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上海醫藥集團股份有限公司 Shanghai Pharmaceuticals Holding Co., Ltd.* (A joint stock company incorporated in the People’s Republic of China with limited liability) (Stock Code: 02607)
VOLUNTARY ANNOUNCEMENT ON ESTABLISHMENT OF JOINT VENTURE BY WHOLLY-OWNED SUBSIDIARY AND TSUMURA & CO.
This announcement is made by the Board of Directors (the “Board”) of Shanghai Pharmaceuticals Holding Co., Ltd. (the “Company” or “Shanghai Pharma”) on a voluntary basis.
I. OVERVIEW OF EXTERNAL INVESTMENT
Shanghai Traditional Chinese Medicine Co., Ltd. (上海市藥材有限公司) (“Shanghai Traditional Chinese Medicine”), a wholly-owned subsidiary of Shanghai Pharma entered into a joint venture agreement (the “Joint Venture Agreement”) with Tsumura & Co. (“Tsumura & Co.”) at Shanghai Pharma Building, No.200 Taicang Road, Shanghai in the afternoon, 6 May 2016 to jointly establish a joint venture, with a registered capital of RMB 600 million. Shanghai Traditional Chinese Medicine shall contribute RMB 306 million in cash, representing 51% equity interest of the joint venture.
Proposals related to the Transaction have been considered and approved by the 76th meeting of the Fifth Session of the Executive Committee of the Board of Shanghai Pharma on 6 May 2016. There is no need to submit the Transaction to the Board meeting and general meeting for consideration.
The Transaction does not constitute a connected transaction and major assets reorganization.
* For identification purpose only
- 1 - II. BASIC INFORMATION ON THE INVESTORS
1. Tsumura & Co.
Country of registration: Japan
Nature of business: Joint-stock company
Registered office: 2-17-11, Akasaka, Minato-ku, Tokyo, Japan
Representative: Terukazu Kato
Registered capital: YEN 19.487 billion
Major business: As the largest producer of Chinese Kampo medicine in Japan, Tsumura & Co. was established in 1893, its Kampo medicine products has a market share of 85% in Kampo preparation market for medical usage in Japan.
In 2014, Tsumura & Co. recorded a sales revenue of YEN 110.438 billion, operating profits of YEN 19.491 billion, net profit of YEN 14.075 billion, gross assets of YEN 215.654 billion and net assets of YEN 150.947 billion. (audited financial data)
Tsumura & Co. is a Tokyo Stock Exchange listed company (Stock Code：4540), its shareholder structure is relatively diversified, its top three substantial shareholders are Japan Trustee Services Bank, Ltd. (Trust Window), The Master Trust Bank of Japan, Ltd. (Trust Window), and Japan Trustee Services Bank, Ltd. (Trust Window 9) respectively. (as at September 2015)
Relationship with Shanghai Pharma: In July 2001, Shanghai Traditional Chinese Medicine, a wholly-owned subsidiary of Shanghai Pharma, Tsumura & Co. and Shanghai Zhangjiang Hi-Tech Park Development Co., Ltd. jointly established Shanghai Tsumura Pharmaceuticals Co., Ltd. (“Shanghai Tsumura”), 34% of which is held by Shanghai Traditional Chinese Medicine. Shanghai Tsumura mainly produces intermediate extract powder for Tsumura & Co.’s production of Chinese prescription preparations used in medical treatment, and exports them from China to Japan.
- 2 - 2. Shanghai Traditional Chinese Medicine Co., Ltd
Country of registration: China
Nature of business: Limited liability company (sole proprietorship of legal person)
Registered office: No. 239, Hankou Road, Huangpu District, Shanghai, China
Legal Representative: Chen Junli
Registered capital: RMB 648.47 million
Major Business: Shanghai Traditional Chinese Medicine is a wholly-owned subsidiary of Shanghai Pharma and was established in 1955, and is a large medical enterprise covering the production and distribution of Chinese medicine, Chinese herbal medicine, Chinese patent medicine, Chinese medicine for health care. It is Shanghai Pharma’s core platform for developing the whole industry chain for Chinese medicine.
In 2015, Shanghai Traditional Chinese Medicine recorded a revenue from major business of RMB 4,473.4123 million, net profit attributed to the shareholders of parent company of RMB 186.8443 million. As at the end of 2015, the total assets of Shanghai Traditional Chinese Medicine amounted to RMB 4,068.5985 million, the net assets attributed to shareholders of parent company amounted to RMB 1,147.493 million. (audited financial data)
III. BASIC INFORMATION OF INVESTMENT SUBJECT
1. Name of the joint venture: Shanghai Pharma Tsumura Pharmaceuticals Co., Ltd. (tentative name, which is subject to the approval by Industrial and Commercial Administration)
2. Registered place: Shanghai International Medical Park, Pudong New District, Shanghai, China (tentative)
3. Business scope: production and sales of Chinese patent medicine, Chinese herbal granule, Chinese herbal extract, Chinese herbal medicine (except for processed products), health care products, Chinese medicine, research and development of health care products, research and development consulting, research, development, import and export of production equipment and deployment equipment of related products (actual business scope is subject to the approval by the registration authority).
- 3 - 4. Registered capital: RMB 600 million
Unit: ten thousand, RMB Form of Amount of Shareholding Name of investor contribution contribution ratio
Shanghai Traditional Cash Chinese Medicine 30,600 51% Tsumura & Co. Cash 29,400 49%
Total – 60,000 100%
5. Total amount of the investment in the joint venture is RMB 1.2 billion. In principle, except for the registered capital, capital should be raised in appropriate way agreed by parties of the joint venture after the establishment of such joint venture.
6. Operating plan of the joint venture:
1 Enhancing the management of source of medical materials, promoting standardized management, and realizing the whole process management from the source, processing, production, marketing, clinical application and ADR monitoring;
2 Introducing and absorbing advanced extractive technique, production technique and information management of production, and promoting the production technique and management of Chinese medicine industry;
3 Ensuring the quality stability and homogeneity of products of different lots, improving the effectiveness of Chinese medical treatment and realizing the stability of clinical application;
4 Realizing energy saving and reasonable use of Chinese medicine resources, promoting the green, healthy and sustainable development of the industry;
5 Providing safe, high-quality and competitive products to patients and consumers, thereby obtaining economic interests that satisfy investment parties.
- 4 - IV. MAIN CONTENT OF THE EXTERNAL INVESTMENT AGREEMENT
1. Contribution arrangement
The parties of the joint venture should complete the contribution of capital no less than 20% of the registered capital in accordance to their contribution ratio respectively in 90 days from the date of establishment of the joint venture; the remaining registered capital should be contributed no later than two years from the date of establishment of the joint venture.
2. Term of joint venture
The term of joint venture is 50 years, and is calculated since the date of establishment.
3. The governance structure of the joint venture
The joint venture shall set up a board of directors, which is the high authority of the joint venture.
The board shall consist of 7 directors (including one chairman and one vice chairman), of which 4 directors shall be appointed by Shanghai Traditional Chinese Medicine appointed, and 3 directors shall be appointed by Tsumura & Co. A director shall be appointed by Shanghai Traditional Chinese Medicine to serve as the Chairman of the board and legal representative.
The joint venture shall not set up a board of supervisors, but will appoint a supervisor as recommended by Shanghai Traditional Chinese Medicine.
The joint venture shall set up an operating management institution in charge of daily operating management of the joint venture. The operating management institution includes one general manager, three deputy general managers and one financial director. The general manager shall be recommended by Tsumura & Co., one of the deputy general manager shall be recommended by Shanghai Traditional Chinese Medicine (in charge of marketing) and the other two deputy general managers shall be recommended by Tsumura & Co. (in charge of production and quality management), the financial general manager shall be recommended by Shanghai Traditional Chinese Medicine and the general manager, deputy general managers and financial general manager shall be appointed by the board.
The operating institution of the joint venture shall be approved by the board in accordance with the rules of procedures.
- 5 - 4. Obligations and responsibilities of the parties of the joint venture
Shanghai Traditional Chinese Medicine shall, leverage its own resources, provide necessary support to the joint venture for raising funds to explore China market and help the joint venture to improve operating management capacity, thereby improving the sales profitability in Chinese market; Tsumura & Co. shall be in charge of the technique application, production management, Chinese medicine management and other production technique and quality management that can improve the production profitability.
The procurement of Chinese medicine, type of products, product development and research of new products meeting the Chinese market, shall be determined by both parties and the joint venture after negotiation under the premise of meeting market-oriented principle, ensuring the product quality and interest optimization principles.
5. Default liabilities
The default party who fails to pay the contribution amount timely in full in accordance with the Joint Venture Agreement should pay liquidated damages; if the contribution is overdue for three months, other than claim for liquidated damages, the observant party reserves the right to terminate the agreement and require the default party to compensate for the loss; each party should assume the responsibility and compensate for the total direct loss of other parties and the joint venture if its non-performance causes loss to other parties or the joint venture.
6. Profit distribution
The profit should be distributed according to the actual contribution ratio of both parties of the joint venture.
7. Dispute resolution
Dispute should be settled through negotiation and arbitration.
8. Condition precedent of the agreement
The agreement will enter into force after being signed by both parties of joint venture and approved by approval authority.
V. SIGNIFICANCE AND INFLUENCE OF JOINT VENTURE ON LISTED COMPANY
1. It is in the interest of Shanghai Pharma to seize the industry opportunity in Chinese herbal granule
- 6 - After more than ten years of development, the quality advantage of Chinese herbal granule has been well recognized and has a large development space. The country’s pilot production limitation of Chinese herbal granule is expected to be fully opened to Chinese medicine enterprises in future. The establishment of joint venture producing Chinese herbal granule by Shanghai Traditional Chinese Medicine and Tsumura & Co. is in accordance to the whole development strategy of national traditional medicine development, is benefit to Shanghai Pharma to seize the industry opportunity in Chinese herbal granule and is a significant measure of Shanghai Pharma’s strategy to develop the whole industry chain of Chinese medicine.
2. It is in the interest of combining respective advantages of Shanghai Traditional Chinese Medicine and Tsumura & Co., and rapidly forming differentiated core competitiveness of the joint venture
Combining the Shanghai Traditional Chinese Medicine’s advantages in medical material resource, medical material base, warehouse logistics, multiple channels etc. and Tsumura & Co.’s advantage in production technique of Chinese herbal medicine and fining management sense, rapidly forming differentiated core competitiveness advantages, thus to built the most advanced company in research and development, production and marketing of Chinese herbal granule domestically and even internationally.
The cooperation is expected not to have significant influence on the prevailing financial situation and operating results of Shanghai Pharma.
VI. RISK ANALYSIS
Given that the State has yet to fully open the limitation on the production of Chinese herbal granule, relevant policies remain uncertain,. The State’s full opening of pilot production limitation of Chinese herbal granule in the future may further intensify the market competition risk. As the joint venture has yet to finish the business registration, the details of the subsequent cooperation remain uncertain.
By Order of the Board Shanghai Pharmaceuticals Holding Co., Ltd. ZHOU Jie Chairman
Shanghai, the PRC, 7 May 2016
As at the date of this announcement, the executive directors of the Company are Mr. Cho Man and Mr. HU Fengxiang; the non-executive directors are Mr. ZHOU Jie and Mr. JIANG Ming; and the independent non-executive directors are Mr. CHEN Naiwei, Mr. WAN Kam To, Mr. TSE Cho Che, Edward and Mr. LI Zhenfu.
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