Northeast Pharmaceutical from Relocation Acquires Opportunity

Northeast Pharmaceutical Group Co., Ltd., an old state-owned
company, has met a major development opportunity in its
relocation. According to the municipal program made by Shenyang
City, Northeast Pharmaceutical Group located in the Tiexi
District of Shenyang will move to Shenyang Xihe Development Zone.
Its subsidiary - Northeast Pharmaceutical Group Co., Ltd. (the
company, SZ: 000579) will get a profit-earning chance through
land replacement or government subsidy in this relocation and
renovation.
   According to officials from Shenyang Municipal Government,
"the relocation and renovation will be started in 2007 and
completed in 3-5 years. The government will give financial
support to the company and its shareholder Northeast
Pharmaceutical Group through land replacement and
compensation."
   The vitamin C business that once caused difficulties to the
company has also made a turning point and met a new opportunity.
   It is reported that the company reached an agreement with its
major shareholder. Vitamin C will still be produced by Northeast
Pharmaceutical Group, but sold and marketed by the company. The
company will get benefits by deducting points. The output of
vitamin C is around 20 000 tons a year in the Group. Based on
a price of US$3.0 per kg, the company can increase its revenues
by around RMB600 million a year.
   When the company got listed in 1996, it planned to raise funds
for the vitamin C production. According to the program made by
the company at that time, the production scale of vitamin C in
the company would hold the first place in China and the second
place in the world.
   The vitamin C project that was launched in rush met "Waterloo"
in the same year. On the one hand, the company remained to be
an old state-owned enterprise in management and shareholdings.
The relationship between production and sales was not
straightened up. The sales in the domestic market were not as
good as had been expected. On the other hand, the large
production scale of vitamin C in the company brought great impact
on international vitamin C producers. The price of vitamin C went
straight down from US$11.8 per kg to US$4.5 per kg in 1996.
   Due to the sudden change of the situation, the operating rate
was low and the scale effect could not be formed. The vitamin
C project expected to make money for the company had a bad luck
and serious losses gobbled up all the profits in the company.
The company had to transfer the vitamin C business to its major
shareholder - the Group in 1997. Business related to the vitamin
C production totaling RMB1.22 billion were stripped off and
given to its major shareholder Northeast Pharmaceutical Group.
   Unexpectedly, after several years' hard time the price of
vitamin C started to pick up in 2002. The outbreak of SARS in
2003 led to a boom of the vitamin C industry, and the price rose
sharply to US$13 per kg.
   As vitamin C had a sustained low price for several years, many
domestic and foreign vitamin C producers were defeated in
competition and failed to survive and see the coming of
rehabilitation.
   Owning to the recovery of the vitamin C industry and the
collapse of competitors, the vitamin C production has suddenly
turned from a heavy burden to a favorite. The company has started
to consider getting the vitamin C production back into its arms.
But how can do it? After repeated negotiations, the company has
only got the sales right of vitamin C from its parent company.
   As drugs for AIDS are centrally purchased by the state today,
the company can only get limited benefits. Inputs made by the
government will however surely be increased in future.
   According to the program made by the company, the main
business of the company at present and in future is composed of
OTC, health-care products and prescription drugs. The company
mainly produces more than 800 technical drugs and formulations
including antibiotics, vitamins, drugs for cardiovascular and
cerebrovascular diseases, drugs for digestive systems,
anti-virus drugs, natural drugs, drugs for AIDS, drugs of nerve
anesthesia, drugs for tuberculosis, drugs for family planning
and cosmetics.
   The inclusion of drugs for AIDS in the product list has made
the company eye-catching in the capital market.
   Patients of AIDS are increasing in China. The government has
already accordingly made more input and paid greater attention
to this problem. Investors think that the performance of the
company will remarkably improve in future. Although the company
holds nearly 70% market share in drugs for aids, profits gained
are not much, even less than what the company has got from other
technical drugs and intermediates.
   In November 2006, Liu Zhen replaced Dong Zenghe to become the
chairman of the company. According to the information from the
company, Liu Zhen is quite ambitious and aggressive. As soon as
he assumes office, he promises that the company will take the
relocation as the breakthrough point to promote the overall
innovation and development of the company. Efforts will be made
to achieve sales revenue of over RMB5.0 billion in 2007 and
attain the goal of RMB10 billion in 2010.