Hengrui Medicine: Secondary Innovation Expands Development Space         

Jiangsu Hengrui Medicine Co., Ltd. (Hengrui Medicine, SH: 600276) was incorporated in Lianyungang city, Jiangsu province in 1997, and listed on the Shanghai Stock Exchange in 2000. It mainly engages in developing, manufacturing and distributing western medicines, including raw chemical pharmaceuticals, tablets, injections, capsules, powder injection, etc., as well as manufacturing and distributing medicinal SP composite membranes and PTP aluminum foils. In the third quarter of 2008, Hengrui Medicine's operating revenue was RMB590 million, with operating profits of RMB116 million. Over 60% of revenue comes from anti-tumor drugs, while at the current stage and even in the near future, its further development will rely on innovation.

*Secondary Innovation   

Hengrui Medicine claims that its annual investment in research and development for new medicines reaches RMB200 million, which accounts for 8% of its annual revenue and far exceeds the average value of its similar domestic medicine enterprises in China. Mr. Sun Piaoyang, Chairman of the Board said that each year, about 800-900 categories of drugs are currently made for clinical use around the globe, but countless projects in new medicine R&D are launched. It is conceivable that the amount of such projects aborted annually is difficult to calculate, and nearly all the pharmacy patents successful in R&D belong to large-scaled international pharmaceutical companies, whereas a majority of Chinese pharmaceutical enterprises still remain in the stage of generic drugs production. But, Hengrui Medicine often sees opportunity in aborted international projects.  
    "Every year, those aborted projects in new medicine R&D became the target of our secondary innovation," said Mr. Sun clearly, "our company purchased some of those projects aborted and re-explored their values, and then readjusted their research orientation and made them our patents." But, not all the secondary innovations ended with success.
    In Mr. Sun's view, the secondary innovation is an innovation with Chinese features, and compared with generic drugs, "it always pursues to be a cut above others."
    Recently, it is common that some pharmaceutical enterprises are prosecuted by a few international enterprises for producing generic drugs in superficial layer. Even Hengrui Medicine is no exception. However, its innovation "striving to be a cut above others" has broken away from low-price competition among similar drugs, and its space for development has been expanded dramatically.

*Reasons for Prediction of Potential Development    

According to international standards, Hengrui Medicine's sort of innovation cannot be called "innovation," but it does bring a new era for Hengrui Medicine in development.
    In 2007, the anti-tumor drugs produced by Hengrui Medicine began to take the lead among the pharmaceutical enterprises in China. Up to now, the anti-tumor drugs still remain its key directions, and more importantly, such drugs cover a large scope, and at present, anti-tumor medicines are only part of the categories it produces, and looking ahead, its market potential is enormous, especially in China with its aging population.
    General Manager of Hengrui Medicine said, prior to 2007, the main business of the company had been growing about 30% annually. According to report of quarter 3 in 2008, due to the influence of international financial turmoil, compared with the same period of 2007, financial transaction assets decreased by over RMB105 million. He also pointed out that the company did not attach too much importance to the revenue brought about by financial transaction assets. As a comprehensive pharmaceutical enterprise with R&D and production of anti-tumor medicine, drugs for surgery, antibiotics, OTC (over-the-counter) drugs, Hengrui Medicine boasts outstanding capabilities for innovation and R&D in some aspects (such as anti-tumor medicine) in comparison with similar enterprises, which gives an impetus to the company for longer-term sustainable development. And this is the very focus that Hengrui Medicine is really concerned about, now and forever.
    Up to the issuing of an interim report in 2008, Hengrui Medicine had newly submitted eight applications for patents in China, as well as three applications for PCT patents (international patents). According to the company's forecast, it will enjoy an increase of over 20% in main business in 2009.

*Business Getting Further Diversified     

On the premise of stable development in main business, Hengrui Medicine is also doing its utmost to adjust and maintain its sound relations with stakeholders.  
    At present, three companies that have holding rights of Hengrui Medicine: Lianyungang Tianyu Investment Co., Ltd. (hereafter called "Tianyu Investment"), Lianyungang Dayuan Investment Co., Ltd., Lianyungang Heng-chuang Pharmaceutical Science and Technology Co., Ltd. (hereafter called "Hengchuang Pharmaceutical").
    In June 2008, the Hengrui Medicine bulletin claimed that the company planned to purchase 100% of the stock of Lianyungang Huachen Pharmaceutical Co., Ltd. from Tianyu Investment and Hengchuang Pharmaceutical. When the transaction is completed, Huachen Pharmaceutical will serve as a specialized subsidiary holding company with OTC drugs produced by Hengrui Medicine. This is one of the key active transformation actions taken by Hengrui Medicine.
    It is obvious that a series of external takeovers and persistent emphasis on its R&D capabilities will enable Hengrui Medicine to continue to be a leading enterprise in the medicine industry.