries and bonuses
Pension costs—defined contribution plans
Staff welfare
2015
2017
Year Ended December 31,
2016
(in US$’000)
48,350
4,929
7,813
54,444
6,635
9,322
32,776
3,837
12,785
Employee benefit expenses of approximately US$14,276,000 (2016: US$13,548,000; 2015:
US$19,585,000) are included in cost of sales.
70,401
61,092
49,398
F-72
11. Cash and bank balances
Cash at bank and on hand
Bank deposits maturing over three months (note)
Cash and bank balances
December 31,
2017
2016
(in US$’000)
43,527
—
43,527
20,292
40,205
60,497
Note: The weighted average effective interest rate on 2016 bank deposits, with maturity ranging
from 37 days to 181 days was 2.1% per annum. Cash at bank earns interest at floating rates based
on daily bank deposit rates.
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.
12. Trade and Bills Receivables
Trade receivables—third parties
Trade receivables—related parties (Note 22(b))
Bills receivables
December 31,
2017
2016
(in US$’000)
11,614
6,966
3,865
22,445
10,657
7,010
6,051
23,718
All the trade and bills receivables are denominated in RMB and are due within one year from the end
of the reporting period.
The carrying value of trade and bills receivables approximates their fair values.
Movements on the provision for trade receivables are as follows:
As at January 1
Reversal of provision for trade receivables
Decreased due to collection or write-off
Exchange difference
As at December 31
2017
2016
(in US$’000)
2015
—
—
—
—
—
131
(81)
(45)
(5)
—
137
—
—
(6)
131
There are no impaired receivables as at December 31, 2017 and December 31, 2016.
F-73
13. Other Receivables, Prepayments and Deposits
Prepayments to suppliers
Interest receivables
Deposits
Receivable from disposal of asset held for sale (Note 7)
Others
14. Inventories
Raw materials
Work in progress
Finished goods
December 31,
2017
2016
(in US$’000)
358
—
846
—
1,252
112
87
7
9,690
1,366
2,456
11,262
December 31,
2017
2016
(in US$’000)
37,851
12,656
10,600
61,107
29,010
10,161
8,673
47,844
Movements on the provision for excess and obsolete inventories are as follows:
As at January 1
Provision for excess and obsolete inventories
Write-off
Exchange differences
As at December 31
2017
1,362
994
(522)
88
1,922
2016
(in US$’000)
606
1,236
(406)
(74)
1,362
2015
343
1,569
(1,309)
3
606
F-74
15. Property, plant and equipment
Buildings
situated in
the PRC
Leasehold
improvements
Plant
and
equipment
Furniture
and
fixtures,
other
equipment
and motor
vehicles
Construction
in progress
Total
Cost
As at January 1, 2017
Additions
Disposals
Transfers
Exchange differences
As at December 31, 2017
Accumulated depreciation and
impairment
As at January 1, 2017
Depreciation
Disposals
Exchange differences
As at December 31, 2017
Net book value
67,221
26
—
603
4,220
72,070
1,120
3,468
—
175
4,763
(in US$’000)
315
162
—
—
24
501
134
62
—
10
206
20,003
541
(8)
1,316
1,306
23,158
2,613
2,038
(6)
225
4,870
6,213
1,133
(174)
(15)
417
7,574
2,927
988
(174)
208
3,949
2,606
1,610
—
(1,904)
103
96,358
3,472
(182)
—
6,070
2,415
105,718
1,174
—
—
22
1,196
7,968
6,556
(180)
640
14,984
As at December 31, 2017
67,307
295
18,288
3,625
1,219
90,734
F-75
Buildings
situated in
the PRC
Leasehold
improvements
Plant
and
equipment
Furniture
and
fixtures,
other
equipment
and motor
vehicles
Construction
in progress
Total
Cost
As at January 1, 2016
Additions
Disposals
Transfers
Transfer from non-current
assets classified as held for
sale
Exchange differences
As at December 31, 2016
Accumulated depreciation and
impairment
As at January 1, 2016
Depreciation
Disposals
Impairment
Transfer from non-current
assets classified as held for
sale
Exchange differences
As at December 31, 2016
Net book value
—
—
—
70,222
—
(3,001)
67,221
—
1,168
—
—
—
(48)
1,120
(in US$’000)
1,403
349
(293)
16,553
3,925
801
(234)
1,817
82,837
10,774
(120)
(88,771)
88,483
11,939
(824)
—
2,794
(803)
266
(362)
—
(2,114)
3,061
(6,301)
20,003
6,213
2,606
96,358
898
1,251
(246)
—
2,515
671
(218)
—
—
—
—
1,174
3,692
3,135
(641)
1,174
810
(100)
145
(186)
—
—
955
(347)
2,613
2,927
1,174
7,968
318
15
(177)
179
1
(21)
315
279
45
(177)
—
—
(13)
134
As at December 31, 2016
66,101
181
17,390
3,286
1,432
88,390
F-76
Buildings
situated in
the PRC
Leasehold
improvements
Plant
and
equipment
Furniture
and
fixtures,
other
equipment
and motor
vehicles
Construction
in progress
Total
(in US$’000)
23,065
—
—
—
2,156
5
(41)
—
13,660
71
(47)
—
4,266
470
(163)
34
39,346
46,287
—
(34)
82,493
46,833
(251)
—
(22,143)
(922)
(1,716)
(86)
(11,734)
(547)
(501)
(181)
—
(2,762)
(36,094)
(4,498)
Cost
As at January 1, 2015
Additions
Disposals
Transfers
Transfer to non-current
assets classified as held
for sale
Exchange differences
As at December 31, 2015
—
318
1,403
3,925
82,837
88,483
Accumulated depreciation
and impairment
As at January 1, 2015
Depreciation
Disposals
Transfer to non-current
assets classified as held
for sale
Exchange differences
As at December 31, 2015
Net book value
As at December 31, 2015
16,385
851
—
1,368
244
(37)
9,199
610
(34)
2,587
572
(145)
(16,559)
(677)
(1,237)
(59)
(8,493)
(384)
(384)
(115)
898
2,515
—
—
279
39
—
—
—
—
—
—
29,539
2,277
(216)
(26,673)
(1,235)
3,692
505
1,410
82,837
84,791
During the year ended December 31, 2017, finance cost from bank borrowings of nil (2016:
US$639,000; 2015: US$2,029,000) was capitalized.
Construction in progress in 2015 and 2016 mainly related to the construction of a new factory in
Fengpu District, Shanghai. In September 2016, the new factory was put into operation.
16. Deferred Tax Assets
The movements in deferred tax assets are as follows:
As at January 1
Credited/(debited) to the consolidated income statements
—accrued expenses, provisions and depreciation
allowances
Exchange differences
As at December 31
2017
3,310
2016
(in US$’000)
4,509
2015
2,788
75
209
(936)
(263)
1,834
(113)
3,594
3,310
4,509
The Group’s deferred tax assets are mainly temporary differences including accrued expenses,
provisions and deferred income. The potential deferred tax assets in respect of tax losses which have not
F-77
been recognized in the consolidated financial statements were approximately US$1,323,000 (2016:
US$944,000).
These unrecognized tax losses can be carried forward against future taxable income and will expire in
the following years:
2019
2020
2021
2022
17. Trade Payables
Trade payables—third parties
Trade payables—related parties (Note 22(b))
December 31,
2017
2016
(in US$’000)
16
2,134
2,097
1,045
15
2,008
1,751
—
5,292
3,774
December 31,
2017
2016
(in US$’000)
8,774
2,999
11,773
6,323
1,656
7,979
All the trade payables are denominated in RMB and due within one year from the end of the
reporting period. The carrying value of trade payables approximates their fair values due to their
short-term maturities.
18. Other Payables, Accruals and Advance Receipts
Other payables and accruals
Accrued salaries and benefits
Accrued selling and marketing expenses
Value-added tax and tax surcharge payables
Others
Advance receipts
Payments in advance from customers
Payments in advance for other government subsidy (note)
December 31,
2017
2016
(in US$’000)
15,484
35,914
13,544
7,450
72,392
2,159
—
2,159
13,932
31,085
1,706
12,437
59,160
274
5,815
6,089
74,551
65,249
Note: As at December 31, 2016, the Company had received and deferred approximately
US$5.8 million from a government subsidy relating to a research and development project. In
May 2017, the Company met the criteria of the subsidy and recognized US$5.9 million in other
operating income, with difference due to exchange difference.
F-78
19. Current Tax Liabilities
As at January 1
Current tax
Tax paid
Exchange difference
As at December 31
2017
2016
2015
13,718
10,949
(19,887)
561
(in US$’000)
3,275
26,709
(15,595)
(671)
1,608
7,928
(6,199)
(62)
5,341
13,718
3,275
20. Notes to the Consolidated Statements of Cash Flows
(a) Reconciliation of profit for the year to net cash generated from operations:
Year Ended December 31,
2016
2017
2015
Profit for the year
Adjustments to reconcile profit for the year to net
cash generated from operations
Taxation charge
Interest income
Gain on disposal of assets held for sale
Depreciation on property, plant and equipment
Loss on disposal of property, plant and equipment
Impairment of property, plant and equipment
Amortization of leasehold land
Amortization of other intangible asset
Reversal provision for trade receivables
Provision for excess and obsolete inventories
Exchange differences
Changes in working capital:
Trade and bills receivables
Other receivables, prepayments and deposits
Inventories
Trade payables
Other payables, accruals and advance receipts
Deferred income
Payment for other intangible asset
Total changes in working capital
Net cash generated from operations
55,623
(in US$’000)
120,499
31,307
10,874
(757)
27,645
(565)
— (88,536)
3,135
179
1,174
166
225
(81)
1,236
186
6,556
2
—
164
222
—
994
1,377
6,094
(306)
—
2,277
34
—
271
217
—
1,569
1,720
1,273
(1,057)
(14,257)
3,794
13,574
121
—
(463)
922
(8,395)
3,572
3,740
(329)
(4,236)
361
(7,118)
(5,530)
25,979
(430)
— (1,202)
3,448
(953)
7,824
78,503
64,310
51,007
(b) Supplemental disclosure for non-cash activities
During the year ended December 31, 2017, there was a decrease in accruals made for purchases of
property, plant and equipment of US$4.3 million.
F-79
21. Commitments
(a) Capital commitments
The Group had the following capital commitments:
Property, plant and equipment
Contracted but not provided for
December 31,
2017
2016
(in US$’000)
574
—
Capital commitments for property, plant and equipment are mainly for improvements to the
Company’s plant.
(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:
Not later than 1 year
Between 1 to 2 years
Between 2 to 3 years
December 31,
2017
2016
(in US$’000)
283
21
10
314
405
101
3
509
22. Significant Related Party Transactions
The Group has the following significant transactions during the years with related parties which were
carried out in the normal course of business at terms determined and agreed by the relevant parties:
(a) Transactions with related parties:
2017
Year Ended December 31,
2016
(in US$’000)
2015
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
Provision of marketing services to:
—A fellow subsidiary of SHCM(HK)IL
27,471
—
27,471
26,044
—
26,044
17,478
3,549
21,027
16,469
17,792
11,151
—
789
223
315
389
286
10,195
8,401
5,093
F-80
No transactions have been entered into with the directors of the Company (being the key
management personnel) during the year ended December 31, 2017 (2016 and 2015: nil).
(b) Balances with related parties included in:
Trade receivables—related parties
—A fellow subsidiary of SHTCML
—A fellow subsidiary of SHCM(HK)IL
Other receivables—related parties
—A fellow subsidiary of SHTCML
Trade payable—related parties
—A fellow subsidiary of SHTCML
Other payables, accruals and advance receipts
—Fellow subsidiaries of SHCM(HK)IL
December 31,
2017
2016
(in US$’000)
399
6,567
6,966
3,943
3,067
7,010
974
—
2,999
1,656
888
739
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.
23. Particulars of Principal Subsidiaries
Nominal value
of registered
capital
Equity
interest
attributable
to the Group
As at
As at
December 31, December 31,
2017
2016
(in RMB’000)
2017
2016 Type of legal entity
Principal activity
Place of
establishment
and
operation
PRC
20,000 20,000 100% 100%
Limited liability
company
Distribution of drug
products
Limited liability
company
Agriculture and sales
of Chinese herbs
Name
Shanghai Shangyao Hutchison
Whampoa GSP Company
Limited
Hutchison Heze Bio Resources &
Technology Co., Limited
PRC
1,500
1,500
100% 100%
24. Subsequent Events
The Group evaluated subsequent events through March 9, 2018, which is the date when the
consolidated financial statements were issued.
F-81
HUTCHISON WHAMPOA GUANGZHOU
BAIYUNSHAN CHINESE MEDICINE
COMPANY LIMITED
F-82
Report of Independent Auditors
To the Board of Directors and Shareholders of Hutchison Whampoa Guangzhou Baiyunshan Chinese
Report of Independent Auditors
Medicine Company Limited
To the Board of Directors and Shareholders of Hutchison Whampoa Guangzhou Baiyunshan Chinese
Medicine Company Limited
We have audited the accompanying consolidated financial statements of Hutchison Whampoa
Guangzhou Baiyunshan Chinese Medicine Company Limited and its subsidiaries, which comprise the
We have audited the accompanying consolidated financial statements of Hutchison Whampoa
consolidated statements of financial position as of December 31, 2017 and 2016, and the related
Guangzhou Baiyunshan Chinese Medicine Company Limited and its subsidiaries, which comprise the
consolidated income statements, consolidated statements of comprehensive income, of changes in equity
consolidated statements of financial position as of December 31, 2017 and 2016, and the related
and of cash flows for each of the three years in the period ended December 31, 2017.
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, 2017.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of the consolidated financial
Management’s Responsibility for the Consolidated Financial Statements
statements in accordance with International Financial Reporting Standards as issued by the International
Management is responsible for the preparation and fair presentation of the consolidated financial
Accounting Standards Board; this includes the design, implementation, and maintenance of internal
statements in accordance with International Financial Reporting Standards as issued by the International
control relevant to the preparation and fair presentation of consolidated financial statements that are free
Accounting Standards Board; this includes the design, implementation, and maintenance of internal
from material misstatement, whether due to fraud or error.
control relevant to the preparation and fair presentation of consolidated financial statements that are free
from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on the consolidated financial statements based on our
Auditors’ Responsibility
audits. We conducted our audits in accordance with auditing standards generally accepted in the
Our responsibility is to express an opinion on the consolidated financial statements based on our
United States of America. Those standards require that we plan and perform the audit to obtain
audits. We conducted our audits in accordance with auditing standards generally accepted in the
reasonable assurance about whether the consolidated financial statements are free from material
United States of America. Those standards require that we plan and perform the audit to obtain
misstatement.
reasonable assurance about whether the consolidated financial statements are free from material
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures
misstatement.
in the consolidated financial statements. The procedures selected depend on our judgment, including the
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures
assessment of the risks of material misstatement of the consolidated financial statements, whether due to
in the consolidated financial statements. The procedures selected depend on our judgment, including the
fraud or error. In making those risk assessments, we consider internal control relevant to the Company’s
assessment of the risks of material misstatement of the consolidated financial statements, whether due to
preparation and fair presentation of the consolidated financial statements in order to design audit
fraud or error. In making those risk assessments, we consider internal control relevant to the Company’s
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on
preparation and fair presentation of the consolidated financial statements in order to design audit
the effectiveness of the Company’s internal control. Accordingly, we express no such opinion. An audit also
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on
includes evaluating the appropriateness of accounting policies used and the reasonableness of significant
the effectiveness of the Company’s internal control. Accordingly, we express no such opinion. An audit also
accounting estimates made by management, as well as evaluating the overall presentation of the
includes evaluating the appropriateness of accounting policies used and the reasonableness of significant
consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and
accounting estimates made by management, as well as evaluating the overall presentation of the
appropriate to provide a basis for our audit opinion.
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
Opinion
respects, the financial position of Hutchison Whampoa Guangzhou Baiyunshan Chinese Medicine
In our opinion, the consolidated financial statements referred to above present fairly, in all material
Company Limited and its subsidiaries as of December 31, 2017 and 2016, and the results of their
respects, the financial position of Hutchison Whampoa Guangzhou Baiyunshan Chinese Medicine
operations and their cash flows for each of the three years in the period ended December 31, 2017 in
Company Limited and its subsidiaries as of December 31, 2017 and 2016, and the results of their
accordance with International Financial Reporting Standards as issued by the International Accounting
operations and their cash flows for each of the three years in the period ended December 31, 2017 in
Standards Board.
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
/s/ PricewaterhouseCoopers Zhong Tian LLP
March 9, 2018
Guangzhou, the People’s Republic of China
March 9, 2018
F-83
F-83
Hutchison Whampoa Guangzhou Baiyunshan Chinese Medicine Company Limited
Consolidated Income Statements
(in US$’000)
Revenue
Cost of sales
Gross profit
Selling expenses
Administrative expenses
Other net operating income
Operating profit
Share of profits of joint venture and associated
companies, net of tax
Finance costs
Loss on divestment of a subsidiary
Profit before taxation
Taxation charge
Profit for the year
Attributable to:
Shareholders of the Company
Non-controlling interests
Year Ended December 31,
Note
2017
2016
2015
5
6
7
14
8
227,422
(135,964)
224,131
(134,776)
211,603
(120,142)
91,458
(45,262)
(24,541)
3,000
24,655
65
(117)
(169)
24,434
(3,629)
20,805
20,776
29
20,805
89,355
(46,873)
(21,716)
3,097
23,863
19
(123)
—
23,759
(3,631)
20,128
20,376
(248)
20,128
91,461
(45,325)
(23,722)
2,902
25,316
6
(158)
—
25,164
(3,948)
21,216
21,376
(160)
21,216
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 Comprehensive Income
(in US$’000)
Year Ended December 31,
2016
2015
2017
Profit for the year
Other comprehensive income/(loss) that has been or may be reclassified
20,805
20,128
21,216
subsequently to profit or loss:
Exchange translation differences
Total comprehensive income
Attributable to:
Shareholders of the Company
Non-controlling interests
8,293
(9,248)
(5,097)
29,098
10,880
16,119
28,672
426
29,098
11,549
(669)
16,427
(308)
10,880
16,119
The accompanying notes are an integral part of these consolidated financial statements.
F-85
Hutchison Whampoa Guangzhou Baiyunshan Chinese Medicine Company Limited
Consolidated Statements of Financial Position
(in US$’000)
Assets
Current assets
Cash and cash equivalents
Bank deposits maturing over three months
Trade and bills receivables
Other receivables, prepayments and deposits
Inventories
Assets classified as held for sale
Total current assets
Property, plant and equipment
Leasehold land
Goodwill
Other intangible assets
Investments in a joint venture and associated companies
Deferred tax assets
Other non-current assets
Total assets
Liabilities and shareholders’ equity
Current liabilities
Trade payables
Other payables, accruals and advance receipts
Current tax liabilities
Liabilities directly associated with assets classified as held for sale
Total current liabilities
Deferred tax liabilities
Deferred income
Finance lease payables
Total liabilities
Company’s shareholders’ equity
Share capital
Reserves
Total Company’s shareholders’ equity
Non-controlling interests
Total shareholders’ equity
Total liabilities and shareholder’s equity
December 31,
Note
2017
2016
10
10
11
12
13
14
15
16
17
18
19
14
16
20
13,843
—
36,368
6,936
44,423
101,570
—
101,570
70,817
10,424
8,751
2,906
473
2,489
11,366
23,448
1,675
39,901
3,671
28,839
97,534
25,097
122,631
65,130
10,056
8,237
3,076
384
1,717
10,504
208,796
221,735
15,545
59,015
1,227
75,787
—
75,787
114
18,248
386
94,535
18,575
33,689
892
53,156
17,062
70,218
131
17,566
451
88,366
24,103
86,513
110,616
3,645
24,103
102,969
127,072
6,297
114,261
133,369
208,796
221,735
The accompanying notes are an integral part of these consolidated financial statements.
F-86
Hutchison Whampoa Guangzhou Baiyunshan Chinese Medicine Company Limited
Consolidated Statements of Changes in Equity
(in US$’000)
Attributable to shareholders of the Company
Share
capital
Exchange General
reserves
reserve
Retained
earnings
24,103
—
12,592
—
131
—
74,680
21,376
Total
111,506
21,376
Non-
controlling
interests
Total
equity
3,802
(160)
115,308
21,216
As at January 1, 2015
Profit/(loss) for the year
Other comprehensive loss
Exchange translation
differences
Total comprehensive (loss)/
income
Dividends declared to
shareholders
Capital contribution from a
non-controlling shareholder of
a subsidiary
— (4,949)
— (4,949)
—
—
—
—
As at December 31, 2015
24,103
7,643
Profit/(loss) for the year
Other comprehensive loss
Exchange translation
differences
Total comprehensive (loss)/
income
Dividends declared to
shareholders
Dividend declared to a
non-controlling shareholder of
a subsidiary
Capital contribution from a
non-controlling shareholder of
a subsidiary
—
—
— (8,827)
— (8,827)
—
—
—
—
—
—
As at December 31, 2016
24,103
(1,184)
Profit for the year
Other comprehensive income
Exchange translation
differences
Total comprehensive income
Dividends declared to
shareholders
Divestment of a subsidiary
—
—
— 7,896
— 7,896
—
—
—
—
131
—
—
—
—
—
—
131
—
—
—
—
(4,949)
(148)
(5,097)
21,376
16,427
(308)
16,119
(6,410)
(6,410)
—
(6,410)
—
—
46
46
89,646
121,523
3,540
125,063
20,376
20,376
(248)
20,128
—
(8,827)
(421)
(9,248)
20,376
11,549
(669)
10,880
(6,000)
(6,000)
—
(6,000)
—
—
—
—
104,022
127,072
(174)
(174)
3,600
6,297
3,600
133,369
20,776
20,776
29
20,805
—
7,896
20,776
28,672
397
426
8,293
29,098
—
—
—
—
— (45,128)
—
—
(45,128)
— (3,078)
— (45,128)
(3,078)
As at December 31, 2017
24,103
6,712
131
79,670
110,616
3,645
114,261
The accompanying notes are an integral part of these consolidated financial statements.
F-87
Hutchison Whampoa Guangzhou Baiyunshan Chinese Medicine Company Limited
Consolidated Statements of Cash Flows
(in US$’000)
Operating activities
Net cash generated from operations
Interest received
Finance costs paid
Income tax paid
Net cash generated from operating activities
Investing activities
Purchase of property, plant and equipment
Deposits into bank deposits maturing over three months
Proceed from bank deposits maturing over three months
Government grants received relating to property, plant and
equipment
Proceeds from divestment of a subsidiary, net of cash held
14
Net cash used in investing activities
Financing activities
Dividends paid to shareholders
Finance lease payments
Proceeds from bank borrowings
Repayment of bank borrowings
Capital contribution from a non-controlling shareholder of a
subsidiary
Net cash used in financing activities
Net (decrease)/increase in cash and cash equivalents
Effect of exchange rate changes on cash and cash equivalents
Cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Year Ended December 31,
Note
2017
2016
2015
21(a)
24,844
220
(117)
(4,040)
16,426
238
(412)
(4,159)
12,278
628
(36)
(4,703)
20,907
12,093
8,167
(7,236) (13,219) (21,698)
(3,178)
23,749
— (1,466)
53
1,780
660
2,641
3,733
—
451
—
(2,155) (10,899)
(676)
(29,872)
(93)
—
—
(6,000)
—
—
(923)
(6,410)
—
923
(625)
—
—
46
(29,965)
(6,923)
(6,066)
(11,213)
1,474
(5,729)
(1,844)
1,425
(1,274)
(9,739)
(7,573)
151
23,582
31,155
31,004
13,843
23,582
31,155
The accompanying notes are an integral part of these consolidated financial statements.
F-88
Hutchison Whampoa Guangzhou Baiyunshan Chinese Medicine Company Limited
Notes to the Consolidated Financial Statements
1. General Information
Hutchison Whampoa Guangzhou Baiyunshan Chinese Medicine Company Limited (the ‘‘Company’’)
and its subsidiaries (together the ‘‘Group’’) are principally engaged in manufacturing, selling and
distribution of over-the-counter drug products. The Group has manufacturing plants in the People’s
Republic of China (the ‘‘PRC’’) and sells 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 Company
Limited (‘‘GBPHCL’’).
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 9, 2018.
2. Summary of Significant Accounting Policies
The consolidated financial statements of the Company have been prepared in accordance with
International Financial Reporting Standards (‘‘IFRS’’) and
issued by the IFRS
Interpretations Committee applicable to companies reporting under IFRS. The consolidated financial
statements comply with IFRS as issued by the International Accounting Standards Board (‘‘IASB’’). These
consolidated financial statements have been prepared under the historical cost convention.
interpretations
During the year, the Group has adopted all of the new standards, amendments and interpretations
issued by the IASB that are relevant to the Group’s operations and mandatory for annual periods
beginning January 1, 2017. The adoption of these new 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, 2017 and have not been early adopted by the Group:
IAS 28 (Amendments)(1)
IAS 40 (Amendments)(1)
IFRS 2 (Amendments)(1)
IFRS 9(1)
IFRS 10 and IAS 28 (Amendments)(3)
IFRS 15(1)
IFRS 15 (Amendments)(1)
IFRS 16(2)
IFRIC 22(1)
IFRIC 23(2)
Annual improvement 2014-2016(1)
Annual improvement 2015-2017(2)
Investments in Associates and Joint Ventures
Transfers of Investment Property
Classification and Measurement of Share-based
Payment Transactions
Financial Instruments
Sale or Contribution of Assets between an
Investor and its Associate or Joint Venture
Revenue from Contracts with Customers
Revenue from Contracts with Customers
Leases
Foreign Currency Transactions and Advance
Consideration
Uncertainty over Income Tax Treatments
Improvements to IFRSs
Improvements to IFRSs
(1) Effective for the Group for annual periods beginning on or after January 1, 2018.
(2) Effective for the Group for annual periods beginning on or after January 1, 2019.
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(3) No mandatory effective date determined yet, but available for adoption.
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 16 for which management is still assessing the impact.
Based on its evaluation of IFRS 15 and its Amendments, the Group expects there will not be a
material impact to the timing of revenue recognition. The Group expects the timing of recognition will be
at the point when the goods have been 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 will adopt the new standard using the modified retrospective method in the
year commencing January 1, 2018.
(a) Basis of Consolidation
The consolidated financial statements of the Group include the financial statements of the Company
and its subsidiaries, and also include the Group’s interests in a joint venture and associated companies on
the basis set out in Notes 2(e) and 2(f) below.
The accounting policies of subsidiaries, the joint venture and associated companies have been
changed where necessary to ensure consistency with the policies adopted by the Group.
Intercompany transactions, balances and unrealized gains on transactions between group companies
are eliminated. Unrealized losses are also eliminated unless the transaction provides evidence of an
impairment of the transferred asset.
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 financial statements,
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.
F-90
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 acquiree 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.
(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 it to be a joint venture. The joint venture is accounted for using the
equity method.
Under the equity method of accounting, the 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 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 losses after tax
of joint venture’’ in the income statement.
(f) Associated Companies
An associate is an entity, other than a subsidiary or a joint venture, in which the Group has a
long-term equity interest and over which the Group is in position to exercise significant influence over its
management, including participation in the financial and operating policy decisions.
The results and net assets of associates are incorporated in these financial statements using the equity
method of accounting, except when the investment is classified as held for sale, in which case it is
accounted for under IFRS 5, Non-current assets held for sale and discontinued operations. The total
carrying amount of such investments is reduced to recognize any identified impairment loss in the value of
individual investments.
(g) Foreign Currency Translation
Items included in the financial statements 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, joint venture and associated companies is
Renminbi (‘‘RMB’’) whereas the consolidated financial statements are presented in US$, which is the
Company’s presentation currency.
Foreign currency transactions are translated into the functional currency using the exchange rates at
the dates of the transactions. Foreign currency gains and losses resulting from the settlement of such
transactions and from the translation of monetary assets and liabilities denominated in foreign currencies
at year end exchange rates are generally recognized in the income statement.
The financial statements of the Company, subsidiaries, joint venture and associated companies are
translated into the Company’s presentation currency using the year end rates of exchange for the
F-91
statements of financial position items and the average rates of exchange for the year for the income
statement items. Exchange translation differences are recognized directly in other comprehensive income/
(loss).
(h) 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 asset costs less accumulated
impairment losses over their estimated useful lives. The principal estimated useful lives are as follows:
Buildings and facilities
Plant and equipment
Furniture and fixtures, other equipment and motor vehicles
10-30 years
10 years
5 years
The assets’ useful lives are reviewed and adjusted, if appropriate, at the 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.
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 into 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.
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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 costs over the estimated useful lives 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 an asset 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.
(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 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.
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(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 statements of cash flows, cash and cash equivalents include cash on hand, bank
deposits and other short-term highly liquid investments with original maturities of three months or less and
restricted cash.
(s) 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.
(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.
(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 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)
F-94
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 liabilities 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 managed by
the relevant municipal and provincial governments in the PRC. The assets of these plans are held
separately from those of the Group. 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 under
the plans 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.
(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.
(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.
F-95
(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 year 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.
(ab) Segment Reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the
chief operating decision-makers. The Board of Directors, which is responsible for allocating resources and
assessing performance of the operating segments, has been identified as the steering committee that makes
strategic decisions.
F-96
(ac) General Reserves
In accordance with the laws applicable to Foreign Investment Enterprises established in the PRC, the
Company makes appropriations to certain non-distributable reserve funds including the general reserve
fund, the enterprise expansion fund and the staff bonus and welfare fund. The amount of appropriations to
these funds are made at the discretion of the Company’s Board of Directors.
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
purposes.
(i) Credit risk
The carrying amounts of cash at bank, bank deposits, trade receivables (including bills receivables)
and other receivables 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 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 settled by state-owned banks or other reputable 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.
Management periodically assesses the recoverability of trade receivables and other receivables. The
Group’s historical experience collecting receivables falls within the recorded allowances.
(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 10. The Group’s exposure to interest rate risk would mainly be to
bank borrowings which bear interest at fixed rates.
(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, 2017 and 2016, the Group’s current financial liabilities were mainly due for
settlement within twelve months and the Group expects to meet all liquidity requirements.
(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-97
The Group regularly reviews and manages its capital structure to ensure an optimal balance between
higher shareholders’ return that might be possible with higher levels of borrowings and the 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 statements 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, 2017 and 2016 was as follows:
Total liabilities
Total assets
Liabilities to assets ratio
(c) Fair value estimation
December 31,
2017
2016
(in US$’000)
94,535
208,796
88,366
221,735
45.3%
39.9%
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, and other payables
and accruals 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 includes a summary of the significant accounting policies used in the preparation of the
financial statements. The preparation of financial statements 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 financial statements. 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 consolidated financial statements.
(a) Sales rebates
Certain sales rebates are provided to customers when their business performance for the whole year
meets certain criteria as stipulated in the contracts. The estimate of sales rebates during the year is based
on estimated sales transactions for the entire period stipulated and is subject to change based on actual
performance and collection status.
F-98
(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 non-Financial assets
The Group tests annually whether goodwill 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
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 business—manufacture and distribution of drug products
—Distribution business—provision of sales, distribution and marketing services to pharmaceutical
manufacturers
The operating segments are strategic business units that offer different products and services. They
are managed separately because each business requires different technology and marketing approaches.
The performance of each of the reportable segments is assessed based on a measure of earnings before
share of profits of joint venture and associated companies, net of tax, interest income, finance costs and
taxation charge (‘‘Adjusted EBIT’’).
F-99
The segment information for the reportable segments for the year is as follows:
Revenue from external customers
Adjusted EBIT
Interest income
Operating profit
Share of profits of joint venture and associated
companies, net of tax
Finance costs
Loss on divestment of a subsidiary
Depreciation/amortization
Additions to non-current assets (other than financial
instrument and deferred tax assets)
Total segment assets
Revenue from external customers
Adjusted EBIT
Interest income
Operating profit
Share of profits of joint venture and associated
companies, net of tax
Finance costs
Depreciation/amortization
Impairment of property, plant and equipment
Additions to non-current assets (other than financial
instrument and deferred tax assets)
Year Ended December 31, 2017
Manufacturing
business
PRC
176,134
23,280
131
23,411
65
117
169
4,976
6,111
Distribution
business
PRC
(in US$’000)
51,288
1,155
89
1,244
—
—
—
9
1
Total
227,422
24,435
220
24,655
65
117
169
4,985
6,112
As at December 31, 2017
(in US$’000)
13,661
195,135
208,796
Manufacturing
business
PRC
155,838
Year Ended December 31, 2016
Distribution
business
PRC
(in US$’000)
68,293
23,077
160
23,237
19
123
2,902
617
20,924
548
78
626
—
—
56
—
—
Total
224,131
23,625
238
23,863
19
123
2,958
617
20,924
Total segment assets
As at December 31, 2016
185,407
(in US$’000)
36,328
221,735
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Revenue from external customers
Adjusted EBIT
Interest income
Operating profit
Share of profits of joint venture and associated
companies, net of tax
Finance costs
Depreciation/amortization
Additions to non-current assets (other than financial
instrument and deferred tax assets)
Year Ended December 31, 2015
Manufacturing
business
PRC
144,510
24,152
496
24,648
6
158
3,221
21,698
Distribution
business
PRC
(in US$’000)
67,093
536
132
668
—
—
53
—
Total
211,603
24,688
628
25,316
6
158
3,274
21,698
Revenue from external customers is after elimination of inter-segment sales. The amount eliminated
was US$3,039,000 for 2017 (2016: US$16,181,000; 2015: US$19,010,000).
Sales between segments are carried out at mutually agreed terms.
A reconciliation of Adjusted EBIT for reportable segments to profit before taxation is provided
as follows:
Adjusted EBIT for reportable segments
Interest income
Share of profits of joint venture and associated
companies, net of tax
Finance costs
Loss on divestment of a subsidiary
Profit before taxation
6. Other Net Operating Income
Interest income
Other operating income
Other operating expenses
7. Operating Profit
Operating profit
Year Ended December 31,
2016
(in US$’000)
23,625
238
2017
24,435
220
65
(117)
(169)
19
(123)
—
2015
24,688
628
6
(158)
—
24,434
23,759
25,164
2017
Year Ended December 31,
2016
(in US$’000)
238
3,435
(576)
220
3,306
(526)
3,000
3,097
2015
628
2,574
(300)
2,902
Year Ended December 31,
2017
2016
2015
24,655
(in US$’000)
23,863
25,316
F-101
Operating profit is stated after charging the following:
Cost of inventories recognized as expense
Depreciation of property, plant and equipment
Impairment of property, plant and equipment
Loss on disposal of property, plant and equipment
Amortization of leasehold land
Amortization of other intangible assets
Operating lease rentals in respect of land and buildings
Movements on the provision for trade receivables
Movements on the provision for excess and obsolete
inventories
Research and development expense
Auditor’s remuneration
Employee benefit expenses (Note 9)
Year Ended December 31,
2017
125,156
4,380
—
166
253
352
1,214
(41)
2016
(in US$’000)
122,969
2,227
617
60
255
476
872
38
2015
111,064
2,877
—
54
271
126
1,022
77
187
1,014
87
32,659
972
1,098
90
31,910
340
1,284
89
31,838
8. Taxation Charge
Current tax
Deferred income tax (Note 16)
Taxation charge
2017
Year Ended December 31,
2016
(in US$’000)
4,518
(887)
4,298
(669)
2015
4,034
(86)
3,629
3,631
3,948
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 were
recognized
Others
Taxation charge
2017
Year Ended December 31,
2016
(in US$’000)
23,759
24,434
2015
25,164
6,109
5,940
6,291
70
(2,935)
244
(2,783)
207
(2,699)
396
(11)
250
(20)
131
18
3,629
3,631
3,948
Note: The Company has been successful in its application to renew the High and New Technology
Enterprise status. Accordingly, the Company is subjected to a preferential income tax rate of 15%
for 2017 and up to 2019 (2016: 15%; 2015: 15%).
F-102
The weighted average tax rate calculated at the statutory tax rates of respective companies for the year
was 25% (2016: 25%; 2015: 25%). The effective tax rate for the year was 14.9% (2016: 15.3%;
2015: 15.7%).
9. Employee Benefit Expenses
Wages, salaries and bonuses
Pension costs—defined contribution plans
Staff welfare
Year Ended December 31,
2017
23,700
7,637
1,322
32,659
2016
(in US$’000)
23,490
7,417
1,003
31,910
2015
22,902
7,695
1,241
31,838
Employee benefit expenses of approximately US$9,122,000 (2016: US$8,704,000; 2015: US$8,611,000)
are included in cost of sales.
10. Cash and Bank Balances
Cash and cash equivalents
Included in assets classified as held for sale (Note 14)
Cash and cash equivalents as per consolidated statements of
financial position
Bank deposits maturing over three months (note)
Cash and bank balances
December 31,
2017
2016
(in US$’000)
13,843
—
23,582
(134)
13,843
—
13,843
23,448
1,675
25,123
Note: The weighted average effective interest rate on bank deposits as at December 31, 2016 with
maturity of 91 days to 365 days was 1.3% per annum. Cash at bank earns interest at floating rates
based on daily bank deposit rates.
The cash at bank balances are denominated in RMB and 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.
11. Trade and Bills Receivables
Trade receivables—third parties
Trade receivables—related parties (Note 23(b))
Bills receivables
December 31,
2017
2016
(in US$’000)
1,755
285
34,328
36,368
223
466
39,212
39,901
F-103
All trade and bills receivables are denominated in RMB and are due within one year from the end of
the reporting period. The carrying value of trade and bills receivables approximates their fair values.
Movements on the provision for trade receivables are as follows:
As at January 1
Increase in provision for trade receivables
Decrease in provision due to subsequent collection
Transfer to assets classified as held for sale
Exchange differences
As at December 31
2017
110
—
(41)
—
6
75
2015
2016
(in US$’000)
285
165
38
77
— (185)
—
(81)
(12)
(12)
110
165
The impaired and provided receivables as at December 31, 2017 and December 31, 2016 were aged
over 1 year.
12. Other Receivables, Prepayments and Deposits
Prepayments to suppliers
Value-added tax receivables
Others
13. Inventories
Raw materials
Work in progress
Finished goods
December 31,
2017
2016
(in US$’000)
3,272
2,157
1,507
6,936
850
1,352
1,469
3,671
December 31,
2017
2016
(in US$’000)
14,853
14,808
14,762
44,423
10,326
9,537
8,976
28,839
Movements on the provision for excess and obsolete inventories are as follows:
As at January 1
Increase in provision for excess and obsolete inventories
Decrease in provision due to subsequent sale
Write-off
Exchange differences
2017
2016
(in US$’000)
332
972
—
—
(63)
1,241
529
(342)
(497)
69
As at December 31
1,000
1,241
F-104
2015
—
340
—
—
(8)
332
14. Assets Classified as Held For Sale
In December 2016, the board of directors and shareholders of Nanyang Baiyunshan Hutchison
Whampoa Guanbao Pharmaceutical Company Limited (‘‘NBHG’’) agreed in principle to a divestment of
the Company’s 60% majority interest in NBHG. As at December 31, 2016, the remaining step prior to the
divestment was to complete the government-mandated auction process. Since the Company had held
discussions with potential buyers, it had determined that a divestment was highly probable and accordingly,
the Company reclassified the remaining assets and liabilities of NBHG as assets classified as held for sale
and liabilities directly associated with assets classified as held for sale respectively.
The major classes of assets and liabilities associated with NBHG classified as net assets held for sale
are as follows:
Assets classified as held for sale:
Cash and cash equivalents
Trade and bill receivables
Other receivables, prepayment and deposits
Inventories
Property, plant and equipment
Goodwill
Other intangible assets
Deferred tax assets
Total assets classified as held for sale
Liabilities directly associated with assets classified as held for sale:
Trade payables
Other payables, accruals and advance receipts
Deferred tax liabilities
Total liabilities directly associated with assets classified as held for
sale
December 31,
2016
(in US$’000)
134
12,360
4,672
6,949
241
172
546
23
25,097
(9,400)
(7,526)
(136)
(17,062)
On July 26, 2017, the Company received dividends of US$1.6 million from NBHG and on
September 1, 2017 completed the divestment of its majority interest in NBHG for consideration of
US$2.7 million (which was US$2.6 million net of cash held at NBHG). Based on the then net assets
associated with NBHG attributable to the Company of US$2.9 million, the Company recorded a loss of
$0.2 million upon the divestment.
F-105
15. Property, Plant and Equipment
Cost
As at January 1, 2017
Additions
Disposals
Transfers
Exchange differences
As at December 31, 2017
Accumulated depreciation
As at January 1, 2017
Depreciation
Disposals
Exchange differences
As at December 31, 2017
Net book value
As at December 31, 2017
Cost
As at January 1, 2016
Additions
Disposals
Transfers
Transfer to assets classified as held for sale
Exchange differences
As at December 31, 2016
Accumulated depreciation
As at January 1, 2016
Depreciation
Disposals
Impairment
Transfer to assets classified as held for sale
Exchange differences
As at December 31, 2016
Net book value
As at December 31, 2016
Buildings
and
facilities
Plant and
equipment
25,969
2,539
—
32,214
2,656
63,378
8,550
1,762
—
568
13,701
291
(328)
11,847
1,209
26,720
10,088
1,841
(484)
665
10,880
12,110
Furniture and
fixtures, other
equipment
and motor
vehicles
(in US$’000)
Construction
in progress
Total
7,769
677
(1,026)
580
494
8,494
6,289
777
(704)
396
6,758
42,618
2,605
—
(44,641)
1,391
90,057
6,112
(1,354)
—
5,750
1,973
100,565
—
—
—
—
—
24,927
4,380
(1,188)
1,629
29,748
52,498
14,610
1,736
1,973
70,817
Buildings
and
facilities
Plant and
equipment
Furniture and
fixtures, other
equipment
and motor
vehicles
(in US$’000)
Construction
in progress
Total
26,757
816
(25)
226
—
(1,805)
12,794
706
(11)
1,134
—
(922)
25,969
13,701
7,774
842
(1)
487
—
(552)
10,070
592
(9)
130
—
(695)
8,550
10,088
7,888
926
(53)
17
(447)
(562)
7,769
6,163
793
(19)
—
(206)
(442)
6,289
31,259
15,390
—
(1,377)
—
(2,654)
78,698
17,838
(89)
—
(447)
(5,943)
42,618
90,057
— 24,007
2,227
—
(29)
—
617
—
—
(206)
— (1,689)
— 24,927
17,419
3,613
1,480
42,618
65,130
F-106
Cost
As at January 1, 2015
Additions
Disposals
Transfers
Exchange differences
Buildings
and
facilities
Plant and
equipment
26,972
638
(13)
260
(1,100)
13,275
663
(609)
—
(535)
As at December 31, 2015
26,757
12,794
Accumulated depreciation
As at January 1, 2015
Depreciation
Disposals
Exchange differences
As at December 31, 2015
Net book value
As at December 31, 2015
6,978
1,101
—
(305)
7,774
10,276
949
(572)
(583)
10,070
Furniture and
fixtures, other
equipment
and motor
vehicles
(in US$’000)
Construction
in progress
Total
7,842
352
(53)
70
(323)
7,888
5,629
827
(49)
(244)
6,163
9,989
22,541
—
(330)
(941)
58,078
24,194
(675)
—
(2,899)
31,259
78,698
— 22,883
2,877
—
(621)
—
(1,132)
—
— 24,007
18,983
2,724
1,725
31,259
54,691
Construction in progress in 2015 and 2016 mainly related to the construction of a new office building
and a new factory. In March 2017 and December 2017, the new factory and the new office became ready
for its intended use respectively.
16. Deferred Tax Assets and Liabilities
Deferred tax assets
Deferred tax liabilities
Net deferred tax assets
The movements in net deferred tax assets are as follows:
At January 1
Credited/(debited) to the consolidated income statements
—tax losses
—accrued expenses, provisions, depreciation allowances
Transfer to assets classified as held for sale (Note 14)
Exchange differences
At December 31
December 31,
2017
2016
(in US$’000)
2,489
(114)
2,375
1,717
(131)
1,586
2017
1,586
2016
(in US$’000)
667
2015
606
657
12
—
120
552
335
113
(81)
2,375
1,586
354
(268)
—
(25)
667
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 temporary differences including tax losses, accrued
expenses, provisions and depreciation allowances. The potential deferred tax assets in respect of tax losses
F-107
which have not been recognized in the consolidated financial statements were approximately US$612,000
(2016: US$215,000).
These unrecognized tax losses can be carried forward against future taxable income and will expire in
the following years:
2018
2019
2020
2021
2022
17. Other Non-Current Assets
Leasehold land rights (note (i))
Restricted cash (note (ii))
December 31,
2017
2016
(in US$’000)
170
207
240
169
1,661
2,447
160
195
345
159
—
859
December 31,
2017
2016
(in US$’000)
11,160
206
11,366
10,504
—
10,504
Notes:
(i) Represents payments for a land use right. The title of the land is in the process of
registration, pending remaining administrative procedures. The respective payments are
recorded in other non-current assets until the registration is completed and title is
transferred to the Company. As at December 31, 2017, this process is still in progress.
(ii) Restricted cash is comprised of a deposit subject to a contractual restriction up to
March 2019 and is therefore not available for general use by the Group.
18. Trade Payables
Trade payables—third parties
Trade payables—related parties (Note 23(b))
December 31,
2017
2016
(in US$’000)
11,707
3,838
15,545
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.
F-108
19. Other Payables, Accruals and Advance Receipts
Other payables and accruals
Accrued salaries and benefits
Accrued selling and administrative expenses
Value-added tax and tax surcharge payables
Deposits received
Finance lease payables
Dividends payable
Other payables to manufacturers
Others
Advance receipts
Payments in advance from customers
Deferred government incentives (note)
December 31,
2017
2016
(in US$’000)
5,512
4,920
2,178
2,894
104
15,256
4,323
10,987
46,174
11,423
1,418
12,841
59,015
5,072
9,464
2,257
2,455
93
174
1,766
6,978
28,259
3,499
1,931
5,430
33,689
Note: The deferred government incentives are related to the property, plant and equipment and
research and development projects which are expected to be completed within one year.
20. Deferred Income
Deferred government incentives:
Buildings and other non-current assets
Others
December 31,
2017
2016
(in US$’000)
13,850
4,398
18,248
13,462
4,104
17,566
F-109
21. Notes to the Consolidated Statements of Cash Flows
(a) Reconciliation of profit for the year to net cash generated from operations:
Profit for the year
Adjustments to reconcile profit for the year to net cash
generated from operations
Taxation charge
Finance costs
Interest income
Share of profits of joint venture and associated
companies, net of tax
Depreciation on property, plant and equipment
Loss on disposal of property, plant and equipment
Impairment of property, plant and equipment
Amortization of leasehold land
Amortization of other intangible assets
Movements on the provision for trade receivables
Movements on the provision for excess and obsolete
inventories
Amortization of deferred income
Loss on divestment of a subsidiary
Exchange differences
Changes in working capital:
Trade and bills receivables
Other receivables, prepayments and deposits
Inventories
Other non-current assets
Trade payables
Other payables, accruals and advance receipts
Movements on the net assets classified as held for
sale
Total changes in working capital
Net cash generated from operations
Year Ended December 31,
2017
20,805
2016
(in US$’000)
20,128
2015
21,216
3,629
117
(220)
(65)
4,380
166
—
253
352
(41)
3,631
123
(238)
(19)
2,227
60
617
255
476
38
3,948
158
(628)
(6)
2,877
54
—
271
126
77
187
(1,076)
169
1,363
972
(1,941)
—
(810)
340
(1,262)
—
(710)
6,903
(3,265)
(15,771)
(206)
(3,424)
11,194
5,992
(15,266)
(911)
(2,153)
3,837
2,633
—
—
(12,424)
10,531
(4,838) (10,677)
(606)
—
—
(5,175)
(9,093) (14,183)
24,844
16,426
12,278
(b) Supplemental disclosure for non-cash activities
During the year ended December 31, 2016, a non-controlling shareholder of a subsidiary made an
additional capital contribution in the form of intangible assets amounting to US$3.6 million.
During the year ended December 31, 2017, there was a decrease in accruals made for purchases of
property, plant and equipment of US$1.1 million. During the year ended December 31, 2016, there was an
increase in accruals made for purchases of property, plant and equipment of US$3.7 million.
F-110
22. Commitments
(a) Capital commitments
The Group had the following capital commitments:
Property, plant and equipment
Contracted but not provided for
December 31,
2017
2016
(in US$’000)
460
6,162
Capital commitments for property, plant and equipment are mainly for the construction in progress of
a new office building and a 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:
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
December 31,
2017
2016
(in US$’000)
999
379
141
141
47
1,106
1,080
—
—
—
1,707
2,186
F-111
23. Significant Related Party Transactions
The Group has the following significant transactions during the years with related parties which were
carried out in the normal course of business at terms determined and agreed by the relevant parties:
(a) Transactions with related parties:
Year Ended December 31,
2016
2015
2017
Sales of goods to:
—Fellow subsidiaries of GBPHCL
—A fellow subsidiary of GZHCMHK
Other services income from:
—Fellow subsidiaries of GBPHCL
Purchase of goods from:
—An equity investee
—Fellow subsidiaries of GBPHCL
Advertising expenses to:
—A fellow subsidiary of GBPHCL
Interest paid to:
—A fellow subsidiary of GBPHCL
—A non-controlling shareholder of a subsidiary
(in US$’000)
24,252
946
25,198
22,872
280
23,152
25,688
152
25,840
3,171
2,310
875
1,726
31,446
33,172
745
36,291
37,036
198
32,156
32,354
5,957
3,527
6,353
92
25
117
85
—
85
122
—
122
No transactions have been entered into with the directors of the Company (being the key
management personnel) during the year ended December 31, 2017 (2016 and 2015: nil).
F-112
(b) Balances with related parties included in:
Trade receivable—related parties
—Fellow subsidiaries of GZHCMHK (note (i))
—Fellow subsidiaries of GBPHCL (note (i))
Trade payables—related parties
—Fellow subsidiaries of GBPHCL (Note 18 and note (i))
Other receivables—related parties
—Fellow subsidiaries of GBPHCL (note (i))
—An equity investee (note (i))
Other payables, accruals and advance receipt—related parties
—Fellow subsidiaries of GZHCMHK (note (i))
—Fellow subsidiaries of GBPHCL (note (i))
—GBPHCL (note (ii))
—GZHCMHK (dividend payable)
—GBPHCL (dividend payable)
—Non-controlling shareholder of NBHG (dividend payable)
December 31,
2017
2016
(in US$’000)
20
265
285
—
466
466
3,838
5,290
727
443
1,170
158
3,231
2,477
7,628
7,628
—
21,122
972
—
972
286
539
2,332
—
—
174
3,331
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.
F-113
24. Particulars of Principal Subsidiaries, Joint Venture and Associated Companies
Name
Hutchison Whampoa Guangzhou
Baiyunshan Chinese Medicine
(Bozhou) Co. Ltd
Hutchison Whampoa Guangzhou
Baiyunshan Pharmaceuticals
Limited
Hutchison Whampoa Guangzhou
Baiyunshan Health &
Wellness Co. Ltd
Hutchison Whampoa Baiyunshan Lai
Da Pharmaceuticals (Shan Tou)
Company Limited
Fuyang Baiyunshan Hutchison
Whampoa Chinese Medicine
Technology Company Limited
Wenshan Baiyunshan Hutchison
Whampoa Qidan Sanqi Chinese
Medicine Co. Ltd.
Daqing Baiyunshan Hutchison
Whampoa Banlangen Technology
Company Limited
Shen Nong Garden Traditional
Chinese Medicine Museum
Nanyang Baiyunshan Hutchison
Place of
establishment
and
operation
Nominal value
of registered
capital
As at
December 31,
Equity interest
attributable
to the Group
As at
December 31,
2017
2016
2017
2016
Type of legal entity
Principal activity
(in RMB’000)
PRC
100,000
100,000
100% 100%
Limited liability
company
Manufacture, sales and
distribution of drug
products
PRC
10,000
10,000
100% 100%
Limited liability
company
Sales and marketing of
drug products
PRC
10,000
10,000
100% 100%
PRC
10,000
10,000
70% 70%
Limited liability
company
Health supplemented
food distribution
Limited liability
company
Manufacture, sales and
distribution of drug
products
PRC
3,650
3,650
75% 75%
company
Chinese herbs
Limited liability Agriculture and sales of
PRC
2,000
2,000
51% 51%
company
Chinese herbs
Limited liability Agriculture and sales of
PRC
1,020
1,020
51% 51%
company
Chinese herbs
Limited liability Agriculture and sales of
PRC
1,000
1,000
100% 100%
Non-profit
making
organization
Promote awareness of
Chinese herbs
Limited liability Agriculture and sales of
Whampoa Danshen R&D Limited
PRC
1,000
1,000
51% 51%
company
Chinese herbs
Bozhou Baiyunshan Pharmaceuticals
Co Ltd
NBHG
Joint Venture
Qing Yuan Baiyunshan Hutchison
Whampoa ChuanXinLian R&D
Limited
Associated companies
Linyi Shenghe Jiuzhou
PRC
PRC
500
500
100% 100%
— 30,000
— 60%
Limited liability
company
Limited liability
company
Manufacture, sales and
distribution of drug
products
Sales of drug products
PRC
1,000
1,000
50% 50%
company
Chinese herbs
Limited liability Agriculture and sales of
Limited liability Agriculture and sales of
Pharmaceuticals Company Limited
PRC
3,000
3,000
30% 30%
company
Chinese herbs
Tibet Lizhi Guangzhou
Pharmaceutical
Development Co. Ltd.
25. Subsequent events
PRC
2,000
2,000
20% 20%
Limited liability
company
Trading of Chinese
herbs
The Group evaluated subsequent events through March 9, 2018, which is the date when the
consolidated financial statements were issued.
F-114
NUTRITION SCIENCE PARTNERS LIMITED
F-115
Report of Independent Auditors
To the Board of Directors and Shareholders of Nutrition Science Partners Limited
Report of Independent Auditors
To the Board of Directors and Shareholders of Nutrition Science Partners Limited
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
We have audited the accompanying consolidated financial statements of Nutrition Science Partners
December 31, 2017 and 2016, and the related consolidated income statements, consolidated statements of
Limited and its subsidiary, which comprise the consolidated statements of financial position as of
comprehensive income, of changes in equity and of cash flows for each of the three years in the period
December 31, 2017 and 2016, and the related consolidated income statements, consolidated statements of
ended December 31, 2017.
comprehensive income, of changes in equity and of cash flows for each of the three years in the period
ended December 31, 2017.
Management’s Responsibility for the Consolidated Financial Statements
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
Management is responsible for the preparation and fair presentation of the consolidated financial
Accounting Standards Board; this includes the design, implementation, and maintenance of internal
statements in accordance with International Financial Reporting Standards as issued by the International
control relevant to the preparation and fair presentation of consolidated financial statements that are free
Accounting Standards Board; this includes the design, implementation, and maintenance of internal
from material misstatement, whether due to fraud or error.
control relevant to the preparation and fair presentation of consolidated financial statements that are free
from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Auditors’ 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
Our responsibility is to express an opinion on the consolidated financial statements based on our
United States of America. Those standards require that we plan and perform the audit to obtain
audits. We conducted our audits in accordance with audit standards generally accepted in the
reasonable assurance about whether the consolidated financial statements are free from material
United States of America. Those standards require that we plan and perform the audit to obtain
misstatement.
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
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures
assessment of the risks of material misstatement of the consolidated financial statements, whether due to
in the consolidated financial statements. The procedures selected depend on our judgment, including the
fraud or error. In making those risk assessments, we consider internal control relevant to the Company’s
assessment of the risks of material misstatement of the consolidated financial statements, whether due to
preparation and fair presentation of the consolidated financial statements in order to design audit
fraud or error. In making those risk assessments, we consider internal control relevant to the Company’s
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on
preparation and fair presentation of the consolidated financial statements in order to design audit
the effectiveness of the Company’s internal control. Accordingly, we express no such opinion. An audit also
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on
includes evaluating the appropriateness of accounting policies used and the reasonableness of significant
the effectiveness of the Company’s internal control. Accordingly, we express no such opinion. An audit also
accounting estimates made by management, as well as evaluating the overall presentation of the
includes evaluating the appropriateness of accounting policies used and the reasonableness of significant
consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and
accounting estimates made by management, as well as evaluating the overall presentation of the
appropriate to provide a basis for our audit opinion.
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
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 as of December 31,
In our opinion, the consolidated financial statements referred to above present fairly, in all material
2017 and 2016, and the results of their operations and their cash flows for each of the three years in the
respects, the financial position of Nutrition Science Partners Limited and its subsidiary as of December 31,
period ended December 31, 2017, in accordance with International Financial Reporting Standards as
2017 and 2016, and the results of their operations and their cash flows for each of the three years in the
issued by the International Accounting Standards Board.
period ended December 31, 2017, in accordance with International Financial Reporting Standards as
issued by the International Accounting Standards Board.
/s/ PricewaterhouseCoopers
Hong Kong
/s/ PricewaterhouseCoopers
March 9, 2018
Hong Kong
March 9, 2018
F-116
F-116
Nutrition Science Partners Limited
Consolidated Income Statements
(in US$’000)
Revenue
Service fees charged by related parties
Clinical trial expenses
Other research and development costs
Other expenses
Loss before taxation
Taxation charge
Loss for the year
Note
5
6
Year Ended December 31,
2016
2017
2015
—
(8,893)
—
(242)
(75)
—
(8,123)
(40)
(281)
(38)
—
(5,712)
(427)
(1,371)
(42)
(9,210)
(8,482)
(7,552)
—
(9,210)
—
(8,482)
—
(7,552)
The accompanying notes are an integral part of these consolidated financial statements.
F-117
Nutrition Science Partners Limited
Consolidated Statements of Comprehensive Income
(in US$’000)
Year Ended December 31,
2016
2015
2017
Loss for the year
Total comprehensive loss for the year
(9,210)
(8,482)
(7,552)
(9,210)
(8,482)
(7,552)
The accompanying notes are an integral part of these consolidated financial statements.
F-118
Nutrition Science Partners Limited
Consolidated Statements of Financial Position
(in US$’000)
Assets
Current assets
Cash and cash equivalents
Non-current assets
Intangible asset
Total assets
Liabilities and shareholders’ equity
Current liabilities
Other payables and accruals
Amounts due to related companies
Total liabilities
Shareholders’ equity
Share capital
Accumulated losses
Total shareholders’ equity
Total liabilities and shareholders’ equity
December 31,
Note
2017
2016
7
8
10
9
9,640
5,393
30,000
39,640
30,000
35,393
289
950
1,239
140
1,642
1,782
98,000
(59,599)
84,000
(50,389)
38,401
39,640
33,611
35,393
The accompanying notes are an integral part of these consolidated financial statements.
F-119
Nutrition Science Partners Limited
Consolidated Statements of Changes in Equity
(in US$’000)
As at January 1, 2015
Total comprehensive loss
As at December 31, 2015
Issuance of share capital
Capitalization of shareholders’ loans (Note 11)
Total comprehensive loss
As at December 31, 2016
Issuance of share capital
Total comprehensive loss
As at December 31, 2017
Share
capital
Accumulated
losses
Total
equity
60,000
—
60,000
10,000
14,000
—
84,000
14,000
—
98,000
(34,355)
(7,552)
(41,907)
—
—
(8,482)
25,645
(7,552)
18,093
10,000
14,000
(8,482)
(50,389)
33,611
—
(9,210)
14,000
(9,210)
(59,599)
38,401
The accompanying notes are an integral part of these consolidated financial statements.
F-120
Nutrition Science Partners Limited
Consolidated Statements of Cash Flows
(in US$’000)
Operating activities
Loss before taxation
Changes in working capital:
Decrease in prepayments
Increase/(decrease) in other payables and accruals
(Decrease)/increase in amounts due to related companies
Net cash used in operating activities
Financing activities
Proceeds from issuance of share capital
Proceeds from shareholders’ loans
Net cash generated from financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosure of non-cash activities
Capitalization of shareholders’ loans
Note
9
11
Year Ended December 31,
2016
2015
2017
(9,210)
(8,482)
(7,552)
—
149
(692)
410
(311)
1,152
1,889
(1,942)
(20)
(9,753)
(7,231)
(7,625)
14,000
—
14,000
4,247
5,393
9,640
10,000
—
10,000
—
4,000
4,000
2,769
(3,625)
2,624
5,393
6,249
2,624
11
— 14,000
—
The accompanying notes are an integral part of these consolidated financial statements.
F-121
Nutrition Science Partners Limited
Notes to the Consolidated Financial Statements
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 Nestl´e Health Science S.A. (‘‘NHS’’), a subsidiary of
Nestl´e S.A. (‘‘Nestl´e’’), entered into a joint venture agreement (‘‘JV Agreement’’). Pursuant to the JV
Agreement, Nestl´e agreed to contribute cash of US$30,000,000 and the Chi-Med Group agreed to
contribute into the Company assets and business processes including (i) the global development and
commercial rights of a novel, oral therapy drug candidate for Inflammatory Bowel Disease (‘‘IBD’’) and
(ii) the exclusive rights to its extensive botanical library and well-established botanical research and
development platform in the field of gastrointestinal disease. The Company would be jointly owned by
HMPHK and NHS having 50% equity interest each.
These consolidated financial statements are presented in United States dollars (‘‘US$’’), unless
otherwise stated and have been approved for issue by the Company’s Board of Directors on March 9, 2018.
2. Summary of Significant Accounting Policies
The consolidated financial statements of the Company have been prepared in accordance with
issued by the IFRS
International Financial Reporting Standards (‘‘IFRS’’) and
Interpretations Committee applicable to companies reporting under IFRS. The consolidated financial
statements comply with IFRS as issued by International Accounting Standards Board (‘‘IASB’’). These
consolidated financial statements have been prepared under the historical cost convention.
interpretations
As of December 31, 2017, the Company has accumulated losses of US$59,599,000 (2016:
US$50,389,000) due to its research and development activities. The Company relies on HMPHK and NHS
for financial support. In preparing these consolidated financial statements, 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 IASB that are relevant to the Group’s operations and mandatory for annual
periods beginning January 1, 2017. 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.
F-122
The following standards, amendments and interpretations were in issue but not yet effective for
financial year ended December 31, 2017 and have not been early adopted by the Group:
IAS 28 (Amendments)(1)
IAS 40 (Amendments)(1)
IFRS 2 (Amendments)(1)
IFRS 9(1)
IFRS 10 and IAS 28 (Amendments)(3)
IFRS 15(1)
IFRS 15 (Amendments)(1)
IFRS 16(2)
IFRIC 22(1)
IFRIC 23(2)
Annual improvement 2014-2016(1)
Annual improvement 2015-2017(2)
Investments in Associates and Joint Ventures
Transfers of Investment Property
Classification and Measurement of Share-based
Payment Transactions
Financial Instruments
Sale or Contribution of Assets between an Investor
and its Associate or Joint Venture
Revenue from Contracts with Customers
Revenue from Contracts with Customers
Leases
Foreign Currency Transactions and Advance
Consideration
Uncertainty over Income Tax Treatments
Improvements to IFRSs
Improvements to IFRSs
(1) Effective for the Group for annual periods beginning on or after January 1, 2018.
(2) Effective for the Group for annual periods beginning on or after January 1, 2019.
(3) No mandatory effective date determined yet, but available for adoption.
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 financial statements of the Group include the financial statements of the Company
and its subsidiary. The financial statements of the subsidiary are 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 financial statements,
the subsidiary is accounted for as described in Note 2(a) above.
(c) Foreign Currency Translation
Items included in the financial statements of each of the Group’s companies are measured using the
currency of the primary economic environment in which the entity operates. The consolidated financial
statements are presented in US$, which is the Company’s functional and presentation currency.
(d) Segment Reporting
The Group has one operating segment which conducts research and development activities. 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-123
(e)
Intangible Assets
Intangible assets acquired separately are measured on initial recognition at cost. 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.
(f) Research and Development Costs
All research costs are charged to the consolidated income statements as incurred.
Expenditures incurred on projects to develop new products are 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 the expenditure reliably during the development. Product development expenditures which do not
meet these criteria are expensed when incurred.
(g) Cash and Cash Equivalents
In the consolidated statements of cash flows, cash and cash equivalents comprise cash at bank.
(h) 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.
(i)
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
(i) 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 purposes.
(a) 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.
(b) Liquidity Risk
The Group’s objective is to maintain a balance between continuity of funding and flexibility through
balances with related companies and shareholders.
F-124
As at December 31, 2017 and 2016, the Group’s current financial liabilities were all contractually due
for settlement within twelve months and expects to meet all liquidity requirements.
(ii) Capital Management
The primary objective of the Group’s capital management is 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, 2017, 2016 and 2015.
(iii) 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 financial statements. The preparation of the consolidated financial statements 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 financial statements. 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 financial statements.
(i) Impairment of intangible asset
The Group tests annually whether an intangible asset not ready for use has 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(e). 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 have 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 asset,
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 8.
F-125
5. Significant Related Party Transactions
(i) 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:
Service fees charged by a subsidiary of Chi-Med
Service fees charged by an affiliate of NHS
Year Ended December 31,
2015
2016
2017
(in US$’000)
8,123
—
8,123
5,099
613
5,712
8,893
—
8,893
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 collaboration agreement will end on December 31, 2022, until which time the
Company is required to spend a minimum of US$500,000 in each calendar year on research activities.
The Company will own the right to any products arising from the future research and development.
HMP and NHS will provide the necessary services and employees in order to provide the Company with
the on-going research activities. HMP and NHS will be remunerated by a fee paid by the Company for the
services and staff provided.
(ii) Other transaction with related party:
On March 25, 2013, the Company and Nestec Ltd., an affiliate of NHS, entered into an option
agreement for the exclusive option to obtain exclusive royalty-bearing licenses to commercialize certain
products in certain territories. The exercise price of the option is either fixed or subject to negotiation
upon the receipt of the exercise notice, depending on the territories. The value of the option is considered
as negligible on day one. Because the option is not a derivative, it would not be subject to fair value
remeasurement in the subsequent periods. As of December 31, 2017, the option has not been exercised.
(iii) Compensation of key management personnel of the Group:
No compensation was paid by the Group to the key management personnel of the Group in respect of
their services rendered to the Group during the years ended December 31, 2017, 2016 and 2015.
6. Taxation Charge
No Hong Kong profits tax has been provided as the Group had no assessable profit for the years
ended December 31, 2017, 2016 and 2015.
F-126
The taxation on the Group’s loss before taxation differs from the theoretical account that would arise
using the applicable tax rate as follows:
Loss before taxation
Calculated at a taxation rate of 16.5%
Tax effect of expenses not deductible for tax
purposes
Taxation
7. Cash and Cash Equivalents
Cash at bank
Year Ended December 31,
2017
(9,210)
2016
(in US$’000)
(8,482)
2015
(7,552)
(1,520)
(1,400)
(1,246)
1,520
1,400
1,246
—
—
—
December 31,
2017
2016
(in US$’000)
9,640
5,393
The carrying amounts of the cash and cash equivalents are denominated in US$.
8. Intangible Asset
IPR&D projects and others
Impairment test for intangible asset
December 31,
2017
2016
(in 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. In 2017, the Chi-Med Group and
NHS updated the development plan for the Company’s drug candidate for IBD, which is an enhanced
version of the drug with higher potential efficacy. The development plan was expanded to include more
trials and increased numbers of patients, which was primarily due to the Company’s strategy to strengthen
the clinical data to support a future regulatory approval application.
The corresponding increase in investment reflects the Group’s increased projected market size, which
has been updated for a significant increase in patients in the past few years and the expected increase
through the date of commercialization. In addition, the Group believes the potential market size includes
all patients in the IBD market given the higher potential efficacy; therefore, the 2017 value-in-use
calculation has been updated to include patients treated with biologic therapies, compared to the 2016
value-in-use calculation which excluded such patients. The Company expects global commercialization to
occur in 2026. The discount rate used of 21.60% (2016: 20.37%) 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.
F-127
The key assumptions used in the value-in-use calculation are as follows:
Key assumptions
2017
2016
Projected market size
Projected market share
Probability of success rate (Phase III)
Period of projected cash flows
Headroom
US$21 billion
10% of projected market size
61%
23 years
US$22 million
US$10 billion
10% of projected market size
61%
24 years
US$9 million
The Company prepared the financial projections taking into account actual and prior year
performance and market development expectations. Judgement is required to determine key assumptions
adopted in the cash flow projections.
The sensitivity of the value-in-use of the intangible asset to the changes in key assumptions is:
Impact on the value-in-use of the intangible asset
Change in
assumption
Increase in assumption
Decrease in assumption
2017
2016
2017
2016
Market size
Probability of success rate
Discount rate
9. Share Capital
5%
2% point
1% point
Increase
by 14%
Increase
by 15%
Increase Decrease Decrease
by 13%
by 12%
by 14%
Increase Decrease Decrease
by 14%
by 12%
by 13%
Increase
Increase
Decrease Decrease
by 18%
by 25%
by 16%
by 22%
Issued and fully paid:
Ordinary shares
At January 1
Issuance of shares (notes (i),
note (ii))
Capitalization of shareholders’ loans
(Note 11)
At December 31
2017
2016
2015
Number of
shares
(in US$’000)
Number of
shares
(in US$’000)
Number of
shares
(in US$’000)
42,000
84,000
20,000
60,000
20,000
60,000
7,000
14,000
20,000
10,000
—
—
2,000
49,000
98,000
42,000
—
—
20,000
—
—
60,000
60,000
14,000
84,000
84,000
Share capital as at December 31
98,000
Notes:
(i) On February 22, 2017, 7,000 additional ordinary shares of US$2,000 each were issued at a total cash consideration
of US$14,000,000. They are issued equally to the two existing shareholders.
(ii) On March 30, 2016, 20,000 additional ordinary shares of US$500 each were issued at a total cash consideration of
US$10,000,000. They are issued equally to the two existing shareholders.
F-128
10. Amounts Due to Related Companies
Subsidiaries of Chi-Med
December 31,
2017
2016
(in US$’000)
950
1,642
The amounts due to related companies are unsecured, interest free and repayable on demand.
11. Shareholders’ Loans
Previously outstanding shareholders’ loans of US$5,000,000 each, totaling 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, totaling
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. No shareholders’ loans were outstanding as at December 31, 2017 and 2016.
12. Directors’ Emoluments
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, 2017, 2016 and 2015.
13. Subsidiary
Name
Nutrition Science Partners
Nominal value
of issued
ordinary share
capital in GBP
As at
December 31,
Equity interest
attributable to
the Group
As at
December 31,
2017
2016
2017
2016
Place of
establishment
and
operation
(UK) Limited
United Kingdom
1
1
100%
100%
14. Subsequent Events
Type of
legal entity
Limited liability
company
Principal activity
Inactive
The Group evaluated subsequent events through March 9, 2018, which is the date when the
consolidated financial statements were issued.
F-129
Information for Shareholders
Listing
The ordinary shares of the Company are listed on the AIM market of the London Stock
Exchange and in the form of American depositary shares (“ADSs”) on the NASDAQ
Global Select 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, 2018 to April 27, 2018
April 27, 2018
July 2018
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 and publicly available
data. 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 is subject to change
based on various factors, including those discussed above.
(Incorporated in the Cayman Islands with limited liability)
2017 Annual Report
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