##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 20-F
 
 (Mark One)o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934ORþ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2008ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934ORo
    
    SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission file number: 001-33398
 
 Simcere Pharmaceutical Group
 
  N/A
 
  Cayman Islands
 
  No. 699-18 Xuan Wu Avenue,
Xuan Wu District, Nanjing
Jiangsu Province 210042
Peoples Republic of China
 
  Zhigang Zhao
Chief Financial Officer
No. 699-18 Xuan Wu Avenue,
Xuan Wu District, Nanjing
Jiangsu Province 210042
Peoples Republic of China
Tel: (86) 25 8556 6666 x 8818
Fax: (86) 25 8547 7666
E-mail: zhaozhigang@simcere.com
 
  Securities registered or to be registered pursuant to Section 12(b) of the Act:
 Title of Each Securities
    
    Name of Each Exchange on Which RegisteredAmerican Depositary Shares, each representing two ordinary 
shares, par value $0.01 per share
    
    New York Stock Exchange
 Securities registered or to be registered pursuant to Section 12(g) of the Act:
 None
 
  Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
 None
 
   o þ
 o þ
 þ o
 o o
  o þ o
  þ
 o
 o
 o o
 o þ
  o o




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TABLE OF CONTENTS
 INTRODUCTION
    
    
    1PART I
    
    
    1Item 1. Identity of Directors, Senior Management and Advisers
    
    
    1Item 2. Offer Statistics And Expected Timetable
    
    
    1Item 3. Key Information
    
    
    1Item 4. Information of the Company
    
    
    26Item 5. Operating and Financial Review and Prospects
    
    
    46Item 6. Directors, Senior Management and Employees
    
    
    78Item 7. Major Shareholder and Related Party Transactions
    
    
    88Item 8. Financial Information
    
    
    90Item 9. The Offer and Listing
    
    
    91Item 10. Additional Information
    
    
    92Item 11. Quantitative and Qualitative Disclosures about Market Risk
    
    
    98Item 12. Description of Securities Other Than Equity Securities
    
    
    99PART II
    
    
    100Item 13. Defaults, Dividend Arrearages And Delinquencies
    
    
    100Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    
    100Item 15. Controls and Procedures
    
    
    100Item 16A. Audit Committee Financial Expert
    
    
    102Item 16B. Code of Ethics
    
    
    102Item 16C. Principal Accountant Fees and Services
    
    
    103Item 16D. Exemptions from the Listing Standards for Audit Committees
    
    
    103Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    
    
    103Item 16F. Change in Registrants Certifying Accountant
    
    
    103Item 16G. Corporate Governance
    
    
    103PART III
    
    
    105Item 17. Financial Statements
    
    
    105Item 18. Financial Statements
    
    
    105Item 19. Exhibits
    
    
    105EX-8.1 SUBSIDIARIES OF THE REGISTRANTEX-12.1 CEO CERTIFICATIONEX-12.2 CFO CERTIFICATIONEX-13.1 CEO CERTIFICATIONEX-13.2 CFO CERTIFICATIONEX-15.1 CONSENT OF KPMG




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INTRODUCTION
  
    
    $ and U.S. dollars refer to the legal currency of the United States;
    
    ADRs refer to the American depositary receipts, which, if issued, evidence our
ADSs;
    
    ADSs refer to our American depositary shares, each of which represents two
ordinary shares;
    
    China and the PRC refer to the Peoples Republic of China, excluding, for the
purpose of this annual report on Form 20-F only, Taiwan and the special administrative
regions of Hong Kong and Macau;
    
    ordinary shares refer to our ordinary shares, par value $0.01 per share;
    
    RMB and Renminbi refer to the legal currency of China; and
    
    we, us, our company and our refer to Simcere Pharmaceutical Group, its
predecessor entities and its consolidated subsidiaries.
   
 PART I
 
 Item 1. Identity of Directors, Senior Management and Advisers
  
 Item 2. Offer Statistics And Expected Timetable
  
 Item 3. Key Information
 A.
    
    Selected Financial Data




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Year Ended December 31,2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    2008RMB
    
    RMB
    
    RMB
    
    RMB
    
    RMB
    
    $(in thousands, except share, per share and per ADS data)Selected Consolidated Statement of
Income DataTotal revenues(1)
    
    
    564,198
    
    
    
    737,014
    
    
    
    950,606
    
    
    
    1,368,748
    
    
    
    1,741,143
    
    
    
    255,206Gross profit
    
    
    410,403
    
    
    
    565,940
    
    
    
    760,046
    
    
    
    1,127,667
    
    
    
    1,420,261
    
    
    
    208,173Research and development expenses
    
    
    (19,907
    )
    
    
    (16,288
    )
    
    
    (34,289
    )
    
    
    (68,295
    )
    
    
    (86,089
    )
    
    
    (12,618
    )Sales, marketing and distribution
expenses
    
    
    (230,865
    )
    
    
    (312,426
    )
    
    
    (442,757
    )
    
    
    (634,449
    )
    
    
    (782,960
    )
    
    
    (114,762
    )General and administrative expenses
    
    
    (77,593
    )
    
    
    (87,139
    )
    
    
    (98,249
    )
    
    
    (161,061
    )
    
    
    (194,233
    )
    
    
    (28,469
    )Income from operations
    
    
    82,038
    
    
    
    150,087
    
    
    
    184,751
    
    
    
    263,862
    
    
    
    356,979
    
    
    
    52,324Foreign currency exchange gains, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,670
    
    
    
    39,879
    
    
    
    5,845Other income(1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,526
    
    
    
    1,104
    
    
    
    162Net income(2)(3)
    
    
    46,245
    
    
    
    102,745
    
    
    
    172,258
    
    
    
    301,261
    
    
    
    350,151
    
    
    
    51,323Earnings per share  basic
    
    
    0.67
    
    
    
    1.49
    
    
    
    1.86
    
    
    
    2.56
    
    
    
    2.80
    
    
    
    0.41Earnings per share  diluted
    
    
    0.67
    
    
    
    1.49
    
    
    
    1.86
    
    
    
    2.48
    
    
    
    2.80
    
    
    
    0.41Earnings per ADS  basic
    
    
    1.34
    
    
    
    2.98
    
    
    
    3.72
    
    
    
    5.13
    
    
    
    5.61
    
    
    
    0.82Earnings per ADS  diluted
    
    
    1.34
    
    
    
    2.98
    
    
    
    3.72
    
    
    
    4.95
    
    
    
    5.60
    
    
    
    0.82Basic weighted average number of
shares
    
    
    69,000,000
    
    
    
    69,000,000
    
    
    
    92,695,890
    
    
    
    117,534,566
    
    
    
    124,921,934
    
    
    
    124,921,934Diluted weighted average number of
shares
    
    
    69,000,000
    
    
    
    69,000,000
    
    
    
    92,695,890
    
    
    
    121,667,507
    
    
    
    125,005,803
    
    
    
    125,005,803
 
 (1)
    
    Total revenues include product revenues and other revenue.(2)
    
    In 2007 and 2008, other income represented the incentive payment received from our depositary
in connection with the establishment of the ADR program following our initial public offering.
The incentive payment received in 2007 had the effect of increasing our 2007 net income by
RMB20.5 million, or RMB0.17 per share on a basic basis and a diluted basis, or RMB0.35 per ADS
on a basic basis and RMB0.34 on a diluted basis. The incentive payment received in 2008 had
the effect of increasing our 2008 net income by RMB1.1 million ($0.2 million), or RMB0.01
($0.001) per share on a basic basis and a diluted basis, or RMB0.02 ($0.003) per ADS on a
basic basis and a diluted basis.(3)
    
    In 2006, two of our operating subsidiaries were eligible for 100% tax exemptions under a tax
holiday of a two-year 100% exemption followed by a three-year 50% exemption commencing from
the first profit-making year after offsetting accumulated tax losses, or 2+3 tax holiday. In
2007, four of our operating subsidiaries were eligible for 100% tax exemptions under 2+3 tax
holiday, three of which expired at the end of 2007. In 2008, one and three of our operating
subsidiaries were eligible for 100% and 50% tax exemptions from income tax, respectively; and
two of our operating subsidiaries were qualified as advanced and new technology enterprises
and eligible for a preferential income tax rate. The effect of the income tax exemptions and
the preferential tax rate for advanced and new technology enterprises increased our net income
for 2006, 2007 and 2008 by RMB38.8 million, RMB62.9 million and RMB57.7 million ($8.5
million), respectively, or RMB0.42, RMB0.54 and RMB0.46 ($0.07) on the per share basis,
respectively. Prior to 2006, there were no such tax exemptions and preferential tax
arrangements in place. Year Ended December 31,2004
    
    2005
    
    2006
    
    2007
    
    2008(in percentages)Other Consolidated Financial DataGross margin
    
    
    72.7
    
    
    
    76.8
    
    
    
    80.0
    
    
    
    82.4
    
    
    
    81.6Operating margin
    
    
    14.5
    
    
    
    20.4
    
    
    
    19.5
    
    
    
    19.3
    
    
    
    20.5Net margin
    
    
    8.2
    
    
    
    13.9
    
    
    
    18.2
    
    
    
    22.0
    
    
    
    20.1
 As of December 31,2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    2008RMB
    
    RMB
    
    RMB
    
    RMB
    
    RMB
    
    $(in thousands)Selected Consolidated Balance Sheet DataCash and cash equivalents
    
    
    102,672
    
    
    
    90,060
    
    
    
    106,027
    
    
    
    497,352
    
    
    
    812,814
    
    
    
    119,137Held-to-maturity investment securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    470,000
    
    
    
    
    
    
    
    Accounts and bills receivables, net
    
    
    99,987
    
    
    
    130,871
    
    
    
    162,781
    
    
    
    488,374
    
    
    
    748,997
    
    
    
    109,783Inventories
    
    
    27,878
    
    
    
    40,293
    
    
    
    39,483
    
    
    
    65,241
    
    
    
    95,948
    
    
    
    14,063Amounts due from related parties
    
    
    91,396
    
    
    
    85,575
    
    
    
    434
    
    
    
    7,503
    
    
    
    24,365
    
    
    
    3,571Total current assets
    
    
    322,446
    
    
    
    391,461
    
    
    
    411,429
    
    
    
    1,557,153
    
    
    
    1,707,759
    
    
    
    250,312Property, plant and equipment, net
    
    
    119,558
    
    
    
    125,365
    
    
    
    267,054
    
    
    
    374,058
    
    
    
    463,059
    
    
    
    67,872Intangible assets, net
    
    
    18,020
    
    
    
    15,731
    
    
    
    163,148
    
    
    
    251,221
    
    
    
    275,244
    
    
    
    40,344
 2




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As of December 31,2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    2008RMB
    
    RMB
    
    RMB
    
    RMB
    
    RMB
    
    $(in thousands)Goodwill
    
    
    13,814
    
    
    
    13,814
    
    
    
    100,634
    
    
    
    161,496
    
    
    
    178,211
    
    
    
    26,121Total assets
    
    
    581,041
    
    
    
    621,227
    
    
    
    1,034,547
    
    
    
    2,472,208
    
    
    
    2,778,222
    
    
    
    407,214Short-term bank loans and borrowings and
current installments of long-term debt
    
    
    293,000
    
    
    
    171,000
    
    
    
    333,000
    
    
    
    29,000
    
    
    
    6,000
    
    
    
    879Amounts due to related parties
    
    
    12,908
    
    
    
    78,153
    
    
    
    1,352
    
    
    
    
    
    
    
    
    
    
    
    Total current liabilities
    
    
    456,747
    
    
    
    421,185
    
    
    
    568,173
    
    
    
    342,637
    
    
    
    335,013
    
    
    
    49,103Long-term debt, excluding current installments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    52,000
    
    
    
    62,000
    
    
    
    9,088Total shareholders equity
    
    
    119,990
    
    
    
    192,537
    
    
    
    442,740
    
    
    
    1,983,816
    
    
    
    2,253,025
    
    
    
    330,235
 Exchange Rate Information
   RMB per U.S. Dollar Exchange RatePeriodEnd
    
    Average(1)
    
    Low
    
    High(RMB per $1.00)2004
    
    
    8.2765
    
    
    
    8.2768
    
    
    
    8.2774
    
    
    
    8.27642005
    
    
    8.0702
    
    
    
    8.1826
    
    
    
    8.2765
    
    
    
    8.07022006
    
    
    7.8041
    
    
    
    7.9579
    
    
    
    8.0702
    
    
    
    7.80412007
    
    
    7.2946
    
    
    
    7.5806
    
    
    
    7.8127
    
    
    
    7.29462008
    
    
    6.8225
    
    
    
    6.9193
    
    
    
    7.2946
    
    
    
    6.78002008December
    
    
    6.8225
    
    
    
    6.8539
    
    
    
    6.8842
    
    
    
    6.82252009January
    
    
    6.8392
    
    
    
    6.8360
    
    
    
    6.8403
    
    
    
    6.8225February
    
    
    6.8395
    
    
    
    6.8363
    
    
    
    6.8470
    
    
    
    6.8241March
    
    
    6.8329
    
    
    
    6.8360
    
    
    
    6.8438
    
    
    
    6.8240April
    
    
    6.8180
    
    
    
    6.8304
    
    
    
    6.8361
    
    
    
    6.8180May
    
    
    6.8278
    
    
    
    6.8235
    
    
    
    6.8326
    
    
    
    6.8176June (through June 12)
    
    
    6.8352
    
    
    
    6.8328
    
    
    
    6.8371
    
    
    
    6.8264
 
 (1)
    
    Annual averages are calculated from month-end rates. Monthly averages are calculated using the
average of the daily rates during the relevant period. 3




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B.
    
    Capitalization and Indebtedness
  C.
    
    Reasons for the Offer and Use of Proceeds
  D.
    
    Risk Factors
 Risks Related to Our Company
 Our products and product candidates may not achieve or maintain widespread market acceptance.
  
    
    the perceived advantages of our products over competing products and the
availability and success of competing products;
    
    the effectiveness of our sales and marketing efforts;
    
    the safety and efficacy of our products and the prevalence and severity of adverse
side effects, if any;
    
    our product pricing and cost effectiveness;
    
    publicity concerning our products, product candidates or competing products;
    
    whether or not patients routinely use our products, refill prescriptions and
purchase additional products;
    
    our ability to respond to changes in healthcare practitioner and patient
preferences; and
    
    the continued inclusion of our products in the Medical Insurance Catalogs.
  Our trademarks, patents and other non-patented intellectual property are valuable assets and if we
are unable to protect them from infringement, our business prospects may be harmed.
  4




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
    
    we might not have been the first to make the inventions covered by each of our
pending patent applications and issued patents;
    
    we might not have been the first to file patent applications for these inventions;
    
    others may independently develop similar or alternative technologies or duplicate
our technologies without infringing our intellectual property rights;
    
    one or more of our pending patent applications may not result in issued patents;
    
    our issued patents may not provide a basis for commercially viable products, may not
provide us with any competitive advantages, or may be challenged and invalidated by
third parties;
    
    we may not develop additional proprietary technologies or product candidates that
are patentable; and
    
    the patents of others may prevent us from developing or commercializing our product
candidates.
   The existence of a patent may not necessarily protect us from competition as our patent may be
challenged, invalidated or held unenforceable. We may also be found to infringe the patents of
others.
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Litigation to protect our intellectual property rights or defend against third-party allegations of
infringement may be costly.
  
    
    pay monetary damages to settle the results of such adverse determination, which
could adversely affect our business, financial condition and results of operations;
    
    cease selling, incorporating or using any of our products that incorporate the
challenged intellectual property, which would adversely affect our revenue or costs, or
both;
    
    obtain a license from the holder of the infringed intellectual property right, which
might be costly or might not be available on reasonable terms, or at all; or
    
    redesign our products to make them non-infringing, which would be costly and
time-consuming and may require additional clinical trials, or may not be possible at
all.
  Most of our products are branded generics that can be manufactured and sold by other pharmaceutical
manufacturers in China once the relevant protection or monitoring periods, if any, elapse.
  6




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We may be subject to damages resulting from claims that we or our employees have wrongfully used or
disclosed alleged trade secrets of their former employers.
  Our future research and development projects may not be successful.
   We rely on certain domestic and overseas research institutions and universities for the research and development of new
products and any failure of our research partners to meet our timing and quality standards or our
failure to continue such collaborative arrangement or enter into such new arrangements could
adversely affect our ability to develop new pharmaceuticals and our overall business prospects.
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We may not be able to obtain regulatory approval for any of the products resulting from our
development efforts and failure to obtain these approvals could materially harm our business.
  Our marketing activities are critical to the success of our products, and if we fail to grow our
marketing capabilities or maintain adequate spending on marketing activities, the market share of
our products and our brand name and product reputation would be materially adversely affected.
  We may not be successful in competing with other manufacturers of pharmaceuticals in the tender
processes for the purchase of medicines by state-owned and state-controlled hospitals.
  8




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We may not be able to successfully identify and acquire new products or businesses.
   
    
    failure to obtain regulatory approval for any newly acquired product candidates;
    
    the integration of the acquired businesses, operations, services and personnel with
our existing business and operations;
    
    the infringement of third parties intellectual property rights or intellectual
property right challenges as to the acquired pharmaceuticals;
    
    unforeseen or hidden liabilities;
    
    the diversion of resources from our existing businesses and technologies;
    
    our inability to generate sufficient revenue to recover costs and expenses of the
acquisitions; and
    
    potential loss of, or harm to, relationships with employees or customers, any of
which could significantly disrupt our ability to manage our business and materially and
adversely affect our business, financial condition and results of operations.
 We depend on distributors for all of our revenues and failure to maintain relationships with our
distributors or to otherwise expand our distribution network would materially and adversely affect
our business.
  9




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We may not be able to effectively manage our employees, distribution network and third-party
marketing firms, and our reputation, business, prospects and brand may be materially and adversely
affected by actions taken by our distributors.
  
    
    sell our products outside their designated territory, possibly in violation of the
exclusive distribution rights of other distributors;
    
    fail to adequately promote our products; or
    
    violate the anti-corruption laws of China, the United States or other countries.
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There is no assurance that our existing products will continue to be included or new products
developed by us will be included in the Medical Insurance Catalogs.
  We have limited insurance coverage and may incur losses resulting from product liability claims or
business interruptions.
  Our revenue depends and will likely continue to depend on a limited number of product lines.
  Our limited operating history may not serve as an adequate basis to judge our future prospects and
results of operations.
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
    
    retain and acquire customers;
    
    diversify our revenue sources by successfully developing and selling new products;
    
    effectively manage our business as it expands;
    
    respond to changes in our regulatory environment;
    
    manage risks associated with intellectual property rights;
    
    maintain effective control of our costs and expenses;
    
    raise sufficient capital to sustain and expand our business; and
    
    attract, retain and motivate qualified personnel.
  We may not be able to manage our expansion of operations effectively.
  We have no control over Hong Kong Medgenn or the development and sale of Endu outside of the PRC.
Our brand and reputation may be adversely affected if the development and sale of Endu outside of
the PRC violate the intellectual property rights of any third parties.
  12




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Our business depends substantially on the continuing efforts of our executive officers, research
personnel and other key personnel, and our business may be severely disrupted if we lose their
services.
   Delays in production due to regulatory restrictions or other factors could have a material adverse
impact on our business.
  13




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Our operating results may fluctuate considerably on a quarterly basis. These fluctuations could
have an adverse effect on the price of our shares and ADSs.
  
    
    the seasonal fluctuations in demand for our products, especially our antibiotics,
such as Zailin and Anqi;
    
    timing of research and development expenses;
    
    regulatory events;
    
    new product introductions by us or our competitors;
    
    variations in the demand for products we may introduce;
    
    litigation involving patents, licenses or other intellectual property; and
    
    product liability lawsuits.
  Our future liquidity needs are uncertain and we may need to raise additional funds in the future.
  
    
    we determine to devote significant amount of financial resources to the research and
development of projects that we believe to have significant commercialization
potential;
    
    we determine to acquire or license rights to additional product candidates or new
technologies;
    
    some or all of our product candidates fail in clinical trials or pre-clinical
studies or prove to be not as commercially promising as we expect and we are forced to
develop or acquire additional product candidates;
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
    
    our product candidates require more extensive clinical or pre-clinical testing or
clinical trials of these product candidates take longer to complete than we currently
expect; or
    
    we determine or are required to conduct more high-throughput screening than expected
against current or additional disease targets to develop additional product candidates.Our ability to raise additional funds in the future is subject to a variety of uncertainties,
including:
    
    our future financial condition, results of operations and cash flows;
    
    general market conditions for capital-raising activities by pharmaceutical
companies; and
    
    economic, political and other conditions in China and elsewhere.
  A significant amount of intangible assets and goodwill are recorded on our balance sheet. Future
impairment of our intangible assets or goodwill could have a material adverse impact on our
financial condition and results of operations.
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Our non-public shareholders have substantial influence over our company and their interests may not
be aligned with the interests of our other shareholders.
  Our production activities involve the controlled use of potentially harmful biological materials as
well as hazardous materials and chemicals.
  New labor laws in the PRC may adversely affect our results of operations.
  If we grant additional employee share options, restricted shares or other share-based compensation
in the future, our net income could be adversely affected.
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Counterfeit pharmaceuticals in China could negatively impact our revenues, brand reputation,
business and results of operations.
  Inappropriate use of our trade names by other entities could negatively affect our business.
  We may be classified as a passive foreign investment company, which could result in adverse United
States federal income tax consequences to U.S. holders.
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If a poll is not demanded at our shareholder meetings, voting will be by show of hands and shares
will not be proportionately represented. Shareholder resolutions may be passed without the presence
of the majority of our shareholders in person or by proxy.
  Risks Related to Our Industry
 Changes in economic conditions and consumer confidence in China may influence consumer preferences
and spending patterns, and accordingly, our results of operations.
  We face intense competition that may prevent us from maintaining or increasing market share for our
existing products and gaining market acceptance for our future products. Our competitors may
develop or commercialize products before us or more successfully than us.
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##### Table of Contents



The retail prices of certain of our products are subject to control, including periodic downward
adjustment, by PRC government authorities.
  Pharmaceutical companies in China require a number of permits and licenses in order to carry on
their business.
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##### Table of Contents



Risks Related to Doing Business in China
 Uncertainties with respect to the PRC legal system could have a material adverse effect on us.
  Adverse changes in political and economic policies of the PRC government could have a material
adverse effect on the overall economic growth of China, which could reduce the demand for our
products and materially and adversely affect our competitive position.
  
    
    the degree of government involvement;
    
    the level of development;
    
    the growth rate;
    
    the control of foreign exchange;
    
    access to financing; and
    
    the allocation of resources.
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##### Table of Contents



We rely on dividends paid by our subsidiaries for our cash needs, and any limitation on the ability
of our subsidiaries to make payments to us could have a material adverse effect on our ability to
conduct our business.
  Recent PRC regulations relating to the establishment of offshore special purpose companies by PRC
residents may subject our PRC resident shareholders to personal liability, limit our ability to
inject capital into our PRC subsidiaries, limit our PRC subsidiaries ability to distribute profits
to us, or otherwise adversely affect us.
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##### Table of Contents



Our financial results benefit from tax concessions granted by the PRC government, the change to or
expiration of which would materially change our results of operations.
   Dividends we receive from our operating subsidiaries located in the PRC may be subject to PRC
withholding tax.
  We may be deemed a PRC resident enterprise under the new CIT law and be subject to the PRC taxation
on our worldwide income.
  Dividends payable by us to our foreign investors and gain on the sale of our ADSs or ordinary
shares may become subject to taxes under PRC tax laws.
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##### Table of Contents



Fluctuation in the value of the Renminbi may have a material adverse effect on your investment.
   Governmental control of currency conversion may affect the value of your investment.
  We face risks related to health epidemics and other outbreaks of contagious diseases, including
avian flu, SARS, and swine flu.
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##### Table of Contents



Risks Related to Our ADSs
 The market price for our ADSs may be volatile.
  
    
    announcements of technological or competitive developments;
    
    regulatory developments in China affecting us, our customers or our competitors;
    
    announcements regarding patent litigation or the issuance of patents to us or our
competitors;
    
    actual or anticipated fluctuations in our quarterly operating results;
    
    changes in financial estimates by securities research analysts;
    
    changes in the economic performance or market valuations of other pharmaceutical
companies;
    
    addition or departure of our executive officers and key research personnel;
    
    release or expiry of lock-up or other transfer restrictions on our outstanding
ordinary shares or ADSs; and
    
    sales or perceived sales of additional ordinary shares or ADSs.
  Substantial future sales or perceived sales of our ADSs in the public market could cause the price
of our ADSs to decline.
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##### Table of Contents



Our articles of association contain anti-takeover provisions that could discourage a third party
from acquiring us, which could limit our shareholders opportunity to sell their shares, including
ordinary shares represented by our ADSs, at a premium.
   Holders of ADSs have fewer rights than shareholders and must act through the depositary to exercise
those rights.
   You may be subject to limitations on transfers of your ADSs.
  Your right to participate in any future rights offerings may be limited, which may cause dilution
to your holdings and you may not receive cash dividends if it is impractical to make them available
to you.
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##### Table of Contents



We are a Cayman Islands company and, because judicial precedent regarding the rights of
shareholders is more limited under Cayman Islands law than that under U.S. law, you may have less
protection for your shareholder rights than you would under U.S. law.
   You may have difficulty enforcing judgments obtained against us.
  
 Item 4. Information of the Company
 A.
    
    History and Development of the Company
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B.
    
    Business Overview
   27




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##### Table of Contents



Our Products
   NumberofProduct Category
    
    Products
    
    Major Products
    
    BrandsAntibacterial and Antiviral
    
    
    16
    
    
    Amoxicillin granules, capsules and tablets ;
Amoxicillin with clavulanate potassium granules,
tablets and injection; biapenem injection; cefaclor dry
suspension; azithromycin granules; and ribavirin
dispersible tablets
    
    Zailin, Anqi,
Anxin, Zaike, Zaiqi
and NanyuanAnti-cancer
    
    
    5
    
    
    Recombinant human endostatin injection, nedaplatin
injection, lentinan injection and fluorouracil implants
    
    Endu, Jiebaishu,
Yineng and SinofuanAnti-Allergic
    
    
    2
    
    
    Clemastine fumarate capsules and clemastine fumarate
dry suspension
    
    LangjingAnti-Osteoporosis
    
    
    2
    
    
    Alfacalcidol soft capsules
    
    FanengCardiovascular and
Cerebrovascular
    
    
    5
    
    
    Edaravone injection; amlodipine maleate tablets; and
sumatriptan succinate tablets
    
    Bicun, Yidasheng,
Ningliping and
YoushuDigestive Conditions
    
    
    3
    
    
    Smectite powder and aldioxa tablets
    
    Biqi and OdijiaNon-Steroidal Anti-Inflammatory
    
    
    2
    
    
    Diclofenac sodium sustained-release capsules and gelatin
    
    YingtaiqingRespiratory System
    
    
    6
    
    
    Herbal medicine used for the treatment of cough in
liquids and tablets; artificial cowbezoar and
chlorphenamine maleate granules compound paracetamol
and amantadine hydrochloride tablets; compound zinc
gluconate; pediatric paracetamol;
    
    Simcere
Kechuanning,
Zaikang, Boke,
Aiersi and BotingUrinary Conditions
    
    
    1
    
    
    Naftopidil tablets
    
    ZaichangOthers
    
    
    3
    
    
    Various herbal oral solutions
    
    Chengyuan and Shibo
 Our Innovative Pharmaceutical Endu (Recombinant Human Endostatin Injection)
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Our Principal Branded Generic Pharmaceuticals
  29




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##### Table of Contents




    
    Bicun (edaravone injection);
    
    Zailin (amoxicillin capsules, dispersible tablets, granules and injection); and
    
    Yingtaiqing (diclofenac sodium sustained-release capsules and gelatin).
 Bicun
 Zailin
 Yingtaiqing
 Other Branded Generic Pharmaceutical Products
  
    
    Sinofuan.Sinofuan is our first-to-market sustained release implants for the
treatment of cancer. In April 2008, we acquired Sinofuan by acquiring a 70.0% equity
interest of Wuhu Simcere Zhong Ren.
    
    Yidasheng.Yidasheng is our prescription edaravone injection pharmaceutical for the
treatment of strokes. Yidasheng became our product in October 2007, when we completed
the acquisition of a 51.0% stake in Jilin Boda, the manufacturer of Yidasheng.
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
    
    Biqi. Biqi is the brand name for our generic OTC anti-diarrhea pharmaceutical. We
obtained regulatory approval to manufacture and sell Biqi in November 1999. Biqi has
been included in the national Medical Insurance Catalog since 2000.
    
    Anqi. Anqi is the brand name of our amoxicillin and clavulanate potassium tablets,
granules, and injection for the treatment of infections.
    
    Zaike. Zaike is the brand name for our cefaclor in dry suspension antibiotics for
the treatment of infections. Regulatory approval to manufacture and sell Zaike was
obtained in February 1995. Zaike has been included in the national Medical Insurance
Catalog since 2000.
    
    Simcere Kechuanning. Simcere Kechuanning is the brand name for our OTC herbal
medicine used for the treatment of coughs. It comes in oral liquid and tablet
formulations. Regulatory approvals to manufacture and sell Simcere Kechuanning oral
liquids were obtained in October 1995 and tablets in March 2004. Simcere Kechuanning
has been included in the national Medical Insurance Catalog since 2000.
 Marketing and Distribution
  Our Marketing Strategy
    Distribution
  31




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Manufacturing, Quality Control and Supplies
 Manufacturing
   Pharmaceutical AgentProduction Unit
    
    Delivery Form
    
    2008 CapacityHainan SimcerePenicillin family
    
    Granules
    
    630,000,000 packsPenicillin family
    
    Capsules
    
    378,000,000 pillsCefaclor family
    
    Granules
    
    240,000,000 packsCefaclor family
    
    Capsules
    
    12,000,000 pillsCefaclor family
    
    Tablets
    
    140,000,000 pillsGeneral
    
    Tablets
    
    80,000,000 pillsGeneral
    
    Granules
    
    360,000,000 packsGeneral
    
    Gelatin
    
    10,000,000 tubesGeneral
    
    Powder
    
    180,000,000 packsGeneral
    
    Capsules
    
    360,000 pillsNanjing SimcerePenicillin family
    
    Powder injection
    
    8,400,000 vialsPenicillin family
    
    Granules
    
    41,904,000 packsPenicillin family
    
    Dry suspension
    
    65,000,000 bottlesPenicillin family
    
    Tablets
    
    64,440,000 pills
 32




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##### Table of Contents



Pharmaceutical AgentProduction Unit
    
    Delivery Form
    
    2008 CapacityGeneral
    
    Oral solution
    
    28,800,000 bottlesGeneral
    
    Small volume parenteral solutions
    
    18,000,000 vialsGeneral
    
    Tablets
    
    20,640,000 packsGeneral
    
    Dry suspension
    
    27,600,000 packsGeneral
    
    Capsules
    
    72,000,000 pillsGeneral
    
    Granules
    
    20,000,000 packsGeneral
    
    Powder injection
    
    7,500,000 vialsGeneral
    
    Frozen-dry powder
    
    3,200,000 vialsGeneral
    
    Sterile active pharmaceutical ingredients, or APIs
    
    420 kgShandong SimcereRecombinant human endostatin
    
    Injection
    
    1,000,000 vialsNanjing Tung ChitNedaplatin injection
    
    Frozen-dry powder injection
    
    600,000 bottlesJilin BodaEdavarone injection
    
    Low-dose injection
    
    10,000,000 vialsGeneral
    
    Tablets
    
    800,000,000 pillsGeneral
    
    Capsules
    
    300,000,000 pillsGeneral
    
    Granules
    
    100,000,000 packsGeneral
    
    Topical solution
    
    5,000,000 bottlesGeneral
    
    Powder injection
    
    1,500,000 packsAPIs
    
    Moroxydine
    
    1,000,000 kgAPIs
    
    Asparamide
    
    100,000 kgAPIs
    
    Ethacridine lactate
    
    5,000 kgAPIs
    
    Nefopam hydrochloride
    
    5,000 kgAPIs
    
    Edaravone
    
    60,000 kgWuhu Simcere Zhong RenFluorouracil implant
    
    Implant
    
    1,000,000 vials
 Quality Control
  Raw Materials
  33




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Competition
  
    
    For Endu, there are currently no directly competitive products as Endu is the first
recombinant human endostatin injection approved for sale in China. However, Endu
indirectly competes with other types of cancer treatments currently available in China.
    
    For Bicun, the main competitive product was Yidasheng manufactured by Jilin Boda,
which we acquired a 51.0% equity interest in October 2007. However, in 2008, three
other pharmaceutical companies, China National Medicines Gourui Pharmaceutical
Co.,Ltd., Kunming Jida Pharmaceutical Co,. Ltd., and Jilin Huinan Changlong
Biopharmaceutical Co., Ltd. launched their edaravone injections in China.
    
    For Zailin, the main competitive products are Amoxian and Amoxilin, which are
manufactured by Zhuhai United Laboratories Pharmaceutical Co., Ltd. and Kunming Baker
Norton Pharmaceutical Co., Ltd., respectively.
    
    For Yingtaiqing, the main competitive products are Votalin and Difene, which are
manufactured by Beijing Novartis Pharma Ltd. and Klinge Pharma GmbH of Germany,
respectively.
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Environmental Matters
  Insurance
  Regulation
  Pharmaceutical Product Manufacturing
 35




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##### Table of Contents



Permits and Licenses for Pharmaceutical Manufacturers
  Good Manufacturing Practices
   Certification By Facilities
    
    Coverage
    
    Issue Date
    
    Expiration DateHainan Simcere
    
    Tablets (Including Cephalosporins), Granules, Capsules,
Dry Suspensions (Including Cephalosporins, Penicillin), Soft Capsules, Powders, Gelatin
    
    August 30, 2006
    
    August 29, 2011Bulk Drug (Montmorillonite, Aluminium, Dihydroxyallan-toninate, Levamlodipine Besylate, Pamidronate Disodium, Valaciclovir Hydrochloride and Benazepril Hydrochloride)
    
    January 8, 2007
    
    January 7, 2012Bulk Drug (Sumatriptan Succinate, Meloxicam, Naftopidil, Edaravone and Sibutramine Hydrochloride)
    
    November 26, 2008
    
    November 25, 2013Bulk Drug (Amlodipine Maleate, Cefprozil and Cefteram pivoxil)
    
    November 1, 2005
    
    October 31, 2010Nanjing Simcere
    
    Tablets, Granules, Dry Suspensions (Penicillins)
    
    May 6, 2008
    
    May 5, 2013Small Volume Parenteral Solutions,
    
    December 3, 2008
    
    December 2, 2013Mixture, Oral Solution
    
    October 27,2008
    
    October 26, 2013Powder for Injection
    
    August 6, 2008
    
    August 5, 2013Sterile Bulk (Biapenem)
    
    July 21, 2008
    
    July 20, 2013Tablets, Capsules, Dry Suspensions
    
    March 30, 2006
    
    March 29, 2011Granules
    
    May 11, 2006
    
    May 10, 2011Powder for Injection (Penicillin)
    
    April 19, 2006
    
    April 18, 2011Shandong Simcere
    
    Recombinant Human Endostatin Injection (Anti-cancer Drugs)
    
    March 20, 2006
    
    March 19, 2011Jilin Boda
    
    Tablets (with hormones), Capsules, Granules, Power, Tinctures, Topical Solution, Bulk Drug (Ethacridine Lactate, Nefopam Hydrochloride,
Moroxydine Hydrochloride, Sulfaguanidinem, Phenytoinum Sodium and povidone lodine)
    
    October 9, 2004
    
    October 8, 2009Low-Dose Injection
    
    December 9, 2005
    
    December 8, 2010Bulk Drug (Edaravone)
    
    December 12, 2005
    
    December 11, 2010Bulk Drug (Asparagine)
    
    December 23, 2006
    
    December 22, 2011Tablets, Capsules, Granules
    
    November 28, 2008
    
    November 27, 2013Nanjing Tung Chit
    
    Frozen-Dry Powder Injection (Anti-Cancer Drug) and Bulk Drug (Nedaplatin)
    
    August 18, 2004
    
    August 16, 2009Wuhu Simcere Zhong Ren
    
    Anti-cancer Implants
    
    May 18, 2009
    
    May 17, 2014
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Approval and Registration of Pharmaceutical Products
     37




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##### Table of Contents



Pre-clinical Research and Clinical Trials
   
    
    Phase I  preliminary trial of clinical pharmacology and human safety evaluation
studies. The primary objective is to observe the pharmacokinetics and the tolerance
level of the human body to the new medicine as a basis for ascertaining the appropriate
methods of dosage.
    
    Phase II  preliminary exploration on the therapeutic efficacy. The purpose is to
assess preliminarily the efficacy and safety of pharmaceutical products on patients
within the target indication of the pharmaceutical products and to provide the basis
for the design research and dosage tests for Phase III. The design and methodology of
research in this phase generally adopts double-blind and random methods with limited
sample sizes.
    
    Phase III  confirm the therapeutic efficacy. The objective is to further verify
the efficacy and safety of pharmaceutical products on patients within the target
indication of the pharmaceutical products, to evaluate the benefits and risks and
finally to provide sufficient experimental proven evidence to support the registration
application of the pharmaceutical products. In general, the trial should adopt
double-blind, random methods with sufficient sample sizes.
    
    Phase IV  stage of application with research conducted by the applicants
themselves after the launch of a new pharmaceutical. The objective is to observe the
efficacy and adverse reaction of pharmaceutical products under extensive use, to
perform an evaluation of the benefits and risks of the application among ordinary or
special group of patients, and to ascertain and improve the appropriate dosage volume
for application.
 Continuing SFDA Regulation
   Pharmaceutical Distribution
  38




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Restrictions on Foreign Ownership of Pharmaceutical Wholesale and Retail Businesses in China
  Good Supply Practices
   Product Liability and Protection of Consumers
    Price Controls
  39




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Tendering System for Medicines Purchased by Healthcare Institutions
  Reimbursement Under the National Medical Insurance Program
 40




---



##### Table of Contents



PRC Patent Law
  Patent Prosecution
  Patent Enforcement
  41




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##### Table of Contents



Compulsory License
  International Patent Treaties
   Trademarks
   42




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##### Table of Contents




    
    use of a trademark that is identical with or similar to a registered trademark in
respect of the same or similar commodities without the authorization of the trademark
registrant;
    
    sale of commodities infringing upon the exclusive right to use the trademark;
    
    counterfeiting or making, without authorization, representations of a registered
trademark of another person, or sale of such representations of a registered
trademark;
    
    changing a registered trademark and selling products on which the changed
registered trademark is used without the consent of the trademark registrant; and
    
    otherwise infringing upon the exclusive right of another person to use a registered
trademark.
  
    
    The trademark owner can provide his trademark registration certificate and other
relevant evidence to the State or local Administration for Industry and Commerce, or
AIC, which can, at its discretion, launch an investigation. The AIC may take such
actions as: order the infringer to immediately cease the infringing behavior, seize
and destroy any infringing products and representations of the trademark in question,
close the facilities used to manufacture the infringing products or impose a fine. If
the trademark owner is dissatisfied with the State AICs decision, he may, within 15
days of receiving the AICs decision, institute civil proceedings in court.
 
    
    The trademark owner may institute civil proceedings directly in court. Civil
redress for trademark infringement includes:
 
    
    injunctions;
    
    requiring the infringer to take steps to mitigate the damage (i.e. print
notices in newspapers); and
    
    damages (i.e. compensation for the economic loss and injury to reputation as a
result of trademark infringement suffered by the trademark holder).
 The amount of compensation is calculated according to either the gains acquired by the
infringer from the infringement during the infringement, or the loss suffered by the
trademark owner, including expenses incurred by the trademark holder to deter such
infringement. If it is difficult to determine the gains acquired by the infringer from the
infringement, or the loss suffered by the trademark owner, the court may elect to award
compensation of not more than RMB500,000.
 
    
    If the case is so serious as to constitute a crime, the trademark owner may lodge a
complaint with the relevant public security organ and the infringer is subject to
investigation for criminal responsibility in accordance with PRC law.
  Foreign Exchange Regulation
  43




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Dividend Distribution Regulation
  C.
    
    Organizational Structure
  44




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##### Table of Contents




    
    Simcere Pharmaceutical Co., Ltd., or Hainan Simcere, is our wholly owned subsidiary
that engages in the manufacturing of pharmaceutical products. Hainan Simcere is
currently authorized to manufacture 64 pharmaceutical products;
    
    Nanjing Simcere Dongyuan Pharmaceutical Co., Ltd., or Nanjing Simcere, is our
wholly owned subsidiary that engages in the manufacturing of pharmaceutical products.
Nanjing Simcere is currently authorized to manufacture 87 pharmaceutical products;
    
    Jiangsu Simcere Pharmaceutical Co., Ltd., or Jiangsu Simcere, and Shanghai Simcere
Pharmaceutical Co., Ltd., or Shanghai Simcere, are both our wholly owned subsidiaries
that engage in the marketing, sales and distribution of pharmaceutical products;
    
    Jiangsu Simcere Pharmaceutical R&D Co., Ltd., or Simcere Research, is our wholly
owned subsidiary that engages in the research and development of pharmaceutical
products;
    
    Sichuan Zigong Yirong Industrial Co., Ltd., or Sichuan Simcere, is our wholly owned
subsidiary that owns the mining right to a smectite mine in Sichuan Province and
engages in the extraction of smectite, a raw material used for the manufacturing of
one of our pharmaceutical products;
    
    Hainan Qitian Pharmaceutical Co., Ltd., or Qitian Simcere, is our wholly owned
subsidiary that engages in the processing and refinement of smectite;
    
    Shandong Simcere Medgenn Bio-Pharmaceutical Co., Ltd., or Shandong Simcere,
formerly known as Yantai Medgenn Co., Ltd., is our wholly owned subsidiary that
engages in the manufacturing of Endu
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##### Table of Contents



in China. We completed the acquisition of 80.0%
of the equity interest of Shandong Simcere in September 2006. We have since acquired
the remaining 20.0% of the equity interest in Shandong Simcere, which is now our
wholly owned subsidiary. In addition, Shandong Simcere owns a 40.0% equity interest in
Medgenn (Hong Kong) Co., Ltd., or Hong Kong Medgenn that was acquired for no cash
consideration. Hong Kong Medgenn has the exclusive right to engage in the development
and sale of Endu in any jurisdiction outside of the PRC until February 10, 2015. Hong
Kong Medgenn has not conducted any operations to date;
    
    Jilin Boda Pharmaceutical Co., Ltd., or Jilin Boda, is our 51.0% owned subsidiary
that engages in the manufacturing and sale of pharmaceutical products. We completed
the acquisition of the 51.0% equity interest in Jilin Boda in October 2007;
    
    Nanjing Tung Chit Pharmaceutical Company Limited, or Nanjing Tung Chit, is our
85.71% owned subsidiary that engages in the manufacturing and sale of pharmaceutical
products. We completed the acquisition of the 85.71% equity interest in Nanjing Tung
Chit in November 2007 through our purchase of 100% equity interest in Master Luck
Corporation Limited; and
    
    Wuhu Simcere Zhong Ren Pharmaceutical Co., Ltd. is our 70.0% owned subsidiary that
engages in the manufacturing and sale of pharmaceutical products. We completed the
acquisition of the 70.0% equity interest in Wuhu Simcere Zhong Ren in April 2008.
    
    Jiangsu Yanshen Biological Technology Stock Co., Ltd., or Jiangsu Yanshen, is our
37.5% owned subsidiary that engages in the manufacturing and sale of pharmaceutical
products. We completed the acquisition of the 37.5% equity interest in Jiangsu Yanshen
in May 2009.
 D.
    
    Property, Plant and Equipment
  
 Item 5. Operating and Financial Review and Prospects
 You should read the following discussion and analysis of our financial condition and results
of operations in conjunction with our consolidated financial statements included elsewhere in this
annual report on Form 20-F . This discussion may contain forward-looking statements based upon
current expectations that involve risks and uncertainties. Our actual results may differ materially
from those anticipated in these forward-looking statements as a result of various factors,
including those set forth under Item 3. Key InformationD. Risk Factors or in other parts of
this annual report on Form 20-F .
 46




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##### Table of Contents



A.
    
    Operating Results
 Overview
      
    
    the growth of the pharmaceutical market in China;
    
    our ability to successfully develop, acquire and launch first-to-market branded
generic and innovative pharmaceuticals;
    
    the extent of inclusion of our pharmaceuticals in the Medical Insurance Catalogs;
    
    our ability to compete in the tender processes for purchase of medicines by
state-owned and state-controlled Chinese hospitals; and
    
    product pricing and price controls.
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##### Table of Contents



The Growth of the Pharmaceutical Market in China
   Our Ability to Successfully Develop, Acquire and Launch First-to-Market Generic and Innovative
Pharmaceuticals
  The Extent of Inclusion of Our Pharmaceuticals in the Medical Insurance Catalogs
  48




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Our Ability to Compete In the Tender Processes for Purchase of Medicines by State-Owned and
State-Controlled Chinese Hospitals
  Product Pricing and Price Controls
    49




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##### Table of Contents



Maximum Retail
    
    Maximum RetailPrice Before
    
    Price AfterDate of
    
    Adjustment
    
    AdjustmentProduct
    
    Brand
    
    Dosage Form
    
    Adjustment
    
    (RMB)
    
    (RMB)Herbal Cough Medicine
    
    Simcere Kechuanning
    
    Liquids (6 10ml vials per box)
    
    March 15, 2007
    
    
    16.9
    
    
    
    16.8Amlodipine maleate
    
    Ningliping
    
    Tablets (10 5mg tablets per box)
    
    January 26, 2007
    
    
    45.0
    
    
    
    38.8Benazepril hydrochloride
    
    Puliduo
    
    Tablets (14 10mg tablets per box)
    
    January 26, 2007
    
    
    47.0
    
    
    
    41.1Alfacalcidol
    
    Faneng
    
    Capsules (20 0.25ug
capsules)
    
    January 26, 2007
    
    
    52.0
    
    
    
    38.6Faneng
    
    Capsules (30 0.25ug
capsules)
    
    January 26, 2007
    
    
    78.0
    
    
    
    47.1Ribavirin dispersible
    
    Nanyuan
    
    Dispersible tablets
(24 0.1g packs)
    
    August 28, 2006
    
    
    18.2
    
    
    
    8.1Azithromycin
    
    Zaiqi
    
    Granules (6 0.1g
packs)
    
    October 10, 2005
    
    
    24.6
    
    
    
    12.5
   Acquisitions
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Revenues
    Year Ended December 31,2006
    
    2007
    
    2008(in
    
    (% of
    
    (in
    
    (% of
    
    (in
    
    (% ofthousands
    
    product
    
    thousands
    
    product
    
    thousands
    
    productof RMB)
    
    revenues)
    
    of RMB)
    
    revenues)
    
    of RMB)
    
    revenues)Bicun
    
    
    230,867
    
    
    
    24.4
    
    
    
    426,216
    
    
    
    31.3
    
    
    
    570,584
    
    
    
    32.9Zailin
    
    
    266,790
    
    
    
    28.1
    
    
    
    287,333
    
    
    
    21.0
    
    
    
    290,215
    
    
    
    16.7Endu
    
    
    34,726
    
    
    
    3.7
    
    
    
    216,193
    
    
    
    15.9
    
    
    
    239,439
    
    
    
    13.8Yingtaiqing
    
    
    136,754
    
    
    
    14.4
    
    
    
    140,824
    
    
    
    10.3
    
    
    
    146,660
    
    
    
    8.4
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Cost of Materials and Production and Operating Expenses
  Year Ended December 31,2006
    
    2007
    
    2008(in percentages)Cost of materials and production
    
    
    20.0
    
    
    
    17.6
    
    
    
    18.4Operating expensesResearch and development expenses
    
    
    3.6
    
    
    
    4.9
    
    
    
    4.9Sales, marketing and distribution expenses
    
    
    46.6
    
    
    
    46.4
    
    
    
    45.0General and administrative expenses
    
    
    10.3
    
    
    
    11.8
    
    
    
    11.2Total operating expenses
    
    
    60.5
    
    
    
    63.1
    
    
    
    61.1
  52




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Cost of Materials and Production
  
    
    costs of the pharmaceuticals in which we are the exclusive distributors of;
    
    costs of the necessary active ingredients and supporting ingredients of
pharmaceuticals we manufacture and various types of packaging materials;
    
    salaries and benefits for personnel directly involved in production activities;
    
    overhead costs, including utility, maintenance of production equipment and other
support expenses associated with the production of our products; and
    
    depreciation of property, plant and equipment used for production purposes.
Depreciation of property, plant and equipment attributable to production activities is
capitalized as part of inventory, and expensed as cost of materials and production
when products are sold.
  Research and Development Expenses
   53




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54




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®
       55




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##### Table of Contents




    
    the delay in research and development of certain projects preventing us to focus our
resources on more promising product candidates;
    
    the intended use of a product candidate, which affects the length and timing of the
research and development projects;
    
    the number of patients who participate in the clinical trials;
    
    the number of sites included in clinical trials;
    
    the length of time required to enroll clinical trial participants;
    
    the duration of patient treatment and follow-up during clinical trials;
    
    the costs of producing supplies of the product candidates needed for clinical
trials; and
    
    the requirement and timing of SFDA approvals.
      56




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Sales, Marketing and Distribution Expenses
  General and Administrative Expenses
  Share-Based Compensation Expenses
    57




---



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Taxation and Incentives
      58




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Critical Accounting Policies and the Use of Estimates
   Allowance for Doubtful Accounts
  59




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Year Ended December 31,2006
    
    2007
    
    2008
    
    2008RMB
    
    RMB
    
    RMB
    
    $(in thousands)Balance at the beginning of the year
    
    
    5,556
    
    
    
    6,834
    
    
    
    7,709
    
    
    
    1,130Additions charged to bad debt expense
    
    
    1,433
    
    
    
    1,203
    
    
    
    1,576
    
    
    
    231Additions related to acquisitions of subsidiaries
    
    
    
    
    
    
    1,074
    
    
    
    
    
    
    
    Write-off of accounts receivable charged against
the allowance
    
    
    (155
    )
    
    
    (1,402
    )
    
    
    (1,216
    )
    
    
    (178
    )Balance at the end of the year
    
    
    6,834
    
    
    
    7,709
    
    
    
    8,069
    
    
    
    1,183
 Inventories
   Depreciation and Amortization
   Long-Lived Assets and Goodwill
 60




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61




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Share-based Compensation
      62




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##### Table of Contents




    
    no material changes in the existing political, legal, fiscal and economic conditions
and pharmaceutical industry in China;
    
    no major changes in tax law in China or the tax rates applicable to our subsidiaries
and consolidated affiliated entities in China;
    
    exchange rates between the Renminbi and U.S. dollar will not differ materially from
current rates;
    
    our future growth will not be constrained by the lack of funding;
    
    our continuing ability to retain competent management and key personnel to support
our ongoing operations; and
    
    industry trends and market conditions for the pharmaceutical and related industries
will not deviate significantly from economic forecasts.
     63




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Income tax uncertainties and realization of deferred tax assets
       Results of Operations
  64




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Year Ended December 31,2006
    
    2007
    
    2008% of Total
    
    
    
    
    
    % of Total
    
    
    
    
    
    % of TotalRMB
    
    Revenues
    
    RMB
    
    Revenues
    
    RMB
    
    Revenues(in thousands, except percentages)Product revenues
    
    
    947,797
    
    
    
    99.7
    
    
    
    1,363,014
    
    
    
    99.6
    
    
    
    1,736,832
    
    
    
    99.8Other revenue (1)
    
    
    2,809
    
    
    
    0.3
    
    
    
    5,734
    
    
    
    0.4
    
    
    
    4,311
    
    
    
    0.2Total revenues
    
    
    950,606
    
    
    
    100.0
    
    
    
    1,368,748
    
    
    
    100.0
    
    
    
    1,741,143
    
    
    
    100.0Cost of materials and production
    
    
    (190,560
    )
    
    
    (20.0
    )
    
    
    (241,081
    )
    
    
    (17.6
    )
    
    
    (320,882
    )
    
    
    (18.4
    )Gross profit
    
    
    760,046
    
    
    
    80.0
    
    
    
    1,127,667
    
    
    
    82.4
    
    
    
    1,420,261
    
    
    
    81.6Operating expenses:Research and development expenses
    
    
    (34,289
    )
    
    
    (3.6
    )
    
    
    (68,295
    )
    
    
    (4.9
    )
    
    
    (86,089
    )
    
    
    (4.9
    )Sales, marketing and distribution expenses
    
    
    (442,757
    )
    
    
    (46.6
    )
    
    
    (634,449
    )
    
    
    (46.4
    )
    
    
    (782,960
    )
    
    
    (45.0
    )General and administrative expenses
    
    
    (98,249
    )
    
    
    (10.3
    )
    
    
    (161,061
    )
    
    
    (11.8
    )
    
    
    (194,233
    )
    
    
    (11.2
    )Total operating expenses
    
    
    575,295
    
    
    
    (60.5
    )
    
    
    (863,805
    )
    
    
    (63.1
    )
    
    
    (1,063,282
    )
    
    
    (61.1
    )Income from operations
    
    
    184,751
    
    
    
    19.5
    
    
    
    263,862
    
    
    
    19.3
    
    
    
    356,979
    
    
    
    20.5Interest income
    
    
    2,827
    
    
    
    0.3
    
    
    
    24,361
    
    
    
    1.8
    
    
    
    34,302
    
    
    
    2.0Interest expense
    
    
    (10,705
    )
    
    
    (1.2
    )
    
    
    (6,346
    )
    
    
    (0.5
    )
    
    
    (4,693
    )
    
    
    (0.3
    )Foreign currency exchange gains, net
    
    
    
    
    
    
    
    
    
    
    24,670
    
    
    
    1.8
    
    
    
    39,879
    
    
    
    2.3Other income (1)
    
    
    
    
    
    
    
    
    
    
    20,526
    
    
    
    1.5
    
    
    
    1,104
    
    
    
    0.1Earnings before income taxes and minority
interests
    
    
    176,873
    
    
    
    18.6
    
    
    
    327,073
    
    
    
    23.9
    
    
    
    427,571
    
    
    
    24.6Income tax expense
    
    
    (6,952
    )
    
    
    (0.7
    )
    
    
    (13,527
    )
    
    
    (1.0
    )
    
    
    (49,285
    )
    
    
    (2.8
    )Income before minority interests
    
    
    169,921
    
    
    
    17.9
    
    
    
    313,546
    
    
    
    22.9
    
    
    
    378,286
    
    
    
    21.8Minority interests
    
    
    2,337
    
    
    
    0.3
    
    
    
    (12,285
    )
    
    
    (0.9
    )
    
    
    (28,135
    )
    
    
    (1.7
    )Net income (2)(3)
    
    
    172,258
    
    
    
    18.2
    
    
    
    301,261
    
    
    
    22.0
    
    
    
    350,151
    
    
    
    20.1
 
 (1)
    
    In 2007, in the Form 6-K furnished with the SEC on August 7, 2007 for the quarter ended June
30, 2007, an incentive payment of RMB20.5 million we received from our depositary in
connection with the establishment of the ADR program following our initial public offering was
erroneously classified as part of other revenue. Such incentive payment is reclassified as
other nonoperating income.(2)
    
    In 2007 and 2008, other income represented the incentive payment received from our depositary
in connection with the establishment of the ADR program following our initial public offering.
The incentive payment received in 2007 had the effect of increasing our 2007 net income by
RMB20.5 million or RMB0.17 per share on a basic basis and a diluted basis or RMB0.35 per ADS
on a basic basis and RMB0.34 on a diluted basis. The incentive payment received in 2008 had
the effect of increasing our 2008 net income by RMB1.1 million ($0.2 million) or RMB0.01
($0.001) per share on a basic basis and a diluted basis or RMB0.02 ($0.003) per ADS on a basic
basis and a diluted basis.(3)
    
    In 2006, two of our operating subsidiaries were eligible for 100% tax exemptions under 2+3
tax holiday. In 2007, four of our operating subsidiaries were eligible for 100% tax exemptions
under 2+3 tax holiday, three of which expired at the end of 2007. In 2008, one and three of
our operating subsidiaries were eligible for 100% and 50% tax exemptions from income tax,
respectively; and two of our operating subsidiaries were qualified as advanced and new
technology enterprises and eligible for a preferential income tax rate. The effect of the
income tax exemptions and the preferential tax rate for advanced and new technology
enterprises increased our net income for 2006, 2007 and 2008 by RMB38.8 million, RMB62.9
million and RMB57.7 million ($8.5 million), respectively, or RMB0.42, RMB0.54 and RMB0.46
($0.07) on the per share basis, respectively. Prior to 2006, there were no such tax exemptions
and preferential tax arrangements in place. Comparison of Years Ended December 31, 2007 and December 31, 2008
 Total Revenues
 Gross Profit and Gross Margin
 65




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Operating Expenses
 
    
    Research and Development Expenses. Our research and development expenses increased
to RMB86.1 million ($12.6 million) in 2008 from RMB68.3 million in 2007. The increase
was primarily due to the increased staff costs associated with the Phase IV clinical
trials and research of Endu and the increased activity level of our research and
development team. Research and development expenses as a percentage of our total
revenues remained comparable between intervening years.
    
    Sales, Marketing and Distribution Expenses. Our sales, marketing and distribution
expenses increased by 23.4% to RMB783.0 million ($114.8 million) in 2008 from RMB634.4
million in 2007. The increase was mainly attributable to the increased marketing
service fees paid to professional marketing companies for the promotion of our
products. Sales, marketing and distribution expenses as a percentage of our total
revenues decreased to 45.0% in 2008 from 46.4% in 2007. This decrease was due primarily
to improved economies of scale associated with the expansion of our operations.
    
    General and Administrative Expenses. Our general and administrative expenses
increased by 20.6% to RMB194.2 million ($28.5 million) in 2008 from RMB161.1 million in
2007. This increase was primarily related to staff costs, expense related to
professional service fees associated with being a public company since April 2007.
General and administrative expenses as a percentage of our total revenues decreased to
11.2% in 2008 from 11.8% in 2007.
 Interest Income
 Interest Expense
 Foreign Currency Exchange Gains, Net
 Other Income
 Income Tax Expense
 66




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Minority interests
 Net Income
 Comparison of Years Ended December 31, 2006 and December 31, 2007
 Total Revenues
 Gross Profit and Gross Margin
 Operating Expenses
 
    
    Research and Development Expenses. Our research and development expenses increased
to RMB68.3 million in 2007 from RMB34.3 million in 2006. Research and development
expenses as a percentage of our total revenues increased to 4.9% in 2007 from 3.6% in
2006. This increase was due primarily to increased expenses associated with the Phase
IV clinical trials of Endu and the continued expansion of our research and development
activities.
    
    Sales, Marketing and Distribution Expenses. Our sales, marketing and distribution
expenses increased by 43.3% to RMB634.4 million in 2007 from RMB442.8 million in 2006.
The increase was mainly attributable to the increased marketing service fees paid to
professional marketing companies for the promotion of our products and market research
expenses incurred in connection with the promotion of the safety and effectiveness of
Endu. Sales, marketing and distribution expenses as a percentage of our total revenues
decreased to 46.4% in 2007 from 46.6% in 2006. This decrease was due primarily to
improved economies of scale associated with the expansion of our operations.
    
    General and Administrative Expenses. Our general and administrative expenses
increased by 63.9% to RMB161.1 million in 2007 from RMB98.2 million in 2006. General
and administrative expenses as a percentage of our total revenues increased to 11.8% in
2007 from 10.3% in 2006. This increase were
 67




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##### Table of Contents



primarily related to share-based compensation expenses, staff costs, expense related to
our initial public offering celebration event and professional service fees associated
with being a new public company since April 2007.
 Interest Income
 Interest Expense
 Foreign Currency Exchange Gains, Net
 Other Income
 Income Tax Expense
 Minority interests
 Net Income.
 B.
    
    Liquidity and Capital Resources
 Liquidity and Capital Resources
  68




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Year Ended December 31,2006
    
    2007
    
    2008
    
    2008RMB
    
    RMB
    
    RMB
    
    $(in thousands)Net cash provided by operating activities
    
    
    118,951
    
    
    
    150,415
    
    
    
    147,158
    
    
    
    21,568Net cash (used in)/provided by investing
activities
    
    
    (259,196
    )
    
    
    (695,974
    )
    
    
    252,668
    
    
    
    37,035Net cash provided by/(used in) financing
activities
    
    
    156,212
    
    
    
    938,383
    
    
    
    (88,846
    )
    
    
    (13,022
    )Effect of exchange rate changes on cash and
cash equivalents
    
    
    
    
    
    
    (1,499
    )
    
    
    4,482
    
    
    
    657Net increase in cash and cash equivalents
    
    
    15,967
    
    
    
    391,325
    
    
    
    315,462
    
    
    
    46,238Cash and cash equivalents at beginning of year
    
    
    90,060
    
    
    
    106,027
    
    
    
    497,352
    
    
    
    72,899Cash and cash equivalents at end of year
    
    
    106,027
    
    
    
    497,352
    
    
    
    812,814
    
    
    
    119,137
     69




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Operating Activities
    Investing Activities
   70




---



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Financing Activities
    Capital expenditures
  Recently Issued Accounting Pronouncements
    71




---



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72




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##### Table of Contents



C.
    
    Research and Development, Patents and Licenses, etc.
 Our Strategy
  Our Capability
  Collaboration in Research
   73




---



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®
     Product Candidates
   74




---



##### Table of Contents



PotentialTherapeutic Effects and
    
    
    
    
    
    MonitoringProduct Candidate
    
    Scope of Applications
    
    Status
    
    Patentable
    
    PeriodIguratimod tablets
    
    Treatment of
osteoarthritis and
rheumatoid arthritis
    
    New drug application
    
    No
    
    5 yearsPalonosetron for 
injection
    
    Nausea and vomiting
associated with
chemotherapy
    
    New drug application
    
    No
    
    4 years
 Iguratimod Tablets
 Palonosetron for Injection
 Intellectual Property
    75




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##### Table of Contents



D.
    
    Trend Information
  E.
    
    Off-Balance Sheet Arrangements
  F.
    
    Tabular Disclosure of Contractual Obligations
  76




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##### Table of Contents



Contractual ObligationsLess than
    
    
    
    
    
    
    
    
    
    More than1 Year
    
    1-3 Years
    
    3-5 Years
    
    5 Years
    
    TotalRMB
    
    RMB
    
    RMB
    
    RMB
    
    RMB(in thousands)Short-term borrowings and current
installments of long-term debt
    
    
    6,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,000Interest payments
    
    
    4,486
    
    
    
    7,857
    
    
    
    5,558
    
    
    
    8,679
    
    
    
    26,580Payable for acquisitions
    
    
    9,830
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,830Long-term debt excluding current
installments
    
    
    
    
    
    
    19,700
    
    
    
    9,400
    
    
    
    32,900
    
    
    
    62,000Liabilities for uncertain tax position
    
    
    
    
    
    
    20,529
    
    
    
    
    
    
    
    
    
    
    
    20,529Operating lease commitments
    
    
    2,327
    
    
    
    622
    
    
    
    6
    
    
    
    37
    
    
    
    2,992Research and development projects
    
    
    13,159
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,159Capital commitments
    
    
    19,578
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,578Purchase commitments
    
    
    15,750
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,750Total
    
    
    71,130
    
    
    
    48,708
    
    
    
    14,964
    
    
    
    41,616
    
    
    
    176,418
 Inflation
  G.
    
    Safe Harbor
   
    
    our anticipated growth strategies;
    
    our future business development, results of operations and financial condition;
    
    market acceptance of our products and product candidates;
    
    our ability to effectively protect our intellectual property and trade secrets and
not infringe on the intellectual property and trade secrets of others;
    
    the sufficiency of our existing and future intellectual property right protections;
    
    our ability to obtain regulatory approval for products that we develop;
    
    our ability to successfully develop and improve products;
 77




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
    
    changes in the healthcare industry in China, including increased availability of
funding for medical insurance coverage and the inclusion of additional medicines in the
national and provincial Medical Insurance Catalogs;
    
    our ability to manage our expansion of operations;
    
    environmental compliance costs and liabilities;
    
    competition from other manufacturers of pharmaceutical products;
    
    the expected growth for the pharmaceutical industry in China;
    
    our ability to obtain permits and licenses to carry on our business; and
    
    fluctuations in general economic and business conditions in China.
  
 Item 6. Directors, Senior Management and Employees
 A.
    
    Directors and Senior Management
 Directors and Executive Officers
  Name
    
    Age
    
    Position/ TitleJinsheng Ren
    
    
    47
    
    
    Chairman of the board of directors and chief executive officerGuoqiang Lin (1)(3)
    
    
    66
    
    
    Independent directorHongquan Liu (1)(2)(3)
    
    
    50
    
    
    Independent directorGary Siu Kwan Sik (1)(2)
    
    
    42
    
    
    Independent directorJohn Huan Zhao
    
    
    46
    
    
    DirectorJindong Zhou
    
    
    47
    
    
    Executive vice presidentXiaojin Yin
    
    
    50
    
    
    Senior vice president of research and developmentFrank Zhigang Zhao
    
    
    49
    
    
    Chief financial officerQingsen Li
    
    
    48
    
    
    Vice president of human resourcesJialun Tian
    
    
    43
    
    
    Vice president of hospital salesXiaohua Yang
    
    
    43
    
    
    Vice president of hospital salesHuaping Fu
    
    
    44
    
    
    Vice president of commercial salesPeng Wang
    
    
    50
    
    
    Chief Scientific OfficerHaibo Qian
    
    
    46
    
    
    Secretary to the board of directors and company secretary
 
 (1)
    
    Audit committee members.(2)
    
    Compensation committee members.(3)
    
    Corporate governance and nominating committee members. 78




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##### Table of Contents



Mr. Jinsheng Ren
 Professor Guoqiang Lin
 Mr. Hongquan Liu
 Mr. Gary Siu Kwan Sik
 Mr. John Huan Zhao
 Mr. Jindong Zhou
 Mr. Xiaojin Yin
 79




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Mr. Frank Zhigang Zhao
 Mr. Qingsen Li
 Mr. Jialun Tian
 Mr. Xiaohua Yang
 Mr. Huaping Fu
 Dr. Peng Wang
 Dr. Haibo Qian
 80




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##### Table of Contents



B.
    
    Compensation
 Compensation of Directors and Executive Officers
  2006 Share Incentive Plan
  Termination of Awards
 Administration
 Option Exercise
 Third-party Acquisition
 Amendment and Termination of Plan
 81




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##### Table of Contents



Number of Restricted
    
    Date of Grant of
    
    Date of Grant of
    
    End of VestingName
    
    Shares Granted
    
    Restricted Shares
    
    Cancelled Option
    
    PeriodJinsheng Ren
    
    2,665,988
    
    May 7, 2009
    
    November 15, 2006
    
    November 14, 2011Frank Zhigang Zhao
    
    *(1)
    
    May 7, 2009
    
    November 15, 2006
    
    November 14, 2011Jindong Zhou
    
    *(1)
    
    May 7, 2009
    
    November 15, 2006
    
    November 14, 2011Xiaojin Yin
    
    *(1)
    
    May 7, 2009
    
    November 15, 2006
    
    November 14, 2011Huaping Fu
    
    *(1)
    
    May 7, 2009
    
    November 15, 2006
    
    November 14, 2011Jialun Tian
    
    *(1)
    
    May 7, 2009
    
    November 15, 2006
    
    November 14, 2011Xiaohua Yang
    
    *(1)
    
    May 7, 2009
    
    November 15, 2006
    
    November 14, 2011Guoqiang Lin
    
    *(1)
    
    May 7, 2009
    
    March 29, 2007
    
    March 28, 2012Hongquan Liu
    
    *(1)
    
    May 7, 2009
    
    March 29, 2007
    
    March 28, 2012Gary Siu Kwan Sik
    
    *(1)
    
    May 7, 2009
    
    March 29, 2007
    
    March 28, 2012Qingsen Li
    
    *(1)
    
    May 7, 2009
    
    December 24, 2008
    
    August 31, 2013Other employees as a group(2)
    
    849,552
    
    May 7, 2009
    
    November 15, 2006
    
    November 14, 2011Other employees as a group(2)
    
    12,024
    
    May 7, 2009
    
    March 29, 2007
    
    March 28, 2012
 
 (1)
    
    Beneficially own less than 1.0% of our outstanding ordinary shares.(2)
    
    None of these employees is our director or executive officer. 2008 Share Incentive Plan
  82




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Termination of Awards
 Administration
 Option Exercise
 Third-party Acquisition
 Amendment and Termination of Plan
  Employee Pension and Other Retirement Benefits
  C.
    
    Board Practices
 Duties of Directors
 83




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##### Table of Contents




    
    convening shareholders annual general meetings and reporting its work to
shareholders at such meetings;
    
    declaring dividends and distributions;
    
    appointing officers and determining the term of office of officers;
    
    exercising the borrowing powers of our company and mortgaging the property of our
company; and
    
    approving the transfer of shares of our company, including the registering of such
shares in our share register.
  Audit Committee
  
    
    selecting our independent registered public accounting firm and pre-approving all
auditing and non-auditing services permitted to be performed by our independent
registered public accounting firm;
    
    reviewing with our independent registered public accounting firm any audit problems
or difficulties and managements response;
    
    reviewing and approving all proposed related-party transactions, as defined in Item
404 of Regulation S-K under the Securities Act;
    
    discussing the annual audited financial statements with management and our
independent registered public accounting firm;
    
    reviewing major issues as to the adequacy of our internal controls and any special
audit steps adopted in light of significant control deficiencies;
    
    annually reviewing and reassessing the adequacy of our audit committee charter;
    
    such other matters that are specifically delegated to our audit committee by our
board of directors from time to time; and
 84




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##### Table of Contents




    
    meeting separately and periodically with management and our internal auditor and
independent registered public accounting firm.
 Compensation Committee
  
    
    approving and overseeing the compensation package for our executive officers;
    
    reviewing and making recommendations to the board with respect to the compensation
of our directors; and
    
    reviewing periodically any long-term incentive compensation or equity plans,
programs or similar arrangements, annual bonuses, employee pension and welfare benefit
plans and granting our executive officers awards under such plans.
 Corporate Governance and Nominating Committee
  
    
    identifying and recommending to the board nominees for election or re-election to
the board, or for appointment to fill any vacancy;
    
    reviewing annually with the board the current composition of the board in light of
the characteristics of independence, age, skills, experience and availability of
service to us;
    
    advising the board periodically with respect to significant developments in the law
and practice of corporate governance as well as our compliance with applicable laws and
regulations, and making recommendations to the board on all matters of corporate
governance and on any corrective action to be taken; and
    
    monitoring compliance with our code of business conduct and ethics, including
reviewing the adequacy and effectiveness of our procedures to ensure proper compliance.
 Terms of Directors and Executive Officers
  Employment Agreements
 85




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Interested Transactions
  Remuneration and Borrowing
  D.
    
    Employees
  Number of
    
    PercentageEmployees
    
    of totalMarketing and brand management
    
    
    963
    
    
    
    34.9
    %Manufacturing and quality control
    
    
    1,010
    
    
    
    36.6
    %General and administration
    
    
    581
    
    
    
    21.1
    %Research and development
    
    
    205
    
    
    
    7.4
    %Total
    
    
    2,759
    
    
    
    100.0
    %
   86




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##### Table of Contents



E.
    
    Share Ownership
  
    
    each of our directors and executive officers; and
    
    each person known to us to own beneficially more than 5.0% of our ordinary shares.
 Shares BeneficiallyOwned(1)(2)Number
    
    
    %Directors and Executive Officers:Jinsheng Ren(3)
    
    
    51,447,964
    
    
    
    43.6Guoqiang Lin
    
    
    *
    
    
    
    *Hongquan Liu
    
    
    *
    
    
    
    *Gary Siu Kwan Sik
    
    
    *
    
    
    
    *John Huan Zhao(4)
    
    
    17,924,692
    
    
    
    15.3Jindong Zhou
    
    
    *
    
    
    
    *Xiaojin Yin
    
    
    *
    
    
    
    *Frank Zhigang Zhao
    
    
    *
    
    
    
    *Qingsen Li
    
    
    *
    
    
    
    *Jialun Tian
    
    
    *
    
    
    
    *Xiaohua Yang
    
    
    *
    
    
    
    *Huaping Fu
    
    
    *
    
    
    
    *Peng Wang
    
    
    *
    
    
    
    *Haibo Qian
    
    
    *
    
    
    
    *All directors and executive officers as a group
    
    
    69,727,984
    
    
    
    58.9Principal Shareholders:New Good Management Limited(5)
    
    
    50,381,556
    
    
    
    43.1Assure Ahead Investments Limited(6)
    
    
    17,924,692
    
    
    
    15.3King View Development International Limited(7)
    
    
    11,820,000
    
    
    
    10.1
 
 *
    
    Upon exercise of all options granted, would beneficially own less than 1.0% of our
outstanding ordinary shares.(1)
    
    Beneficial ownership is determined in accordance with Rule 13d-3 of the General Rules and
Regulations under the Exchange Act, and includes voting or investment power with respect to
the securities.(2)
    
    The number of shares outstanding in calculating the percentages for each listed person
includes, as applicable, (i) the ordinary shares underlying share options exercisable by such
person, and (ii) restricted shares awarded to such person that are vested but yet to be duly
registered or that can be vested, in each case within 60 days of the date of this annual
report. Percentage of beneficial ownership of each listed person is based on 116,926,380
ordinary shares outstanding as of May 31, 2009 and, as applicable, (i) the ordinary shares
underlying share options exercisable by such person and (ii) restricted shares awarded to such
person that are vested but yet to be duly registered or that can be vested, in each case
within 60 days of the date of this annual report.(3)
    
    Includes 50,381,556 ordinary shares directly held by New Good Management Limited, a British
Virgin Islands company, which is controlled by Mr. Ren, and 1,066,408 restricted shares that
have vested as of the date hereof. Mr. Ren is the chairman of the board of directors and the
controlling shareholder of New Good Management Limited.(4)
    
    Represents 17,924,692 ordinary shares directly held by Assure Ahead Investments Limited. Mr.
Zhao, a director of Assure Ahead Investments Limited, disclaims beneficial ownership of shares
held by Assure Ahead Investments Limited except to the extent of his pecuniary interests in
those shares.(5)
    
    New Good Management Limited is a British Virgin Islands company that is controlled by Mr.
Jinsheng Ren and beneficially owned by Messrs. Jinsheng Ren, Yat Ming Chu, Jindong Zhou,
Feifei Gao, Zhiyong Fu, Jinzheng Hao, Chuan Li, Xiaoxia Chen, Weidong Ren, Qimin Xu, Bingdong
Lu, Xiaojin Yin, Yizhong Wu, Minze Li, Haibo Qian and Suqin Peng. Mr. Ren is the chairman of
the board of directors and the controlling shareholder of New Good Management Limited. The
address of New Good Management Limited is at the offices of Offshore Incorporations Limited,
P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands. 87




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##### Table of Contents



(6)
    
    Assure Ahead Investments Limited is a British Virgin Islands company that is 100.0% owned by
Hony Capital II, L.P., an exempted limited partnership formed under the laws of the Cayman
Islands; Hony Capital II, L.P.s general partner is Hony Capital II GP Ltd., which is wholly
owned by Legend Holdings Limited, an investment holding company incorporated in the Peoples
Republic of China. Legend Holdings Limited is 65.0% owned by the Chinese Academy of Sciences,
a national academic and research institution owned and controlled by the PRC government. The
address for Assure Ahead Investments Limited is at the offices of Offshore Incorporations
Limited, P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin
Islands. The directors of Assure Ahead Investments Limited, Messrs. John Huan Zhao, Shunlong
Wang and Yonggang Cao have voting and investment power over the shares that this shareholder
beneficially owns.(7)
    
    King View Development International Limited is a British Virgin Islands company and a wholly
owned subsidiary of Trustbridge Partners II, L.P., a limited partnership whose general partner
is TB Partners GP2, L.P. The general partner of TB Partners GP2, L.P. is TB Partners GP
Limited. The address of King View Development International Limited is 2701B, Azia Center,
1233 Lujiazui Ring Road, Shanghai, Peoples Republic of China. The investment committee of
Trustbridge Partners II, L.P. has voting and investment power over the shares that this
shareholder beneficially owns.   
 Item 7. Major Shareholder and Related Party Transactions
 A.
    
    Major Shareholders
  B.
    
    Related Party Transactions
 Transactions with Companies in Which a Major Shareholder had Equity Interests
   Transactions with a Minority Shareholder
  88




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##### Table of Contents



Reorganization and Private Placement
   Share Incentives
  Registration Rights Agreements
  
    
    Demand Registration Rights. At any time commencing the earlier of November 20, 2008
or six months after our initial public offering, shares held by Assure Ahead
Investments Limited or its transferees and assignees have the right to demand that we
file a registration statement under the Securities Act covering the offer and sale of
their securities, so long as the aggregate amount of securities to be sold under the
registration statement exceeds $20.0 million. We are obligated under the registration
rights agreement to use our best efforts to register our ordinary shares for resale if
Assure Ahead Investments Limited makes such request. However, we are not required to
provide for any payment or transfer any other consideration to Assure Ahead Investments
Limited in the event of non-performance. We have the ability to delay or withdraw the
filing of a registration statement for up to 90 days if we furnish to Assure Ahead
Investments Limited or their transferees and assignees a certificate signed by our
chief executive officer or our chairman of the board of directors stating that, board
of directors determines it would be seriously detrimental to us or our shareholders for
a registration statement to be filed in the near future. We are not obligated to affect
such demand registrations on more than two occasions.
    
    Form F-3 or S-3 Registration Rights. Upon our company becoming eligible for use of
Form F-3 or S-3, Assure Ahead Investments Limited or their transferees and assignees
have the right to request that we file a registration statement under Form F-3 or S-3,
so long as the aggregate amount of securities to be sold under the registration
statement exceeds $1.0 million. Such requests for registrations are not counted as
demand registrations.
    
    Piggyback Registration Rights. If we propose to file a registration statement with
respect to an offering for our own account or for the account of any person that is not
Assure Ahead Investments Limited or their transferees and assignees, we must offer
Assure Ahead Investments Limited or their transferees
 89




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and assignees the opportunity to include their securities in the registration statement.
We must use our reasonable best efforts to cause the underwriters in any underwritten
offering to permit any such shareholder who so requests to include their securities on
the same terms and conditions as the securities of our company.
 
    
    Expenses of Registration. We will pay all expenses relating to any demand or
piggyback registration, whether or not such registrations become effective, except that
shareholders shall bear the expense of any brokers commission or underwriters
discount or commission relating to registration and sale of their securities.
  
    
    Pursuant to the registration rights agreement entered into among us, New Good
Management and King View Development International Limited on May 12, 2008, we agree to
file as promptly as practicable but in any event no later than thirty (30) days after
the earlier of (i) June 30, 2008 and (ii) the date on which we file our annual report
on Form 20-F for the fiscal year ended December 31, 2007 with the SEC, a shelf
registration statement for an offering to be made on a delayed or continuous basis
pursuant to Rule 415 registering the resale from time to time by holders of all of the
registrable securities. New Good Management will bear all costs associated with the
filing of such registration statements.
  C.
    
    Interests of Experts and Counsel
  
 Item 8. Financial Information
 A. Consolidated Statements and Other Financial Information
  Legal and Administrative Proceedings
  Dividend Policy
   90




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##### Table of Contents



B.
    
    Significant Changes
  
 Item 9. The Offer and Listing
 A.
    
    Offering and Listing Details
   Sales PriceHigh
    
    Low2008
    
    $
    15.88
    
    
    $
    4.41Quarterly High and LowFirst Quarter 2008
    
    $
    13.99
    
    
    $
    9.98Second Quarter 2008
    
    $
    15.88
    
    
    $
    10.42Third Quarter 2008
    
    $
    13.96
    
    
    $
    8.05Fourth Quarter 2008
    
    $
    8.94
    
    
    $
    4.41First Quarter 2009
    
    $
    9.13
    
    
    $
    4.76Monthly Highs and LowsDecember 2008
    
    $
    7.35
    
    
    $
    5.70January 2009
    
    $
    9.13
    
    
    $
    6.21February 2009
    
    $
    7.38
    
    
    $
    5.70March 2009
    
    $
    6.01
    
    
    $
    4.76April 2009
    
    $
    7.15
    
    
    $
    5.05May 2009
    
    $
    8.43
    
    
    $
    5.87June 2009 (through June 15)
    
    $
    8.23
    
    
    $
    7.44
 B.
    
    Plan of Distribution
  C.
    
    Markets
  D.
    
    Selling Shareholders
  E.
    
    Dilution
  91




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F.
    
    Expenses of the Issue
  
 Item 10. Additional Information
 A.
    
    Share Capital
  B.
    
    Memorandum and Articles of Association
  C.
    
    Material Contracts
  D.
    
    Exchange Controls
 Foreign Currency Exchange
  
    
    Foreign Currency Administration Rules (1996), as amended, or the Exchange Rules; and
    
    Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996),
or the Administration Rules;
   E.
    
    Taxation
 Cayman Islands Taxation
  Peoples Republic of China Taxation
 92




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##### Table of Contents



United States Federal Income Taxation
  
    
    an individual citizen or resident of the United States;
    
    a corporation (or other entity treated as a corporation for United States federal
income tax purposes) created organized in or under the laws of the United States, any
state thereof or the District of Columbia;
    
    an estate the income of which is subject to United States federal income taxation
regardless of its source; or
    
    a trust that (1) is subject to the primary supervision of a court within the United
States and one or more U.S. persons control all substantial decisions of the trust or
(2) has a valid election in effect under applicable U.S. Treasury regulations to be
treated as a U.S. person.
  
    
    a dealer in securities or currencies;
    
    certain financial institutions;
    
    insurance companies;
 93




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##### Table of Contents




    
    a regulated investment company;
    
    a real estate investment trust;
    
    broker dealers;
    
    U.S. expatriates;
    
    traders that elect to mark to market;
    
    tax-exempt entities;
    
    persons liable for alternative minimum tax;
    
    persons holding an ADS or ordinary share as part of a straddle, constructive sale,
hedging, conversion or integrated transaction;
    
    persons whose functional currency is not the U.S. dollar;
    
    persons that actually or constructively own 10.0% or more of our voting stock; or
    
    persons holding ADSs or ordinary shares through partnerships or other pass-through
entities.
     ADSs
  94




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Taxation of Dividends and Other Distributions on the ADSs or Ordinary Shares
   Taxation of Disposition of ADSs or Ordinary Shares
  Passive Foreign Investment Company
   
    
    at least 75% of its gross income is passive income; or
    
    at least 50% of the value of its assets (based on an average of the quarterly
values of the assets during a taxable year) is attributable to assets that produce or
are held for the production of passive income.
   95




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##### Table of Contents




    
    the excess distribution or gain will be allocated ratably over your holding period
for the ADSs or ordinary shares;
    
    the amount allocated to the current taxable year, and any taxable year prior to the
first taxable year in which we became a PFIC, will be treated as ordinary income; and
    
    the amount allocated to each other year will be subject to the highest tax rate in
effect for that year and the interest charge generally applicable to underpayments of
tax will be imposed on the resulting tax attributable to each such year.
    96




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##### Table of Contents



Information Reporting and Backup Withholding
   F.
    
    Dividends and Paying Agents
 Not applicable.
 G.
    
    Statement by Experts
 Not applicable.
 H.
    
    Documents on Display
   97




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##### Table of Contents



I.
    
    Subsidiary Information
  
 Item 11. Quantitative and Qualitative Disclosures about Market Risk
 Foreign Currency Exchange Risk
    98




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##### Table of Contents



Interest Rate Risk
  Credit Risk with Financial Institutions
  
 Item 12. Description of Securities Other Than Equity Securities
  99




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##### Table of Contents



PART II
 
 Item 13. Defaults, Dividend Arrearages And Delinquencies
  
 Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    
    approximately RMB17.0 million ($2.5 million) to repay the short-term bank loans and
borrowings;
    
    approximately RMB65.1 million ($9.5 million) for the acquisition of a 70.0% equity
interest in Wuhu Simcere Zhong Ren; and
    
    approximately RMB93.9 million ($13.8 million) to fund our research and development
efforts.
 
 Item 15. Controls and Procedures
 Disclosure Controls and Procedures
  Managements Annual Report on Internal Control Over Financial Reporting
  100




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Changes in Internal Control over Financial Reporting
  Report of Independent Registered Public Accounting Firm
 The Board of Directors and Shareholders  Simcere Pharmaceutical Group:
   101




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##### Table of Contents



ITEM 16A. Audit Committee Financial Expert
  
 Item 16B. Code of Ethics
  102




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##### Table of Contents



ITEM 16C. Principal Accountant Fees and Services
  Year Ended December 31,2007
    
    
    2008Audit fees(1)
    
    $
    1,035
    
    
    $
    1,929Audit-related fees(2)
    
    
    481
    
    
    
    163Tax fees
    
    
    
    
    
    
    Other fees
    
    
    
    
    
    
    Total
    
    $
    1,516
    
    
    $
    2,092
 
 (1)
    
    Audit fees represent the aggregate fees billed for each of the fiscal years listed for
professional services rendered by our principal auditors for the audit of our annual financial
statements or services that are normally provided by the auditors in connection with statutory
and regulatory filings or engagements.(2)
    
    Audit-related fees represent the aggregate fees billed in each of the fiscal years listed
for assurance and related services by our principal auditors for services rendered that are
reasonably related to the performance of the audit or review of our consolidated financial
statements and are not reported under Audit fees. Services comprising the fees disclosed
under the category of Audit-related fees in 2008 involve principally limited reviews
performed on our consolidated financial statements.  
 ITEM 16D. Exemptions from the Listing Standards for Audit Committees
  
 ITEM 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
   
 Item 16F. Change in Registrants Certifying Accountant
  
 Item 16G. Corporate Governance
 103




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##### Table of Contents




    
    The New York Stock Exchange standards for domestic companies require that
non-management directors meet at regularly scheduled executive sessions without
management. Our non-management directors have not met in executive sessions without
management, and there is no requirement under the laws of the Cayman Islands that our
non-management directors meet in executive sessions.
 104




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##### Table of Contents



PART III
 
 Item 17. Financial Statements
  
 Item 18. Financial Statements
  INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
 PageReport of Independent Registered Public Accounting Firm
    
    F-2Consolidated Balance Sheets as of December 31, 2007 and 2008
    
    F-3Consolidated Statements of Income for the years ended December 31, 2006, 2007 and 2008
    
    F-4Consolidated Statements of Shareholders Equity and Comprehensive Income for the years ended December 31, 2006, 2007 and 2008
    
    F-5Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2007 and 2008
    
    F-6Notes to the Consolidated Financial Statements
    
    F-8
 
 Item 19. Exhibits
 Exhibit Number
    
    Description of Document1.1
    
    Second Amended and Restated Memorandum and Articles of Association of the Registrant2.1
    
    Registrants Form of American Depositary Receipt2.2
    
    Registrants Specimen Certificate for Ordinary Shares2.3
    
    Form of Deposit Agreement among the Registrant, the depositary and Owners and
Beneficial Owners of the American Depositary Shares issued thereunder2.4
    
    Registration Rights Agreement among Simcere Pharmaceutical Group, New Good
Management Limited and Assure Ahead Investments Limited, dated November 20, 20062.5
    
    Share Purchase Agreement among Luo Yongzhang, Zhou Bing and State Good Group
Limited, dated May 28, 20062.6
    
    Share Purchase Agreement among Yantai Rongchang Pharmaceutic Co., Ltd., Beijing
Scientific Town Development Co., Ltd., Yantai Ruikang Biochemical Drugs LLC and
Simcere Pharmaceutical Company Limited, dated May 28, 20062.7
    
    Registration Rights Agreement among Simcere Pharmaceutical Group, New Good
Management Limited and King View Development International Limited, dated May 12,
20084.1
    
    Form of Indemnification Agreement with the Registrants directors4.2
    
    Form of Employment Agreement of senior executive officers4.3
    
    Form of Non-Disclosure, Non-Competition and Proprietary Information Agreement4.4
    
    2006 Share Incentive Plan adopted as of November 13, 20064.5
    
    Cooperation Agreement on the Incorporation of Medgenn (Hong Kong) Ltd. entered into
between Bestspeed Investments Limited (BVI) and Yantai Medgenn Co., Ltd., dated
February 10, 20054.6
    
    Implementation Rules of Supplementary Agreement on Cooperation Agreement on the
Incorporation of Medgenn (Hong Kong) Ltd. entered into between Yantai Medgenn Co.,
Ltd. and Medgenn (Hong Kong) Co., Ltd., dated August 6, 20054.7
    
    Joint Research Agreement on Anti-Tumor Drug AL6802 entered into between Jiangsu
Simcere Pharmaceutical R&D Co., Ltd. and Advenchen Laboratories LLC, dated January
8, 20078.1*
    
    Subsidiaries of the Registrant11.1
    
    Code of Business Conduct and Ethics12.1*
    
    CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 200212.2*
    
    CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 200213.1*
    
    CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 200213.2*
    
    CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 200215.1*
    
    Consent of KPMG
 
 *
    
    Filed herewith. 105




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SIGNATURES
  Simcere Pharmaceutical GroupBy:
    /s/ Jinsheng RenName:
    Jinsheng RenTitle:
    Chief Executive Officer  106




---



##### 



SIMCERE PHARMACEUTICAL GROUP AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 Contents
    
    PageReport of Independent Registered Public Accounting Firm
    
    F-2Consolidated Balance Sheets as of December 31, 2007 and 2008
    
    F-3Consolidated Statements of Income for the years ended December 31, 2006, 2007 and 2008
    
    F-4Consolidated Statements of Shareholders Equity and Comprehensive Income for the years
ended December 31, 2006, 2007 and 2008
    
    F-5Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2007 and 2008
    
    F-6 to 9Notes to Consolidated Financial Statements
    
    F-10
  F-1




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Report of Independent Registered Public Accounting Firm
 The Board of Directors and Shareholders
Simcere Pharmaceutical Group:
     Internal Control  Integrated Framework
  Hong Kong, China  June 16, 2009
 F-2




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##### Table of Contents



Simcere Pharmaceutical Group and Subsidiaries
 
 Consolidated Balance Sheets
 (Amounts expressed in thousands, except share data)
 December 31,Note
    
    2007
    
    2008
    
    2008RMB
    
    RMB
    
    US$AssetsCurrent assetsCash and cash equivalents
    
    
    
    
    497,352
    
    
    
    812,814
    
    
    
    119,137Pledged bank deposits
    
    2(d)
    
    
    910
    
    
    
    952
    
    
    
    139Held-to-maturity investment securities
    
    2(e)
    
    
    470,000
    
    
    
    
    
    
    
    Accounts and bills receivables, net
    
    3
    
    
    488,374
    
    
    
    748,997
    
    
    
    109,783Inventories
    
    4, 19
    
    
    65,241
    
    
    
    95,948
    
    
    
    14,063Prepaid expenses and other current assets
    
    
    
    
    26,037
    
    
    
    43,431
    
    
    
    6,366Amounts due from related parties
    
    19
    
    
    7,503
    
    
    
    4,365
    
    
    
    640Deferred tax assets
    
    10(d)
    
    
    1,736
    
    
    
    1,252
    
    
    
    184Total current assets
    
    
    
    
    1,557,153
    
    
    
    1,707,759
    
    
    
    250,312Amount due from a related party
    
    19
    
    
    
    
    
    
    20,000
    
    
    
    2,931Property, plant and equipment, net
    
    5
    
    
    377,637
    
    
    
    478,850
    
    
    
    70,187Land use rights
    
    6
    
    
    116,386
    
    
    
    114,624
    
    
    
    16,801Intangible assets, net
    
    7
    
    
    251,221
    
    
    
    275,244
    
    
    
    40,344Goodwill
    
    7
    
    
    161,496
    
    
    
    178,211
    
    
    
    26,121Deferred tax assets
    
    10(d)
    
    
    8,315
    
    
    
    3,534
    
    
    
    518Total assets
    
    
    
    
    2,472,208
    
    
    
    2,778,222
    
    
    
    407,214LiabilitiesCurrent liabilitiesShort-term borrowings and current installments of long-term debt
    
    8, 9
    
    
    29,000
    
    
    
    6,000
    
    
    
    879Accounts and bills payables
    
    
    
    
    23,711
    
    
    
    25,219
    
    
    
    3,696Accrued payroll and employee benefits
    
    
    
    
    29,634
    
    
    
    28,436
    
    
    
    4,168Other payables and accrued liabilities
    
    11
    
    
    255,777
    
    
    
    251,843
    
    
    
    36,913Income taxes payable
    
    10
    
    
    4,515
    
    
    
    23,290
    
    
    
    3,414Deferred tax liabilities
    
    10(d)
    
    
    
    
    
    
    225
    
    
    
    33Total current liabilities
    
    
    
    
    342,637
    
    
    
    335,013
    
    
    
    49,103Long-term debt, excluding current installments
    
    9
    
    
    52,000
    
    
    
    62,000
    
    
    
    9,088Deferred tax liabilities
    
    10(d)
    
    
    61,690
    
    
    
    59,358
    
    
    
    8,700Other liabilities
    
    10(b)
    
    
    19,928
    
    
    
    20,529
    
    
    
    3,009Total liabilities
    
    
    
    
    476,255
    
    
    
    476,900
    
    
    
    69,900Minority interests
    
    
    
    
    12,137
    
    
    
    48,297
    
    
    
    7,079Shareholders equityOrdinary shares US$0.01 par value:500,000,000 shares authorized, 125,006,200 and 122,227,318
shares issued and outstanding as of December 31, 2007 and 2008,
respectively
    
    18
    
    
    9,840
    
    
    
    9,624
    
    
    
    1,411Additional paid-in capital
    
    
    
    
    1,550,697
    
    
    
    1,505,252
    
    
    
    220,631Accumulated other comprehensive loss
    
    21
    
    
    (46,849
    )
    
    
    (82,130
    )
    
    
    (12,038
    )Retained earnings
    
    
    
    
    470,128
    
    
    
    820,279
    
    
    
    120,231Total shareholders equity
    
    
    
    
    1,983,816
    
    
    
    2,253,025
    
    
    
    330,235Commitments and contingencies
    
    14Total liabilities, minority interests and shareholders equity
    
    
    
    
    2,472,208
    
    
    
    2,778,222
    
    
    
    407,214
  F-3




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##### Table of Contents



Simcere Pharmaceutical Group and Subsidiaries
 
 Consolidated Statements of Income
 (Amounts expressed in thousands, except share data)
 Years ended December 31,Note
    
    2006
    
    2007
    
    2008
    
    2008RMB
    
    RMB
    
    RMB
    
    US$Product revenues
    
    16, 19
    
    
    947,797
    
    
    
    1,363,014
    
    
    
    1,736,832
    
    
    
    254,574Other revenue
    
    2(k)
    
    
    2,809
    
    
    
    5,734
    
    
    
    4,311
    
    
    
    632Total revenue
    
    
    
    
    950,606
    
    
    
    1,368,748
    
    
    
    1,741,143
    
    
    
    255,206Cost of materials and production
    
    19
    
    
    (190,560
    )
    
    
    (241,081
    )
    
    
    (320,882
    )
    
    
    (47,033
    )Gross profit
    
    
    
    
    760,046
    
    
    
    1,127,667
    
    
    
    1,420,261
    
    
    
    208,173Operating expenses:Research and development expenses
    
    
    
    
    (34,289
    )
    
    
    (68,295
    )
    
    
    (86,089
    )
    
    
    (12,618
    )Sales, marketing and distribution expenses
    
    
    
    
    (442,757
    )
    
    
    (634,449
    )
    
    
    (782,960
    )
    
    
    (114,762
    )General and administrative expenses
    
    
    
    
    (98,249
    )
    
    
    (161,061
    )
    
    
    (194,233
    )
    
    
    (28,469
    )Income from operations
    
    
    
    
    184,751
    
    
    
    263,862
    
    
    
    356,979
    
    
    
    52,324Interest income
    
    
    
    
    2,827
    
    
    
    24,361
    
    
    
    34,302
    
    
    
    5,028Interest expense
    
    5
    
    
    (10,705
    )
    
    
    (6,346
    )
    
    
    (4,693
    )
    
    
    (688
    )Foreign currency exchange gains, net
    
    21
    
    
    
    
    
    
    24,670
    
    
    
    39,879
    
    
    
    5,845Other income
    
    14(d)
    
    
    
    
    
    
    20,526
    
    
    
    1,104
    
    
    
    162Earnings before income taxes and minority interests
    
    
    
    
    176,873
    
    
    
    327,073
    
    
    
    427,571
    
    
    
    62,671Income tax expense
    
    10(a)
    
    
    (6,952
    )
    
    
    (13,527
    )
    
    
    (49,285
    )
    
    
    (7,224
    )Income before minority interests
    
    
    
    
    169,921
    
    
    
    313,546
    
    
    
    378,286
    
    
    
    55,447Minority interests
    
    
    
    
    2,337
    
    
    
    (12,285
    )
    
    
    (28,135
    )
    
    
    (4,124
    )Net income
    
    
    
    
    172,258
    
    
    
    301,261
    
    
    
    350,151
    
    
    
    51,323Earnings per share:Basic
    
    15
    
    
    1.86
    
    
    
    2.56
    
    
    
    2.80
    
    
    
    0.41Diluted
    
    15
    
    
    1.86
    
    
    
    2.48
    
    
    
    2.80
    
    
    
    0.41
  F-4




---



##### Table of Contents



Simcere Pharmaceutical Group and Subsidiaries
 
 Consolidated Statements of Shareholders Equity and Comprehensive Income
 (Amounts expressed in thousands, except share data)
 Share CapitalAccumulated
    
    
    
    
    
    TotalNumber of
    
    
    
    
    
    Additional
    
    other
    
    
    
    
    
    shareholdersContributed
    
    ordinary
    
    Par value
    
    paid-in
    
    comprehensive
    
    Retained
    
    equity
    
    ComprehensiveNote
    
    capital
    
    shares
    
    amount
    
    capital
    
    loss
    
    earnings
    
    (note 13)
    
    incomeRMB
    
    
    
    
    
    RMB
    
    RMB
    
    RMB
    
    RMB
    
    RMB
    
    RMBBalance as of
January 1, 2006
    
    
    
    
    60,200
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    132,337
    
    
    
    192,537Distribution to
shareholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,303
    )
    
    
    (1,303
    )Effect of
reorganization:
    
    1(c)Issuance of
ordinary shares
to NGM
    
    
    
    
    (60,200
    )
    
    
    69,000,000
    
    
    
    5,457
    
    
    
    54,743
    
    
    
    
    
    
    
    
    
    
    
    Distribution to
NGM
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (134,425
    )
    
    
    (134,425
    )Issuance of
ordinary shares
to AAI
    
    
    
    
    
    
    
    
    31,000,000
    
    
    
    2,452
    
    
    
    207,784
    
    
    
    
    
    
    
    
    
    
    
    210,236Share-based
compensation
    
    17
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,437
    
    
    
    
    
    
    
    
    
    
    
    3,437Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    172,258
    
    
    
    172,258
    
    
    
    172,258Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    172,258Balance as of
December 31, 2006
    
    
    
    
    
    
    
    
    100,000,000
    
    
    
    7,909
    
    
    
    265,964
    
    
    
    
    
    
    
    168,867
    
    
    
    442,740Issuance of
ordinary shares in
connection with
public offering,
net of issuance
costs of RMB46,099
    
    
    
    
    
    
    
    
    25,000,000
    
    
    
    1,931
    
    
    
    1,253,778
    
    
    
    
    
    
    
    
    
    
    
    1,255,709Share-based
compensation
    
    17
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,764
    
    
    
    
    
    
    
    
    
    
    
    30,764Issuance of
ordinary shares
upon exercise of
share options
    
    17
    
    
    
    
    
    
    6,200
    
    
    
    
    
    
    
    191
    
    
    
    
    
    
    
    
    
    
    
    191Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    301,261
    
    
    
    301,261
    
    
    
    301,261Foreign currency
translation
adjustments, net of
nil tax
    
    21
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (46,849
    )
    
    
    
    
    
    
    (46,849
    )
    
    
    (46,849
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    254,412Balance as of
December 31, 2007
    
    
    
    
    
    
    
    
    125,006,200
    
    
    
    9,840
    
    
    
    1,550,697
    
    
    
    (46,849
    )
    
    
    470,128
    
    
    
    1,983,816Share-based
compensation
    
    17
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,536
    
    
    
    
    
    
    
    
    
    
    
    25,536Issuance of
ordinary shares
upon exercise of
share options
    
    17
    
    
    
    
    
    
    198,000
    
    
    
    14
    
    
    
    5,722
    
    
    
    
    
    
    
    
    
    
    
    5,736Repurchase of
ordinary shares
    
    18
    
    
    
    
    
    
    (2,976,882
    )
    
    
    (230
    )
    
    
    (76,703
    )
    
    
    
    
    
    
    
    
    
    
    (76,933
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    350,151
    
    
    
    350,151
    
    
    
    350,151Foreign currency
translation
adjustments, net of
nil tax
    
    21
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (35,281
    )
    
    
    
    
    
    
    (35,281
    )
    
    
    (35,281
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    314,870Balance as of
December 31, 2008
    
    
    
    
    
    
    
    
    122,227,318
    
    
    
    9,624
    
    
    
    1,505,252
    
    
    
    (82,130
    )
    
    
    820,279
    
    
    
    2,253,025Balance as of
December 31,
2008 US$
    
    
    
    
    
    
    
    
    
    
    
    
    1,411
    
    
    
    220,631
    
    
    
    (12,038
    )
    
    
    120,231
    
    
    
    330,235
  F-5




---



##### Table of Contents



Simcere Pharmaceutical Group and Subsidiaries
 
 Consolidated Cash Flow Statements
 (Amounts expressed in thousands)
 Years ended December 31,Note
    
    2006
    
    2007
    
    2008
    
    2008RMB
    
    RMB
    
    RMB
    
    US$Operating activities:Net income
    
    
    
    
    172,258
    
    
    
    301,261
    
    
    
    350,151
    
    
    
    51,323Adjustments to reconcile net income to
net cash provided by operating
activities:Bad debt expense
    
    
    
    
    1,433
    
    
    
    1,203
    
    
    
    1,576
    
    
    
    231Inventory write-downs
    
    
    
    
    2,143
    
    
    
    3,213
    
    
    
    3,000
    
    
    
    440Depreciation of property, plant and
equipment
    
    
    
    
    17,202
    
    
    
    27,770
    
    
    
    39,791
    
    
    
    5,832Amortization of intangible assets
    
    
    
    
    4,812
    
    
    
    15,084
    
    
    
    29,433
    
    
    
    4,314Acquired in-process research and
development
    
    
    
    
    
    
    
    
    884
    
    
    
    
    
    
    
    Gain on disposal of property, plant and
equipment
    
    
    
    
    (513
    )
    
    
    (2,526
    )
    
    
    (21
    )
    
    
    (3
    )Minority interests
    
    
    
    
    (2,337
    )
    
    
    12,285
    
    
    
    28,135
    
    
    
    4,124Deferred tax (benefit)/expense
    
    
    
    
    (2,124
    )
    
    
    11,009
    
    
    
    (2,770
    )
    
    
    (406
    )Share-based compensation expense
    
    
    
    
    3,437
    
    
    
    30,764
    
    
    
    25,536
    
    
    
    3,743Unrealized foreign currency exchange
gains
    
    
    
    
    
    
    
    
    (45,350
    )
    
    
    (39,763
    )
    
    
    (5,828
    )Changes in assets and liabilities, net of
effects from acquisitionsIncrease in accounts and bills receivables
    
    
    
    
    (33,242
    )
    
    
    (316,010
    )
    
    
    (257,135
    )
    
    
    (37,689
    )Decrease/(increase) in inventories
    
    
    
    
    2,002
    
    
    
    (14,304
    )
    
    
    (32,648
    )
    
    
    (4,786
    )(Increase)/decrease in prepaid expenses
and other current assets
    
    
    
    
    (18,609
    )
    
    
    47,704
    
    
    
    (15,241
    )
    
    
    (2,234
    )Decrease in prepaid land use rights
    
    
    
    
    1,458
    
    
    
    1,956
    
    
    
    2,486
    
    
    
    364Decrease in amounts due from related
parties
    
    
    
    
    869
    
    
    
    166
    
    
    
    3,138
    
    
    
    460(Decrease)/increase in accounts and bills
payables
    
    
    
    
    (1,416
    )
    
    
    1,084
    
    
    
    1,275
    
    
    
    187Increase/(decrease) in accrued payroll
and employee benefits
    
    
    
    
    6,189
    
    
    
    4,946
    
    
    
    (1,424
    )
    
    
    (209
    )(Decrease)/increase in other payables and
accrued liabilities
    
    
    
    
    (17,246
    )
    
    
    67,644
    
    
    
    (7,737
    )
    
    
    (1,135
    )(Decrease)/increase in income taxes
payable and other long-term liabilities
    
    
    
    
    (17,474
    )
    
    
    2,984
    
    
    
    19,376
    
    
    
    2,840Increase/(decrease) in amounts due to
related parties
    
    
    
    
    109
    
    
    
    (1,352
    )
    
    
    
    
    
    
    Net cash provided by operating activities
    
    
    
    
    118,951
    
    
    
    150,415
    
    
    
    147,158
    
    
    
    21,568Investing activities:Payment for purchase of land use rights
    
    
    
    
    (2,142
    )
    
    
    (20,449
    )
    
    
    (926
    )
    
    
    (136
    )Payment for purchase of intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    (2,554
    )
    
    
    (374
    )Purchase of property, plant and equipment
    
    
    
    
    (85,676
    )
    
    
    (78,143
    )
    
    
    (117,541
    )
    
    
    (17,228
    )Payment of deposits for purchase of
property, plant and equipment
    
    
    
    
    (4,056
    )
    
    
    
    
    
    
    (15,791
    )
    
    
    (2,316
    )Proceeds from disposal of property, plant
and equipment and land use right
    
    
    
    
    2,417
    
    
    
    
    
    
    
    1,942
    
    
    
    285Payments for acquisitions of additional
equity interests
    
    7(b), (c)
    
    
    (10,927
    )
    
    
    (27,064
    )
    
    
    
    
    
    
    
 F-6




---



##### Table of Contents



Simcere Pharmaceutical Group and Subsidiaries
 Consolidated Cash Flow Statements
 (Amounts expressed in thousands)
 Years ended December 31,Note
    
    2006
    
    2007
    
    2008
    
    2008RMB
    
    RMB
    
    RMB
    
    US$Payment for acquisition of Shandong
Simcere
    
    
    
    
    (177,959
    )
    
    
    
    
    
    
    
    
    
    
    Payment for acquisition of Boda
    
    7(b)
    
    
    
    
    
    
    (101,735
    )
    
    
    
    
    
    
    Payment for acquisition of Master Luck
    
    7(b)
    
    
    
    
    
    
    (29,776
    )
    
    
    
    
    
    
    Payment for acquisition of Wuhu Zhong Ren
    
    7(a)
    
    
    
    
    
    
    
    
    
    
    (62,420
    )
    
    
    (9,149
    )(Increase)/decrease in held-to-maturity
investment securities
    
    
    
    
    
    
    
    
    (470,000
    )
    
    
    470,000
    
    
    
    68,890(Increase)/decrease in pledged bank
deposits
    
    
    
    
    (15,787
    )
    
    
    19,877
    
    
    
    (42
    )
    
    
    (6
    )Proceeds from repayments of loans and
advances due from related parties
    
    19
    
    
    40,351
    
    
    
    212
    
    
    
    
    
    
    
    Proceeds from disposal of property, plant
and equipment, and land use right to
related parties
    
    19
    
    
    
    
    
    
    11,104
    
    
    
    
    
    
    
    Loans and advances made to related parties
    
    19
    
    
    (5,417
    )
    
    
    
    
    
    
    (20,000
    )
    
    
    (2,931
    )Net cash (used in)/provided by investing
activities
    
    
    
    
    (259,196
    )
    
    
    (695,974
    )
    
    
    252,668
    
    
    
    37,035Financing activities:Proceeds from issuance of ordinary shares
    
    
    
    
    
    
    
    
    1,301,808
    
    
    
    
    
    
    
    Proceeds from exercise of share options
    
    
    
    
    
    
    
    
    191
    
    
    
    5,736
    
    
    
    841Payments for repurchase of ordinary shares
    
    
    
    
    
    
    
    
    
    
    
    
    (76,933
    )
    
    
    (11,276
    )Payments for offering costs
    
    
    
    
    (6,753
    )
    
    
    (39,346
    )
    
    
    
    
    
    
    Proceeds from short-term bank loans and
other borrowings
    
    
    
    
    291,000
    
    
    
    
    
    
    
    
    
    
    
    Principal repayments of bank loans and
other borrowings
    
    
    
    
    (174,800
    )
    
    
    (314,000
    )
    
    
    (17,000
    )
    
    
    (2,492
    )Repayment of loans and advances due to
related parties
    
    19
    
    
    (158,489
    )
    
    
    
    
    
    
    
    
    
    
    Proceeds from loans and advances due to
related parties
    
    
    
    
    81,579
    
    
    
    
    
    
    
    
    
    
    
    Proceeds from repayment of loans and
advances due from related parties
    
    
    
    
    49,338
    
    
    
    
    
    
    
    
    
    
    
    Capital contribution from AAI in
connection with Reorganization
    
    
    
    
    210,236
    
    
    
    
    
    
    
    
    
    
    
    Distribution to NGM in connection with
Reorganization
    
    
    
    
    (134,425
    )
    
    
    
    
    
    
    
    
    
    
    Distribution to shareholders
    
    
    
    
    (1,474
    )
    
    
    
    
    
    
    
    
    
    
    Distribution by a subsidiary to its
minority shareholder
    
    
    
    
    
    
    
    
    (10,270
    )
    
    
    (649
    )
    
    
    (95
    )Net cash provided by/(used in) financing
activities
    
    
    
    
    156,212
    
    
    
    938,383
    
    
    
    (88,846
    )
    
    
    (13,022
    )
  F-7




---



##### Table of Contents



Simcere Pharmaceutical Group and Subsidiaries
Consolidated Cash Flow Statements
(Amounts expressed in thousands)
 Years ended December 31,2006
    
    2007
    
    2008
    
    2008RMB
    
    RMB
    
    RMB
    
    US$Effect of exchange rate changes on
cash and cash equivalents
    
    
    
    
    
    
    
    
    (1,499
    )
    
    
    4,482
    
    
    
    657Net increase in cash and cash
equivalents
    
    
    
    
    15,967
    
    
    
    391,325
    
    
    
    315,462
    
    
    
    46,238Cash and cash equivalents at
beginning of year
    
    
    
    
    90,060
    
    
    
    106,027
    
    
    
    497,352
    
    
    
    72,899Cash and cash equivalents at end of
year
    
    
    
    
    106,027
    
    
    
    497,352
    
    
    
    812,814
    
    
    
    119,137(a) Supplemental cash flow and
non-cash information:Cash and cash equivalents paid
during the period for:Income taxes
    
    
    
    
    22,730
    
    
    
    3,056
    
    
    
    40,401
    
    
    
    5,922Interest, net of capitalized interest
    
    
    
    
    12,303
    
    
    
    6,418
    
    
    
    4,693
    
    
    
    688Non-cash investing transactions:Payable and accruals for acquisition
of property, plant and equipment and
land use right
    
    
    
    
    68,276
    
    
    
    39,791
    
    
    
    32,890
    
    
    
    4,820Payable for acquisition of Shandong
Simcere
    
    
    
    
    9,830
    
    
    
    
    
    
    
    
    
    
    
    Payable for acquisition of Boda
    
    
    
    
    
    
    
    
    8,323
    
    
    
    
    
    
    
    Non-cash financing transactions:Accrued offering costs
    
    
    
    
    11,775
    
    
    
    
    
    
    
    
    
    
    
    (b) Analysis of net cash outflow in
respect of acquisitions is as
follow:i) Acquisition of an 80% equity
interest of Shandong Simcere in 2006RMBCash consideration paid
    
    
    
    
    (186,769
    )Cash and cash equivalents acquired
    
    
    
    
    8,810Net cash outflow in respect of
acquisition of Shandong Simcere
    
    
    
    
    (177,959
    )ii) Acquisition of Boda in 2007Cash consideration paid
    
    7(b)
    
    
    (114,738
    )Cash and cash equivalents acquired
    
    
    
    
    13,003Net cash outflow in respect of
acquisition of Boda
    
    
    
    
    (101,735
    )
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Simcere Pharmaceutical Group and Subsidiaries
 Consolidated Cash Flow Statements
 (Amounts expressed in thousands)
 Years ended December 31,2006
    
    2007
    
    2008
    
    2008RMB
    
    RMB
    
    RMB
    
    US$iii) Acquisition of Master Luck in
2007Cash consideration paid
    
    7(b)
    
    
    (32,927
    )Cash and cash equivalents acquired
    
    
    
    
    3,151Net cash outflow in respect of
acquisition of Master Luck
    
    
    
    
    (29,776
    )iv) Acquisition of Wuhu Zhong Ren in
2008Cash consideration paid
    
    7(a)
    
    
    (65,090
    )Cash and cash equivalents acquired
    
    
    
    
    2,670Net cash outflow in respect of
acquisition of Wuhu Zhong Ren
    
    
    
    
    (62,420
    )
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Simcere Pharmaceutical Group and Subsidiaries
 
 Notes to Consolidated Financial Statements
 (Amounts expressed in thousands, except share data)
 1
    
    Principal activities, significant concentrations and risks, organization and basis of
presentation
 (a)
    
    Principal activities
 Simcere Pharmaceutical Group (the Company) and its subsidiaries, namely State Good Group
Limited (SGG), Simcere Pharmaceutical Co., Ltd. (formerly Hainan Simcere Pharmaceutical
Co., Ltd., Hainan Simcere), Nanjing Simcere Dongyuan Pharmaceutical Co., Ltd. (Nanjing
Simcere), Hainan Qitian Pharmaceutical Co., Ltd. (Qitian Simcere), Sichuan Zigong Yirong
Industrial Co., Ltd. (Sichuan Simcere), Jiangsu Simcere Pharmaceutical Co., Ltd.
(Jiangsu Simcere), Shanghai Simcere Pharmaceutical Co., Ltd. (Shanghai Simcere),
Jiangsu Simcere Pharmaceutical R&D Co., Ltd. (Simcere Research), Shandong Simcere Medgenn
Bio-Pharmaceutical Co., Ltd. (Shandong Simcere) (formerly Yantai Medgenn Co., Ltd.),
Jilin Province Boda Pharmaceutical Co., Ltd. (Boda), Master Luck Corporation Ltd.
(Master Luck), Nanjing Tung Chit Pharmaceutical Co., Ltd. (Tung Chit), and Wuhu Simcere
Zhong Ren Pharmaceutical Co., Ltd. (Simcere Zhong Ren) are principally engaged in the
research, development, manufacture and distribution of pharmaceutical products in the
Peoples Republic of China (the PRC). The Company and its subsidiaries are collectively
referred to as the Group.
 (b)
    
    Significant concentrations and risks
 Revenue concentrationsThe Group sells its products to pharmaceutical distributors in the PRC. Sales to
distributors account for substantially all of the Groups revenues. The Group does not have
long-term distribution agreements and competes for desired distributors with other
pharmaceutical manufacturers. Consequently, maintaining relationships with existing
distributors and replacing distributors may be costly, difficult and time-consuming. Any
disruption of the Groups distribution network, including its failure to renew existing
distribution agreements with desired distributors, could negatively affect its ability to
effectively sell its products and could materially and adversely affect its business,
financial condition and results of operations. As of and for the years ended December 31,
2006, 2007 and 2008, no single customer contributed, on an individual basis, 10% or more of
the Groups total revenues or gross accounts receivable.The Group derives a substantial portion of its revenue from the sales of four products,
namely Bicun, Zailin, Endu, and Yingtaiqing, of which revenues were over RMB100,000
(US$14,657) individually for the year ended December 31, 2008. Aggregate sales of these
products accounted for 70.6%, 78.5% and 71.8% of the Groups product revenues for the years
ended December 31, 2006, 2007 and 2008, respectively. Prior to December 2007, one of the
Groups top selling products, Bicun, was subject to a protection period. During this
period, no application for new medicine certificates for the same product is allowed.
Since then, a few competitors have entered into the edaravone market in China and the Group
may face more severe competition and price pressure in the near future. As the Group
expects the sales of these products to continue to comprise a substantial portion of
revenues in the future, any factors adversely affecting the sales of any of these products
will have a material adverse effect on the Groups business, financial condition and
results of operations.Price control by PRC government authoritiesCertain medical products sold in the PRC, primarily those included in the PRCs published
Medical Insurance Catalogue and those pharmaceutical products whose production or trading
are deemed to constitute monopolies by the PRC government, are subject to retail price
controls in the form of fixed prices or price ceilings. The fixed prices or the price
ceilings of such medicines are published by the national and provincial price
administration authorities from time to time. Although the Group only sells its products
through distributors, the controls over retail prices could have a corresponding effect on
the wholesale prices. The prices of medicines that are not
subject to price controls are determined freely at the discretion of the respective
pharmaceutical companies, subject, in certain cases, to notification to the provincial
pricing authorities. Certain of the Groups products are subject to price controls and
accordingly, the price of such
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 products could not be increased at the Groups discretion
above the relevant controlled price ceiling without prior governmental approval. In
addition, the price of such products may also be adjusted downward by the relevant
government authorities in the future. Such price control, especially downward price
adjustment, may negatively affect the Groups revenue and profitability. For the years
ended December 31, 2006, 2007 and 2008, the percentages of the Groups revenues from
products that were subject to government pricing controls were 77%, 73% and 72.0%,
respectively.
 Concentration of suppliersThe Group sources raw materials, as well as packaging materials, from various
independent suppliers in the PRC. Historically, the majority of the Groups raw materials
have been readily available. The Group generally maintains two vendors for each major raw
material in order to diversify its vendor base and help to ensure a reliable supply of raw
materials at reasonable prices. The Group also maintains a supplier evaluation scheme
through which potential vendors are evaluated based on a number of factors including
quality, timely delivery, cost and technical capability. For the years ended December 31,
2006, 2007 and 2008, the Group purchased 50.9%, 50.9% and 40.3%, respectively, of its total
supply of raw materials from its five largest suppliers.Cash, cash equivalents and investment concentrationsAs of December 31, 2007 and 2008, RMB931,167 and RMB774,881 (US$113,577), respectively, in
cash, cash equivalents and investment securities were held in uninsured accounts at
financial institutions located in the PRC, cash, cash equivalents and investment securities
of RMB36,185 and RMB4,009 (US$588), respectively, were held in insured accounts at major
financial institutions located in the Hong Kong Special Administrative Region (the HK
SAR) with full coverage, and cash, cash equivalents and investment securities of nil and
RMB33,924 (US$4,964), respectively, were held in insured accounts at major financial
institutions located in the United States of America (the U.S.) and were insured up to
US$2,000. Further, as of December 31, 2007 and 2008, the Groups cash and cash equivalents
balances included U.S. dollar denominated bank deposits of US$22 and US$18,477
(RMB126,057), respectively, in uninsured accounts at financial institutions located in the
PRC, nil and US$4,964 (RMB33,924), respectively, in insured accounts at major financial
institutions located in the U.S. and were insured up to US$2,000, and US$4,692 and US$388
(RMB2,648), respectively, in insured accounts at major financial institutions located in
the HK SAR. Management believes that these major financial institutions are of high credit
quality.
 (c)
    
    Organization
 The Company was incorporated in the Cayman Islands and established in August 2006 under the
Cayman Islands Companies Law as part of a series of corporate reorganization activities
(the Reorganization) in the preparation of the Companys initial public offering (IPO).
In connection with the Reorganization, Assure Ahead Investments Limited (AAI) and New
Good Management Company Limited (NGM), the two shareholders of State Good Group Limited
(SGG), transferred their respective equity interests in SGG in exchange for the ordinary
shares of the Company. Upon the issuance of the Companys shares, the ownership interests
in the Company held by AAI and NGM were identical to their respective ownership interests
in SGG prior to the share exchange.SGG was established in the British Virgin Islands in October 2005 in connection with the
reorganization of Simcere Hainan Investment Group Ltd. (Simcere Investment) to
facilitate the raising of capital from investors outside of the PRC. Simcere Investment,
through its operating subsidiaries (the Predecessor Operations), was an integrated
pharmaceutical company that
developed, manufactured and marketed a range of branded generic and other pharmaceutical
products in the PRC.In March 2006, Simcere Investment transferred all of its equity interests in the
Predecessor Operations to SGG through a newly formed holding company, NGM, in exchange for
34,500 ordinary shares of SGG and cash payable of US$16,800. Concurrently, AAI subscribed
for 15,500 ordinary shares of SGG for cash of US$26,400.
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 
 On April 20, 2007, the Companys shares were listed on the New York Stock Exchange
following the completion of IPO of 15,625,000 American Depositary Shares (ADSs),
representing 31,250,000 ordinary shares, at a price of US$14.5 per ADS. Each ADS presents
two ordinary shares of the Company. The offering consisted of 12,500,000 ADSs, representing
25,000,000 ordinary shares, newly issued by the Company and 3,125,000 ADSs, representing
6,250,000 ordinary shares, sold by certain selling shareholders. The Company raised net
proceeds of approximately US$168,563 from the offering.On April 25, 2007, the underwriters exercised the option to purchase an aggregate of
2,343,700 additional ADSs, representing 4,687,400 ordinary shares, at an initial public
offering price of US$14.5 less the underwriting discount from the selling shareholders.Upon the completion of the IPO in April 2007, NGM and AAI held 51.75% and 23.25% equity
interests in the Company, respectively.
 (d)
    
    Basis of presentation
 The accompanying consolidated financial statements have been prepared in accordance with
U.S. generally accepted accounting principles (U.S. GAAP).As the Reorganization was completed for the sole purpose of establishing the legal
structure of the Company to facilitate the IPO, and as the transfer of the equity interests
in the Predecessor Operations was between entities under common control, the transfer of
these entities have been accounted for and presented in the accompanying consolidated
financial statements in a manner similar to pooling-of-interests.Accordingly, the assets and liabilities of the Predecessor Operations transferred to SGG,
and then subsequently to the Company, have been initially recognized at their historical
carrying amounts and the accompanying consolidated financial statements as of and for the
year ended December 31, 2006 present the financial condition and the results of the Group
as if the Predecessor Operations were transferred to the Company as of the beginning of
2006. The cash distribution of US$16,800 (RMB134,425) paid in connection with the
Reorganization has been accounted for as an equity transaction in the consolidated
statements of shareholders equity and comprehensive income.
 2
    
    Summary of significant accounting policies
 (a)
    
    Consolidation
 The consolidated financial statements include the financial statements of the Company and
its majority-owned subsidiaries. All significant intercompany balances and transactions
have been eliminated upon consolidation. For consolidated subsidiaries where the Companys
ownership is less than 100%, the outside shareholders interests are shown as minority
interests.
 (b)
    
    Use of estimates
 The preparation of the consolidated financial statements in conformity with U.S. GAAP
requires management of the Group to make a number of estimates and assumptions affect the
reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could differ from
those estimates. Significant items subject to such estimates and assumptions include
recoverability of the carrying amount of property, plant and equipment, goodwill and
intangible assets; the allocation of the purchase price for the Groups acquisitions;
allowances for doubtful receivables and deferred income tax assets; depreciation and
amortizable lives; recoverability of inventories; and amounts recorded for contingencies.
The current economic environment has increased the degree of uncertainty inherent in those
estimates and assumptions.
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 
 (c)
    
    Foreign currency translation
 The reporting currency of the Group is Renminbi (RMB).Through March 31, 2007, the Companys and SGGs functional currency was RMB. Effective from
April 1, 2007, the Company and SGG changed their functional currency to United States
dollar (U.S. dollar) due to the significant changes in the Companys and SGGs economic
facts and circumstances upon the completion of the Companys listing on the New York Stock
Exchange, which resulted in the Companys financing and operating activities being
predominately denominated in U.S. dollar. The corresponding adjustment attributable to
current-rate translation of non-monetary assets as of the date of the change was immaterial
and has been recorded as other comprehensive loss, a separate component within
shareholders equity.The functional currency of the Companys PRC subsidiaries is RMB. RMB is not a fully
convertible currency. All foreign exchange transactions involving RMB must take place
either through the Peoples Bank of China (PBOC) or other institutions authorized to buy
and sell foreign exchange. The exchange rates adopted for the foreign exchange transactions
are the rates of exchange quoted by the PBOC, which are determined largely by supply and
demand.Transactions of the Company through March 31, 2007 and of the Companys PRC subsidiaries
denominated in currencies other than RMB are translated into RMB at the exchange rates
quoted by the PBOC prevailing at the dates of the transactions. Monetary assets and
liabilities denominated in foreign currencies including U.S. dollar intercompany loans that
are not long-term investment in nature are translated into RMB using the applicable
exchange rates quoted by the PBOC at the balance sheet dates. The resulting exchange
differences are recorded in the consolidated statements of income.Effective from April 1, 2007, assets and liabilities of the Company and SGG, whose
functional currency is not the RMB, are translated into RMB at the exchange rates at the
balance sheet dates. Income and expense items are translated at the average rates of
exchange prevailing during the period from April 1, 2007 through December 31, 2007. The
adjustment resulting from translating the financial statements of such entities is
reflected as a component of accumulated other comprehensive income (loss) within
shareholders equity.For the U.S. dollar convenience translation amounts included in the accompanying financial
statements, the RMB amounts were translated into U.S. dollars at the rate of
US$1.00=RMB6.8225, representing the noon buying rate in The City of New York for cable
transfers of RMB on December 31, 2008 as certified for Customs purposes by the Federal
Reserve Bank of New York. No representation is made that the RMB amounts could have been,
or could be, converted into U.S. dollars at that rate or at any other rate on December 31,
2008 or on any other date.
 (d)
    
    Cash and cash equivalents and pledged bank deposits
 Cash and cash equivalents consist of cash on hand, cash in bank accounts, interest-bearing
savings accounts, money market funds, time deposits and short-term fixed income investments
with original maturities of three months or less at the date of purchase. Cash that is
restricted as to withdrawal for use or pledged as security is disclosed separately on the
face of the balance sheet, and is not included in the cash and cash equivalents total in
the consolidated statements of cash flows. The pledged bank deposits represent cash
maintained at a bank as security for short-term bills payable issued by a subsidiary of the
Company to third party suppliers. These pledged bank deposits are restricted as to
withdrawal or use by the pledged subsidiary for as long as the related short-term bills
payable of the subsidiary that is using the bills payable facility are outstanding. Upon
maturity of the bills payable which generally ranges from three to six months, the cash is
available for use by the Group.
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 
 (e)
    
    Held-to-maturity investment securities
 The Group invests in short-term fixed income investments offered by banks and financial
institutions. These investments are classified as held-to-maturity and measured at
amortized cost in the consolidated balance sheets because the Company has the intent and
ability to hold these investments to maturity. All held-to-maturity investment securities
as at December 31, 2007 were denominated in RMB, and had maturity terms ranging from six to
twelve months and fixed interest rates ranging from 4.4% to 6.4% per annum. Given the short
duration of these investments, the carrying values of these short-term investments
approximate at their fair values.
 (f)
    
    Accounts receivable and bills receivable
 Accounts receivable are recorded at the invoiced amount and do not bear interest. The Group
maintains an allowance for doubtful accounts for estimated losses resulting from inability
of its customers to make required payments. The allowance for doubtful accounts is based on
a review of specifically identified accounts, aging data and historical write-off
experience. Judgments are made with respect to the collectibility of accounts receivable
based on historical experience, customer specific facts and current economic conditions.
Account balances are charged off against the allowance after all means of collection have
been exhausted and the potential for recovery is considered remote. Apart from those
disclosed in note 14(e), the Group does not have any off-balance-sheet credit exposure
related to its customers.To reduce the Groups credit risk, the Group has required certain customers to pay for the
sale of the Groups products by bills receivable. A bill receivable primarily represents a
short-term note receivable issued by a financial institution that entitles the Group to
receive the full face amount from the financial institution at maturity, which generally
ranges from 3 to 6 months from the date of issuance. Historically, the Group has not
experienced any collection losses on bills receivable and therefore no allowance for
doubtful accounts has been provided.
 (g)
    
    Inventories
 Inventories are stated at the lower of cost or market value. Cost is determined using the
weighted average cost method. Costs of work-in-progress and finished goods comprise direct
materials, direct labor and related manufacturing overhead based on normal operating
capacity.
 (h)
    
    Long-lived assets
 Property, plant and equipmentProperty, plant, and equipment are stated at cost. Depreciation is provided over the
estimated useful lives of the assets, using the straight-line method. When items are
retired or otherwise
disposed of, income is charged or credited for the difference between net book value and
proceeds realized thereon. Ordinary maintenance and repairs are charged to expense as
incurred, and replacements and betterments are capitalized. The estimated useful lives of
property, plant and equipment are as follows:
 Building and leasehold improvements
    
    20 - 50 yearsMachinery and equipment
    
    3 - 10 yearsMotor vehicles
    
    3 -   8 yearsFurniture, fixtures and office equipment
    
    3 -   5 years
 No depreciation expense is provided in respect of construction-in-progress.Depreciation of property, plant and equipment attributable to manufacturing activities is
capitalized as part of the cost of inventory, and expensed to cost of materials and
production when the inventory is sold.
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 
 Goodwill and other intangible assetsGoodwill represents the excess of the Companys acquisition cost over the fair value of the
net assets acquired. Goodwill is not amortized but instead is tested for impairment at
least annually.Intangible assets are amortized on a straight-line basis over the estimated useful lives of
the respective assets. The Groups intangible assets and their respective estimated useful
lives are as follows:
 Customer relationships
    
    4 - 11 yearsDeveloped technology
    
    10 - 16 yearsProduct trademarks
    
    6 - 10 yearsManufacturing and supply licenses
    
    1 -   5 years
 Impairment of long-lived assetsLong-lived assets including property, plant and equipment, and intangible assets are
reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the asset. If the carrying
amount of an asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the fair value
of the asset. Assets to be disposed of are reported at the lower of carrying amount or fair
value less costs to sell, and are no longer depreciated.Goodwill is tested annually for impairment, and is tested for impairment more frequently if
events and circumstances indicate that the asset might be impaired. This determination is
made at the reporting unit level and consists of two steps. The Group as a whole is
considered the reporting unit for purposes of goodwill impairment testing. The first step
of the impairment test involves comparing the fair value of the reporting unit with its
carrying amount, including goodwill. Second, if the carrying amount of a reporting unit
exceeds its fair value, an impairment loss is recognized for any excess of the carrying
amount of the reporting units goodwill over the implied fair value of that goodwill. The
implied fair value of goodwill is determined by allocating the fair value of the reporting
unit in a manner similar to a purchase price allocation. The residual fair value after this
allocation is the implied fair value of the reporting unit goodwill. The Group uses
its market capitalization based on the quoted market price of its ordinary shares in
determining the fair value of its reporting unit. For the years ended December 31, 2006,
2007 and 2008, management performed its annual impairment review of goodwill and concluded
that there was no impairment.
 (i)
    
    Land use rights
 A land use right in the PRC represents an exclusive right to occupy, use, develop, lease,
transfer a piece of land during the contractual term of the land use right. Land use rights
are usually paid in one lump sum at the date the right is granted. The prepayment usually
covers the entire duration period of the land use right. The lump sum advance payments are
capitalized as land use right assets and then charged to expenses on a straight-line basis
over the respective periods of the rights of 24-75 years.
 (j)
    
    Income taxes
 Income taxes are accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to temporary differences
between the financial statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. A valuation allowance is
provided to reduce the amount of deferred tax assets if it is considered more likely than not that
some portion or all of the deferred tax assets will not be realized. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or settled.
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 The effect on deferred tax assets and liabilities of a change in tax rates is recognized in
consolidated statements of income in the period that includes the enactment date.On January 1, 2007, the Company adopted the provisions of Financial Accounting Standards
Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes  an
Interpretation of FASB Statement No. 109 (FIN 48). Under this Interpretation, management
determines whether it is more likely than not that a tax position will be sustained upon
examination, including resolution of any related appeals or litigation processes, based
solely on the technical merits of the position. In evaluating whether a tax position has
met the more-likely-than-not recognition threshold, it is presumed that the position will
be examined by the appropriate taxing authority that has full knowledge of all relevant
information. In addition, a tax position that meets the more-likely-than-not recognition
threshold is measured to determine the amount of benefit to recognize in the financial
statements. The tax position is measured at the largest amount of benefit that is greater
than 50 percent likely of being realized upon settlement. The tax positions are regularly
reevaluated based on the results of the examination of income tax filings, statute of
limitations expirations and changes in tax law that would either increase or decrease the
technical merits of a position relative to the more likely than not recognition threshold.
The Groups policy is to accrue interest and penalties related to unrecognized tax benefits
as a component of income tax expense. Upon adoption of FIN 48 on January 1, 2007,
management evaluated the Groups income tax position and reclassified RMB14,195 of
unrecognized tax benefits from current liabilities to non-current other liabilities. Prior
to the adoption of FIN 48, the Group recognized the effect of income tax positions only if
such positions were probable of being sustained.
 (k)
    
    Revenues
 Sales of pharmaceutical products represent the invoiced value of products sold, net of
value added taxes (VAT). The Group recognizes revenue from the sale of products when the
following criteria are met: 1) persuasive evidence of an arrangement exits (sales
agreements and customer purchase orders are used to determine the existence of an
arrangement); 2) delivery of the product has occurred and risks and benefits of ownership
have been transferred, which is when the product is received by the customer at its or a
designated location in accordance with the sales terms; 3) the sales price is fixed or
determinable; and 4) collectibility is probable. The Groups sales agreements do not
provide the customer the right of return, unless the products are defective in which case
the Group allows for an exchange of products or return. For the periods presented,
defective product returns were immaterial.In the PRC, VAT at a general rate of 17% on invoice amount is collected on behalf of tax
authorities in respect of the sales of products and is not recorded as revenue. VAT
collected from customers, net of VAT paid for purchases, is recorded as a liability in the
consolidated balance sheets until it is paid to the authorities.Nanjing Simcere and Shanghai Simcere operate in special economic zones of the PRC and are
eligible to receive an annual refund of a portion of the VAT paid to local tax authorities.
The refund is included in other revenue in the consolidated statements of income, as it is
akin to a government operating subsidy, and is recognized as revenue upon receipt since the
refund amount is discretionary and the amount varies year to year based on the availability
of government funds as determined by the provincial tax bureau of the Jiangsu Province and
Shanghai Municipality.
 (l)
    
    Government grants
 Government grants are recognized when there is reasonable assurance that the Group will
comply with the conditions attaching to them, and the grants are receivable. Grants that
compensate research and development expenses are recorded as a reduction to the related
research and development expenses. Grants that compensate the Group for the cost of
property, plant and equipment and land use rights are recorded as a reduction of the cost
of the related asset and are recognized over the useful life of the asset by way of reduced
depreciation expense or lease payment.
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 For the years ended December 31, 2006, 2007 and 2008, RMB2,183, RMB10,000, and RMB2,697
(US$395), respectively, have been recognized as a reduction of research and development
expenses.
 (m)
    
    Research and development
 Research and development costs are expensed as incurred. These expenses include the costs
of the Groups internal research and development activities and the costs of research and
development conducted by others on behalf of the Group, such as through third-party
collaboration arrangements. Research and development costs in connection with third-party
research and development collaboration arrangements prior to regulatory approval are
incurred as the research and development activities are performed. Once a regulatory
approval is obtained, subsequent milestone payments are recorded as intangible assets, less
accumulated amortization and, unless the assets are determined to have an indefinite life,
amortized over the remaining agreement terms or the expected product life cycle, whichever
is shorter.The costs of acquired technology know-how (drugs in a development stage) that are purchased
from others for a particular research and development project either singly, or as part of
a group of assets, or as part of a business combination, and that have no alternative
future uses (in other research and development projects or otherwise), are expensed as
research and development costs. Management has determined that for an acquired technology
know-how to have an alternative future use, it should be (a) reasonably expected that the
Group will use the technology in an alternative manner for an economic benefit and (b) the
Groups use of the technology is not contingent on further development subsequent to
acquisition (that is, it can be used in an alternative manner at the acquisition date).
None of the Groups acquired technology know-how during the periods presented was
determined to have an alternative future use at the acquisition date since technological
feasibility was not established and regulatory approval from the State Food and Drug
Administration of China (SFDA) was not obtained. Further subsequent development,
including additional clinical testing, was required to obtain the necessary regulatory
approval before the products could be launched onto the market for sale.
 (n)
    
    Advertising costs
 Advertising costs are expensed as incurred and included in sales, marketing and
distribution expenses. Advertising costs for the years ended December 31, 2006, 2007 and
2008 amounted to RMB78,701, RMB31,016, and RMB41,816 (US$6,129), respectively.
 (o)
    
    Shipping and handling fees and costs
 Costs incurred by the Group for shipping and handling, including costs paid to third-party
transportation companies, to transport and deliver products to customers, are included in
sales, marketing and distribution expenses. Shipping and handling fees and costs for the
years ended December 31, 2006, 2007 and 2008 amounted to RMB13,819, RMB11,912 and RMB12,408
(US$1,819), respectively.
 (p)
    
    Retirement and other postretirement benefits
 Contributions to defined contribution retirement plans are charged to the consolidated
statements of income as and when the related employee service is provided. The Group does
not have any defined benefit retirement plans.
 (q)
    
    Share-based payment
 The Company adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised
2004), Share-based Payment (SFAS No. 123R) beginning January 1, 2006. The Company
measures the cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award and recognize the cost as
expense on a straight-line basis over the requisite service period for the entire award in
the Companys consolidated statements of income.
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 (r)
    
    Commitments and contingencies
 In the normal course of business, the Group is subject to loss contingencies, such as legal
proceedings and claims arising out of its business, that cover a wide range of matters,
including, among others, government investigations, shareholder lawsuits, product and
environmental liability, and tax matters. In accordance with SFAS No. 5, Accounting for
Contingencies, the Group records accruals for such loss contingencies when it is probable
that a liability will be incurred and the amount of loss can be reasonably estimated.
Historically, the Group has experienced no product liability claims.
 (s)
    
    Earnings per share
 In accordance with SFAS No.128, Computation of Earnings per Share (SFAS No. 128), basic
earnings per share is computed by dividing net income by the weighted average number of
ordinary shares outstanding during the period. Diluted earnings per share is computed by
dividing net income by the weighted average number of ordinary shares and dilute ordinary
equivalent shares outstanding during the period. Ordinary equivalent shares consist of the
ordinary shares issuable upon the exercise of outstanding share options calculated using
the treasury stock method. Ordinary equivalent shares in the diluted earnings per share
computation are excluded to the extent that their effect is anti-dilutive. As a result of
the Reorganization as described in note 1(c), for purposes of calculating basic earnings
per share for the year ended December 31, 2006, the weighted average number of shares used
in the calculation reflects the 69,000,000 ordinary shares issued to NGM and 31,000,000
ordinary shares issued to AAI in September 2006 as if these shares were issued as of March
28, 2006.
 (t)
    
    Segment reporting
 The Group has no operating segments, as that term is defined by SFAS No. 131, Disclosure
About Segments of an Enterprise and Related Information. All of the Groups operations and
customers are located in the PRC. Consequently, no geographic information is presented.
 (u)
    
    Fair value measurement
 On January 1, 2008, the Group adopted the provisions of SFAS No. 157, Fair Value
Measurements (SFAS No. 157), for fair value measurements of financial assets and
financial liabilities and for fair value measurements of nonfinancial items that are
recognized or disclosed at fair value in the financial statements on a recurring basis.
SFAS No. 157 defines fair value as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market participants at the
measurement date. SFAS No. 157 establishes a framework for measuring fair value and expands
disclosures about fair value measurements (note 20). The initial adoption of SFAS No. 157
had no impact on the Groups financial position and results of operations.In October 2008, the FASB issued FASB Staff Position No. FAS No. 157-3, Determining the
Fair Value of a Financial Asset When the Market for That Asset is Not Active (FSP FAS
157-3) which was effective immediately. FSP FAS 157-3 clarifies the application of SFAS
No. 157 in cases where the market for a financial instrument is not active and provides an
example to illustrate key considerations in determining fair value in those circumstances.
Management has considered the guidance provided by FSP FAS 157-3 in its determination of
estimated fair values during 2008.FASB Staff Position No. FAS No. 157-2, Effective Date of FASB Statement No. 157, (FSP FAS
157-2) delays the effective date of SFAS No. 157 until fiscal years beginning after
November 15, 2008 for all nonfinancial assets and nonfinancial liabilities that are
recognized or disclosed at fair value in the financial statements on a nonrecurring basis.
In accordance with FSP FAS 157-2, the Company has not applied the provisions of SFAS No.
157 to the intangible assets acquired in business combinations during 2008 (note 7(a)) that
have been recognized or disclosed at fair value for the year ended December 31, 2008. On
January 1, 2009, the Company will be required to apply the provisions of SFAS No. 157 to
fair value measurements of nonfinancial assets and nonfinancial liabilities that are
recognized or disclosed at fair value in the financial statements on a nonrecurring basis.
Management does not expect the initial impact of adopting FSP FAS 157-2 will have a
material impact on the Groups consolidated financial statements.
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 In April 2009, the FASB issued FASB Staff Position No. FAS No. 157-4, Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly (FSP FAS 157-4). FSP FAS
157-4 relates to determining fair values when there is no active market or where the price
inputs being used represent distressed sales. It reaffirms what SFAS No. 157 states is the
objective of fair value measurementto reflect how much an asset would be sold for in an
orderly transaction (as opposed to a distressed or forced transaction) at the date of the
financial statements under current market conditions. Specifically, it reaffirms the need
to use judgment to ascertain if a formerly active market has become inactive and in
determining fair values when markets have become inactive. This guidance is effective for
interim and annual periods ending after June 15, 2009, but entities may adopt this guidance
earlier for the interim and annual periods ending after March 15, 2009. Management is
currently evaluating the impact that FSP FAS 157-4 will have on the consolidated financial
statements.
 (v)
    
    Recently issued accounting standards
 FASB Statement No. 141R (SFAS No. 141R)
 In December 2007, the FASB issued SFAS No. 141R, Business Combination, which replaces FASB
Statement No. 141. SFAS No. 141R provides revised guidance on the recognition and
measurement of the consideration transferred, identifiable assets acquired, liabilities
assumed, noncontrolling interests and goodwill acquired in a business combination. SFAS
No. 141R also expands required disclosure surrounding the nature and financial effects of
business combinations. SFAS No. 141R applies prospectively to business combinations for
which the acquisition date is on or after January 1, 2009. The Group plans to adopt the
provisions of SFAS No. 141R on January 1, 2009. The adoption of SFAS No. 141R will impact
the accounting for business combinations completed by the Group on or after January 1,
2009.
 FASB Statement No. 160 (SFAS No. 160)
 In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements  an Amendment of ARB No. 51. SFAS No. 160 establishes accounting and
reporting standards for the treatment of noncontrolling interests in a subsidiary.
Noncontrolling interests in a subsidiary will be reported as a component of equity in the
consolidated financial statements and any retained noncontrolling equity investment upon
deconsolidation of a subsidiary will initially be measured at fair value. SFAS No. 160 is
effective, on a prospective basis, for fiscal years beginning on or after December 15,
2008. However, presentation and disclosure requirements must be retrospectively applied to
comparative financial statements. The Group plans to adopt the provisions of SFAS No. 160
on January 1, 2009. The initial adoption of SFAS 160 is expected to only result in the
reclassification and presentation of minority interests as noncontrolling interests in the
Groups consolidated financial statements.
 Emerging Issues Task Force Issue No. 07-1 (EITF No. 07-1)
 In December 2007, the FASB issued EITF No. 07-1, Accounting for Collaborative
Arrangements. EITF No. 07-1 provides guidance regarding financial statement presentation
and disclosure of collaborative arrangements, which includes arrangements entered into
regarding development and commercialization of products. It requires certain transactions
between collaborators to be recorded in the statements of income on either a gross or net
basis when certain characteristics exist in the collaborative relationship. EITF 07-1
became effective for the Group on January 1, 2009. The initial adoption of EITF 07-1 is not
expected to have an effect on the Groups financial position and results of operations.
However, the adoption of EITF 07-1 may have an effect on the presentation of collaborative
arrangements in the consolidated statements of income and could result in the reporting of
lower amounts of product revenues and research and development expenses.
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 FASB Staff Position No. FAS No. 142-3 (FSP FAS 142-3)
 In April 2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of
Intangible Assets. FSP FAS 142-3 provides guidance with respect to estimating the useful
lives of recognized intangible assets acquired on or after the effective date and requires
additional disclosure related to the renewal or extension of the terms of recognized
intangible assets. FSP FAS 142-3 is effective for fiscal years and interim periods
beginning after December 15, 2008. Management does not expect the adoption of FSP FAS 142-3
to have a material impact on the Groups financial position and results of operations.
 3
    
    Accounts and bills receivables, netAccounts and bills receivables, net are summarized as follows:
 December 31,2007
    
    2008
    
    2008RMB
    
    RMB
    
    US$Accounts receivable
    
    
    175,495
    
    
    
    317,213
    
    
    
    46,495Less: allowance for doubtful accounts
    
    
    (7,709
    )
    
    
    (8,069
    )
    
    
    (1,183
    )Accounts receivable, net
    
    
    167,786
    
    
    
    309,144
    
    
    
    45,312Bills receivable, net
    
    
    320,588
    
    
    
    439,853
    
    
    
    64,471488,374
    
    
    
    748,997
    
    
    
    109,783
 The movements of the allowance for doubtful accounts are as follows:
 Years ended December 31,2006
    
    2007
    
    2008
    
    2008RMB
    
    RMB
    
    RMB
    
    US$Balance at the beginning of the year
    
    
    5,556
    
    
    
    6,834
    
    
    
    7,709
    
    
    
    1,130Additions charged to bad debt
expense
    
    
    1,433
    
    
    
    1,203
    
    
    
    1,576
    
    
    
    231Additions related to acquisitions
of subsidiaries
    
    
    
    
    
    
    1,074
    
    
    
    
    
    
    
    Write-off of accounts receivable
charged against the allowance
    
    
    (155
    )
    
    
    (1,402
    )
    
    
    (1,216
    )
    
    
    (178
    )Balance at the end of the year
    
    
    6,834
    
    
    
    7,709
    
    
    
    8,069
    
    
    
    1,183
 As part of its ongoing control procedures, management monitors the creditworthiness of its
customers to which it grants credit terms in the normal course of business. Credit terms
are normally 30 to 90 days from the date of billing. The Group does not normally require
collateral or other security to support credit sales.Several subsidiaries of the Group transfer with recourse certain of its bills receivable to
third party financial institutions. Under this arrangement, control over the transferred
bills receivable is surrendered and the subsidiaries do not retain beneficial interests in
the transferred bills receivables. All of the transferred bills receivables were accounted
for as sales and derecognized upon transfer pursuant to the provisions of SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities.
 For the years ended December 31, 2006, 2007 and 2008, the Group received proceeds from the
sale of bills receivable amounting to RMB8,321, RMB51,720 and RMB274,183 (US$40,188),
respectively. In addition, the Group recorded discounts amounting to RMB56, RMB521 and
RMB2,993 (US$439) in respect of bills receivable sold for the years ended December 31,
2006, 2007 and 2008, respectively, which have been included in interest expense.
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 4
    
    InventoriesInventories by major categories are summarized as follows:
 December 31,2007
    
    2008
    
    2008RMB
    
    RMB
    
    US$Raw materials
    
    
    15,548
    
    
    
    14,537
    
    
    
    2,131Consumables and packaging materials
    
    
    10,445
    
    
    
    12,914
    
    
    
    1,893Work-in-progress
    
    
    4,337
    
    
    
    17,924
    
    
    
    2,627Finished goods
    
    
    34,911
    
    
    
    50,573
    
    
    
    7,41265,241
    
    
    
    95,948
    
    
    
    14,063
 Inventory write-downs amounting to RMB2,143, RMB3,213 and RMB3,000 (US$440) were recognized
in cost of materials and production in the consolidated statements of income during the
years ended December 31, 2006, 2007 and 2008, respectively.
 5
    
    Property, plant and equipment, netProperty, plant and equipment, net consist of the following:
 December 31,2007
    
    2008
    
    2008RMB
    
    RMB
    
    US$Buildings and leasehold improvements
    
    
    253,354
    
    
    
    326,120
    
    
    
    47,800Machinery and equipment
    
    
    110,987
    
    
    
    165,958
    
    
    
    24,325Motor vehicles
    
    
    29,184
    
    
    
    38,058
    
    
    
    5,578Furniture, fixtures and office equipment
    
    
    26,828
    
    
    
    31,766
    
    
    
    4,656Construction-in-progress
    
    
    79,541
    
    
    
    64,927
    
    
    
    9,517499,894
    
    
    
    626,829
    
    
    
    91,876Less: accumulated depreciation and
amortization
    
    
    (125,836
    )
    
    
    (163,770
    )
    
    
    (24,004
    )374,058
    
    
    
    463,059
    
    
    
    67,872Deposits for purchase of property,
plant and equipment
    
    
    3,579
    
    
    
    15,791
    
    
    
    2,315377,637
    
    
    
    478,850
    
    
    
    70,187
 The Group capitalizes interest cost as a component of the cost of construction in progress.
The following is a summary of interest cost incurred during the years ended December 31,
2006, 2007 and 2008:
 Years ended December 31,2006
    
    2007
    
    2008
    
    2008RMB
    
    RMB
    
    RMB
    
    US$Interest cost capitalized
    
    
    1,550
    
    
    
    763
    
    
    
    2,133
    
    
    
    313Interest cost charged to income
    
    
    10,705
    
    
    
    6,346
    
    
    
    4,693
    
    
    
    688Total interest cost incurred
    
    
    12,255
    
    
    
    7,109
    
    
    
    6,826
    
    
    
    1,001
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 6
    
    Land use rights
 Land use rights consist of the following items:
 December 31,2007
    
    2008
    
    2008RMB
    
    RMB
    
    US$Land use rights: non-current portion
    
    
    116,386
    
    
    
    114,624
    
    
    
    16,801 current portion
    
    
    2,473
    
    
    
    2,472
    
    
    
    362Total land use rights
    
    
    118,859
    
    
    
    117,096
    
    
    
    17,163
 7
    
    Acquisitions, goodwill and intangible assets
 (a)
    
    2008 acquisition
 Acquisition of a 70% equity interest in Wuhu Zhong RenOn May 5, 2008, the Group completed the acquisition of 70% of the outstanding equity
interest in Wuhu Zhong Ren, a PRC company based in Wuhu, for cash consideration of
RMB65,090 (US$9,540). Wuhu Zhong Ren a PRC-based drug manufacturer specialized in the
production of a 5-FU sustained release anti-tumor implant, Sinofuan. Sinofuan is the only
sustained release anti-tumor implant approved by the State Food and Drug Administration.
The acquisition furthers the Groups growth strategy, enhances the offerings in the
anti-tumor drug market and creates synergies with Endu, the Groups anti-tumor drug. In
particular, it can achieve economies of scales through increased utilization of the Groups
existing distribution channels. The acquisition of Wuhu Zhong Ren was accounted for as a
business combination and the purchase price was allocated to the assets acquired and
liabilities assumed on the basis of their respective estimated fair values on the
acquisition date. The financial results of Wuhu Zhong Ren have been consolidated and
included in the Companys consolidated financial statements from May 1, 2008 onwards.The following table summarizes the purchase price allocation of the assets acquired and
liabilities assumed at the date of acquisition:
 AmountRMBCash and cash equivalents
    
    
    1,869Other current assets
    
    
    5,808Deferred tax assets
    
    
    2,415Property, plant and equipment
    
    
    6,985Developed technology
    
    
    45,542Manufacturing license
    
    
    763Other non-current assets, primarily land use right
    
    
    154Goodwill
    
    
    16,715Total assets acquired
    
    
    80,251Current liabilities
    
    
    (5,783
    )Deferred tax liabilities
    
    
    (9,378
    )Net assets acquired
    
    
    65,090
 The estimated useful lives of the identifiable intangible assets acquired in the
acquisition of Wuhu Zhong Ren are 12 years for developed technology, and 1.1 years for
manufacturing license. The intangible assets acquired have a weighted-average useful life
of 11.8 years from the date of acquisition. Goodwill and the amortization of these
intangibles assets are not deductible for tax purposes.
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 (b)
    
    2007 acquisitions
 Acquisition of an additional 10% equity interest in Shandong SimcereOn June 13, 2007, upon receiving relevant regulatory approval, the Group completed its
acquisition of an additional 10% equity interest in Shandong Simcere for RMB27,064. The
Group accounted for this transaction as a step acquisition using the purchase method of
accounting.The following table summarizes the purchase price allocation of the assets acquired and
liabilities assumed at the date of acquisition:
 AmountRMBCash and cash equivalents
    
    
    590Other current assets
    
    
    2,011Property, plant and equipment
    
    
    1,830Developed technology
    
    
    17,358Manufacturing license
    
    
    104Customer relationship
    
    
    1,254Other non-current assets, primarily land use right
    
    
    1,569Goodwill
    
    
    10,576Total assets acquired
    
    
    35,292Current liabilities
    
    
    (4,527
    )Deferred tax liabilities
    
    
    (3,701
    )Net assets acquired
    
    
    27,064
 The estimated useful lives of the identifiable intangible assets acquired in the
acquisition of the additional 10% interest in Shandong Simcere are 5.6 years for customer
relationship, 15 years for the developed technology, and 3.8 years for manufacturing
license. The intangible assets acquired have a weighted-average useful life of 14.3 years
from the date of acquisition. Goodwill and the amortization of these intangible assets are
not deductible for tax purposes.Acquisition of 51% equity interest of BodaOn October 18, 2007, the Group completed its acquisition of 51% of the outstanding equity
interest in Boda, a PRC based company that manufactures and sells pharmaceutical products
in the PRC, for RMB123,061. Boda is the manufacturer of injectable stroke management
medication, Yidasheng, the edaravone injection. Yidasheng is the only other edaravone
injection currently available in the PRC other than Bicun, the Groups product. The
acquisition of Boda helps the Group capture the majority share of the edaravone injection
market in the PRC and will create synergies with Bicun and the Groups other existing
products. RMB114,738 of the consideration was paid in 2007 with the remaining balance paid
in 2008. The acquisition of Boda was accounted for as a business combination and the
purchase price was allocated to the assets acquired and liabilities assumed on the basis of
their respective estimated fair values on the acquisition date. The financial results of
Boda have been consolidated and included in the Companys consolidated financial statements
from October 1, 2007 onwards.The acquisition of the 51% equity interest in Boda resulted in the recognition of goodwill
of RMB46,105 and intangible assets of RMB76,031. Goodwill and the amortization of these
intangible assets are not deductible for tax purposes. The following table summarizes the
purchase price allocation of the assets acquired and liabilities assumed at the date of
acquisition:
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 AmountRMBCash and cash equivalents
    
    
    6,632Other current assets
    
    
    17,937Property, plant and equipment
    
    
    27,349Developed technology
    
    
    59,981Manufacturing license
    
    
    719Customer relationship
    
    
    15,331Other non-current assets, primarily land use right
    
    
    7,711Goodwill
    
    
    46,105Total assets acquired
    
    
    181,765Current liabilities
    
    
    (37,540
    )Deferred tax liabilities
    
    
    (21,164
    )Net assets acquired
    
    
    123,061
 The estimated useful lives of the identifiable intangible assets acquired in the
acquisition of Boda are 5 years for customer relationship, 12 years for developed
technology, and 2.7 years for manufacturing license. The intangible assets acquired have a
weighted-average useful life of 10.5 years from the date of acquisition.Unaudited proforma financial informationThe following unaudited pro forma financial information represents the results of
operations of the Group as if the acquisition of Boda had occurred as of the beginning of
2006 and 2007. The unaudited pro forma financial information is not necessarily indicative
of what the Companys consolidated results of operations actually would have been had it
completed the acquisition at the beginning of 2006 and 2007. In addition, the unaudited pro
forma financial information does not attempt to project the future results of operations of
the combined entity.
 Years ended December 31,2006
    
    2007RMB
    
    RMB(unaudited)
    
    (unaudited)Product revenues
    
    
    983,910
    
    
    
    1,414,439Income from operations
    
    
    179,014
    
    
    
    272,833Net income
    
    
    163,695
    
    
    
    299,054Earnings per shareBasic
    
    
    1.77
    
    
    
    2.54Diluted
    
    
    1.77
    
    
    
    2.46
 Acquisition of a 100% equity interest in Master LuckOn November 21, 2007, the Group acquired 100% of the outstanding ordinary shares of Master
Luck, an investment holding company which owns 85.71% of the outstanding equity interest in
Tung Chit, a PRC company based in Nanjing that manufactures and sells pharmaceutical
products in the PRC, for cash consideration of RMB32,927. Tung Chit is the manufacturer of
nedaplatin injection, a chemotherapy pharmaceutical that is marketed under the brand name
Jiebaishu. This acquisition further complements the Groups current portfolio of products and will create
synergies with the Groups existing antineoplastic pharmaceuticals. The acquisition of
Master Luck was accounted for by the Group under the purchase method.The following table summarizes the purchase price allocation of the assets acquired and
liabilities assumed:
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 AmountRMBCash and cash equivalents
    
    
    2,701Other current assets
    
    
    4,122Property, plant and equipment
    
    
    14,119Developed technology
    
    
    5,691Manufacturing license
    
    
    1,363Customer relationship
    
    
    1,089Other non-current assets, primarily land use right
    
    
    10,369Goodwill
    
    
    8,230Total assets acquired
    
    
    47,684Current liabilities
    
    
    (12,798
    )Deferred tax liabilities
    
    
    (1,959
    )Net assets acquired
    
    
    32,927
 The estimated useful lives of the identifiable intangible assets acquired in the
acquisition of Tung Chit are 4 years for customer relationship, 10 years for developed
technology, and 2 years for manufacturing license. Goodwill and the amortization of these
intangibles assets are not deductible for tax purposes.
 (c)
    
    2006 acquisitions
 In July 2006, the Group acquired 10%, 15.96%, 5%, 20% and 22.23% of the equity interest in
Shanghai Simcere, Sichuan Simcere, Qitian Simcere, Simcere Research and Jiangsu Simcere,
respectively. In September 2006, the Group also completed its acquisition of 80% of the
equity interest in Shandong Simcere.The acquisition of Shandong Simcere was accounted for as a purchase business combination.
The results of operations of Shandong Simcere have been consolidated and included in the
consolidated statements of income from September 30, 2006 onwards. The following table
summarizes the purchase price allocation of the assets acquired and liabilities assumed at
the date of acquisition:
 AmountRMBCash and cash equivalents
    
    
    7,048Other current assets
    
    
    7,669Property, plant and equipment
    
    
    15,228Developed technology
    
    
    142,684Manufacturing license
    
    
    577Other non-current assets, primarily land use right
    
    
    12,170Goodwill
    
    
    86,453Total assets acquired
    
    
    271,829Current liabilities
    
    
    (51,638
    )Deferred tax liabilities
    
    
    (17,922
    )Minority share of Shandong Simceres equity deficit
    
    
    (5,670
    )Net assets acquired
    
    
    196,599
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 The estimated useful economic lives of the identifiable intangible assets acquired in the
acquisition of Shandong Simcere are 16 years for developed technology right, and 4.8 years
for manufacturing license. Goodwill recognized in this transaction amounted to RMB86,453.Unaudited proforma financial informationThe following unaudited pro forma financial information represents the results of
operations of the Group as if the acquisition of Shandong Simcere had occurred as of the
beginning of 2006. The unaudited pro forma financial information is not necessarily
indicative of what the Companys consolidated results of operations actually would have
been had it completed the acquisition at the beginning of 2006. In addition, the unaudited
pro forma financial information does not attempt to project the future results of
operations of the combined entity.
 Year ended December 31,2006RMB(unaudited)Product revenues
    
    
    953,343Income from operations
    
    
    178,813Net income
    
    
    164,982Earnings per shareBasic
    
    
    1.78Diluted
    
    
    1.78
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 (d)
    
    Intangible assets
 The Groups intangible assets related to the Groups acquisitions consisted of the
following:
 December 31, 2007GrossAmortization
    
    carrying
    
    Accumulated
    
    Net carryingperiod
    
    amount
    
    amortization
    
    amountYears
    
    RMB
    
    RMB
    
    RMBCustomer relationships
    
    4-11
    
    
    37,418
    
    
    
    (7,476
    )
    
    
    29,942Developed technology
    
    10-16
    
    
    232,302
    
    
    
    (16,202
    )
    
    
    216,100Product trademarks
    
    6-10
    
    
    4,303
    
    
    
    (1,606
    )
    
    
    2,697Manufacturing and
supply licenses
    
    2-5
    
    
    3,581
    
    
    
    (1,099
    )
    
    
    2,482Total
    
    
    
    
    277,604
    
    
    
    (26,383
    )
    
    
    251,221
 December 31, 2008GrossAmortization
    
    carrying
    
    Accumulated
    
    Net carryingperiod
    
    amount
    
    amortization
    
    amountYears
    
    RMB
    
    RMB
    
    RMBCustomer relationships
    
    4-11
    
    
    37,418
    
    
    
    (12,900
    )
    
    
    24,518Developed technology
    
    10-16
    
    
    284,995
    
    
    
    (38,174
    )
    
    
    246,821Product trademarks
    
    6-10
    
    
    4,303
    
    
    
    (2,077
    )
    
    
    2,226Manufacturing and
supply licenses
    
    1-5
    
    
    4,344
    
    
    
    (2,665
    )
    
    
    1,679Total
    
    
    
    
    331,060
    
    
    
    (55,816
    )
    
    
    275,244Total  US$
    
    
    
    
    48,525
    
    
    
    (8,181
    )
    
    
    40,344
 The aggregate amortization expenses for intangible assets for the years ended December 31,
2006, 2007 and 2008, were RMB4,812, RMB15,084 and RMB29,433 (US$4,314), respectively.
Amortization expense of customer relationships is recorded in sales, marketing and
distribution expenses and amortization expense for developed technology, product trademarks
and manufacturing and supply licenses is recorded in cost of materials and production. As
of December 31, 2008, the estimated amortization expense for the years ended December 31 is
as follows:
 RMB2009
    
    
    28,0522010
    
    
    26,9812011
    
    
    26,5962012
    
    
    25,1752013
    
    
    22,091
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##### Table of Contents



Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 (e)
    
    Goodwill
 The changes in the carrying amount of goodwill for the years ended December 31, 2007 and
2008 are as follows:
 Years ended December 31,2007
    
    2008
    
    2008RMB
    
    RMB
    
    US$Balance at the beginning of the year
    
    
    100,634
    
    
    
    161,496
    
    
    
    23,671Acquisition of Shandong Simcere
    
    
    10,576
    
    
    
    
    
    
    
    Minority interest share in the post
acquisition income of Shandong
Simcere
    
    
    (4,049
    )
    
    
    
    
    
    
    Acquisition of Boda
    
    
    46,105
    
    
    
    
    
    
    
    Acquisition of Tung Chit
    
    
    8,230
    
    
    
    
    
    
    
    Acquisition of Wuhu Zhong Ren
    
    
    
    
    
    
    16,715
    
    
    
    2,450Balance at the end of year
    
    
    161,496
    
    
    
    178,211
    
    
    
    26,121
 8
    
    Short-term borrowings
 As of December 31, 2007, short-term borrowings included an aggregate of RMB19,000 unsecured
and interest-free loans from a local district government in Shandong, PRC, which the Group
obtained for working capital needs and a RMB10,000 loan from a third party, that was
non-interest bearing and unsecured. During the year ended December 31, 2008, the Group
repaid RMB10,000 (US$1,466) and RMB3,000 (US$440) of the third party loan and government
loans, respectively, and renewed the remaining RMB16,000 (US$2,345) of the government loan
into two borrowings. RMB3,000 (US$440) of the government loan is an unsecured interest free
short-term borrowing which is repayable on demand and a RMB13,000 (US$1,906) secured
long-term loan (note 10) of which RMB3,000 (US$440) is payable in 2009. The weighted
average effective interest rates on short-term borrowings outstanding as of December 31,
2007 and 2008, were 5.97% and nil per annum, respectively.As of December 31, 2007 and 2008, the Group had unutilized banking facilities of RMB390,000
and RMB50,000 (US$7,329), respectively, with various banks available to be drawn upon.
 9
    
    Long-term debt
 As of December 31, 2007 and 2008, long-term debt include a floating interest loan of
RMB52,000 (US$7,622) which is repayable over an 11-year period from 2010 to 2020. Interest
is payable on a quarterly basis. The loan was obtained from a local district government in
Jilin, PRC, to finance the construction of a new production plant in a city in Jilin
Province. The 2008 balance also includes RMB10,000 (US$1,466) representing the long-term
loan portion (due on 2010 and 2011) of the RMB13,000 (US$1,906) secured long term loan from
a local district government in Shandong, PRC (note 8) which bears a fixed interest rate at
5.40% per annum. The weighted-average effective interest rates on long-term loans
outstanding as of December 31, 2007 and 2008 were 7.03% and 6.90% per annum, respectively.
The loan agreements do not require the Group to comply with any financial covenants.Principal repayments required on the long-term loan outstanding as of December 31, 2008,
are RMB3,000 in 2009, RMB8,000 in 2010, RMB11,700 in 2011, RMB4,700 in 2012 and, RMB4,700
in 2013 and RMB32,900 thereafter.
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##### Table of Contents



Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 10
    
    Income tax
 Cayman Islands and British Virgin IslandsUnder the current laws of the Cayman Islands and British Virgin Islands, the Company and
SGG are not subject to tax on their income or capital gains. In addition, upon any payment
or dividend paid by these companies, no Cayman Islands or British Virgin Islands
withholding tax is imposed.Peoples Republic of ChinaThe Companys subsidiaries incorporated in the PRC file separate income tax returns.Prior to January 1, 2008, the PRCs statutory income tax rate was 33%, consisting of 30%
state tax and 3% local tax. Hainan Simcere, Shandong Simcere, Nanjing Simcere and Tung
Chit, being production-oriented foreign investment enterprises, were each entitled to a tax
holiday of a two-year 100% exemption followed by a three-year 50% exemption commencing from
the first profit-making year after offsetting accumulated tax losses (2+3 tax holiday).
In addition, Hainan Simcere and Shandong Simcere, being located in one of the Special
Economic Zones and Economic and Technological Development Zones, respectively, were
entitled to a reduced income tax rate of 15%. Further, Shanghai Simcere was located in
KangQiao Industrial Area and was granted a reduced income tax rate of 15% for 2007 by the
local taxing authority.On March 16, 2007, the National Peoples Congress passed the Corporate Income Tax Law of
the PRC (new CIT law), which unified the income tax rate to 25% for all enterprises. The
new CIT law was effective as of January 1, 2008. The new CIT law provides a five-year
transition period from its effective date for those enterprises which were established
before March 16, 2007 and which were entitled to a preferential lower tax rate under the
then effective tax laws and regulations, as well as grandfathering tax holidays. The
transitional tax rates are 18%, 20%, 22%, 24% and 25% for 2008, 2009, 2010, 2011 and 2012
onwards, respectively. In addition, entities that were previously entitled to the 2+3 tax
holidays under the then effective tax laws and regulations shall continue to enjoy the tax
holidays until they expire. Further, entities that qualify as Advanced and New Technology
Enterprises (ANTEs) under the new CIT law are entitled to a preferential income tax rate
of 15%. However, the new recognition criteria and procedures for ANTEs under the new CIT
law were not issued until April 14, 2008.In December 2008, Shandong Simcere and Boda were recognized by the Chinese government as
ANTEs under the new CIT law and entitled to the preferential income tax rate of 15% from
2008 to 2010. Under the new CIT law, where the transitional preferential income tax
policies and the preferential policies prescribed under the new CIT law and its
implementation rules overlap, an enterprise shall choose to carry out the most preferential
policy, but shall not enjoy multiple preferential policies. Shandong Simcere has chosen to
enjoy the 2+3 tax holiday grandfathering treatment until its expiry in 2011.Based on the above, the Companys major PRC subsidiaries are subject to the following tax
rates:
 
    
    Jiangsu Simcere and Simcere Research are subject to income tax at 33% in
2006 and 2007, and at 25% from 2008 onwards.
    
    Hainan Simcere commenced its 2+3 tax holiday in 2006 and is subject to
income tax at 0%, 0%, 9%, 10%, 11%, 24% and 25% for 2006, 2007, 2008, 2009, 2010, 2011
and 2012 onwards, respectively.
    
    Shandong Simcere commenced its 2+3 tax holiday in 2007 and is subject to
income tax at 0%, 0%, 10%, 11%, 12% and 25% for 2007, 2008, 2009, 2010, 2011 and 2012
onwards, respectively.
    
    Nanjing Simcere and Tung Chit commenced their 2+3 tax holidays in 2006 and
are subject to income tax at 0% for 2006 and 2007, 12.5% from 2008 to 2010 and 25%
from 2011 onwards.
 F-29




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##### Table of Contents



Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 
    
    Shanghai Simcere is subject to income tax at 33%, 15% and 25% for 2006,
2007 and 2008 onwards, respectively.
    
    Boda is subject to income tax at 33% in 2006 and 2007. As of December 31,
2007, the applicable tax rate used in measuring its deferred tax assets and
liabilities was 25% since Boda had not been recognized as an ANTE under the new CIT
law. Upon the receipt of the approved ANTE status in December 2008, Boda is entitled
to the preferential income tax rate of 15% retroactively from January 1, 2008 to
December 31, 2010. Thereafter, the income tax rate is 25%.
    
    Simcere Zhong Ren is subject to income tax at 25% from 2008 onwards.
 The new CIT law also imposes a withholding tax at 10%, unless reduced by a tax treaty or
agreement, for dividends distributed by a PRC-resident enterprise to its immediate holding
company outside China for earnings generated beginning on January 1, 2008 and undistributed
earnings generated prior to January 1, 2008 are exempt from such withholding tax. As of
December 31, 2008, the Group has not provided for income taxes on accumulated earnings
generated by its PRC subsidiaries for 2008 since the Group planned to indefinitely reinvest
these earnings in the PRC. It is not practicable to estimate the amount of additional
taxes that might be payable on such undistributed earnings.
 F-30




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##### Table of Contents



Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 The components of earnings (losses) before income taxes and minority interests are as
follows:
 Years ended December 31,2006
    
    2007
    
    2008
    
    2008RMB
    
    RMB
    
    RMB
    
    US$Cayman Islands
    
    
    (3,454
    )
    
    
    (409
    )
    
    
    (30,377
    )
    
    
    (4,452
    )British Virgin Islands
    
    
    22,819
    
    
    
    (7,795
    )
    
    
    (1,080
    )
    
    
    (158
    )PRC
    
    
    157,508
    
    
    
    335,277
    
    
    
    459,028
    
    
    
    67,281Total earnings before
income taxes and
minority interests
    
    
    176,873
    
    
    
    327,073
    
    
    
    427,571
    
    
    
    62,671
 (a)
    
    Income taxes
 Income tax expense (benefit) consists of the following:
 Years ended December 31,2006
    
    2007
    
    2008
    
    2008RMB
    
    RMB
    
    RMB
    
    US$PRCCurrent
    
    
    9,076
    
    
    
    2,518
    
    
    
    52,055
    
    
    
    7,630Deferred
    
    
    (2,124
    )
    
    
    11,009
    
    
    
    (2,770
    )
    
    
    (406
    )Income tax expense
    
    
    6,952
    
    
    
    13,527
    
    
    
    49,285
    
    
    
    7,224
 (b)
    
    Income tax contingencies
 The following table summarizes the movement of unrecognized tax benefits:
 December 31,2007
    
    2008RMB
    
    RMBBalance at January 1
    
    
    14,195
    
    
    
    19,928Increase related to current year tax positions
    
    
    5,733
    
    
    
    Balance at December 31
    
    
    19,928
    
    
    
    19,928Balance at December 31  US$
    
    
    
    
    
    
    2,921
 The balance of total unrecognized tax benefits as of each year end, if recognized, would
affect the Groups effective income tax rate. No interest and penalties were provided as of
January 1, 2007, and for the year ended December 31, 2007. During 2008, the Group has
accrued RMB601 (US$88) of interest related to unrecognized tax benefits. Management does
not expect that the total amount of unrecognized tax benefits as of December 31, 2008 will
significantly change over the next twelve months.According to the PRC Tax Administration and Collection Law, the statute of limitations is
three years if the underpayment of taxes is due to computational errors made by the
taxpayer or the withholding agent. The statute of limitations is extended to five years
under special circumstances where the underpayment of taxes is more than RMB100 (US$15). In
the case of transfer pricing issues, the statute of limitations is ten years. There is no
statute of limitation in the case of tax evasion. Accordingly, the PRC tax returns for the
Companys PRC subsidiaries are open to examination by the PRC state and local authorities
for the tax years beginning in 2003.
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##### Table of Contents



Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 (c)
    
    Reconciliation of expected income tax to actual income tax expense
 The actual income tax expense reported in the consolidated statements of income differs
from the amounts computed by applying the PRC statutory income tax rate to earnings before
income taxes and minority interests as a result of the following:
 Years ended December 31,Note
    
    2006
    
    2007
    
    2008
    
    2008RMB
    
    RMB
    
    RMB
    
    US$PRC statutory tax rate
    
    
    
    
    
    
    33
    %
    
    
    33
    %
    
    
    25
    %
    
    
    25
    %Computed expected income tax expense
    
    
    
    
    
    
    58,367
    
    
    
    107,935
    
    
    
    106,893
    
    
    
    15,668Non-deductible expensesSalaries and benefits
    
    
    
    
    
    
    7,228
    
    
    
    958
    
    
    
    
    
    
    
    Advertising and promotion expense
    
    
    
    
    
    
    11,322
    
    
    
    2,862
    
    
    
    1,915
    
    
    
    281Research and development expense
    
    
    
    
    
    
    
    
    
    
    2,871
    
    
    
    1,509
    
    
    
    221Others
    
    
    
    
    
    
    1,207
    
    
    
    1,026
    
    
    
    4,224
    
    
    
    619Non-taxable income
    
    
    
    
    
    
    (62
    )
    
    
    (1,735
    )
    
    
    (252
    )
    
    
    (37
    )Tax rate differential
    
    
    (a
    )
    
    
    (31,116
    )
    
    
    (70,782
    )
    
    
    (23,980
    )
    
    
    (3,515
    )Effect of tax holiday
    
    
    (b
    )
    
    
    (38,775
    )
    
    
    (63,539
    )
    
    
    (56,407
    )
    
    
    (8,267
    )Non-PRC entities not subject to income tax
    
    
    
    
    
    
    (6,390
    )
    
    
    2,707
    
    
    
    7,864
    
    
    
    1,152Change in valuation allowance
    
    
    
    
    
    
    4,161
    
    
    
    15,619
    
    
    
    13,111
    
    
    
    1,922Tax rebate
    
    
    
    
    
    
    (769
    )
    
    
    (4,888
    )
    
    
    
    
    
    
    Tax credit for purchase of domestic
equipment
    
    
    
    
    
    
    
    
    
    
    (2,124
    )
    
    
    (4,255
    )
    
    
    (624
    )Tax benefit resulting from intercompany
transfers of intellectual properties
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (188
    )
    
    
    (28
    )Change in enacted tax rates or tax status
    
    
    
    
    
    
    1,779
    
    
    
    22,617
    
    
    
    (1,149
    )
    
    
    (168
    )Actual income tax expense
    
    
    
    
    
    
    6,952
    
    
    
    13,527
    
    
    
    49,285
    
    
    
    7,224
 Notes:(a)
    
    The provision for income tax for the Companys PRC subsidiaries is based on a
statutory rate of 33% in 2006 and 2007 and 25% in 2008 of the assessable income of the
Companys PRC subsidiaries as determined in accordance with the relevant income tax
rules and regulations of the PRC, except for certain subsidiaries which are subject to
tax holidays or taxed at preferential rates as discussed above.(b)
    
    The effect of tax holiday increased the Groups net income by RMB38,775,
RMB62,916 and RMB55,675 (US$8,160) for the years ended December 31, 2006, 2007 and
2008, respectively. Consequently, the effect of the tax holiday also increased the
Groups basic and diluted earnings per share for such periods as follows:
 Years ended December 31,2006
    
    2007
    
    2008
    
    2008RMB
    
    RMB
    
    RMB
    
    US$Increase in earnings per share:Basic
    
    
    0.42
    
    
    
    0.54
    
    
    
    0.45
    
    
    
    0.07Diluted
    
    
    0.42
    
    
    
    0.52
    
    
    
    0.45
    
    
    
    0.07
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##### Table of Contents



Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 (d)
    
    Deferred taxes
 The tax effects of the Groups temporary differences that give rise to significant portions
of the deferred tax asset and liabilities are as follows:
 December 31,2007
    
    2008
    
    2008RMB
    
    RMB
    
    US$Deferred tax assetsProperty, plant and equipment
    
    
    3,131
    
    
    
    4,356
    
    
    
    638Accounts receivable
    
    
    2,639
    
    
    
    2,168
    
    
    
    318Inventories
    
    
    680
    
    
    
    467
    
    
    
    68Research and development
    
    
    3,414
    
    
    
    2,797
    
    
    
    410Tax loss carryforwards
    
    
    26,272
    
    
    
    25,768
    
    
    
    3,777Others
    
    
    
    
    
    
    65
    
    
    
    10Total gross deferred tax assets
    
    
    36,136
    
    
    
    35,621
    
    
    
    5,221Valuation allowance
    
    
    (26,085
    )
    
    
    (24,481
    )
    
    
    (3,588
    )Net deferred tax assets
    
    
    10,051
    
    
    
    11,140
    
    
    
    1,633Deferred tax liabilitiesIntangible assets
    
    
    (61,491
    )
    
    
    (65,403
    )
    
    
    (9,586
    )Property, plant and equipment
    
    
    (199
    )
    
    
    (534
    )
    
    
    (78
    )(61,690
    )
    
    
    (65,937
    )
    
    
    (9,664
    )Net deferred tax liabilities
    
    
    (51,639
    )
    
    
    (54,797
    )
    
    
    (8,031
    )
 In assessing the realizability of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary differences become
deductible and tax loss carryforwards are utilized. Management considers the scheduled
reversal of deferred tax liabilities (including the impact of available carryforward
periods), projected future taxable income, and tax planning strategies in making this
assessment.The increase/(decrease) in the valuation allowance during the years ended December 31,
2006, 2007 and 2008 were RMB4,161, RMB15,619 and (RMB1,604) ((US$235)), respectively. As of
December 31, 2007, full valuation allowances were provided against the deferred tax assets
of Jiangsu Simcere and Simcere Research, which were at cumulative loss positions. The
increase in the valuation allowance for 2007 was mainly due to the increase in the deferred
tax assets relating to tax loss carryforwards of these subsidiaries. The net change in the
total valuation allowance in 2008 was primarily due to an increase in valuation allowance
to fully offset the additional deferred tax assets in Jiangsu Simcere, which was offset by
a reduction of valuation allowance in Simcere Research, of which RMB14,715 was utilized by
the significant earnings in 2008 arising from the intercompany sale transactions that had
been eliminated upon consolidation and such tax benefit is recognized in consolidation as
the transferred intellectual properties are amortized.The amount of the deferred tax assets considered realizable, however, could be reduced in
the near term if estimates of future taxable income during the carryforward period are
reduced.Tax loss carryforwards of the Groups PRC subsidiaries amounted to RMB104,846 as of
December 31, 2008, of which RMB89, RMB778, RMB63,803 and RMB40,176 will expire if unused by
December 31, 2010, 2011, 2012 and 2013, respectively.
 11
    
    Other payables and accrued liabilities
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##### Table of Contents



Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 Other payables and accrued liabilities consist of the following:
 December 31,2007
    
    2008
    
    2008RMB
    
    RMB
    
    US$Accrued traveling and conference expenses
    
    
    85,452
    
    
    
    90,760
    
    
    
    13,303VAT payable
    
    
    31,062
    
    
    
    36,562
    
    
    
    5,359Accrued construction costs for property,
plant and equipment
    
    
    33,276
    
    
    
    29,606
    
    
    
    4,339Security deposits from employees and
agents (note (a))
    
    
    16,067
    
    
    
    21,714
    
    
    
    3,183Government grants (note (b))
    
    
    3,777
    
    
    
    12,753
    
    
    
    1,869Customer receipts in advance
    
    
    10,685
    
    
    
    11,239
    
    
    
    1,647Payable for acquisitions (note (c))
    
    
    18,153
    
    
    
    9,830
    
    
    
    1,441Accrued research and development expenses
    
    
    11,839
    
    
    
    6,929
    
    
    
    1,016Payable for acquisition of property,
plant and equipment and land use right
    
    
    6,515
    
    
    
    3,284
    
    
    
    481Accrued legal and professional fees
    
    
    5,437
    
    
    
    1,555
    
    
    
    228Other accrued liabilities (note (d))
    
    
    33,514
    
    
    
    27,611
    
    
    
    4,047255,777
    
    
    
    251,843
    
    
    
    36,913
 Notes:(a)
    
    The amounts represent refundable cash security deposits received from certain employees and
from third party marketing agents.(b)
    
    The amounts represent the deferred portion of the conditional and refundable government
grants received but not recognized since the conditions are subject to future events.(c)
    
    The outstanding balance related to the acquisition of 80% of Shandong Simcere will be paid
upon completion of the trial period of certain quality control procedures in relation to Endu,
which are procedural in nature.(d)
    
    Other accrued liabilities relate to accruals for purchase of technology know-how, selling
expenses, utilities expenses and other miscellaneous expenses. 12
    
    Statutory reserves
 Under PRC rules and regulations, the Companys operating subsidiaries are required to
provide for certain statutory reserves. Details of the statutory reserves are set out as
follows:
 Statutory surplus reserve
 According to the respective Articles of Association, the Companys operating subsidiaries
are required to transfer 10% of the net profit, as determined in accordance with PRC GAAP,
to a statutory surplus reserve until the reserve balance reaches 50% of the registered
capital of the
respective companies. The transfer to this reserve must be made before distribution of
dividends to shareholders can be made.The statutory surplus reserve can be used to make good previous years losses, if any, and
may be converted into share capital by the issue of new shares to shareholders in
proportion to their existing shareholdings or by increasing the par value of the shares
currently held by the shareholders, provided that the balance after such issue is not less
than 25% of the registered capital.
 Statutory public welfare fund
 Effective from January 1, 2006, following the change of the Company Law of the PRC, the
Companys operating subsidiaries are no longer required to contribute to the statutory
public welfare fund and the balance of the fund carried over from 2005 has been transferred
to the statutory surplus reserve.
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##### Table of Contents



Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 For the years ended December 31, 2006, 2007 and 2008, the Companys subsidiaries made
appropriation to these statutory reserve funds of RMB4,617, RMB45,450 and RMB38,614
(US$5,660), respectively. The accumulated balance of the statutory reserve funds maintained
at the Companys operating subsidiaries as of December 31, 2007 and 2008 were RMB95,317 and
RMB133,931 (US$19,631), respectively.
 13
    
    Pension and other postretirement benefits
 Pursuant to the relevant PRC regulations, the Group is required to make contributions for
each employee at a rate of 20% on a standard salary base as determined by the local Social
Security Bureau, to a defined contribution retirement scheme organized by the local Social
Security Bureau in respect of the retirement benefits for the Groups employees in the PRC.
Contributions of RMB2,704, RMB5,149 and RMB7,062 (US$1,035) for the years ended December
31, 2006, 2007 and 2008, respectively, were charged to expense. The Group has no other
obligation to make payments in respect of retirement benefits of the employees.
 14
    
    Commitments and contingencies
 (a)
    
    Operating lease commitments
 The Group leases certain laboratories, offices and warehouses under various operating lease
arrangements. The rental expense under the operating leases was approximately RMB819,
RMB1,812 and RMB3,304 (US$484) for the years ended December 31, 2006, 2007 and 2008,
respectively. In the normal course of business, leases that expire are renewed or replaced
by leases on other properties. As of December 31, 2008, the Group was obligated under
non-cancellable operating leases requiring future minimum rental payment as follows:
 December 31,2008RMB2009
    
    
    2,3272010
    
    
    4702011
    
    
    1522012
    
    
    32013
    
    
    3Thereafter
    
    
    372,992
 (b)
    
    Capital and purchase commitments
 As of December 31, 2008, the Groups capital commitments for the construction projects and
purchase of machinery and equipment amounted to RMB19,578 (US$2,870).As of December 31, 2008, the Group had commitments of approximately RMB15,750 (US$2,309) to
purchase certain pharmaceutical products from third party suppliers in 2009.
 (c)
    
    Research and developments commitments
 As of December 31, 2008, the Group had funding commitments for co-operative research and
developments projects with third parties amounting to RMB13,159 (US$1,929) payable in 2009.
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 (d)
    
    Depositary receipt facility
 During the years ended December 31, 2007 and 2008, the Company received an incentive
payment of RMB 20,526 and RMB1,104 (US$162) respectively, which is recognized as other
non-operating income in the consolidated statements of income, from a bank in order to
provide that bank with the exclusive right to manage the Companys American Depositary
Receipt (ADR) program. Under the terms of the depositary receipt facility with the bank,
the Company has a contingent obligation to compensate the bank in the event the Company
terminates the ADR program or the number of ADRs outstanding declines by more than 50%.
 (e)
    
    Sales of bills receivable commitments
 As of December 31, 2007 and 2008, outstanding bills discounted with third party financial
institutions for which the Group has retained a recourse obligation amounting to RMB198 and
RMB103,965 (US$15,239), respectively. The fair value of the recourse obligation is based on
historical payment patterns and appropriate discount rate as applicable. The Group has not
historically experienced credit losses with respect to bills receivables sold with full
recourse and as such, no recourse liability was recognized as of December 31, 2007 and 2008
as the estimated fair value of the recourse obligation retained was immaterial.
 15
    
    Earnings per share
 As the Company did not legally exist with outstanding share capital until the share
exchange as described in note 1(c), for the purposes of calculating basic earnings per
share for the years ended December 31 2006, the number of weighted average number of
ordinary shares used in the calculation reflects the 69,000,000 ordinary shares issued to
NGM and the 31,000,000 ordinary shares issued to AAI in September 2006 as if these shares
were issued as of March 28, 2006.
 Years ended December 31,2006
    
    2007
    
    2008
    
    2008RMB
    
    RMB
    
    RMB
    
    US$Numerator for basic and diluted earnings per share:Net income
    
    
    172,258
    
    
    
    301,261
    
    
    
    350,151
    
    
    
    51,323Denominator:Basic weighted average number of ordinary shares
outstanding
    
    
    92,695,890
    
    
    
    117,534,566
    
    
    
    124,921,934
    
    
    
    124,921,934Effect of dilutive options
    
    
    
    
    
    
    4,132,941
    
    
    
    83,869
    
    
    
    83,869Diluted weighted average number of ordinary shares
outstanding
    
    
    92,695,890
    
    
    
    121,667,507
    
    
    
    125,005,803
    
    
    
    125,005,803Basic earnings per share
    
    
    1.86
    
    
    
    2.56
    
    
    
    2.80
    
    
    
    0.41Diluted earnings per share
    
    
    1.86
    
    
    
    2.48
    
    
    
    2.80
    
    
    
    0.41
 For the year ended December 31, 2006, the Companys potentially dilutive securities consist
of 10,000,000 share options (see note 17). The computation of diluted earnings per share
for the year ended December 31, 2006 did not assume conversion of the share options because
the exercise prices of the share options were greater than or equal to the average price of
the ordinary shares, and therefore their inclusion would have been anti-dilutive.
 16
    
    Revenue information
 Product revenues by product category are summarized as follows:
 Years ended December 31,2006
    
    2007
    
    2008
    
    2008RMB
    
    RMB
    
    RMB
    
    US$Anti-stroke medication
    
    
    230,867
    
    
    
    443,446
    
    
    
    651,164
    
    
    
    95,444Antibiotics
    
    
    389,843
    
    
    
    390,107
    
    
    
    395,721
    
    
    
    58,002
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 Anti-cancer
    
    
    34,726
    
    
    
    217,867
    
    
    
    322,862
    
    
    
    47,323Anti-inflammatory drugs
    
    
    174,899
    
    
    
    168,497
    
    
    
    147,765
    
    
    
    21,658Other medicines
    
    
    117,462
    
    
    
    143,097
    
    
    
    219,320
    
    
    
    32,147947,797
    
    
    
    1,363,014
    
    
    
    1,736,832
    
    
    
    254,574
 17
    
    Share-based compensation
 On November 13, 2006, the shareholders of the Company adopted the 2006 Share Incentive Plan
(the 2006 Share Incentive Plan) which provides for the granting of options, limited share
appreciation rights, and other share-based awards such as restricted shares to the
directors and employees of the Group. The board of directors and shareholders of the
Company authorized up to 12,000,000 ordinary shares upon exercise of awards granted under
the 2006 Share Incentive Plan. On July 31, 2008, the Company adopted a new Share Incentive
Plan (the 2008 Share Incentive Plan) that allows the board of directors to grant options,
limited share appreciation rights and other share-based awards such as restricted shares to
directors, employees and consultants of the Group to purchase up to an aggregate of
6,250,000 ordinary shares upon exercise of awards granted under the 2008 Share Incentive
Plan.The following is a summary of share options granted in the years ended December 31, 2006,
2007 and 2008 under the 2006 Share Incentive Plan. No option was issued under the 2008
Share Incentive Plan.
 Years ended December 31,2006
    
    2007
    
    2008Total no. of
share options
granted
    
    
    10,000,000
    
    
    
    1,045,000
    
    
    
    500,000Weighted average
exercise price
per share
    
    
    US$4.200
    
    
    
    US$6.750
    
    
    
    US$6.093Weighted average
vesting period
(in years)
    
    
    5.00
    
    
    
    5.00
    
    
    
    4.82Weighted average
contractual life
(in years)
    
    
    6.00
    
    
    
    6.00
    
    
    
    5.82
 Management has determined, based on the Black-Scholes option pricing model, that the
weighted average grant-date fair value per option was approximately RMB14.69 (US$1.88),
RMB22.25 (US$3.05) and RMB23.27 (US$3.41), or an aggregate of RMB146,000, RMB23,251 and
RMB11,637 (US$1,706) for the years ended December 31, 2006, 2007 and 2008, respectively.The assumptions used in determining the fair value of the share options granted on each
respective date are, shown at their weighted average values, as follows:
 Years ended December 31,2006
    
    2007
    
    2008Valuation assumptionsExpected life (in years)
    
    
    5.5
    
    
    
    5.5
    
    
    
    5.19-5.35Expected volatility
    
    
    40%
    
    
    
    40%
    
    
    
    59%-74%Expected dividend yield
    
    
    0%
    
    
    
    0%
    
    
    
    0%Risk-free interest rate
    
    
    5.11%
    
    
    
    5.11%
    
    
    
    1.54%-3.69%
 For options granted prior to 2007, the expected volatility was estimated based upon the
average volatility of several comparable U.S. listed companies in the pharmaceutical
industry. Since the Company did not have a trading history at the time the options were
issued, management estimated the potential volatility of its ordinary share price by
referring to the average volatility of these comparable companies because
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 management believes that the average volatility of such companies was a reasonable
benchmark to use in estimating the expected volatility of the Companys ordinary shares.
For the 2008 options, the historical volatility of the Companys shares was used to
estimate the volatility of the Companys shares.Because the Companys share options have certain characteristics that are significantly
different from traded options, and because changes in the subjective assumptions can
materially affect the estimated value, in managements opinion, the existing valuation
model may not provide an accurate measure of the fair value of the Companys employee stock
options. Although the fair value of share options is determined in accordance with SFAS No.
123R using the Black-Scholes option pricing model, that value may not be indicative of the
fair value observed in a willing buyer/willing seller market transaction.The amount of compensation cost recognized for these share options was RMB3,437, RMB30,764
and RMB25,536 (US$3,743) for the years ended December 31, 2006, 2007 and 2008,
respectively.Share-based compensation cost is included in the following captions:
 Years ended December 31,2006
    
    2007
    
    2008
    
    2008RMB
    
    RMB
    
    RMB
    
    US$Research and development expenses
    
    
    204
    
    
    
    1,733
    
    
    
    1,512
    
    
    
    222Sales, marketing and distribution
expenses
    
    
    365
    
    
    
    2,871
    
    
    
    2,665
    
    
    
    391General and administrative expenses
    
    
    2,868
    
    
    
    26,160
    
    
    
    21,359
    
    
    
    3,1303,437
    
    
    
    30,764
    
    
    
    25,536
    
    
    
    3,743
 As of December 31, 2008, there was RMB77,390 (US$11,343) of total unrecognized compensation
cost related to non-vested share options and the cost is expected to be recognized on a
straight-line basis over a weighted average period of 3.06 years. The total fair value of
share options vested during the years ended December 31, 2006, 2007 and 2008 was nil,
RMB103,394 and RMB50,524 (US$7,406), respectively. The aggregate intrinsic values of
options exercised during the years ended December 31, 2006, 2007 and 2008 were nil, RMB102
and RMB3,331 (US$488), respectively.A summary of stock option activity is as follows:
 WeightedWeighted
    
    averageaverage
    
    remaining
    
    AggregateNumber of
    
    exercise
    
    contractual
    
    intrinsicOptions
    
    price
    
    term
    
    valueUS$
    
    Years
    
    US$Balance at January 1, 2007
    
    
    10,000,000
    
    
    
    4.20Granted
    
    
    1,045,000
    
    
    
    6.75Exercised
    
    
    (6,200
    )
    
    
    4.20Forfeited
    
    
    (41,000
    )
    
    
    4.20Balance at December 31, 2007
    
    
    10,997,800
    
    
    
    4.44Granted
    
    
    500,000
    
    
    
    6.09Exercised
    
    
    (198,000
    )
    
    
    4.20Forfeited
    
    
    (1,361,800
    )
    
    
    5.91Balance at December 31, 2008
    
    
    9,938,000
    
    
    
    4.33
    
    
    
    3.95
    
    
    
    14Exercisable at December 31, 2008
    
    
    3,696,400
    
    
    
    4.22
    
    
    
    3.88
    
    
    
    
 18
    
    Share repurchases
 On November 4, 2008, the board of directors of the Company approved a share repurchase
program that the Company may purchase up to US$50,000 (RMB341,125) worth of its issued and
outstanding ADSs. The
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 Company expects to implement this share repurchase program over the course of the next 12
months and plans to fund the share repurchase program through its available cash. As of
December 31, 2008, the Company repurchased and cancelled an aggregate of 1.5 million ADSs
under the current repurchase program at an average per share price of US$3.31 (RMB22.59)
and an aggregate cost of US$9,961 (RMB67,959) of which included US$105 (RMB716) of handling
charges.
 19
    
    Related party transactions
 For the years presented, the principal related party transactions and amounts due from and
due to related parties are summarized as follows:
 Years ended December 312006
    
    2007
    
    2008
    
    2008RMB
    
    RMB
    
    RMB
    
    US$Purchase of packaging and raw materials from
related parties (note (a))
    
    
    7,420
    
    
    
    7,335
    
    
    
    109
    
    
    
    16Sales of products to a related party (note (b))
    
    
    1,432
    
    
    
    2,966
    
    
    
    6,775
    
    
    
    993Sales of property, plant and equipment and
land use right to a related party (note (c))
    
    
    
    
    
    
    18,551
    
    
    
    
    
    
    
    Interest income from a loan due to a related
party (note (d))
    
    
    
    
    
    
    
    
    
    
    1,108
    
    
    
    162Loan to a related party (note (d))
    
    
    
    
    
    
    
    
    
    
    20,000
    
    
    
    2,931
 December 31,2007
    
    2008
    
    2008RMB
    
    RMB
    
    US$Due from related parties:Current portion
    
    
    7,503
    
    
    
    4,365
    
    
    
    640Non-current portion
    
    
    
    
    
    
    20,000
    
    
    
    2,931Due from related parties (note (d))
    
    
    7,503
    
    
    
    24,365
    
    
    
    3,571
 Notes:(a)
    
    The Company purchased packaging and raw materials from companies in which a major shareholder
of the Company has an equity interest. Management believes that the materials purchased by the
Company were in the normal course of business at prices determined on an arms length basis.(b)
    
    The Company sold pharmaceutical products to a company in which a major shareholder has an
equity interest. Management believes that the sales were conducted in the normal course of
business at prices determined on an arms length basis.(c)
    
    The Company sold property, plant and equipment and land use right to a company in which a
major shareholder has an equity interest. Management believes that the sale price was
negotiated on an arms length basis.(d)
    
    The current portion of amounts due from related parties related to transactions described in
note (b) and note (c) above as of December 31, 2007 and 2008 were RMB7,503, and RMB3,257
(US$478), respectively. These amounts were interest-free, unsecured and repayable on demand.
The current portion as of December 31, 2008 also included accrued interest of RMB1,108
(US$162) in respect of a RMB20,000 (US$2,931) secured loan included in the non-current portion
of amounts due from related parties. The RMB20,000 (US$2,931) secured loan was provided to a
minority shareholder of a subsidiary and has a one-year term with an option to extend for a
maximum of two years, bears a floating interest rate equal to RMB benchmark lending rates of
financial institutions multiplied by 110% and is secured by the minority shareholders entire
equity interest in the subsidiary. The secured loan has been classified as non-current as of
December 31, 2008 because management expects the loan to be renewed and extended beyond 12
months from the balance sheet date. 20
    
    Fair value of financial instruments
 (a)
    
    Fair value hierarchy
 The Group adopted SFAS No. 157 on January 1, 2008 for fair value measurements of financial
assets and financial liabilities and for fair value measurements of nonfinancial items that
are recognized or disclosed at
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 fair value in the financial statements on a recurring basis. SFAS No. 157 establishes a
fair value hierarchy that prioritizes the inputs to valuation techniques used to measure
fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (Level 1 measurements) and the lowest priority
to measurements involving significant unobservable inputs (Level 3 measurements). The three
levels of the fair value hierarchy are as follows:
 
    
    Level 1 inputs are quoted prices (unadjusted) in active markets for identical
assets or liabilities that the Company has the ability to access at the measurement
date.
    
    Level 2 inputs are inputs other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly or indirectly.
    
    Level 3 inputs are unobservable inputs for the asset or liability.
 The level in the fair value hierarchy within which a fair measurement in its entirety falls
is based on the lowest level input that is significant to the fair value measurement in its
entirety.
 (b)
    
    Fair value of financial instruments
 Management used the following methods and assumptions to estimate the fair value of
financial instruments as the relevant balance sheet date:
 
    
    Short-term financial instruments (cash equivalents, pledged bank deposits,
held-to-maturity investment securities, trade accounts receivable, bills receivable and
other receivables, amounts due from related parties, short-term borrowings, trade
accounts payable, amounts due to related parties, and other payables and accrued
liabilities)  their carrying amounts approximated their respective fair values because
of the short maturity period.
    
    Long-term loans and long-term loan receivable  their fair values are based on the
amount of future cash flows associated with these instruments discounted at the
borrowing and lending rates currently available for similar instruments of comparable
terms. Their carrying values of the long-term loans and long-term receivable
approximated their fair values as all these instruments carry variable interest rates
which approximated rates currently offered by the Companys financial institutions for
similar instruments of comparable maturities.
 As of December 31, 2008, the Group did not have any assets and liabilities that are measured
at fair value on a recurring basis in periods subsequent to initial recognition.
 21
    
    Foreign currency exchange risk
 The fluctuation in foreign currency exchange rates may impose certain risks on the Group.
The Groups exposure to foreign currency exchange risk primarily relates to cash and cash
equivalents denominated in U.S. dollars as a result of the Companys past issuances of
ordinary shares through a private placement and proceeds from the initial public offering
in April 2007.The Company has used a substantial portion of the proceeds from the initial public offering
to provide U.S. dollar denominated loans to its PRC subsidiaries which have converted the
funds into RMB. As these intercompany loans are not considered long-term investment in
nature and given the functional currency of the Company is U.S. dollars and the functional
currency of the PRC subsidiaries is RMB, the gain arising from the translation of the
intercompany loans from U.S. dollars to RMB by the PRC subsidiaries is recognized in the
consolidated statements of income and the loss arising from the translation of the
Companys U.S. dollars financial statements to RMB for consolidation purpose is recognized
in the consolidated statement of shareholders equity and comprehensive income.
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##### Table of Contents



Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 The Group has not hedged exposures in foreign currencies or entered into any other
derivative financial instruments.
 22
    
    Subsequent events
 (a)
    
    Acquisition of the remaining 10% of the outstanding shares of Shandong
Simcere
 On January 6, 2009, the Group completed an acquisition of the remaining 10% of the
outstanding shares of Shandong Simcere for a cash consideration of approximately RMB30,128
(US$4,416). Following the acquisition, Shandong Simcere became a wholly-owned subsidiary of
the Group.
 (b)
    
    Approval of a share option exchange program
 On April 15, 2009, the Compensation Committee of the Company approved a share option
exchange program that offered the directors, employees and consultants the right to
exchange vested and unvested outstanding share options to purchase ordinary shares of the
Company under the 2006 Share Incentive Plan for the Companys restricted shares. The
exchange ratio is determined based on the fair value of replacement restricted shares so
that the fair value of the replacement restricted shares to be issued upon exchange will be
approximately equivalent to the fair value of the share options surrendered by an
individual. A total of 154 directors and employees accepted the offer and tendered an
aggregate of 9,802,400 ordinary shares in exchange for an aggregate of 4,750,018 restricted
shares. The exchange of the share option awards for restricted shares was accounted for as
a modification for awards which involves a cancellation of the original award and an
issuance of a new award. The replacement restricted shares were granted on May 7, 2009.
Management does not expect the effect of this award modification on share-based
compensation expense over the remaining requisite service period to be significant.
 (c)
    
    Acquisition of approximately 35 % of the equity interest of Shanghai Celgen
 On May 18, 2009, the Group entered into a definitive share purchase agreement to indirectly
acquire approximately 35% of the equity interest of Shanghai Celgen Bio-Pharmaceutical Co.,
Ltd. (Shanghai Celgen) for a total cash consideration of RMB140,000. Shanghai Celgen has
expertise in research and production of therapeutic antibodies and possesses an antibody
manufacturing facility in Shanghai, for which GMP certification is pending. Under the
agreement, the Group is entitled to unwind the acquisition and the selling shareholders are
required to return the amounts paid by the Group if the SFDA does not approve Shanghai
Celgens major biogeneric drug candidate within 24 months from the date of the agreement.
The agreement is also subject to certain closing conditions. The Group will account for its
interest of approximately 35% in Shanghai Celgen under the equity accounting method.
 (d)
    
    Acquisition of 37.5% of the equity interest of Jiangsu Yanshen
 On May 20, 2009, the Group entered into a definitive share purchase agreement to acquire a
37.5% equity interest in Jiangsu Yanshen Biological Technology Stock Co., Ltd. (Jiangsu
Yanshen), a China-based developer and manufacturer of vaccines, for a total cash
consideration of approximately RMB195,540. Jiangsu Yanshens core products include an
influenza vaccine and a human use rabies vaccine (vero cell). The Group will account for
its interest of 37.5% in Jiangsu Yanshen under the equity accounting method.
 F-41