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Winteam Pharmaceutical Group Limited (HKSE: 570).

BUSINESS REVIEW

Under the background of the "New Normal" of China's economy and the reform on the medical and healthcare system, the government is having more influence on the pharmaceutical industry and enterprises. More policies have been introduced since the second half of 2015, covering planning of the pharmaceutical system, pharmaceutical quality, comprehensive reform of public hospitals, bidding and purchasing of drugs (including "secondary price negotiation"), cost control on medical insurance reimbursement and the "two-invoice system" to be implemented in the pharmaceutical distribution process as well as other segments in the value chain. Such policies have created direct and long-term uncertainties on the future development of and competition in the pharmaceutical industry. Under the guidance of the healthcare reform policies, the policy on controlling drug sales at hospitals will be fully implemented. It requires the sales of medicine (excluding TCM decoction pieces) as a percentage of total hospital revenue being reduced to about 30% at public hospitals of pilot cities by the end of 2017. The overall size of the hospital drug market will be restricted then.

In a severe market environment where industry policies affecting the volume growth and drug tenders continue to lower prices, the sales growth of the finished drug business of the Group slowed down. Facing the changes in the market, the Group actively adjusted its product strategies and the industrial structure. While gradually digesting the business pressure of the finished drugs, the Group has accelerated the expansion of the concentrated TCM granules business.

1. Concentrated TCM granules: sales and profit saw strong growth as integration speeded up

Concentrated TCM granules carry forward the TCM theory of "treatment based on syndrome differentiation and modification based on symptoms", ensure the quality of TCM drugs and are convenient to use, aligning with the trend of Chinese medicine modernisation. Concentrated TCM granules have been favored by more and more doctors and patients, and maintained rapid growth in the industry in recent years. In China, concentrated TCM granules are currently classified as products on trial with 6 production licenses held by 5 enterprises, of which Tianjiang Pharmaceutical is the forerunner in the sector, with a history in concentrated TCM granules for over 30 years.

During the reporting period, the concentrated TCM granules business recorded satisfactory results, with revenue posted rapid growth of 21.9% to approximately RMB2,054,739,000 from RMB1,685,305,000 for the same period of last year. Gross profit margin improved by 5.7 percentage points to 58.5% from 52.8% for the same period of last year. Such improvement was mainly attributable to that (1) prices increased as part of the sales shifted to direct invoicing to hospitals rather than agents; (2) the increase in sales volume promoted the expansion of output, and benefitted from the effect of economies of scale in production. During the reporting period, profit before taxation and profit for the period for the concentrated TCM granules business was approximately RMB469,075,000 and RMB381,101,000, representing an increase of 34.0% and 27.4% respectively.

Tianjiang Pharmaceutical has established a mature marketing system for the concentrated TCM granules. With two models of direct sales and agency sales progressing together, it rapidly expands market, effectively controls its sales terminals, and maintains the sales and marketing network and has formed extensive sales coverage in each province of China. During the reporting period, the sales of concentrated TCM granules saw significant growth in most regions in China, of which 17 provinces witnessed a year-on-year growth of over 30% in sales revenue. The sales amount in each of the 18 provinces, including Guangdong, Jiangxi, Shaanxi, Shandong, Henan and Hebei, reached over RMB50,000,000 in the first half of 2016, with combined revenue contributing 86.2% of the total sales of concentrated TCM granules.

2. Finished Drugs: reformed marketing and sales models, laying a solid foundation for sustainable development in the long-term

During the reporting period, the continuing operations of finished drug business achieved sales revenue of approximately RMB1,144,551,000, representing a decrease of 19.5% from approximately RMB1,422,067,000 for the same period of last year, which was mainly due to (1) the impact of medical insurance payment and the "two-invoice system", which forced distributors reduced the inventory, so they purchase less from the Group; (2) the tender prices of some products declined slightly, and the implementation of "secondary price negotiation" in Anhui Province, Ningbo City, Zhejiang Province and Northern Jiangsu district during last year led to the cancellation of tenders in these regions, which affected the sales of this year. Gross profit margin was 55.3%, representing a decrease of 4.9 percentage points from 60.2% for the same period of last year. The decrease in gross profit margin was mainly due to the decrease in production volume resulted from changes in sales volume, the increase in fixed unit production cost, and the decrease in sales resulted from the adjustment of unit selling price for some products. Profit before taxation for the finished drug business was approximately RMB196,270,000, representing a decrease of 32.6% as compared with the same period of last year. Profit for the period from the finished drug business was approximately RMB163,975,000, representing a decrease of 32.9% as compared with the same period of last year. Apart from the above factors, a reduction in interest income was also one of the main reasons of the decrease in net profit from the finished drug business. Interest income for the same period of last year was mainly attributable to interest income from deposits of proceeds of placing of new shares of the Company of approximately RMB27,711,000, such interest income was non-recurring, and was discountinued at the end of last year.

The Group digested the pressure on the finished drug sector exerted by industry policies through adjusting the pace of the production and sales of finished drugs and reforming the marketing and sales models to lay a solid foundation for a long-term and sustainable development. The introduction of the "system of responsible persons/ partners" specified the rights and responsibilities of each responsible person. It gave full authorization to them in human, financial and material resources, which improved the team efficiency and fully motivated the front-line management and sales staff. Terminal sales have shown signs of growth.

3. Acceleration in Internal integration

Under the relatively weak market environment for the finished drug business, the Group accelerated the integration and market expansion of the concentrated TCM granules business. The Group has continued strengthening the management team of all subsidiaries to integrate resources and improve the utilization efficiency of labors, capital and production facilities. It has also established the TCM procurement center for centralized procurement of 105 medicinal herbs with large consumption for finished drugs and concentrated TCM granules to ensure the quality of the supply of raw materials, effectively reduced the procurement cost and improve the profit margin.

In order to meet the surging capacity demand for concentrated TCM granules, the Group has been preparing and coordinating with relevant regulatory authorities to integrate the pre-treatment and extraction processes of all TCM production facilities of the Group within Guangdong in Gaoming District, Foshan City. The centralized, energy-saving and environmental friendly development model will further enhance the production efficiency and quality management.

The Group strengthened market supporting and team building, established the expert database and enhanced the academic promotion of major finished products and concentrated TCM granules. Meanwhile, the Group continuously improved the sales mapping system for targeted medical institutes and enhanced the distributors and internal sales forces to expand coverage of grass-root medical institutes, preparing for the deregulation of pilot policies on concentrated TCM granules.

4. Research and Development ("R&D")

Concentrated TCM granules

During the reporting period, the scientific research departments of the Group continued to advance the research on various concentrated TCM granules. The Group conducted 21 research projects focusing on the production and quality control of concentrated TCM granules and 9 on the development of health products. It has obtained 4 utility model patents, 3 invention patents and made 57 new patent applications.

(1) Persistently focusing on the researches of key technical platforms and key varieties to improve the core competitiveness of concentrated TCM granules. Emphasis was put on the research of key technologies for improving product quality, improving production efficiency and reducing production cost, and has made significant progresses in extraction, separation of solids and liquids and granulation. It also conducted researches on key TCM medicinal herbs from the selection, processing, production technologies, quality standard and quality control.

(2) Study on improving the internal quality control standard of concentrated TCM granules. Based on the Chinese Pharmacopoeia (2015 edition) and the research results of Tianjiang Pharmaceutical on the quality of medicinal herbs, decoction pieces, extraction and finished products, the internal quality control standards of the Company were revised. Further studies were made to improve TLC (Thin-layer Chromatography) identification, content determination and other qualitative and quantitative methods. The verification on the HPLC (High Performance Liquid Chromatography) characteristics of medicinal herbs and finished products continued. So far, it has identified HPLC characteristics of over 150 concentrated TCM granules. The study is particularly important in improving the quality control of concentrated TCM granules.

(3) In order to maintain the competitiveness of concentrated TCM granules in the future, the Group formed a dedicated research team and initiated the study on unifying internal standards for concentrated TCM granules and has achieved unification for some of the key varieties in the following aspects: (1) unified place of origin and production base of medicinal herbs, achieving the unification of basic standards of raw materials; (2) unified preparation yield and specification yield, achieving the unification of key parameters in preparation standards; and (3) unified nominal equivalent weight, specification, content of the index ingredients, extract content and identification methods, achieving the unification of basic standards of finished products.

Finished drugs

The Group currently has 3 TCM new drugs and 5 chemical generic drugs under preclinical research and 4 TCM new drugs under clinical research. During the reporting period, the Group has been awarded 4 invention patents and 4 utility model patents. It also applied for 4 invention patents and 6 utility model patents. The Group has initiated the quality consistency evaluation for some of the generic drugs. It is conducting the overall pharmaceutical research on Nifedipine Sustained-release Tablets (I) (I) and Nifedipine Sustained-release Tablets (III). The projects of TCM standardization for Yu Ping Feng Granules and Xianling Gubao Capsule have been approved by the State Administration of Traditional Chinese Medicine, aiming to promote the establishment of a standard system for the industry, facilitate the development of "high quality with compatible price" and guarantee the sustainable development of the TCM industry through improving the overall product quality.

In order to accommodate the requirements on the administration of "clinical pathway" in public hospitals promoted by the regulatory authorities, the Group has been gradually conducting large evidence-based clinical researches to enhance the influence of the Company in the academic world since the end of last year. Large RCTs (Randomized Control Trials) were conducted on Yu Ping Feng Granules, Moisturising & AntiItching Capsule and Jingshu Granules. During the reporting period, clinical trials on Yu Ping Feng Granules for the treatment of COPD (chronic obstructive pulmonary disease) and RRTI (recurrent respiratory tract infection) entered the stage of data processing and follow-up visits. Currently, the initial results are encouraging. The trials on Jingshu Granules and Moisturising & Anti-Itching Capsule have been under the process of recruiting patients since March and are in steady and orderly progress. On such basis, we also initiated clinical researches on Zaoren Anshen Capsule and Fengshi Gutong Capsule. So far, the clinical researches on all key products have been initiated.

In addition, as China attaches importance not only to the efficacy but also the economics of the EDL products, the Group also initiated the pharmacoeconomics researches on its major EDL products during the reporting period, which can prove the cost effectiveness of products. As at end-June, the researches on Xianling Gubao Capsule and Yu Ping Feng Granules have obtained initial results; the researches on Jingshu Granules, Moisturising & Anti-Itching Capsule and Zaoren Anshen Capsule were also in progress. All projects under progress are conducted under the cooperation with top experts in the corresponding fields, which will help significantly improve the influence of the Group in the industry. It also demonstrates the Group's efforts in the academic promotion of pharmaceuticals. We will continue to focus on academic researches to improve the brand recognition of the products and support sales volume growth.

5. Investment Projects

Acquisition of Huayi Pharmaceutical

During the reporting period, Sinopharm Group Guangdong Medi-World Pharmaceutical Co., Ltd., a wholly-owned subsidiary of the Company, completed the acquisition of 100% equity interest in Huayi Pharmaceutical and related shareholder's loan through the tender with RMB83,500,000 (equivalent to approximately HK$100,200,000) on 6 April 2016. Huayi Pharmaceutical was a wholly-owned subsidiary of Sinopharm Group Hongkong Co., Limited ("Sinopharm Hongkong"), a substantial shareholder of the Group. Its exclusive product Qili Capsule, a bone-setting prescription medicine, is listed on the National Essential Drug List (2012 edition).

For details of the transaction, please refer to the announcements of the Company dated 26 February 2016 and 6 April 2016.

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Publication:China Biotech
Geographic Code:9CHIN
Date:May 22, 2019
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