Corporate Profile Founded in 2001, Sihuan Pharmaceutical Holdings Group Ltd. ( Sihuan Pharmaceutical or the Company, together with its subsidiaries, t

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2 Corporate Profile Founded in 2001, Sihuan Pharmaceutical Holdings Group Ltd. ( Sihuan Pharmaceutical or the Company, together with its subsidiaries, the Group ) achieved sound development in the past years and has now become a pharmaceutical corporation with leading capabilities in sales and marketing, production and research and development ( R&D ). Sihuan Pharmaceutical maintained its leadership in China s cardio-cerebral vascular ( CCV ) prescription drug market since Its major products such as Kelinao, Oudimei, Yuanzhijiu, Yeduojia, Chuanqing, Qu Ao and other products are widely used in the treatment of various CCV diseases. The successful listing on the Main Board of The Stock Exchange of Hong Kong Limited (the Stock Exchange ) on 28 October 2010 has fueled the Group s rapid development expansion with enhanced capital. Sihuan Pharmaceutical marked its fourteenth year in In the first half of 2014, the Group further expanded its market share in the CCV prescription drug market and has grown into the third biggest pharmaceutical company in China s hospital market in terms of hospital purchase. The Group s current products and R&D pipeline encompass the top five medical therapeutic areas in China: CCV system, control nervous system ( CNS ), metabolism, oncology and anti-infectives.

3 Contents 2 Corporate Information 5 Chairman s Statement 8 Management Discussion and Analysis 35 Other Information 45 Interim Consolidated Balance Sheet 48 Interim Consolidated Statement of Comprehensive Income 50 Interim Consolidated Statement of Changes in Equity 52 Interim Condensed Consolidated Statement of Cash Flows 53 Notes to the Condensed Interim Financial Information

4 Corporate Information BOARD OF DIRECTORS Executive Directors Dr. Che Fengsheng (Chairman and Chief Executive Officer) Dr. Guo Weicheng (Deputy Chairman) Mr. Meng Xianhui Non-Executive Directors Dr. Zhang Jionglong Mr. Homer Sun Independent Non-Executive Directors Mr. Patrick Sun Mr. Tsang Wah Kwong Mr. Zhu Xun JOINT COMPANY SECRETARIES Mr. Choi Yiau Chong Ms. Mok Ming Wai AUTHORISED REPRESENTATIVES Mr. Choi Yiau Chong Ms. Mok Ming Wai AUDIT COMMITTEE Mr. Patrick Sun (Chairman) Dr. Zhang Jionglong Mr. Tsang Wah Kwong Mr. Zhu Xun REMUNERATION COMMITTEE Mr. Zhu Xun (Chairman) Dr. Che Fengsheng Mr. Patrick Sun Mr. Tsang Wah Kwong 2 Sihuan Pharmaceutical Holdings Group Ltd. Interim Report 2014

5 Corporate Information 22 Clarendon House, 2 Church Street P.O. Box HM1022 Hamilton HM DX, Bermuda Codan Services Company Limited Clarendon House, PO Box HM 1022 Hamilton HM DX Bermuda NOMINATION COMMITTEE Mr. Tsang Wah Kwong (Chairman) Dr. Guo Weicheng Mr. Patrick Sun Mr. Zhu Xun INDEPENDENT AUDITOR PricewaterhouseCoopers 22/F., Prince s Building Central Hong Kong REGISTERED OFFICE Clarendon House, 2 Church Street P.O. Box HM1022 Hamilton HM DX, Bermuda HEADQUARTERS 21/F, Building 2, Zhubang 2000 Business Centre West Balizhuang, Chaoyang District Beijing 10025, P.R.C. PRINCIPAL PLACE OF BUSINESS IN HONG KONG Room 4905, Office Tower, Convention Plaza 1 Harbour Road Wanchai, Hong Kong PRINCIPAL SHARE REGISTRAR Codan Services Company Limited Clarendon House, PO Box HM 1022 Hamilton HM DX Bermuda

6 Corporate Information HONG KONG SHARE REGISTRAR Tricor Investor Services Limited Level 22, Hopewell Centre 183 Queen s Road East Hong Kong WEBSITE STOCK CODE Sihuan Pharmaceutical Holdings Group Ltd. Interim Report 2014

7 Chairman s Statement 34.4% 10.8% (FDA) Despite lingering challenges in China s pharmaceutical market, Sihuan Pharmaceutical continued its sound growth trajectory following a strong growth momentum in 2013 and entered a stage of steady development. Our clear development roadmap and commitment to innovation have laid a strong foundation for where we stand today. There is no doubt that the Group has demonstrated its capability to move in tandem with an ever-changing market, which attests to Sihuan Pharmaceutical s strong fundamentals built up over past years. In the first half of 2014, our core products, Oudimei and Kelinao, delivered sound sales volume growth, while our promising products Yuanzhijiu, Yeduojia, Danshen Chuanxiongqin and Yimaining saw their contribution to sales surge. The Group s profitability further improved as a result, with net profit jumping 34.4% year-on-year. In addition, the Group reinforced its leadership in the cardio-cerebral vascular ( CCV ) prescription drug market with its market share rising to 10.8%, according to IMS Health Incorporated ( IMS ). This made Sihuan Pharmaceutical the third-largest pharmaceutical enterprise in China s hospital market in terms of hospital purchases. In the first half of 2014, the Group made further development in research and development ( R&D ) for new drugs. The China Food and Drug Administration ( CFDA ) accepted the application for clinical trial approval of the Group s self-developed Category 1.1 patent anti-diabetic drug Janagliflozin, the eighth Category 1.1 innovative drug application submitted by Sihuan Pharmaceutical. Of all such drugs, Imigliptin Dihydrochloride, Anaprazole Sodium and Benapenem have entered phase I clinical trial, with Imigliptin Dihydrochloridede livered encouraging results from completed studies. The Investigational New Drug (IND) application of Pirotinib ( ) to the Food and Drug Administration ( FDA ) of United States has also been progressing as planned. On top of that, we have actively stepped up our collaboration with international innovative drug development companies. In terms of generic drugs, the number of applications filed has been increasing. As at 30 June 2014, we have filed applications for 27 drugs to be approved for production; we have over 70 generic drugs under development, among which 22 are Category 3 New Drugs

8 Chairman s Statement GMP After all the Group s production facilities were certified under the new Good Manufacturing Practice ( GMP ), the upgraded production lines have been operating smoothly. Meanwhile, the Group continued to strengthen its quality management system. Facing stronger market competition in the first half of 2014, the Group managed to maintain strong momentum in its overall business, thanks to its diversified product portfolio and timely adjustments to its marketing strategies. The Group s industry-leading sales and marketing capability spoke for itself by delivering above-market performance amid stronger competition and market instability. During the Period, we exercised a high degree of flexibility and adaptability in our sales and marketing strategies. Through the expansion of our market coverage and stepping up of academic promotion, we were able to accelerate sales growth for our promising products. Meanwhile, the Group increased its market penetration into the low-end market and achieved good results for our mature products. The remarkable achievements in 2013 and continuous growth in the first half of 2014 have tested Sihuan Pharmaceutical s business strategies and heralded a new chapter in the Group s sustainable development. In retrospect, Sihuan Pharmaceutical had built up powerful marketing capability and pioneered a ground breaking marketing model in its early years; following which we gradually enriched our product resources by means of generic drugs R&D and M&A. To date, our capabilities in innovative drug development has given us an unmatched product pipeline that is expected to sustain the Group s long-term growth and development. The hard work we put in for over a decade, secured the leadership position of Sihuan Pharmacentical in the Chinese pharmaceutical market and strengthened our foundation for future development. Moving forward, Sihuan Pharmaceutical will continue to commit itself to product diversification through R&D, product collaboration and M&A, focusing on proprietary drugs in major therapeutic areas. It will fully realize the potential of its product resources through its flexible sales and marketing strategies and the expansion of its national network. We expect to launch a number of innovative proprietary drugs and blockbuster generic drugs after three years, which are complementary to the existing product portfolio, and will continue the cycle of high growth to bring Sihuan Pharmaceutical to new heights. 6 Sihuan Pharmaceutical Holdings Group Ltd. Interim Report 2014

9 Chairman s Statement Looking ahead, I am fully optimistic on the market prospect for the Chinese pharmaceutical industry. Despite the pressure from the tightening of the medical insurance budget, lower tender prices and healthcare reforms, the domestic market will continue to grow on the back of inelastic demand. With further industry consolidation and integration, we hold our belief that only the companies with a market-leading position and unique competitive advantages can succeed in the long run. I am fully confident in Sihuan Pharmaceutical s capability to achieve its 2014 full-year target and stride towards its future development. It is my firm belief that we are entering a phase of stable and sustainable growth. Upon the launch of our innovative drugs, Sihuan Pharmaceutical will be one step closer to becoming the most competitive, globally-recognized Chinese pharmaceutical company. Dr. Che Fengsheng Chairman of the Board 27 August

10 Management Discussion and Analysis (I) 34.4% 14.0% 10.8% (I) BUSINESS REVIEW Following a year of strong growth in 2013, the Group sustained sound growth momentum in the first half of 2014, with profit attributable to owners of the Company increasing by 34.4% year-on-year. Sales volume of the Group s key products recorded impressive growth compared with the same period last year, while revenue decreased by 14.0% year-onyear, principally caused by a change in sales strategy which resulted in a downward adjustment in the ex-factory price of Yuanzhijiu starting from the second half of 2013 and of Kelinao, Anjieli, Yeduojia and Oudimei in the first half of 2014 compared to the same period last year. The Group s promising products continued to deliver remarkable growth of sales volume, while the Group s established products recorded steady sales growth. In addition, the Group s research and development of innovative and generic drugs achieved sound progress. During the Period, the Group continued to optimize its production systems. Overall, the Group has achieved all of its operational targets. According to IMS Heath Incorporated ( IMS ), the Group maintained its No. 1 position in the cardio-cerebral vascular ( CCV ) prescription drug market, with an increased market share of 10.8% in terms of hospital purchase during the Period. Moreover, the Group was ranked as the third largest pharmaceutical company in the Chinese hospital market during the Period. The Group s leading position in China s CCV prescription drug market and hospital market was further consolidated. 8 Sihuan Pharmaceutical Holdings Group Ltd. Interim Report 2014

11 Management Discussion and Analysis (i) (i) Sales of Key Products (a) (a) CCV products 94.0% For the six months ended 30 June 2014 ( Period ), sales of CCV products accounted for approximately 94.0% of the Group s total revenue. (1) (2) (3) 30% 50% 20% 16.1% GMP 3.8% GM1 7.0% 17.0% 79.0% During the Period, the sales volume of the Group s promising products such as Oudimei (1), Yuanzhijiu (2), Yeduojia, Danshen Chuanxiongqin, Yimaining (3) and Salivae Miltiorrhizae Liguspyragine Hydrochloride and Glucose Injection grew by over 30% as compared to the corresponding period last year. In particular, Yuanzhijiu, Danshen Chuanxiongqin and Salivae Miltiorrhizae Liguspyragine Hydrochloride and Glucose Injection recorded sales volume growth of over 50%. Meanwhile, the combined sales volume of established products Kelinao/ Anjieli recorded an increase of about 20% year-on-year, while sales of Qingtong rose by 16.1% year-on-year. Sales of Qu Ao increased slightly by 3.8%, while sales of GM1, Chuanqing and Guhong declined by 7.0%, 17.0% and 79.0% respectively, due to a shortage in product supply caused by the test runs of manufacturing facilities after passing the certification of the new Good Manufacturing Practices ( GMP ) standard. The strong growth of our CCV products reinforced the Group s market leading position in China s CCV prescription drug market

12 Management Discussion and Analysis Product Name Sales of key CCV products: For the six months ended 30 June Change in Sales Year-on-Year IMS Change in IMS Data (Sales in terms of hospital purchase) Year-on-Year (RMB 000) (RMB 000) * (1) *Oudimei (1) (Cerebroside-kinin injection) * 80 *Kelinao (Cinepazide maleate injection) (80 mg) * 320 *Anjieli (Cinepazide maleate injection) (320 mg) * (2) *Yuanzhijiu (2) (Troxerutin and cerebroproptein hydrolysate injection) * B(II) *Yeduojia (Compound trivitamin B for injection (II)) 687, , % 34.7% 582, , % 14.3% 67,969 88, % 202, , % 58.2% 129,435 79, % 53.0% * * Due to the change in sales strategy, there was a downward adjustment in the ex-factory price of the aforementioned products. Meanwhile, there was a significant decrease in distribution costs in conjunction with this change, resulting in their profit contributions being largely the same as their profit contributions had the change in sales strategy not taken place. 10 Sihuan Pharmaceutical Holdings Group Ltd. Interim Report 2014

13 Management Discussion and Analysis Product Name For the six months ended 30 June (RMB 000) (RMB 000) Change in Sales Year-on-Year (3) Yimaining (3) (Alprostadil lipid emulsion injection) Danshen Chuanxiongqin injection (Salviae miltiorrhizae and ligustrazine hydrochloride injection) GM1 GM1 (Monosialotetrah exosylganglioside sodium injection) Qu Ao (Cerebroprotein hydrolysate) Chuanqing (Ligustrazine hydrochloride for injection) Qingtong (Edaravone injection) Guhong injection (Compound of aceglutamide and safflower extract) Salivae Miltiorrhizae Liguspyragine Hydrochloride and Glucose Injection 92, , % 57,121 91, % 96,790 90, % (Products supply shortage) 45,849 47, % (Products supply shortage) 48,240 40, % (Products supply shortage) 33,043 38, % 151,180 31, % (Products supply shortage) 5,296 8, %

14 Management Discussion and Analysis Notes: (1) (1) Names of the Group s cerebroside-kinin injection products in different dosages are Oudimei, Oufutai and Waitong, and are collectively known as Oudimei. (2) (2) Names of the Group s troxeratin and cerebroprotein hydrolysate injection products in different dosages are Yuanzhijiu and Xinwai, and are collectively known as Yuanzhijiu. (3) (3) Names of the Group s alprostadil lipid emulsion injection products in different dosages are Yimaining and Yikongning, and are collectively known as Yimaining. (b) (b) Non-cardio-cerebral vascular products ( Non-CCV products ) During the Period, the Group achieved strong performance with the sales of its non-ccv products. All of its major key products achieved sustainable growth. 41.1% 32.6% 6.5% 15.5% Sales of antiepileptic drug Ren Ao (Oxcarbazepine) rose 41.1% year-on-year, while sales of respiratory system drugs Zhuo Ao and Bi Ao (Ambroxol hydrochloride) increased by 32.6% and 6.5% year-on-year, respectively, and sales of Luoanming (Amino acid injection) rose 15.5% year-onyear. The market expansion of Roxatidine was hindered by further delay in the tender process during the Period, with tender wins in only 3 provinces and a supplementary tender submission in another province. Sales activities of Roxatidine have since started in these provinces. 12 Sihuan Pharmaceutical Holdings Group Ltd. Interim Report 2014

15 Management Discussion and Analysis Sales of key Non-CCV products: Therapeutic areas Product Name For the six months ended 30 June (RMB 000) (RMB 000) Change in Sales Year-on-Year 6,325 8, % Central nervous system drug Ren Ao (Oxcarbazepine) 34,792 40, % Metabolism drug Luoanming (Amino acid injection) 26,684 28, % Respiratory system drug Bi Ao (Ambroxol hydrochloride) 7,858 10, % Zhuo Ao (Ambroxol hydrochloride) 2,485 Digestive system drug Roxatidine 9,974 Anti-infective drug Clindamycin

16 Management Discussion and Analysis (ii) (ii) Sales and Marketing During the Period, the key focus of the sales and marketing team was to boost market expansion by making use of all available opportunities. The Group enhanced the market coverage of promising products through provincial tender wins and supplementary tender submissions; meanwhile, the Group furthered the penetration of its established products into low-end markets through their inclusion on provincial Essential Drug Lists ( EDL ) and provincial New Rural Cooperative Medical Scheme Lists ( NRCMSL ) Sales of the Group s promising products such as Oudimei, Yuanzhijiu, Yeduojia, Yimaining and Danshen Chuanxiongqin saw significant increases as the Group seized all opportunities for tender wins and supplementary tender submissions. Market coverage of Oudimei and Yuanzhijiu has now expanded to more than 20 provinces, while market coverage of Yeduojia, Yimaining and Guhong has reached over 15 provinces, and the market coverage of Danshen Chuanxiongqin expanded to 8 provinces. The expanded market coverage secured and accelerated the sustainable sales increase of these promising products. GM1 1,118 GM1 The Group s established products such as Kelinao, Qu Ao, Chuanqing and Qingtong further developed the low-end markets through their inclusion in provincial EDLs and provincial NRCMSLs. Kelinao and Chuanqing were included in the EDLs of Guangdong Province and the Xinjiang Uighur Autonomous Region. In addition, Kelinao, Chuanqing, Qingtong, GM1 and Yimaining were also included in the EDLs at public medical institutions in Anhui Province, which contain 1,118 essential drugs. Sales of Kelinao and Qingtong achieved solid growth during the Period. Unfortunately, Qu Ao, GM1 and Chuanqing did not meet their sales targets due to shortages in product supply, but are expected to see improvements in the second half of the year. 14 Sihuan Pharmaceutical Holdings Group Ltd. Interim Report 2014

17 Management Discussion and Analysis PC12 60% 2,745 2, During the Period, the Group continued to step up its marketing efforts by organizing various academic promotion activities. The Group conducted clinical studies on its two core products, Kelinao and Oudimei, to further enhance physicians understanding of the products. The study entitled Mechanism study of cinepazide maleate on brain ischemia injury ( ), led by Xijing Hospital (), explored the uniqueness of cinepazide maleate () as a calcium channel blocker. The paper Cinepazide maleate protects PC12 cells against oxygen glucose deprivation injury ( PC12 ) was published in the January 2014 issue of Neurological Sciences. The post-launch drug revaluation of Oudimei Clinical Research Studies for Cerebroside-Kinin for Treatment of Ischemic Stroke ( ) (led by The Third Hospital of Peking University ( )) and Clinical Research Studies for Cerebroside- Kinin for Treatment of Hypertensive Intracerebral Hemorrhage ( ) (led by The General Hospital of People s Liberation Army ( )), successfully recruited over 60% of patients. The Group also initiated the Research Studies on Cerebroside-Kinin for Treatment of Alzheimer s Disease ( ) (led by The General Hospital of People s Liberation Army ()). For newly launched products, the Group focused on providing product training to enhance doctors knowledge and recognition of these products. As for its established products, the Group stepped up its efforts in organizing major academic conferences and publishing papers in various academic journals (e.g., Chinese Journal of Neurosurgery, Chinese Journal of Neurology, Chinese Journal of Stroke, Chinese Journal of Neuroimmunology and Neurology) to enhance Sihuan Pharmaceutical s brand image so as to boost the clinical use of these established products. During the Period, the Group organized a total of 2,745 academic promotion activities, including 2,665 departmental seminars at hospitals, 73 regional academic conferences and 8 national medical conferences. The Group s brand image was further enhanced through organizing these seminars and conferences

18 Management Discussion and Analysis (iii) 1.1 CXHL CXHL SGLT2 2 II SGLT2 SGLT2 1.1 I 1.1 FDA ( IND ) (iii) Research and Development ( R&D ) The Group s innovative drug R&D division, Shandong Xuanzhu Pharmaceutical Technology Co., Ltd. ( Xuanzhu Pharma ), filed an application for Approval for Clinical Trial of Janagliflozin (), a Category 1.1 innovative drug, to the Food and Drug Administration ( CFDA ) of China in the first half of 2014, and has received the official acceptance of the application (acceptance number: CXHL and CXHL ). This is the eighth self-developed Category 1.1 innovative drug, for which an application has been successfully filed with the CFDA. Janagliflozin (), an SGLT2 (Sodium-glucose co-transporter 2) inhibitor, is an anti-diabetic drug for the treatment of type 2 diabetes. SGLT2 is the sought-after target in diabetes research, and SGLT2 inhibitor is the most internationally recognized new category of anti-diabetic drug and has huge market potential. Janagliflozin is also the second Category 1.1 innovative drug to be developed by the Group in the anti-diabetes category after Imigliptin Dihydrochloride ( ). Meanwhile, Phase I clinical trial of Imigliptin Dihydrochloride ( ) progressed as planned with encouraging results from the completed studies. Clinical trials of Anaprazole Sodium ( ) and Benapenem (), two other Category 1.1 innovative drugs, also commenced during the Period. Currently, the Group is actively preparing to file an investigational new drug ( IND ) application for Pirotinib () to the Food and Drug Administration ( FDA ) of the United States. 16 Sihuan Pharmaceutical Holdings Group Ltd. Interim Report 2014

19 Management Discussion and Analysis (BisoprololFumarate) (Losartan Potassium) (Lansoprazole) (Esomeprazole) (Fasudil Hydrochloride) (Octreotide Acetate) (Vinpocetine) (FlurbiprofenAxetil) (Oxiracetam) (Esomeprazole Sodium) (Caspofungin Acetate) 3 (Levetiracetam Injection) (Lacosamide) Ornithine Aspartate Injection Hepa-Merz (Rivastigmine Hydrogen Tartrate Capsules) (Caspofungin Acetate for Injection) (Flupirtine Maleate Capsules) (Divalproex Sodium Tablets) (Revaprazan Hydrochloride) ((R) Lansoprazole) Several new production license applications were filed by the Group s generic drug division, the Beijing Aohe Drug Research Institute, during the Period. By the end of June 2014, production license applications for a total of 27 generic drugs were filed, including Bisoprolol Fumarate ( ), Losartan Potassium (), Lansoprazole (), Esomeprazole (), Fasudil Hydrochloride ( ), Octreotide Acetate (), Vinpocetine ( ), Flurbiprofen Axetil (), Oxiracetam (), Esomeprazole Sodium ( ), Caspofungin Acetate ( ) etc.; these products are expected to be launched to the market in the next three years. Also, more than 20 new projects commenced development during the Period. In total, the Group has over 70 generic drug projects under development, including 22 Category 3 new drug projects such as Levetiracetam Injection ( ), Lacosamide (), Ornithine Aspartate Injection (Hepa-Merz) (), Rivastigmine Hydrogen Tartrate Capsules ( ), Caspofungin Acetate for Injection (), Flupirtine Maleate Capsules ( ), Divalproex sodium Tablets ( ), Revaprazan Hydrochloride ( ), (R)-Lansoprazole ( )

20 Management Discussion and Analysis 1.3 L-Phencynonate Hydrochloride III IV (Cinepazide Mesilate) II NeuroVive Pharmaceutical AB to-bbb technologies B.V. G20 (Imigliptin Dihydrochloride) (Anaprazole Sodium) 7.42 Phase III clinical trial of L-Phencynonate Hydrochloride ( ), a Category 1.3 innovative drug, is progressing as planned. Phase II clinical trial of Cinepazide Mesilate ( ), a Category IV exclusive new drug, is nearing completion. Collaboration on innovative drug development projects with NeuroVive Pharmaceutical AB of Sweden and to-bbb technologies B.V. of the Netherlands is also moving ahead as planned. In addition, Xuanzhu Pharma and Beijing Sihuan Pharmaceutical Co., Ltd. have co-applied for Beijing government s G20 Engineering Leading Enterprises Cultiration Project. Imigliptin Dihydrochloride ( ) and Anaprazole Sodium ( ) won the New Chemical Drug Research and Development Award, which included a technology grant of RMB7.42 million. (iv) GMP FDA FDA FDA Apotex Inc. Dr. Reddy s Laboratories Ltd. 1,000 Posaconazole ZaCh System S.p.A. Taro Pharmaceutical Industries Ltd. (iv) Production and Quality Management The new production system has been running smoothly since the main production facilities received the new GMP certification. As the standard of production and management has been improving steadily, the new production facilities, except Changchun Xiangtong Pharmaceutical Co., Ltd., have been able to meet market demand. All facilities have not encountered any qualityrelated incidents. The production facility of the Group s Active Pharmacentical Ingredients ( APIs ) business, Langfang Gaobo Jingband Pharmaceutical Co., Ltd ( Langfang Gaobo Jingband ), passed an on-site inspection by the US FDA in July 2013 and received an Establishment Inspection Report ( EIR ) from the FDA in the first half of The reputation of Langfang Gaobo Jingband has improved significantly since passing the on-site assessment. The Group has deepened its cooperation with Canada-based Apotex Inc. The Group has also signed a contract worth over RMB10 million with India s Dr. Reddy s Laboratories Ltd. involving the Posaconazole project. Moreover, the Group s collaboration with Italy-based company ZaCh System S.p.A. and Israel-owned company Taro Pharmaceutical Industries Ltd. also commenced as planned. 18 Sihuan Pharmaceutical Holdings Group Ltd. Interim Report 2014

21 Management Discussion and Analysis (II) (i) In spite of rising raw material and labor costs, the Group maintained cost efficiency of its production system by expanding the scale of production and improving the manufacturing process and management. (II) FUTURE PROSPECTS (i) Industry Outlook Fueled by accelerated urbanization and the ageing of China s population, the rigid demand in the domestic pharmaceutical market will continue to grow. Also, the market potential brought by national medical insurance coverage is far from fully realized, which will sustain the growth momentum of the pharmaceutical industry in the long run. On the other hand, the country has been curbing excessive growth of medical expenditures, and the tightening of hospital medical budgets in first tier cities, the lowering of provincial tender prices, and the deepening reform of medical institutions will all exert pressure on pharmaceutical enterprises. Moreover, a rising industrial threshold, rising technical standards and stringent regulatory controls will speed up the polarization and consolidation of the pharmaceuticals industry, and quality resources will flow to leading enterprises. With further consolidation and integration in the industry, pharmaceutical companies with comprehensive operational advantages will have more opportunities for their development and for long-term success. Backed by its outstanding capabilities in sales and marketing, R&D and resource integration, Sihuan Pharmaceutical, a leading Chinese pharmaceutical corporation with a solid business foundation and economies of scale, is poised to capitalize on the trend of industry consolidation and to reap benefits and make progress from the strong governmental support for innovation

22 Management Discussion and Analysis (ii) (ii) Growth Strategies (a) (a) Tapping the potential of existing product resources The Group s promising products such as Oudimei, Yuanzhijiu, Yeduojia, Danshen Chuanxiongqin and Yimaining still have considerable market potential; newly launched products such as Salviae Miltiorrhizae Liguspyragine Hydrochloride and Glucose Injection ( ), Roxatidine (), Breviscapine Sodium Chloride Injection ( ), together with products such as Clindamycin () and Metronidzole ( ) that have been included in national EDLs, are products with good market potential. To support the rapid and sustainable growth in sales of these promising products, the Group will continue to enhance both horizontal expansion by seizing all opportunities for tender wins and supplementary tender submissions and vertical expansion in the more economically developed regions. For the abovementioned products that are either at the earlier stages of market development or were recently launched to the market, the Group will step up its efforts in both academic promotion and market expansion. Sales of the Group s established products such as Kelinao, Chuanqing, Qu Ao, and Qingtong is set to achieve sustainable growth from further expansion in the low-end markets through inclusion on more provincial EDLs and provincial NRCMSLs. Meanwhile, the clinical usage of established products has been further expanded by entering into various official medicine usage guidelines. 20 Sihuan Pharmaceutical Holdings Group Ltd. Interim Report 2014

23 Management Discussion and Analysis (b) (b) Maintaining outstanding sales and marketing capabilities The Group will maintain strong sales and marketing capabilities by making prompt adjustments to its marketing strategies and continuing to optimize its marketing network according to changes in the market. In addition, the Group will further step up and optimize its academic promotions. By organizing and participating in various kinds of academic conferences, and by strengthening post-marketing clinical research and proactively participating in relevant research studies by partnering with medical institutions on disease prevention and treatment, we will strive to enhance Sihuan Pharmaceuticals academic status and expand the market presence and clinical application of the Group s products. Meanwhile, we will enhance professional training and the quality of education of our marketing team and distributors so as to adapt to a changing and developing market. (c) (c) Enhancing the pathways for obtaining product resources While the Group s innovative and generic drug development platform is a vital source of new products, mergers and acquisitions is another channel for the acquisition of new product resources and collaboration with international companies will be a critical pathway for obtaining highstandard products in the future. The Group produces a steady stream of product resources through these three major channels, in which we will continue to exert unremitting efforts to carry forward the Group s long-term growth momentum

24 Management Discussion and Analysis (iii) (iii) Outlook A rich and diversified product portfolio has sustained and will continue to sustain the remarkable growth of Sihuan Pharmaceutical in 2014 and the next few years. More importantly, the Group has a proven capability of identifying and obtaining new product resources. The management is highly confident in the Group s future development. The management firmly projects a promising growth trajectory in the second half of 2014 and is confident that the Group will achieve satisfactory full-year results. With an outstanding product pipeline, strong R&D capabilities and proven sales and marketing capabilities, Sihuan Pharmaceutical will effectively navigate challenges, seize opportunities arising from the industry consolidation, further solidify its operational foundation and make strides into a stable stage of development. 22 Sihuan Pharmaceutical Holdings Group Ltd. Interim Report 2014

25 Management Discussion and Analysis PHARMACOLOGICAL CHARACTERISTICS AND CLINICAL APPLICATION OF SIHUAN PHARMACEUTICAL S KEY PRODUCTS Product * Product characteristics HSP70 Nestin Na-K-ATP Ca-Mg-ATP Oudimei * (Cattle encephalon glycoside and ignotin injection) A multiple ganglioside, polypeptide and amino compound preparation used to repair, protect and nurture nerves. Cattle encephalon glycoside and ignotin participates in the growth, split and regeneration process of neurons, and effectively increase the expression of Heat Shock Protein (HSP70 is critical to cells survival and restoration and maintenance of cell function) and Nestin (Nestin is vital to the formation of neurons and splitting nerve cells), thus helping the reparation of nerves; cattle encephalon glycoside and ignotin can protect the integrity of nerve cell membrane structure, maintain the activity of Na-K-ATP, Ca-Mg enzyme and ATP enzyme, prevent excessive release of excitatory amino acids, refrain pathologic lipid from peroxidation, reduce free radical generation and alleviate cerebral edema and neurons injury; the components in the cattle encephalon glycoside and ignotin such as polypeptide and free amino acid can activate and promote protein synthesis of nerve cells, provide and supplement specific nutrients required by nerve metabolism, and provide energy and nutrition support for tissue repair. Cattle encephalon glycoside and ignotin can significantly improve stroke patients neurologic impairment, reduce the morbidity rate of vascular diseases and craniocerebral injury, and improve the prognosis of patients. Cattle encephalon glycoside and ignotin injection is widely used in the treatment of cerebral apoplexy, Alzheimer disease, neonatal hypoxic-ischemic encephalopathy (HIE), craniocerebral injury, spinal cord injury and central nerve damage caused by other factors. It is also used to treat peripheral nerve injuries such as traumatic peripheral nerve injury, diabetic peripheral neuropathy and oppressive nerve lesions

26 Management Discussion and Analysis Product * * Kelinao * Anjieli * (Cinepazide maleate injection) Product characteristics Cinepazide maleate is a calcium channel blocker with endogenous adenosine synergistic effect. Through calcium ion antagonism, it dilates blood vessels, restore lesions blood circulation, and can change the hemorheology parameters to effectively improve the micro cycle; through endogenous adenosine (adenosine is an endogenous protective factor in the hypoxic ischemic brain damage) synergy, it blocks multiple links of stroke cerebral apoplexy in multiple ways and levels, thereby achieving the effect of protecting the nerve cells. TIA Clinically, Cinepazide maleate is widely used in the treatment of cerebral arteriosclerosis, cerebral insufficiency, TIA, cerebral infarction, subarachnoid hemorrhage, cerebral hemorrhage, microcirculation disturbance caused by craniocerebral injury, cardiovascular diseases and diabetes, as well as other peripheral vascular diseases. Chuanqing (Ligustrazine hydrochloride for injection) Also referred to as Tetramethylpyrazine, it is a single chemical entity derived from total synthesis. Ligustrazine hydrochloride is a typical calcium channel blocker, it also has the pharmacological characteristics of improving hemorheology, inhibiting platelet aggregation and fibrosis, which can achieve important biological effects such as expanding blood vessel, improving microcirculation, inhibiting thrombosis and dissolving formed thrombosis, blocking ischemia-reperfusion injury and protecting brain tissue and the myocardial tissue. Clinically, it is widely used to treat ischemic cerebrovascular disease, coronary heart disease, cerebral embolism, vasculitis, vascular dementia and hypercoagulabale state. 24 Sihuan Pharmaceutical Holdings Group Ltd. Interim Report 2014

27 Management Discussion and Analysis Product Qu Ao (Cerebroprotein hydrolysate) Product characteristics (85%) 10,000 (15%) Composed by a variety of free amino acids (85%) vital to human body and low molecular peptide with molecular weight below 10,000 (15%), it promotes neutral cell metabolism and differentiation and synthesis of brain protein. By enhancing the brain s capability of resisting hypoxia, strengthening the effect of high-density lipoprotein, and reducing plasma protein fiber and platelet aggregation rate, it can enhance brain metabolism and improve the cells blood supply state. Clinically, it is widely used to treat brain cell dysfunction caused by cerebrovascular disease, traumatic brain injuries and Alzheimer s disease. Qingtong (Edaravone injection) N Edaravone can directly remove hydroxy and oxygen free radicals, effectively inhibit the generation of lipid free radicals, and increase the amount of rapidly decreasing N-acetyl aspartic acid due to brain disease, effectively inhibit chain reaction caused by the cell membrane lipid peroxidation, bring down the irreversible damage of proteins and nucleic acids mediated by oxygen free radicals, and at the same time reduce the generation of inflammatory mediators. Clinically, it is widely used to treat cardiovascular diseases such as ischemic cerebral infarction, acute intracerebral hemorrhage, acute severe brain injury, dilated cardiomyopathy, as well as peripheral vascular disease (PDA) for people with diabetes and primary nephrotic syndrome. Yimaining (Alprostadil lipid emulsion injection) It is a kind of alprostadil preparation using lipid microspheres as drug carrier. By wrapping with lipid microspheres that prevent alprostadil from deactivation and promote the target distribution to damaged blood vessels, it can promote the targeted microcirculation and protect the organs and tissue cells. Clinically, it is widely used to treat limb ulcer caused by chronic arteriosclerosis obliterans, resting pain, cardio-cerebral vascular microcirculation disturbance and antithrombotic therapy after organ transplantation

28 Management Discussion and Analysis Product Yuanzhijiu (Troxerutin and cerebropropeinhydr olysate injection) Product characteristics camp It is a combo formulation of troxerutin, active peptide and a variety of amino acids and nucleic acids. It can act simultaneously on the nerves and blood vessel system to produce ion channel control effect and relax blood vessels, lower down the capillary permeability and ease cerebral edema, and increase camp in blood platelet to prevent thrombosis. Clinically, it is used to treat acute and chronic cardio-cerebral vascular diseases such as cerebral thrombosis, cerebral hemorrhage and cerebral vasospasm, as well as occlusive peripheral vascular diseases. Guhong Injection It is a combo formulation of aceglutamide and safflower extracts. The two components, through synergistic action, induce cerebral isehemic tolerance, reduce the number of apoptotic neurons and glial cells, protect neurons, and at the same time relax blood vessels and improve microcirculation. Clinically, it is used to treat cerebrovacular problems such as cerebral insufficiency, cerebral embolism and cerebral hemorrhage recovery period; dysfunctions caused by the awareness of neurological surgery; mental deterioration, and memory impairment. B(II) Yeduojia (Compound trivitamin B for injection (II)) B B1 B6 B12 Currently the only intravenous administration of a vitamin B compound formulation, which consists of B1, B2 and B12. Through synergistic action on peripheral nerves, the three components promote sugar aerobic metabolism and provide energy the damaged nerve need, enhance -aminobutyric acid generation and homocysteine metabolism, improve peripheral nerve blood vessels microcirculation, participate in methyl transfer, and maintain a complete myelin sheath, thus achieving the effect of promoting the damaged nerve recovery. Clinically, it is used for nerve injury, polyneuritis, trigeminal neuralgia, sciatica, radiation sickness, antieoplastic-induced vomiting, pernicious anemia and nutritional anemia. 26 Sihuan Pharmaceutical Holdings Group Ltd. Interim Report 2014

29 Management Discussion and Analysis Product Danshen Chuanxiongqin (Salviaemiltiorrhizae and ligustrazine hydrochloride injection) Product characteristics The compound preparation of ligustrazine hydrochloride and dihydroxyphenyl. Through its pharmacological effects of anti-platelet aggregation, vasodilation, microcirculation promotion, and capillary expansion, it can be used to treat occlusive cardio-cerebral vascular diseases such as coronary heart disease, angina pectoris and myocardial infarction. * (1) (J) 2008, 1: 1-5 (2) (J) 2008, 6, 26-3: (3) (J) 2009, 10, 11-10: (4) (J) 2010, 10(9): * (1) (J) 2008, 18-4: (2) (J) 2006, 27-3: (3) 2006, 9: (4) S100B 2007, 7, 87-25: * Kelinao (Cinepazide maleate injection) clinical research bibliography: (1) ZHUANG Jian-hua, ZHAO Zhong-xin, ZENG Li-li, LIU Jian-rong, DONG You-rong, LI Wei, GENG Zhi, SUN Xiao-jiang, LIU Ming-yuan, DING Su-ju, Effects of Cinepazide on Vertigo induced by Verebral-basilar Insufficiency, Chin J New Drugs Clin Rem, 2008, 1: 1-5 (2) XU Er-he, CHU Hang-biao, ZANG Ting-zhen, MA Xin, WU Jian, JIA Jian-ping, XU Siping, The Clinical Efficacy and Safety Profile of Cinepazide Maleate for the Treatment of Hypertensive Hamorrhage, J A poplexy and Nervous Diseases, 2008, 6, 26-3: (3) ZHANG Tong, ZHAO Xing-hui, TIAN Shao-hua, HE Mao-lin, Efficacy of Cinepazide Maleate in Treatment of Patients with Acute Cartid System Stroke, Chin J Geriatr Heart Brain Vessel Dis, 2009, 10, 11-10: (4) YI Zhan-miao, LIU Fang, ZHAI Suo-di, Cinepazide Maleate Injection for Cerebral Infarction: A Systematic Review, Chin J Evid-based Med 2010, 10(9): ; * Oudimei (Cattle encephalon glycoside and ignotin injection) clinical research bibliography: (1) ZHANG Yuqiu, LI Huiqiang, ZHAI Suodi, Systematic Review of Cerebroside Carnosine for Acute Ischemic Stroke, Chin J Pharmacoepidemiol, 2008, 18-4: (2) SHAO Guijun, LIU Xueyuan, Clinical Efficacy Evaluation of Cattle Encephalon Glycoside and Ignotin Injection in Treatment of Acute Cerebral Hemorrhage, Shanghai Medical & Pharmaceutical Journal, 2006, 27-3: (3) WANG Yong-jun, SONG Xue-qin, LIU Qing-rui, LI Xiaogang, LU Hui, ZHANG Guohua, SHI Zhenghong, LIU Jianrong, Multicenter and Randomized Clinical Study of Cerebroside Carnosin Treatment in Acute Ischemic Stroke Patients, Chin J Stroke, 2006, 9: (4) YANG Da-xuan, YANG Jing, LI Li-huan, Effects of Cattle Encephalon Glycoside and Ignotin Injection on Serum Level of S100B Protein and Neuron Specific Evolase in Patients Undergoing Cardiac Valve Replacement with Cardiopulmonary Bypass, Natl Med J China, 2007, 7, 87-25:

30 Management Discussion and Analysis 2, , , % % % 16.7% % % 1, , % 79.8% FINANCIAL REVIEW Turnover During the Period, the Group continued to strengthen its CCV drugs business while promoting sales of its products of other therapeutic areas. A stable growth trend was shown in the sales operations of the Group, but due to adjustment in sales strategies resulting in downward adjustment in ex-factory price of certain products, total revenue for the Period was approximately RMB2,000.0 million, representing a decrease of approximately RMB324.7 million when compared with RMB2,324.7 million for the six months ended 30 June During the Period, a stable growth trend was shown in the sales of CCV drugs by the Group, but due to adjustment in sales strategies, sales of CCV drugs for the Period amounted to approximately RMB1,880.8 million, representing a decrease of approximately RMB334.0 million when compared with the six months ended 30 June 2013, which accounted for approximately 94.0% of the Group s total revenue. Sales of anti-infective drugs decreased by approximately 18.8% from RMB18.5 million for the six months ended 30 June 2013 to RMB15.0 million for the Period, due to stricter restrictions on their clinical use and accounting for approximately 0.8% of the Group s total revenue. In view of that, the Group focused on stepping up its efforts in the promotion of other drugs, such as central nervous system, respiratory and metabolism drugs. Sales of other drugs grew by approximately 16.7% to RMB99.1 million, accounting for approximately 5.0% of the Group s total revenue. Cost of sales The Group s cost of sales for the Period amounted to approximately RMB404.0 million, accounting for approximately 20.2% of the total revenue. Gross profit Gross profit of RMB1,596.0 million was recorded for the Period, representing a decrease of RMB251.1 million when compared with RMB1,847.1 million for the six months ended 30 June The main reason was the adjustment in sales strategy resulting in a lower sales amount when compared with the corresponding period of the previous year. Overall gross profit margin increased from 79.5% for the six months ended 30 June 2013 to 79.8% for the Period, which was mainly due to higher contribution from the products with higher gross profit margins. 28 Sihuan Pharmaceutical Holdings Group Ltd. Interim Report 2014

31 Management Discussion and Analysis % % % 1, % Other net gains Other net gains increased from RMB147.2 million for the six months ended 30 June 2013 to RMB226.0 million for the Period. This was mainly due to an increase in government grants received by the Group. Distribution costs Distribution costs for the Period decreased by RMB534.7 million to RMB694.3 million when compared with the corresponding period of the previous year. The decrease was mainly due to the adjustment in sales strategies by the Group. Administrative expenses Administrative expenses increased by 42.5% from RMB128.4 million for the six months ended 30 June 2013 to RMB183.0 million for the Period. The increase was primarily due to an expansion in the Group s operations and development, resulting in an increase in the relevant administrative expenses and investment in research and development. Net finance income Net finance income decreased by 13.1% from RMB58.4 million for the six months ended 30 June 2013 to RMB50.7 million for the Period. The decrease was mainly due to the decrease in interest income received by the Group. Profit before income tax Based on the above factors, the Group s profit before income tax increased by 44.1% from RMB699.5 million for the six months ended 30 June 2013 to RMB1,007.7 million for the Period. Income tax expenses The Group s income tax expenses for the Period were approximately RMB175.2 million. Profit for the Period Based on the above factors, the Group s net profit increased by 34.3% from RMB620.2 million for the six months ended 30 June 2013 to RMB832.5 million for the Period

32 Management Discussion and Analysis % , , Profit attributable to owners of the Company Profit or net profit attributable to equity holders of the Company increased by 34.4% from RMB617.5 million for the six months ended 30 June 2013 to RMB830.1 million for the Period. Liquidity and financial resources As at 30 June 2014, the Group s cash and cash equivalents amounted to RMB1,425.3 million (as at 31 December 2013: RMB1,508.1 million); no term deposits with maturities of over three months (at as 31 December 2013: RMB233.7 million); available-for-sale financial assets amounted to RMB902.7 million (as at 31 December 2013: RMB776.1 million). The Group generally deposits its excess cash in interest-bearing bank accounts and current accounts. The Group may use extra cash for short-term investments in order to obtain better returns. Therefore, the members of the Group entered into agreements with certain PRC state-owned banking institutions and reputable international financial institutions outside of PRC to invest the extra cash. According to such agreements, during the Period, the total amount of investment of the members of the Group amounted to RMB897.5 million. The investments made by the Group according to these agreements were categorized as short-term investments, which mainly consisted of financial planning products purchased from certain state-owned banks and reputable international financial institutions outside of PRC. For the said financial planning products, the issuing banks of such financial planning products may invest the Group s funds at their discretion into financial instruments such as treasury bonds, discounted bank acceptances, commercial acceptance bills and bank deposits. The investment principal of RMB897.5 million plus interest of approximately RMB5.2 million in aggregate amounted to approximately RMB902.7 million, which was recognized as available-for-sale financial assets in the consolidated balance sheet of the Group as at 30 June As at the date of this announcement, total amount of sold/repaid investment principal amounted to RMB454.5 million. 30 Sihuan Pharmaceutical Holdings Group Ltd. Interim Report 2014

33 Management Discussion and Analysis Save as disclosed below, the Group did not have other liabilities and bank loans. The Group has sufficient cash as at 30 June The Directors are of the opinion that the Group does not have any significant capital risk. 30 June 2014 RMB 000 Unaudited 31 December 2013 RMB 000 Audited Cash and cash equivalents 1,425,347 1,508,076 Less: Borrowings (186,680) 1,425,347 1,321,396 1, , Trade and other receivables The Group s trade receivables consist of the credit sales of its products to be paid by its distributors and bank acceptance bills due within half a year. Other receivables of the Group consist of prepayments to suppliers, deposits and other receivables. The Group s trade and other receivables were RMB1,477.0 million as at 30 June 2014, representing an increase of RMB79.0 million when compared with trade and other receivables of RMB1,398.0 million as at 31 December 2013, the increase was mainly due to the increase in prepayments to suppliers and other receivables. Inventory Inventory as at 30 June 2014 amounted to RMB129.3 million (as at 31 December 2013: RMB101.3 million). Inventory turnover days were 51 days for the Period (for the six months ended 30 June of 2013: 42 days). We had no inventory impairments during the Period