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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
1934
 OR
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 OR
 o
    
    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
   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
  None
   None
  125,006,200 ordinary shares, par
value $0.01 per share, as of December 31, 2007
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TABLE OF CONTENTS
  PageINTRODUCTION
    
    
    1PART IItem 1.
    
    Identity of Directors, Senior Management and Advisers
    
    
    2Item 2.
    
    Offer Statistics and Expected Timetable
    
    
    2Item 3.
    
    Key Information
    
    
    2Item 4.
    
    Information of The Company
    
    
    23Item 5.
    
    Operating and Financial Review and Prospects
    
    
    42Item 6.
    
    Directors, Senior Management and Employees
    
    
    66Item 7.
    
    Major Shareholder and Related Party Transactions
    
    
    73Item 8.
    
    Financial Information
    
    
    75Item 9.
    
    The Offer and Listing
    
    
    76Item 10.
    
    Additional Information
    
    
    76Item 11.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    82Item 12.
    
    Description of Securities Other Than Equity Securities
    
    
    83PART IIItem 13.
    
    Defaults, Dividend Arrearages and Delinquencies
    
    
    84Item 14.
    
    Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    
    84Item 15.
    
    Controls and Procedures
    
    
    84Item 16A.
    
    Audit Committee Financial Expert
    
    
    84Item 16B.
    
    Code of Ethics
    
    
    84Item 16C.
    
    Principal Accountant Fees and Services
    
    
    85Item 16D.
    
    Exemptions from the Listing Standards for Audit Committees
    
    
    85Item 16E.
    
    Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    
    
    85PART IIIItem 17.
    
    Financial Statements
    
    
    86Item 18.
    
    Financial Statements
    
    
    86Item 19.
    
    Exhibits
    
    
    87EX-2.7 REGISTRATION RIGHTS AGREEMENTEX-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.
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PART I
 
 Item 1. Identity of Directors, Senior Management and Advisers
  
 Item 2. Offer Statistics and Expected Timetable
  
 Item 3. Key Information
 Selected Financial Data
  Year Ended December 31,2003
    
    2004
    
    2005
    
    2006
    
    2007
    
    2007RMB
    
    RMB
    
    RMB
    
    RMB
    
    RMB
    
    $(in thousands, except share, per share and per ADS data)Selected Consolidated Statement of
Earnings DataTotal revenues(1)
    
    
    465,818
    
    
    
    564,198
    
    
    
    737,014
    
    
    
    950,606
    
    
    
    1,368,748
    
    
    
    187,638Gross profit
    
    
    321,756
    
    
    
    410,403
    
    
    
    565,940
    
    
    
    760,046
    
    
    
    1,127,667
    
    
    
    154,589Research and development expenses
    
    
    (11,716
    )
    
    
    (19,907
    )
    
    
    (16,288
    )
    
    
    (34,289
    )
    
    
    (68,295
    )
    
    
    (9,362
    )Sales, marketing and distribution expenses
    
    
    (192,751
    )
    
    
    (230,865
    )
    
    
    (312,426
    )
    
    
    (442,757
    )
    
    
    (634,449
    )
    
    
    (86,975
    )General and administrative expenses
    
    
    (84,840
    )
    
    
    (77,593
    )
    
    
    (87,139
    )
    
    
    (98,249
    )
    
    
    (161,061
    )
    
    
    (22,080
    )Income from operations
    
    
    32,449
    
    
    
    82,038
    
    
    
    150,087
    
    
    
    184,751
    
    
    
    263,862
    
    
    
    36,172Foreign currency exchange gains
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,670
    
    
    
    3,382Other Income(1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,526
    
    
    
    2,814Net
income(2) (3)
    
    
    24,390
    
    
    
    46,245
    
    
    
    102,745
    
    
    
    172,258
    
    
    
    301,261
    
    
    
    41,300Earnings per share  basic
    
    
    0.35
    
    
    
    0.67
    
    
    
    1.49
    
    
    
    1.86
    
    
    
    2.56
    
    
    
    0.35Earnings per share  diluted
    
    
    0.35
    
    
    
    0.67
    
    
    
    1.49
    
    
    
    1.86
    
    
    
    2.48
    
    
    
    0.34Earnings per ADS  basic
    
    
    0.70
    
    
    
    1.34
    
    
    
    2.98
    
    
    
    3.72
    
    
    
    5.13
    
    
    
    0.70Earnings per ADS  diluted
    
    
    0.70
    
    
    
    1.34
    
    
    
    2.98
    
    
    
    3.72
    
    
    
    4.95
    
    
    
    0.68Basic weighted average number of shares
    
    
    69,000,000
    
    
    
    69,000,000
    
    
    
    69,000,000
    
    
    
    92,695,890
    
    
    
    117,534,566
    
    
    
    117,534,566Diluted weighted average number of shares
    
    
    69,000,000
    
    
    
    69,000,000
    
    
    
    69,000,000
    
    
    
    92,695,890
    
    
    
    121,667,507
    
    
    
    121,667,507
 
 (1)
    
    Total revenues include product revenues and other revenue. 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 ($2.8 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 income
other than income from operations.(2)
    
    In 2007, the incentive payment received from our depositary in connection with the
establishment of the ADR program following our initial public offering had the effect of
increasing our net income by RMB20.5 million ($2.8 million) or RMB0.17 ($0.02) per share on a
basic basis and a diluted basis or RMB0.35 ($0.05) per ADS on a basic basis and RMB0.34
($0.05) per ADS on a diluted basis.(3)
    
    In 2007, four of our operating subsidiaries were eligible for certain exemptions from
income tax, three of which expired at the end of 2007. The effect of the income tax
exemptions increased our net income for 2006 and 2007 by RMB38.8 million (RMB0.42 per
share) and RMB62.9 million ($8.6 million) (RMB0.54 ($0.07) per share), respectively.
Prior to 2006, there were no tax exemptions in place. 2




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Year Ended December 31,2003
    
    2004
    
    2005
    
    2006
    
    2007(in percentages)Other Consolidated Financial DataGross margin
    
    
    69.1
    
    
    
    72.7
    
    
    
    76.8
    
    
    
    80.0
    
    
    
    82.4Operating margin
    
    
    7.0
    
    
    
    14.5
    
    
    
    20.4
    
    
    
    19.5
    
    
    
    19.3Net margin
    
    
    5.2
    
    
    
    8.2
    
    
    
    13.9
    
    
    
    18.2
    
    
    
    22.0
 As of December 31,2003
    
    2004
    
    2005
    
    2006
    
    2007
    
    2007RMB
    
    RMB
    
    RMB
    
    RMB
    
    RMB
    
    $(in thousands)Selected Consolidated Balance Sheet DataCash and cash equivalents
    
    
    61,193
    
    
    
    102,672
    
    
    
    90,060
    
    
    
    106,027
    
    
    
    497,352
    
    
    
    68,181Short-term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    470,000
    
    
    
    64,431Accounts receivable, net of allowance
for doubtful accounts
    
    
    95,884
    
    
    
    67,459
    
    
    
    83,393
    
    
    
    61,723
    
    
    
    167,786
    
    
    
    23,001Inventories
    
    
    32,031
    
    
    
    27,878
    
    
    
    40,293
    
    
    
    39,483
    
    
    
    65,241
    
    
    
    8,944Amounts due from related parties
    
    
    79,576
    
    
    
    39,890
    
    
    
    85,575
    
    
    
    434
    
    
    
    7,503
    
    
    
    1,029Total current assets
    
    
    334,609
    
    
    
    322,446
    
    
    
    391,461
    
    
    
    411,429
    
    
    
    1,557,153
    
    
    
    213,467Property, plant and equipment, less
accumulated depreciation
    
    
    123,173
    
    
    
    119,558
    
    
    
    125,365
    
    
    
    267,054
    
    
    
    374,058
    
    
    
    51,279Intangible assets, net
    
    
    20,310
    
    
    
    18,020
    
    
    
    15,731
    
    
    
    163,148
    
    
    
    251,221
    
    
    
    34,439Goodwill
    
    
    13,814
    
    
    
    13,814
    
    
    
    13,814
    
    
    
    100,634
    
    
    
    161,496
    
    
    
    22,139Total assets
    
    
    519,019
    
    
    
    581,041
    
    
    
    621,227
    
    
    
    1,034,547
    
    
    
    2,472,208
    
    
    
    338,910Short-term bank loans and borrowings
    
    
    246,330
    
    
    
    293,000
    
    
    
    171,000
    
    
    
    333,000
    
    
    
    29,000
    
    
    
    3,976Amounts due to related parties
    
    
    15,045
    
    
    
    12,908
    
    
    
    78,153
    
    
    
    1,352
    
    
    
    
    
    
    
    Total current liabilities
    
    
    385,882
    
    
    
    456,747
    
    
    
    421,185
    
    
    
    568,173
    
    
    
    342,637
    
    
    
    46,971Total shareholders equity
    
    
    108,437
    
    
    
    119,990
    
    
    
    192,537
    
    
    
    442,740
    
    
    
    1,983,816
    
    
    
    271,957
 Exchange Rate Information
   Noon Buying RatePeriodPeriod
    
    End
    
    Average(1)
    

High
    

Low(RMB per $1.00)2003
    
    
    8.2767
    
    
    
    8.2772
    
    
    
    8.2765
    
    
    
    8.28002004
    
    
    8.2765
    
    
    
    8.2768
    
    
    
    8.2764
    
    
    
    8.27742005
    
    
    8.0702
    
    
    
    8.1826
    
    
    
    8.0702
    
    
    
    8.27652006
    
    
    7.8041
    
    
    
    7.9579
    
    
    
    7.8041
    
    
    
    8.07022007
    
    
    7.2946
    
    
    
    7.5806
    
    
    
    7.2946
    
    
    
    7.8127December
    
    
    7.2946
    
    
    
    7.3682
    
    
    
    7.2946
    
    
    
    7.41202008January
    
    
    7.1818
    
    
    
    7.2405
    
    
    
    7.1818
    
    
    
    7.2946February
    
    
    7.1115
    
    
    
    7.1644
    
    
    
    7.1100
    
    
    
    7.1973March
    
    
    7.0120
    
    
    
    7.0722
    
    
    
    7.0105
    
    
    
    7.1110April
    
    
    6.9870
    
    
    
    6.9997
    
    
    
    6.9840
    
    
    
    7.0185May
    
    
    6.9400
    
    
    
    6.9725
    
    
    
    6.9377
    
    
    
    7.0000June (through June 20)
    
    
    6.8796
    
    
    
    6.9129
    
    
    
    6.8770
    
    
    
    6.9633
 
 (1)
    
    Annual averages are calculated from month-end rates. Monthly averages are calculated using
the average of the daily rates during the relevant period. Capitalization and Indebtedness
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Reasons for the Offer and Use of Proceeds
  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.
   
    
    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;
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
    
    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.
   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
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
    
    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.
  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.
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We rely on research institutions and universities in China 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.
  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.
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We may not be able to successfully identify and acquire new products or businesses.
   
    
    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.
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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.
     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.
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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.
  
    
    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.
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We have no control over 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.
  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.
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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;
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
    
    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;
    
    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 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.
  Our existing shareholders have substantial influence over our company and their interests may not
be aligned with the interests of our other shareholders.
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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.
  We may be unable to establish and maintain an effective system of internal control over financial
reporting, and as a result we may be unable to accurately report our financial results or prevent
fraud.
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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.
  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.
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Risks Related to Our Industry
 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.
    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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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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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.
  A newly enacted PRC tax law could increase the enterprise income tax rate applicable to our
principal subsidiaries in China, which could have a material adverse effect on our results of
operations.
  18




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##### Table of Contents



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 EIT 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.
  19




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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.
  Any future outbreak of severe acute respiratory syndrome or avian influenza in China, or similar
adverse public health developments, may severely disrupt our business and operations.
  Risks Related to Our ADSs
 The market price for our ADSs may be volatile.
  20




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##### Table of Contents




    
    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.
   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.
  21




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##### Table of Contents



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.
   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.
  22




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##### Table of Contents



Item 4. Information of The Company
 History and Development of the Company
   B. Business Overview
    23




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##### Table of Contents



Our Competitive Strengths
  A Strong Portfolio of Branded Products Supported by Proven Commercialization Capabilities
   Strong Growth Potential of Our Innovative Pharmaceutical Endu
  Effective Research and Development Strategy and Product Acquisition Capability Leading to an
Orderly Pipeline of Products that will Contribute to Future Growth
  24




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##### Table of Contents



Significant Marketing and Distribution Experience and an Extensive Distribution Network
  An Experienced Management Team with Proven Ability to Lead Our Growth
  Our Strategies
  Focus on Both the Development of Branded Generic Pharmaceuticals as well as the Research and
Development of Innovative Pharmaceuticals, While Accelerating the Time-to-Market of These Products
  25




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##### Table of Contents



Concentrate Our Marketing and Promotional Efforts on Pharmaceuticals with Large Growth Potential
  Expand Through Acquisitions As Well As Through Organic Growth
  Develop Collaborative Relationships with International Pharmaceutical and Biotechnology Companies
  Our Products
   26




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##### Table of Contents



NumberofProduct Category
    
    Products
    
    Major Products
    
    BrandsAntibacterial and
Antiviral
    
    
    15
    
    
    Amoxicillin granules, capsules and
tablets ; Amoxicillin with
clavulanate potassium granules,
tablets and injection; cefaclor dry
suspension; azithromycin granules;
and ribavirin dispersible tablets
    
    Zailin, Anqi, Zaike,
Zaiqi and NanyuanAnti-cancer
    
    
    4
    
    
    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
    
    
    3
    
    
    herbal medicine used for the
treatment of cough in liquids and
tablets; and compound zinc gluconate
    
    Simcere Kechuanning and
ZaikangUrinary Conditions
    
    
    1
    
    
    Naftopidil tablets
    
    ZaichangOthers
    
    
    2
    
    
    Various herbal oral solutions
    
    Qixuekang and Fukangbao
 Our Innovative Pharmaceutical Endu (Recombinant Human Endostatin Injection)
   .
   27




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Our Principal Branded Generic Pharmaceuticals
  
    
    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
  
    
    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.
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
    
    Zaiqi.Zaiqi is the brand name for our azithromycin granules antibiotics for the
treatment of infections. We obtained regulatory approval to manufacture and sell Zaiqi
in February 2000.
    
    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.
    
    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.
    
    Zaikang. Zaikang is the brand name for our OTC compound zinc gluconate and
ibuprofen granules for the treatment of cold symptoms such as fever, nasal congestion,
running nose and sneezing. We obtained regulatory approval to manufacture and sell
Zaikang in July 2002.
    
    Faneng. Faneng is the brand name for alfacalcidol soft capsules for the treatment
of osteoporosis. We have been the exclusive distributor of Faneng since 2000, which is
manufactured by a third party manufacturer.
 Marketing and Distribution
  Our Marketing Strategy
    Distribution
    29




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Manufacturing, Quality Control and Supplies
 Manufacturing
   Pharmaceutical AgentProduction Unit
    
    Delivery Form
    
    2007 CapacityHainan SimcerePenicillin family
    
    Granules
    
    630,000,000 packsPenicillin family
    
    Capsules
    
    225,000,000 pillsPenicillin family
    
    Dry suspension
    
    45,000,000 packsCefaclor family
    
    Granules
    
    240,000,000 packsCefaclor family
    
    Capsules
    
    60,000,000 pillsCefaclor family
    
    Dry suspension
    
    240,000,000 packsCefaclor family
    
    Tablets
    
    200,000,000 pillsGeneral
    
    Tablets
    
    800,000,000 pillsGeneral
    
    Granules
    
    660,000,000 packsGeneral
    
    Soft capsules
    
    150,000,000 pillsGeneral
    
    Gelatin
    
    5,000,000 tubesGeneral
    
    Powder
    
    160,000,000 packsGeneral
    
    Capsules
    
    150,000,000 pillsNanjing SimcerePenicillin family
    
    Powder injection
    
    11,000,000 vialsPenicillin family
    
    Granules
    
    65,000,000 packsPenicillin family
    
    Dry suspension
    
    65,000,000 bottlesPenicillin family
    
    Tablets
    
    150,000,000 pillsGeneral
    
    Oral solution
    
    50,000,000 bottlesGeneral
    
    Small volume parenteral
solutions
    
    25,000,000 vialsGeneral
    
    Tablets
    
    150,000,000 pillsGeneral
    
    Dry suspension
    
    20,000,000 packsGeneral
    
    Capsules
    
    160,000,000 pillsGeneral
    
    Granules
    
    20,000,000 packsGeneral
    
    Powder injection
    
    7,500,000 vialsGeneral
    
    Frozen-dry powder
injection
    
    2,700,000 vialsGeneral
    
    Sterile active
pharmaceutical
    
    300 kg
 30




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Pharmaceutical AgentProduction Unit
    
    Delivery Form
    
    2007 Capacityingredients, or APIsGeneral
    
    Extract
    
    50,000,000 bottlesYantai MedgennRecombinant human 
endostatin
    
    Injection
    
    700,000 vialsNanjing Tung ChitNedaplatin injection
    
    Frozen-dry powder
injection
    
    270,000 bottlesJilin BodaEdavarone injection
    
    Low-dose injection
    
    20,000,000,000 vialsGeneral
    
    Tablets
    
    2,000,000,000 pillsGeneral
    
    Capsules
    
    50,000,000 pillsGeneral
    
    Granules
    
    10,000,000 packsGeneral
    
    Topical solution
    
    4,000,000 bottlesGeneral
    
    Powder injection
    
    3,000,000 packsAPIs
    
    Phenytoin sodium
    
    80,000 kgAPIs
    
    Moroxydine
    
    1,000,000 kgAPIs
    
    Asparamide
    
    100,000 kgAPIs
    
    Ethacridine lactate
    
    6,000 kgAPIs
    
    Nefopam hydrochloride
    
    6,000 kgAPIs
    
    Edaravone
    
    4,000 kgWuhu ZhongrenFluorouracil implant
    
    Implant
    
    200,000 vials
 Quality Control
  Raw Materials
   31




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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 have acquired a 51.0% equity interest in October 2007. There are currently no
other direct competitive products for Bicun and Yidasheng in China.
    
    For Zailin, the main competitive product is Amoxian, which is manufactured by Zhuhai
United Laboratories Pharmaceutical Co., Ltd.
    
    For Yingtaiqing, the main competitive products are Votalin, which is manufactured by
Beijing Novartis Pharma Ltd., and Difene, which is manufactured by Klinge Pharma GmbH of
Germany.
    32




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Environmental Matters
  Insurance
  Regulation
  Pharmaceutical Product Manufacturing
 Permits and Licenses for Pharmaceutical Manufacturers
  Good Manufacturing Practices
   33




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Certification ByFacilities
    
    Coverage
    
    Issue Date
    
    Expiration DateHainan SimcereTablets (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)
    
    February 16, 2004
    
    February 15, 2009Bulk Drug (Amlodipine Maleate, Cefprozil and Cefteram pivoxil)
    
    November 1, 2005
    
    October 31, 2010Nanjing SimcereTablets, Granules, Dry Suspensions (Penicillins)
    
    May 26, 2003
    
    May 25, 2008Small Volume Parenteral Solutions, Mixture Oral, Solution
    
    January 2, 2004
    
    January 1, 2009Tablets, Capsules, Dry Suspensions
    
    March 30, 2006
    
    March 29, 2011Granules
    
    May 11, 2006
    
    May 10, 2011Powder for Injection (Penicillin)
    
    April 19, 2006
    
    April 18, 2011Yantai MedgennRecombinant Human Endostatin Injection (Anti-cancer Drugs)
    
    March 20, 2006
    
    March 19, 2011Jilin BodaTablets (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, 2011Nanjing Tung ChitFrozen-Dry Powder Injection (Anti-Cancer Drug) and Bulk Drug
(Nedaplatin)
    
    August 18, 2004
    
    August 16, 2009Wuhu ZhongrenAnti-cancer Implants
    
    June 24, 2004
    
    June 23, 2009
 Approval and Registration of Pharmaceutical Products
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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.
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Continuing SFDA Regulation
   Pharmaceutical Distribution
   Restrictions on Foreign Ownership of Pharmaceutical Wholesale and Retail Businesses in China
  Good Supply Practices
   Product Liability and Protection of Consumers
    36




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Price Controls
      Tendering System for Medicines Purchased by Healthcare Institutions
  Reimbursement Under the National Medical Insurance Program
  37




---



##### Table of Contents



PRC Patent Law
  Patent Prosecution
  Patent Enforcement
  Compulsory License
  38




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International Patent Treaties
   Trademarks
   
    
    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.
  39




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Foreign Exchange Regulation
      Dividend Distribution Regulation
  Organizational Structure
  40




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
    
    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 56 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 78 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., formerly Yantai Medgenn Co.,
Ltd., or Yantai Medgenn, is our 90.0%-owned subsidiary that engages in the manufacturing
of Endu in China. We completed the acquisition of 80.0% of the equity interest of Yantai
Medgenn in September 2006. We further acquired an additional 10.0% of the equity
interest in Yantai Medgenn in June 2007. In addition, Yantai Medgenn 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
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##### Table of Contents



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 Zhongren Pharmaceutical Co., Ltd., or Wuhu Zhongren, 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 Zhongren in April 2008.
 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 .
 Operating Results
 Overview
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
    
    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.
 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
  43




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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
    Maximum Retail
    
    Maximum RetailDate of
    
    Price Before
    
    Price AfterProduct
    

Brand
    

Dosage Form
    

Adjustment
    

Adjustment (RMB)
    

Adjustment (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
  44




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Acquisitions
   Revenues
    Year Ended December 31,2005
    
    2006
    
    2007(in
    
    (% of
    
    (in
    
    (% of
    
    (in
    
    (% ofthousands
    
    product
    
    thousands
    
    product
    
    thousands
    
    productof RMB)
    
    revenues)
    
    of RMB)
    
    revenues)
    
    of RMB)
    
    revenues)Bicun
    
    
    139,527
    
    
    
    19.0
    
    
    
    230,867
    
    
    
    24.4
    
    
    
    426,216
    
    
    
    31.3Zailin
    
    
    228,434
    
    
    
    31.0
    
    
    
    266,790
    
    
    
    28.1
    
    
    
    287,333
    
    
    
    21.0Endu
    
    
    
    
    
    
    
    
    
    
    34,726
    
    
    
    3.7
    
    
    
    216,193
    
    
    
    15.9Yingtaiqing
    
    
    115,536
    
    
    
    15.7
    
    
    
    136,754
    
    
    
    14.4
    
    
    
    140,824
    
    
    
    10.3
  45




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Cost of Materials and Production and Operating Expenses
  Year Ended December 31,2005
    
    
    2006
    
    
    2007(in percentages)Cost of materials and production
    
    
    23.2
    
    
    
    20.0
    
    
    
    17.6Operating expensesResearch and development expenses
    
    
    2.2
    
    
    
    3.6
    
    
    
    4.9Sales, marketing and distribution expenses
    
    
    42.4
    
    
    
    46.6
    
    
    
    46.4General and administrative expenses
    
    
    11.8
    
    
    
    10.3
    
    
    
    11.8Total operating expenses
    
    
    56.4
    
    
    
    60.5
    
    
    
    63.1
  Cost of Materials and Production
  
    
    costs of the necessary active ingredients and supporting ingredients of
pharmaceuticals we manufacture and various types of packaging material;
    
    costs of the pharmaceuticals in which we are the exclusive distributors of;
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
    
    overhead costs, including utility, maintenance of production equipment and other
support expenses associated with the production of our products;
    
    salaries and benefits for personnel directly involved in production activities; 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
     47




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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.
       Sales, Marketing and Distribution Expenses
  49




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General and Administrative Expenses
  Share-Based Compensation Expenses
     Taxation and Incentives
  50




---



##### Table of Contents



Critical Accounting Policies and the Use of Estimates
   Allowance for Doubtful Accounts
   51




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##### Table of Contents



Year
Ended December 31,2005
    
    2006
    
    2007
    
    2007RMB
    
    RMB
    
    RMB
    
    $(in thousands)Balance at the beginning of the year
    
    
    7,658
    
    
    
    5,556
    
    
    
    6,834
    
    
    
    937Additions charged to bad debt expense
    
    
    426
    
    
    
    1,433
    
    
    
    1,203
    
    
    
    165Additions related to acquisitions of subsidiaries
    
    
    
    
    
    
    
    
    
    
    1,074
    
    
    
    147Write-off of accounts receivable charged against the allowance
    
    
    (2,528
    )
    
    
    (155
    )
    
    
    (1,402
    )
    
    
    (192
    )Balance at
the end of the year
    
    
    5,556
    
    
    
    6,834
    
    
    
    7,709
    
    
    
    1,057
 Inventories
   Depreciation and Amortization
   Long-Lived Assets and Goodwill
    52




---



##### Table of Contents



Share-based Compensation
   53




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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.
  54




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Income tax uncertainties and realization of deferred income tax assets
         55




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##### Table of Contents



Results of Operations
  Year Ended December 31,2005
    
    2006
    
    2007% of Total
    
    
    
    
    
    % of Total
    
    
    
    
    
    % of TotalRMB
    
    Revenues
    
    RMB
    
    Revenues
    
    RMB
    
    Revenues(in thousands, except percentages)Product revenues
    
    
    736,220
    
    
    
    99.9
    
    
    
    947,797
    
    
    
    99.7
    
    
    
    1,363,014
    
    
    
    99.6Other revenue(1)
    
    
    794
    
    
    
    0.1
    
    
    
    2,809
    
    
    
    0.3
    
    
    
    5,734
    
    
    
    0.4Total revenues
    
    
    737,014
    
    
    
    100.0
    
    
    
    950,606
    
    
    
    100.0
    
    
    
    1,368,748
    
    
    
    100.0Cost of materials and production
    
    
    (171,074
    )
    
    
    (23.2
    )
    
    
    (190,560
    )
    
    
    (20.0
    )
    
    
    (241,081
    )
    
    
    (17.6
    )Gross profit
    
    
    565,940
    
    
    
    76.8
    
    
    
    760,046
    
    
    
    80.0
    
    
    
    1,127,667
    
    
    
    82.4Operating expenses:Research and development expenses
    
    
    (16,288
    )
    
    
    (2.2
    )
    
    
    (34,289
    )
    
    
    (3.6
    )
    
    
    (68,295
    )
    
    
    (4.9
    )Sales, marketing and distribution expenses
    
    
    (312,426
    )
    
    
    (42.4
    )
    
    
    (442,757
    )
    
    
    (46.6
    )
    
    
    (634,449
    )
    
    
    (46.4
    )General and administrative expenses
    
    
    (87,139
    )
    
    
    (11.8
    )
    
    
    (98,249
    )
    
    
    (10.3
    )
    
    
    (161,061
    )
    
    
    (11.8
    )Total operating expenses
    
    
    (415,853
    )
    
    
    (56.4
    )
    
    
    575,295
    
    
    
    (60.5
    )
    
    
    (863,805
    )
    
    
    (63.1
    )Income from operations
    
    
    150,087
    
    
    
    20.4
    
    
    
    184,751
    
    
    
    19.5
    
    
    
    263,862
    
    
    
    19.3Interest income
    
    
    932
    
    
    
    0.1
    
    
    
    2,827
    
    
    
    0.3
    
    
    
    24,361
    
    
    
    1.8Interest expense
    
    
    (14,999
    )
    
    
    (2.0
    )
    
    
    (10,705
    )
    
    
    (1.2
    )
    
    
    (6,346
    )
    
    
    (0.5
    )Foreign currency exchange gains
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,670
    
    
    
    1.8Other income(1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,526
    
    
    
    1.5Earnings before income taxes and minority interests
    
    
    136,020
    
    
    
    18.5
    
    
    
    176,873
    
    
    
    18.6
    
    
    
    327,073
    
    
    
    23.9Income tax expense
    
    
    (32,514
    )
    
    
    (4.5
    )
    
    
    (6,952
    )
    
    
    (0.7
    )
    
    
    (13,527
    )
    
    
    (1.0
    )Income before minority interests
    
    
    103,506
    
    
    
    14.0
    
    
    
    169,921
    
    
    
    17.9
    
    
    
    313,546
    
    
    
    22.9Minority interests
    
    
    (761
    )
    
    
    (0.1
    )
    
    
    2,337
    
    
    
    0.3
    
    
    
    (12,285
    )
    
    
    (0.9
    )Net income(2)(3)
    
    
    102,745
    
    
    
    13.9
    
    
    
    172,258
    
    
    
    18.2
    
    
    
    301,261
    
    
    
    22.0
 
 (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 ($2.8 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 income other than income from operations.(2)
    
    In 2007, the incentive payment received from our depositary in connection with the
establishment of the ADR program following our initial public offering had the effect of
increasing our net income by RMB20.5 million ($2.8 million) or RMB0.17 ($0.02) per share on a
basic basis and a diluted basis or RMB0.35 ($0.05) per ADS on a basic basis and RMB0.34
($0.05) per ADS on a diluted basis.(3)
    
    In 2007, four of our operating subsidiaries were eligible for certain exemptions from income
tax, three of which expired at the end of 2007. The effect of the income tax exemptions
increased our net income for 2006 and 2007 by RMB38.8 million (RMB0.42 per share) and RMB62.9
million ($8.6 million) (RMB0.54 ($0.07) per share), respectively. Prior to 2006, there were no
tax exemptions in place. Comparison of Years Ended December 31, 2006 and December 31, 2007
 Total Revenues.
 Gross Profit and Gross Margin.
 56




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##### Table of Contents



Operating Expenses.
 
    
    Research and Development Expenses.Our research and development expenses increased
to RMB68.3 million ($9.4 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 ($87.0 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 ($22.1 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 primarily related to
share-based compensation expenses, staff costs, expense related to our the 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.
 Other
Income.
 Income Tax Expense.
 Minority interests.
 Net Income.
 57




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##### Table of Contents



Comparison of Years Ended December 31, 2005 and December 31, 2006
 Total Revenues.
 Gross Profit and Gross Margin.
 Operating Expenses.
 
    
    Research and Development Expenses.Our research and development expenses increased
to RMB34.3 million in 2006 from RMB16.3 million in 2005. Research and development
expenses as a percentage of our total revenues increased to 3.6% in 2006 from 2.2% in
2005. This increase was due primarily to additional research and development expenses
associated with the development of product candidates, the increased headcount of our
research and development personnel and increases in their salaries and benefits. The
increase was also attributable to our collaboration arrangements with Tsinghua
University and other institutions.
    
    Sales, Marketing and Distribution Expenses.Our sales, marketing and distribution
expenses increased by 41.7% to RMB442.8 million in 2006 from RMB312.4 million in 2005.
Sales, marketing and distribution expenses as a percentage of our total revenues
increased to 46.6% in 2006 from 42.4% in 2005. This increase was due primarily to a
significant increase in television advertising and other selling expenses in connection
with the promotion of our OTC pharmaceutical Biqi, other promotional expenses incurred
in connection with the promotion of our other products and the increase in salaries and
bonus payments and training expenses in connection with the launch of Endu in July 2006.
We believe that such promotional efforts have substantially increased the market
recognition of the Biqi brand and our Simcere trade name.
    
    General and Administrative Expenses.Our general and administrative expenses
increased by 12.7% to RMB98.2 million in 2006 from RMB87.1 million in 2005 due primarily
to the increase in our administrative personnel in preparation of becoming a listed
company. However, general and administrative expenses as a percentage of our total
revenues decreased to 10.3% in 2006 from 11.8% in 2005 as a result of our increased
economies of scale.
 Interest Income.
 Interest Expense.
 58




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##### Table of Contents



Income Tax Expense.
 Minority interests.
 Net Income.
 B.
    
    Liquidity and Capital Resources
 Liquidity and Capital Resources
  Year Ended December 31,2005
    
    2006
    
    2007
    
    2007RMB
    
    RMB
    
    RMB
    
    $(in thousands)Net cash provided by operating activities
    
    
    106,339
    
    
    
    118,951
    
    
    
    150,415
    
    
    
    20,620Net cash used in investing activities
    
    
    (1,219
    )
    
    
    (259,196
    )
    
    
    (695,974
    )
    
    
    (95,409
    )Net cash (used in) provided by financing activities
    
    
    (117,732
    )
    
    
    156,212
    
    
    
    938,383
    
    
    
    128,640Effect of exchange rate changes on cash and cash
equivalents
    
    
    
    
    
    
    
    
    
    
    (1,499
    )
    
    
    (205
    )Net (decrease) increase in cash and cash equivalents
    
    
    (12,612
    )
    
    
    15,967
    
    
    
    391,325
    
    
    
    53,646Cash and cash equivalents at beginning of year
    
    
    102,672
    
    
    
    90,060
    
    
    
    106,027
    
    
    
    14,535Cash and cash equivalents at end of year
    
    
    90,060
    
    
    
    106,027
    
    
    
    497,352
    
    
    
    68,181
   59




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##### Table of Contents



Operating Activities
    Investing Activities
   Financing Activities
   60




---



##### Table of Contents



Capital expenditures
  Recent Accounting Pronouncements
     C.
    
    Research and Development, Patents and Licenses, etc.
 Our Strategy
  61




---



##### Table of Contents



Our Capability
  Collaboration in Research
 Joint Laboratory for Drug Discovery.
 Joint Anti-Cancer Pharmaceutical Research and Development.
   62




---



##### Table of Contents



Product Candidates
   Expected
    
    PotentialTherapeutic Effects and
    
    
    
    
    
    Time to
    
    MonitoringProduct Candidate
    
    Scope of Applications
    
    Status
    
    Patentable
    
    Market
    
    PeriodIguratimod tablets
    
    Treatment of osteoarthritis
and rheumatoid arthritis
    
    New drug application
    
    No
    
    
    2009
    
    
    5 yearsPalonosetron for 
injection
    
    Nausea and vomiting
associated
with chemotherapy
    
    New drug application
    
    No
    
    
    2008
    
    
    4 yearsLevamisole 
hydrochloride 
nasal 
spray(1)
    
    Treatment of nasal allergies
    
    Phase II of clinical trials
    
    Yes
    
    
    2009
    
    
    20 years
patent
protection
 
 (1)
    
    We currently own two patents and have applied for 20 other patents relating to the Levamisole
hydrochloride nasal spray and we expect to be the exclusive manufacturer of this product for
approximately 13 to 15 years. Iguratimod Tablets.
 Palonosetron for Injection.
 Levamisole Hydrochloride Nasal Spray.
  Intellectual Property
  63




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##### Table of Contents



D.
    
    Trend Information
  E.
    
    Off-Balance Sheet Arrangements
  64




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##### Table of Contents



F.
    
    Tabular Disclosure of Contractual Obligations
  Contractual ObligationsLess Than
    
    
    
    
    
    
    
    
    
    More Than1 Year
    
    1-3 Years
    
    3-5 Years
    
    5 Years
    
    TotalRMB
    
    RMB
    
    RMB
    
    RMB
    
    RMB(in thousands)Short-term bank and loan borrowings
    
    
    29,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,000Interest payments
    
    
    3,656
    
    
    
    5,323
    
    
    
    2,854
    
    
    
    5,198
    
    
    
    17,031Payable for acquisitions
    
    
    18,153
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,153Long-term loans
    
    
    
    
    
    
    5,000
    
    
    
    9,400
    
    
    
    37,600
    
    
    
    52,000Liabilities for uncertain tax position
    
    
    
    
    
    
    19,928
    
    
    
    
    
    
    
    
    
    
    
    19,928Operating lease commitments
    
    
    1,608
    
    
    
    1,685
    
    
    
    6
    
    
    
    40
    
    
    
    3,339Research and development projects
    
    
    11,270
    
    
    
    4,000
    
    
    
    
    
    
    
    
    
    
    
    15,270Capital commitments
    
    
    16,057
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,057Purchase commitments
    
    
    62,170
    
    
    
    15,750
    
    
    
    
    
    
    
    
    
    
    
    77,920Total
    
    
    141,914
    
    
    
    51,686
    
    
    
    12,260
    
    
    
    42,838
    
    
    
    248,698
 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;
    
    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
 65




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##### Table of Contents




    
    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
    
    
    46
    
    
    Chairman of the board of directors and chief executive officerGuoqiang Lin(1)(2)
    
    
    65
    
    
    Independent directorHongquan Liu(1)(2)(3)
    
    
    49
    
    
    Independent directorGary Siu Kwan Sik(1)(3)
    
    
    41
    
    
    Independent directorJohn Huan Zhao
    
    
    45
    
    
    DirectorFrank Zhigang Zhao
    
    
    48
    
    
    Chief financial officerXiaojin Yin
    
    
    49
    
    
    Vice president of research and developmentMark Peizhi Chen
    
    
    41
    
    
    Vice president of marketingJindong Zhou
    
    
    46
    
    
    Vice president of manufacturingDazheng Sun
    
    
    37
    
    
    Vice president of commercial salesBaoxing Zha
    
    
    45
    
    
    Vice president of hospital salesHiu Ming Pang
    
    
    55
    
    
    Senior assistant to the chief executive officerHaibo Qian
    
    
    45
    
    
    Secretary to the board of directors and company secretary
 
 (1)
    
    Audit committee members.(2)
    
    Compensation committee members.(3)
    
    Corporate governance and nominating committee members. Mr. Jinsheng Ren
 Professor Guoqiang Lin
 66




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##### Table of Contents



Mr. Hongquan Liu
 Mr. Gary
Siu Kwan Sik
 Mr. John Huan Zhao
 Mr. Frank Zhigang Zhao
 Mr. Xiaojin Yin
 Mr. Mark Peizhi Chen
 Mr. Jindong Zhou
 67




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##### Table of Contents



Mr. Dazheng
Sun
 Mr. Baoxing Zha
 Dr. Hiu Ming Pang
 Dr. Haibo Qian
  Compensation
 Compensation of Directors and Executive Officers
  2006 Share Incentive Plan
 .
 Termination of Awards
 68




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##### Table of Contents



Administration
 Option Exercise
 Third-party Acquisition
 Amendment and Termination of Plan
  Ordinary SharesUnderlying
    
    Exercise PriceName
    
    Options Granted
    
    ($/Share)
    
    Date of Grant
    
    Date of ExpirationJinsheng Ren
    
    
    5,500,000
    
    
    $
    4.200
    
    
    November 15, 2006
    
    November 14, 2012Frank Zhigang Zhao
    
    *
    (1)
    
    $
    4.200
    
    
    November 15, 2006
    
    November 14, 2012Jindong Zhou
    
    
    200,000
    
    
    $
    4.200
    
    
    November 15, 2006
    
    November 14, 2012Xiaojin Yin
    
    *
    (1)
    
    $
    4.200
    
    
    November 15, 2006
    
    November 14, 2012Hiu Ming Pang
    
    *
    (1)
    
    $
    4.200
    
    
    November 15, 2006
    
    November 14, 2012Dazheng Sun
    
    *
    (1)
    
    $
    4.200
    
    
    November 15, 2006
    
    November 14, 2012Baoxing Zha
    
    *
    (1)
    
    $
    4.200
    
    
    November 15, 2006
    
    November 14, 2012Guoqiang Lin
    
    *
    (1)
    
    $
    6.750
    
    
    March 29, 2007
    
    March 28, 2013Hongquan Liu
    
    *
    (1)
    
    $
    6.750
    
    
    March 29, 2007
    
    March 28, 2013Gary Siu Kwan Sik
    
    *
    (1)
    
    $
    6.750
    
    
    March 29, 2007
    
    March 28, 2013Mark Peizhi Chen
    
    *
    (1)
    
    $
    6.755
    
    
    May 5, 2008
    
    March 8, 2014Other employees as a group(2)
    
    
    2,700,000
    
    
    $
    4.200
    
    
    November 15, 2006
    
    November 14, 2012Other employees as a group(2)
    
    
    945,000
    
    
    $
    6.750
    
    
    March 29, 2007
    
    March 28, 2013
 
 (1)
    
    Upon exercise of all options granted, would beneficially own less than 1.0% of our
outstanding ordinary shares.(2)
    
    None of these employees is our director or executive officer. 69




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##### Table of Contents



Employee Pension and Other Retirement Benefits
  Board Practices
 Duties of Directors
   
    
    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
    
    meeting separately and periodically with management and our internal auditor and
independent registered public accounting firm.
 70




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##### Table of Contents



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
   71




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##### Table of Contents



Interested Transactions
  Remuneration and Borrowing
  Employees
  Number of
    
    PercentageEmployees
    
    of TotalMarketing and brand management
    
    
    1,072
    
    
    
    41.0
    %Manufacturing and quality control
    
    
    896
    
    
    
    34.3
    %General and administration
    
    
    498
    
    
    
    19.0
    %Research and development
    
    
    149
    
    
    
    5.7
    %Total
    
    
    2,615
    
    
    
    100.0
    %
   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.
 72




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##### Table of Contents



Shares BeneficiallyOwned(1)(2)Number
    
    %Directors and Executive Officers:Jingshen Ren(3)
    
    
    26,837,589
    
    
    
    20.92Guoqiang Lin
    
    
    *
    
    
    
    *Hongquan Liu
    
    
    *
    
    
    
    *Gary Siu Kwan Sik
    
    
    *
    
    
    
    *John Huan Zhao(4)
    
    
    26,437,600
    
    
    
    20.78Frank Zhigang Zhao
    
    
    *
    
    
    
    *Jindong Zhou(5)
    
    
    4,066,418
    
    
    
    3.20Xiaojin Yin(6)
    
    
    *
    
    
    
    *Haibo Qian(7)
    
    
    *
    
    
    
    *Hiu Ming Pang
    
    
    *
    
    
    
    *All directors and executive officers as a group
    
    
    58,997,035
    
    
    
    46.38Principal Shareholders:Assure Ahead Investments Limited(8)
    
    
    26,437,600
    
    
    
    20.78New Good Management Limited(9)
    
    
    50,381,556
    
    
    
    39.61King View Development International Limited(10)
    
    
    11,820,000
    
    
    
    9.29
 
 *
    
    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 Securities Exchange Act of 1934, as amended, 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 the ordinary shares underlying options held by such person. Percentage of beneficial
ownership of each listed person is based on 127,209,200 ordinary shares outstanding as of the
date hereof, including 125,012,000 issued ordinary shares and
2,192,200 ordinary shares issuable upon the exercise of share options.(3)
    
    Includes the beneficial ownership of 25,737,589 ordinary shares through Mr. Rens
shareholding in New Good Management Limited. Mr. Ren is the chairman of the board of directors
and the controlling shareholder of New Good Management Limited.(4)
    
    Represents 26,437,600 ordinary shares 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)
    
    Includes the beneficial ownership of 4,026,418 ordinary shares through Mr. Zhous
shareholding in New Good Management Limited.(6)
    
    Includes the beneficial ownership of ordinary shares through Mr. Yins shareholding in New
Good Management Limited.(7)
    
    Represents the beneficial ownership of ordinary shares through Mr. Qians shareholding in New
Good Management Limited.(8)
    
    Assure Ahead Investments Limited is a British Virgin Islands company that is 68.0% owned by
Hony Capital II, L.P., an exempted limited partnership formed under the laws of the Cayman
Islands; 11.0% owned by The Goldman Sachs Group, Inc., a company incorporated under the laws
of Delaware; 3.0% owned by Crystal Lena International Limited, a company incorporated under
the laws of the British Virgin Islands; 3.0% owned by Premier Goal Company Limited, a company
incorporated under the laws of the British Virgin Islands; 5.0% owned by Excel Team
Investments Limited, a company incorporated under the laws of the British Virgin Islands; 5.0%
owned by Enspire Investments Limited, a company incorporated under the laws of the British
Virgin Islands; and 6.0% owned by Right Lane Limited, a company incorporated under the laws of
Hong Kong. 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.(9)
    
    New Good Management Limited is a British Virgin Islands company that is 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 and
Haibo Qian. 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.(10)
    
    King View Development International Limited, 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 Unit 1206, One LuJiaZui
Center, 68 Yincheng Road (C), Pudong district, Shanghai 200120 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
 Major Shareholders
  73




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##### Table of Contents



Related Party Transactions
 Transactions with Companies in Which a Major Shareholder had Equity Interests
  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.
 74




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##### Table of Contents




    
    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 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.
 Interests of Experts and Counsel
  
 Item 8. Financial Information
 Consolidated Statements and Other Financial Information
  Legal and Administrative Proceedings
  Dividend Policy
    Significant Changes
  75




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##### Table of Contents



Item 9. The Offer and Listing
 Offering and Listing Details
   Sales PriceHigh
    
    LowQuarterly High and LowSecond Quarter 2007
    
    $
    19.18
    
    
    $
    12.82Third Quarter 2007
    
    $
    16.30
    
    
    $
    10.81Fourth Quarter 2007
    
    $
    19.30
    
    
    $
    11.70First Quarter 2008
    
    $
    13.99
    
    
    $
    9.98Monthly Highs and LowsDecember 2007
    
    $
    14.98
    
    
    $
    12.30January 2008
    
    $
    13.99
    
    
    $
    10.58February 2008
    
    $
    12.03
    
    
    $
    9.98March 2008
    
    $
    11.80
    
    
    $
    10.05April 2008
    
    $
    13.30
    
    
    $
    10.42May 2008
    
    $
    15.88
    
    
    $
    12.40June 2008 through June 20
    
    $
    15.34
    
    
    $
    12.85
 Plan of Distribution
  Markets
  Selling Shareholders
  Dilution
  Expenses of the Issue
  
 Item 10. Additional Information
 Share Capital
   76




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##### Table of Contents



Memorandum and Articles of Association
  Material Contracts
  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;
   Taxation
 Cayman Islands Taxation
  Peoples Republic of China Taxation
   77




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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;
    
    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.
   78




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##### Table of Contents



ADSs
  Taxation of Dividends and Other Distributions on the ADSs or Ordinary Shares
    79




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##### Table of Contents



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.
    
    
    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.
 80




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##### Table of Contents



Information Reporting and Backup Withholding
   81




---



##### Table of Contents



Dividends and Paying Agents
  Statement by Experts
  Documents on Display
     Subsidiary Information
  
 Item 11. Quantitative and Qualitative Disclosures About Market Risk
 Foreign Currency Exchange Risk
    82




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##### Table of Contents



Interest Rate Risk
  
 Item 12. Description of Securities Other Than Equity Securities
  83




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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 RMB314 million ($43 million) to repay the short-term bank loans and
borrowings;
    
    approximately RMB175 million ($24 million) for the acquisition of a 10% equity
interest in Yantai Medgenn, a 51% equity interest in Jilin Boda and a 85.71% equity
interest in Nanjing Tung Chit;
    
    approximately RMB470 million ($64 million) for short-term investments; and
    
    approximately RMB36 million ($5 million) to fund our research and
development efforts.
 
 Item 15. Controls and Procedures
  Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
  
 Item 16A. Audit Committee Financial Expert
  
 Item 16B. Code of Ethics
  84




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##### Table of Contents



Item 16C. Principal Accountant Fees and Services
  For the Year Ended December 31,2006
    
    
    2007(In $ thousands)Audit fees(1)
    
    
    823
    
    
    
    1,117Audit-related fees(2)
    
    
    
    
    
    
    399Tax fees
    
    
    
    
    
    
    Other fees
    
    
    
    
    
    
    Total
    
    
    823
    
    
    
    1,516
 
 (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 2007 involve principally the issue of comfort
letter and rendering of listing advice in connection with our IPO and certain agreed upon
procedures in connection with our acquisitions.  
 Item 16D. Exemptions from the Listing Standards for Audit Committees
  
 Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
  85




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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, 2006 and 2007
    
    
    F-3Consolidated Statements of Income for the years ended December 31, 2005, 2006 and 2007
    
    
    F-4Consolidated Statements of Shareholders Equity and Comprehensive Income for the years
ended December 31, 2005, 2006 and 2007
    
    
    F-5Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2006 and 2007
    
    
    F-6Notes to the Consolidated Financial Statements
    
    
    F-8
 86




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##### Table of Contents



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
 
 *
    
    Previously filed with the Registrants registration statement on Form F-1 (File No. 333-141539) on March 23, 2007.**
    
    Filed herewith. 87




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##### Table of Contents



SIGNATURES
  Simcere Pharmaceutical GroupBy:
    /s/ Jinsheng RenName:
    Jinsheng RenTitle:
    Chief Executive Officer  88




---



##### 



Contents
    
    
    PageReport of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets as of December 31, 2006 and 2007
    
    
    F-3Consolidated Statements of Income for the years ended December 31,
2005, 2006 and 2007
    
    
    F-4Consolidated Statements of Shareholders Equity and Comprehensive
Income for the years ended December 31, 2005, 2006 and
2007
    
    
    F-5Consolidated Statements of Cash Flows for the years ended December
31, 2005, 2006 and 2007
    
    
    F-6,7Notes to Consolidated Financial Statements
    
    
    F-8
  F-1




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 To the Board of Directors and Shareholders of  Simcere Pharmaceutical Group:
      
 F-2




---



##### Table of Contents



Simcere Pharmaceutical Group and Subsidiaries
 
 Consolidated Balance Sheets
As of December 31, 2006 and 2007
(Amounts expressed in thousands, except share data)
 December 31,Note
    
    
    2006
    
    
    2007
    
    
    2007RMB
    
    
    RMB
    
    
    US$AssetsCurrent assetsCash and cash equivalents
    
    
    
    
    
    
    106,027
    
    
    
    497,352
    
    
    
    68,181Pledged bank deposits
    
    
    2
    (d)
    
    
    20,787
    
    
    
    910
    
    
    
    125Short-term investments
    
    
    2
    (e)
    
    
    
    
    
    
    470,000
    
    
    
    64,431Accounts and bills receivables, net of allowance
for doubtful accounts
    
    
    3
    
    
    
    162,781
    
    
    
    488,374
    
    
    
    66,950Inventories
    
    
    4, 19
    
    
    
    39,483
    
    
    
    65,241
    
    
    
    8,944Prepaid expenses and other current assets
    
    
    5
    
    
    
    79,192
    
    
    
    26,037
    
    
    
    3,569Amounts due from related parties
    
    
    19
    
    
    
    434
    
    
    
    7,503
    
    
    
    1,029Deferred income taxes, net
    
    
    11
    
    
    
    2,725
    
    
    
    1,736
    
    
    
    238Total current assets
    
    
    
    
    
    
    411,429
    
    
    
    1,557,153
    
    
    
    213,467Property, plant and equipment, less
accumulated depreciation and amortization
    
    
    6
    
    
    
    267,054
    
    
    
    374,058
    
    
    
    51,279Land use rights
    
    
    7
    
    
    
    82,522
    
    
    
    116,386
    
    
    
    15,955Deposits for
purchase of property, plant and equipment
    
    
    
    
    
    
    4,056
    
    
    
    3,579
    
    
    
    491Intangible assets, net
    
    
    8
    
    
    
    163,148
    
    
    
    251,221
    
    
    
    34,439Goodwill
    
    
    8
    
    
    
    100,634
    
    
    
    161,496
    
    
    
    22,139Deferred income taxes, net
    
    
    11
    
    
    
    5,704
    
    
    
    8,315
    
    
    
    1,140Total assets
    
    
    
    
    
    
    1,034,547
    
    
    
    2,472,208
    
    
    
    338,910LiabilitiesCurrent liabilitiesShort-term bank loans and other borrowings
    
    
    9
    
    
    
    333,000
    
    
    
    29,000
    
    
    
    3,976Accounts and bills payables
    
    
    
    
    
    
    20,089
    
    
    
    23,711
    
    
    
    3,250Accrued payroll and employee benefits
    
    
    
    
    
    
    23,766
    
    
    
    29,634
    
    
    
    4,062Other payables and accrued liabilities
    
    
    12
    
    
    
    169,874
    
    
    
    255,777
    
    
    
    35,064Amounts due to related parties
    
    
    19
    
    
    
    1,352
    
    
    
    
    
    
    
    Income taxes payable
    
    
    11
    
    
    
    20,092
    
    
    
    4,515
    
    
    
    619Total current liabilities
    
    
    
    
    
    
    568,173
    
    
    
    342,637
    
    
    
    46,971Long-term loan
    
    
    10
    
    
    
    
    
    
    
    52,000
    
    
    
    7,129Deferred income taxes
    
    
    11
    
    
    
    23,634
    
    
    
    61,690
    
    
    
    8,457Other long term liabilities
    
    
    11
    
    
    
    
    
    
    
    19,928
    
    
    
    2,732Total liabilities
    
    
    
    
    
    
    591,807
    
    
    
    476,255
    
    
    
    65,289Minority interests
    
    
    
    
    
    
    
    
    
    
    12,137
    
    
    
    1,664Shareholders equityOrdinary shares US$0.01 par value:500,000,000 shares authorized,
100,000,000 and 125,006,200 shares issued and outstanding as of
December
31, 2006 and 2007, respectively
    
    
    
    
    
    
    7,909
    
    
    
    9,840
    
    
    
    1,349Additional paid-in capital
    
    
    
    
    
    
    265,964
    
    
    
    1,550,697
    
    
    
    212,581Accumulated other comprehensive loss
    
    
    21
    
    
    
    
    
    
    
    (46,849
    )
    
    
    (6,422
    )Retained earnings
    
    
    
    
    
    
    168,867
    
    
    
    470,128
    
    
    
    64,449Total shareholders equity
    
    
    
    
    
    
    442,740
    
    
    
    1,983,816
    
    
    
    271,957Commitments and contingencies
    
    
    15Total liabilities, minority interests and
shareholders equity
    
    
    
    
    
    
    1,034,547
    
    
    
    2,472,208
    
    
    
    338,910
  F-3




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##### Table of Contents



Simcere Pharmaceutical Group and Subsidiaries
 
 Consolidated Statements of Income
Years ended December 31, 2005, 2006 and 2007
(Amounts expressed in thousands, except share data)
 Years ended December 31,Note
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2007RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Product revenues
    
    
    17, 19
    
    
    
    736,220
    
    
    
    947,797
    
    
    
    1,363,014
    
    
    
    186,852Other revenue
    
    
    2
    (k)
    
    
    794
    
    
    
    2,809
    
    
    
    5,734
    
    
    
    786Total revenue
    
    
    
    
    
    
    737,014
    
    
    
    950,606
    
    
    
    1,368,748
    
    
    
    187,638Cost of materials and production
    
    
    19
    
    
    
    (171,074
    )
    
    
    (190,560
    )
    
    
    (241,081
    )
    
    
    (33,049
    )Gross profit
    
    
    
    
    
    
    565,940
    
    
    
    760,046
    
    
    
    1,127,667
    
    
    
    154,589Operating expenses:Research and development expenses
    
    
    
    
    
    
    (16,288
    )
    
    
    (34,289
    )
    
    
    (68,295
    )
    
    
    (9,362
    )Sales, marketing and distribution expenses
    
    
    
    
    
    
    (312,426
    )
    
    
    (442,757
    )
    
    
    (634,449
    )
    
    
    (86,975
    )General and administrative expenses
    
    
    
    
    
    
    (87,139
    )
    
    
    (98,249
    )
    
    
    (161,061
    )
    
    
    (22,080
    )Income from operations
    
    
    
    
    
    
    150,087
    
    
    
    184,751
    
    
    
    263,862
    
    
    
    36,172Interest income
    
    
    
    
    
    
    932
    
    
    
    2,827
    
    
    
    24,361
    
    
    
    3,340Interest expense
    
    
    6
    
    
    
    (14,999
    )
    
    
    (10,705
    )
    
    
    (6,346
    )
    
    
    (870
    )Foreign currency exchange gains
    
    
    21
    
    
    
    
    
    
    
    
    
    
    
    24,670
    
    
    
    3,382Other income
    
    
    15
    
    
    
    
    
    
    
    
    
    
    
    20,526
    
    
    
    2,814Earnings before income taxes
and minority interests
    
    
    
    
    
    
    136,020
    
    
    
    176,873
    
    
    
    327,073
    
    
    
    44,838Income tax expense
    
    
    11
    
    
    
    (32,514
    )
    
    
    (6,952
    )
    
    
    (13,527
    )
    
    
    (1,854
    )Income before minority interests
    
    
    
    
    
    
    103,506
    
    
    
    169,921
    
    
    
    313,546
    
    
    
    42,984Minority interests
    
    
    
    
    
    
    (761
    )
    
    
    2,337
    
    
    
    (12,285
    )
    
    
    (1,684
    )Net income
    
    
    
    
    
    
    102,745
    
    
    
    172,258
    
    
    
    301,261
    
    
    
    41,300Earnings per share:Basic
    
    
    16
    
    
    
    1.49
    
    
    
    1.86
    
    
    
    2.56
    
    
    
    0.35Diluted
    
    
    16
    
    
    
    1.49
    
    
    
    1.86
    
    
    
    2.48
    
    
    
    0.34
  F-4




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##### Table of Contents



Simcere Pharmaceutical Group and Subsidiaries
 
 Consolidated
Statements of Shareholders Equity and Comprehensive Income
Years ended December 31, 2005, 2006 and 2007
(Amounts expressed in thousands, except share data)
 Share CapitalAccumulated
    
    
    
    
    
    
    TotalNumber of
    
    
    
    
    
    
    Additional
    
    
    other
    
    
    
    
    
    
    shareholders
    
    
    TotalContributed
    
    
    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, 2005
    
    
    
    
    
    
    60,200
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    59,790
    
    
    
    119,990Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    102,745
    
    
    
    102,745
    
    
    
    102,745Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    102,745Distribution to shareholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30,198
    )
    
    
    (30,198
    )Balance as of December 31,
2005
    
    
    
    
    
    
    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
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    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
(US$6,320)
    
    
    
    
    
    
    
    
    
    
    25,000,000
    
    
    
    1,931
    
    
    
    1,253,778
    
    
    
    
    
    
    
    
    
    
    
    1,255,709Share-based compensation
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,764
    
    
    
    
    
    
    
    
    
    
    
    30,764Issuance of ordinary shares
upon exercise of share
options
    
    
    18
    
    
    
    
    
    
    
    6,200
    
    
    
    
    
    
    
    191
    
    
    
    
    
    
    
    
    
    
    
    191Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    301,261
    
    
    
    301,261
    
    
    
    301,261Foreign currency translation
adjustments
    
    
    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
    
    
    
    1,983,816Balance as of December 31,
2007  US$
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,349
    
    
    
    212,581
    
    
    
    (6,422
    )
    
    
    64,449
    
    
    
    271,957
  F-5




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##### Table of Contents



Simcere Pharmaceutical Group and Subsidiaries
 
 Consolidated Cash Flow Statements
 Years ended December 31, 2005, 2006 and 2007
 (Amounts expressed in thousands, except share data)
 Years ended December 31,Note
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2007RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Operating activities:Net income
    
    
    
    
    
    
    102,745
    
    
    
    172,258
    
    
    
    301,261
    
    
    
    41,300Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation of property, plant and equipment
    
    
    
    
    
    
    14,543
    
    
    
    17,202
    
    
    
    27,770
    
    
    
    3,807Amortization of intangible assets
    
    
    
    
    
    
    2,289
    
    
    
    4,812
    
    
    
    15,084
    
    
    
    2,068Acquired in-process research and development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    884
    
    
    
    121Loss/(gain) on disposal of property, plant and equipment
    
    
    
    
    
    
    2,296
    
    
    
    (513
    )
    
    
    (2,526
    )
    
    
    (346
    )Minority interests
    
    
    
    
    
    
    761
    
    
    
    (2,337
    )
    
    
    12,285
    
    
    
    1,684Deferred income tax (benefit) expense
    
    
    
    
    
    
    (1,436
    )
    
    
    (2,124
    )
    
    
    11,009
    
    
    
    1,509Share based compensation expense
    
    
    
    
    
    
    
    
    
    
    3,437
    
    
    
    30,764
    
    
    
    4,217Unrealized foreign currency exchange gains
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (45,350
    )
    
    
    (6,217
    )Changes in assets and liabilities, net of effects from acquisitionsIncrease in accounts and bills receivables
    
    
    
    
    
    
    (30,884
    )
    
    
    (31,809
    )
    
    
    (314,807
    )
    
    
    (43,156
    )(Increase)/decrease in inventories
    
    
    
    
    
    
    (12,415
    )
    
    
    4,145
    
    
    
    (11,091
    )
    
    
    (1,520
    )(Increase)/decrease in prepaid expenses and other current assets
    
    
    
    
    
    
    (5,780
    )
    
    
    (18,609
    )
    
    
    47,704
    
    
    
    6,539Decrease in prepaid land use rights
    
    
    
    
    
    
    1,143
    
    
    
    1,458
    
    
    
    1,956
    
    
    
    268Decrease in amounts due from related parties
    
    
    
    
    
    
    4,855
    
    
    
    869
    
    
    
    166
    
    
    
    23(Decrease)/increase in accounts and bills payables
    
    
    
    
    
    
    (24,573
    )
    
    
    (1,416
    )
    
    
    1,084
    
    
    
    149Increase in accrued payroll and employee benefits
    
    
    
    
    
    
    6,438
    
    
    
    6,189
    
    
    
    4,946
    
    
    
    678Increase/(decrease) in other payables and accrued liabilities
    
    
    
    
    
    
    24,345
    
    
    
    (17,246
    )
    
    
    67,644
    
    
    
    9,272Increase/(decrease) in income taxes payable
    
    
    
    
    
    
    22,082
    
    
    
    (17,474
    )
    
    
    2,984
    
    
    
    409(Decrease)/increase in amounts due to related parties
    
    
    
    
    
    
    (70
    )
    
    
    109
    
    
    
    (1,352
    )
    
    
    (185
    )Net cash provided by operating activities
    
    
    
    
    
    
    106,339
    
    
    
    118,951
    
    
    
    150,415
    
    
    
    20,620Investing activities:Payment for purchase of land use rights
    
    
    
    
    
    
    (20,635
    )
    
    
    (2,142
    )
    
    
    (20,449
    )
    
    
    (2,803
    )Purchase of property, plant and equipment
    
    
    
    
    
    
    (23,986
    )
    
    
    (85,676
    )
    
    
    (78,143
    )
    
    
    (10,712
    )Payment of deposits for purchase of property, plant and equipment
    
    
    
    
    
    
    
    
    
    
    (4,056
    )
    
    
    
    
    
    
    Proceeds from disposal of property, plant and equipment
    
    
    
    
    
    
    
    
    
    
    2,417
    
    
    
    
    
    
    
    Payment for acquisition of Nanjing Simcere
    
    
    
    
    
    
    (7,100
    )
    
    
    
    
    
    
    
    
    
    
    Payments for acquisitions of additional equity interests
    
    
    8
    (a)
    
    
    
    
    
    
    (10,927
    )
    
    
    (27,064
    )
    
    
    (3,710
    )Payment for acquisition of Yantai Medgenn
    
    
    
    
    
    
    
    
    
    
    (177,959
    )
    
    
    
    
    
    
    Payment for acquisition of Boda
    
    
    8
    (a)
    
    
    
    
    
    
    
    
    
    
    (101,735
    )
    
    
    (13,947
    )Payment for acquisition of Master Luck
    
    
    8
    (a)
    
    
    
    
    
    
    
    
    
    
    (29,776
    )
    
    
    (4,082
    )Increase in short term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (470,000
    )
    
    
    (64,431
    )Decrease/(increase) in pledged bank deposits
    
    
    
    
    
    
    15,000
    
    
    
    (15,787
    )
    
    
    19,877
    
    
    
    2,725Proceeds from repayments of loans and advances due from
related parties
    
    
    19
    
    
    
    39,890
    
    
    
    40,351
    
    
    
    212
    
    
    
    29Proceeds from disposal of property, plant and equipment, and land
use right to related parties
    
    
    19
    
    
    
    
    
    
    
    
    
    
    
    11,104
    
    
    
    1,522Loans and advances made to related parties
    
    
    19
    
    
    
    (4,388
    )
    
    
    (5,417
    )
    
    
    
    
    
    
    Net cash used in investing activities
    
    
    
    
    
    
    (1,219
    )
    
    
    (259,196
    )
    
    
    (695,974
    )
    
    
    (95,409
    )Financing activities:Proceeds from issuance of ordinary shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,301,808
    
    
    
    178,462Proceeds from exercise of share options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    191
    
    
    
    26Payments for offering costs
    
    
    
    
    
    
    
    
    
    
    (6,753
    )
    
    
    (39,346
    )
    
    
    (5,394
    )Proceeds from short-term bank loans and other borrowings
    
    
    
    
    
    
    210,500
    
    
    
    291,000
    
    
    
    
    
    
    
    Principal repayments of bank borrowings
    
    
    
    
    
    
    (332,500
    )
    
    
    (174,800
    )
    
    
    (314,000
    )
    
    
    (43,046
    )Repayment of loans and advances due to related parties
    
    
    19
    
    
    
    (436,446
    )
    
    
    (158,489
    )
    
    
    
    
    
    
    Proceeds from loans and advances due to related parties
    
    
    
    
    
    
    467,225
    
    
    
    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
    
    
    
    
    
    
    (26,891
    )
    
    
    (1,474
    )
    
    
    
    
    
    
    Capital contribution from minority interests
    
    
    
    
    
    
    380
    
    
    
    
    
    
    
    
    
    
    
    Distribution by a subsidiary to its minority shareholder
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,270
    )
    
    
    (1,408
    )Net cash (used in)/provided by financing activities
    
    
    
    
    
    
    (117,732
    )
    
    
    156,212
    
    
    
    938,383
    
    
    
    128,640
  F-6




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##### Table of Contents



Simcere Pharmaceutical Group and Subsidiaries
 
 Notes to Consolidated Financial Statements
 Years ended December 31, 2005, 2006 and 2007
 (Amounts expressed in thousands, except share data)
 Years ended December 31,2005
    
    
    2006
    
    
    2007
    
    
    2007RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Effect of exchange rate changes on cash and cash equivalents
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,499
    )
    
    
    (205
    )Net (decrease)/increase in cash and cash equivalents
    
    
    
    
    
    
    (12,612
    )
    
    
    15,967
    
    
    
    391,325
    
    
    
    53,646Cash and cash equivalents at beginning of year
    
    
    
    
    
    
    102,672
    
    
    
    90,060
    
    
    
    106,027
    
    
    
    14,535Cash and cash equivalents at end of year
    
    
    
    
    
    
    90,060
    
    
    
    106,027
    
    
    
    497,352
    
    
    
    68,181(a) Supplemental cash flow and non-cash information:Cash and cash equivalents paid during the period for:Income taxes
    
    
    
    
    
    
    21,062
    
    
    
    22,730
    
    
    
    3,056
    
    
    
    419Interest, net of capitalized interest
    
    
    
    
    
    
    14,625
    
    
    
    12,303
    
    
    
    6,418
    
    
    
    880Non-cash investing transactions:Payable for acquisition of property, plant and equipment
and land use right
    
    
    
    
    
    
    16,722
    
    
    
    68,276
    
    
    
    39,791
    
    
    
    5,455Payable for acquisition of Yantai Medgenn
    
    
    
    
    
    
    
    
    
    
    9,830
    
    
    
    
    
    
    
    Payable for acquisition of Boda
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,323
    
    
    
    1,141Non-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 Yantai Medgenn in
2006RMBCash consideration paid
    
    
    
    
    
    
    
    
    
    
    (186,769
    )Cash and cash equivalents acquired
    
    
    
    
    
    
    
    
    
    
    8,810Net cash outflow in respect of acquisition of Yantai Medgenn
    
    
    
    
    
    
    
    
    
    
    (177,959
    )ii) Acquisition of Boda in 2007Cash consideration paid
    
    
    
    
    
    
    
    
    
    
    (114,738
    )Cash and cash equivalents acquired
    
    
    8
    (a)
    
    
    
    
    
    
    13,003Net cash outflow in respect of acquisition of Boda
    
    
    
    
    
    
    
    
    
    
    (101,735
    )iii) Acquisition of Master Luck in 2007Cash consideration paid
    
    
    
    
    
    
    
    
    
    
    (32,927
    )Cash and cash equivalents acquired
    
    
    8
    (a)
    
    
    
    
    
    
    3,151Net cash outflow in respect of acquisition of Master Luck
    
    
    
    
    
    
    
    
    
    
    (29,776
    )
  F-7




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##### Table of Contents



Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
Years ended December 31, 2005, 2006 and 2007
(Amounts expressed in thousands, except share data)
 1
    
    Principal activities, organization and basis of presentation(a)
    
    Principal activitiesSimcere 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. (formerly Yantai
Medgenn Co., Ltd., Yantai Medgenn), Jilin Province Boda Pharmaceutical Co., Ltd. (Boda), Master
Luck Corporation Ltd. (Master Luck), and Nanjing Tung Chit Pharmaceutical Co., Ltd. (Tung
Chit), 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.The following list contains the particulars of operating subsidiaries which principally affected
the results, assets or liabilities of the Group:
 Percentage of ownershipDecember 31,Name of subsidiary
    
    Principal activity
    
    2006
    
    2007Hainan Simcere
    
    Manufacturing of pharmaceutical products and sales to the sales
entities of the Group (Jiangsu Simcere and Shanghai Simcere)
    
    
    100
    %
    
    
    100
    %Nanjing Simcere
    
    Manufacturing of pharmaceutical products and sales to the sales
entities of the Group (Jiangsu Simcere and Shanghai Simcere)
    
    
    100
    %
    
    
    100
    %Qitian Simcere
    
    Manufacturing of pharmaceutical products and sales to the sales
entities of the Group (Jiangsu Simcere and Shanghai Simcere)
    
    
    100
    %
    
    
    100
    %Sichuan Simcere
    
    The extraction of minerals used in the manufacturing of the Groups
pharmaceutical products
    
    
    100
    %
    
    
    100
    %Jiangsu Simcere
    
    Sales and distribution of pharmaceutical products to customers
    
    
    100
    %
    
    
    100
    %Shanghai Simcere
    
    Sales and distribution of pharmaceutical products to customers
    
    
    100
    %
    
    
    100
    %Simcere Research
    
    Research and development of pharmaceutical products
    
    
    100
    %
    
    
    100
    %Yantai Medgenn
    
    Manufacturing of pharmaceutical products and sales to the sales
entities of the Group (Jiangsu Simcere and Shanghai Simcere)
(note i)
    
    
    80
    %
    
    
    90
    %Boda
    
    Manufacturing of pharmaceutical products and direct sales to third
parties (note ii)
    
    
    
    
    
    
    51
    %Tung Chit
    
    Manufacturing of pharmaceutical products and direct sales to third
parties (note iii)
    
    
    
    
    
    
    85.71
    %
 
 Notes:(i)
    
    The additional 10% of the equity interest of Yantai Medgenn was acquired on June 13, 2007.
See note 8.(ii)
    
    Boda was acquired on October 18, 2007. See note 8.(iii)
    
    Tung Chit was acquired on November 21, 2007. See note 8. 
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
Years ended December 31, 2005, 2006 and 2007
(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 the initial public offering (IPO) of 15,625,000 Amercian 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 (RMB23,108) 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.(b)
    
    Significant concentrations and risksRevenue 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, 2005, 2006 and 2007, 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$13,709)
individually for the year ended December 31, 2007. Aggregate sales of these products accounted for
65.7%, 70.6% and 78.5% of the Groups product revenues for the years ended December 31, 2005, 2006
and 2007, respectively. 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
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, 2005, 2006 and 2007, the percentages of the Groups revenues
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
Years ended December 31, 2005, 2006 and 2007
(Amounts expressed in thousands, except share data)
 from products that were subject to government pricing controls were 78%, 77% and 73%, respectively.Concentration of suppliersFor the years ended December 31, 2005, 2006 and 2007, the Group purchased 49.9%, 50.9% and 50.9%,
respectively, of its total supply of raw materials from its five largest suppliers.Cash and short term investment concentrationsAs of December 31, 2006 and 2007, RMB101,844 and RMB931,167 (US$127,651), respectively, in cash and
short term investments were held in uninsured accounts at major financial institutions located in
the PRC, and cash and short term investments of RMB4,183 and RMB36,185 (US$4,961), respectively,
were held in insured accounts at major financial institutions located in the Hong Kong Special
Administrative Region (the HK SAR) and the coverage limit is HK$100 per depositor per financial
institution. Further, as of December 31, 2006 and 2007, the Groups cash balance included U.S.
dollar denominated bank deposits of US$971 and US$22 (RMB158), respectively, in uninsured accounts
at major institutions located in the PRC, and US$536 and US$4,692 (RMB34,227), respectively, in
insured accounts at major financial institutions located in the HK SAR and the coverage limit is
HK$100 per depositor per financial institution. Management believes that these major financial
institutions are of high credit quality.(c)
    
    OrganizationThe 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 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 Investments 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 (RMB134,425). Concurrently, AAI subscribed for 15,500
ordinary shares of SGG for cash of US$26,400 (RMB210,236).Upon the completion of the IPO in April 2007, NGM and AAI held 51.75% and 23.25% equity interests
in the Company, respectively.
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
Years ended December 31, 2005, 2006 and 2007
(Amounts expressed in thousands, except share data)
 (d)
    
    Basis of presentationThe 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 years ended December 31,
2005, 2006 and 2007 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 the earliest date
presented. 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)
    
    ConsolidationThe consolidated financial statements include the financial statements of the Company and its
majority-owned subsidiaries. All significant intercompany balances and transactions have been
eliminated on 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 estimatesThe 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 relating to the reported
amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of revenues and expenses
during the period. 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; allowance for doubtful
receivables; valuation allowance for deferred tax assets; depreciation and amortizable lives;
recoverability of inventories produced; and amounts recorded for contingencies. These estimates
are often based on complex judgments, probabilities and assumptions that management believe to be
reasonable but are inherently uncertain and unpredictable. Actual results may differ from those
estimates. The Group is also subject to other risks and uncertainties that may cause actual
results to differ from estimated amounts, such as competition, foreign exchange, litigation,
legislation and regulations in the pharmaceutical industry.(c)
    
    Foreign currency translationThe 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
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
Years ended December 31, 2005, 2006 and 2007
(Amounts expressed in thousands, except share data)
 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 the 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=RMB7.2946,
representing the noon buying rate in The City of New York for cable transfers of RMB on December
31, 2007, 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, 2007 or on any other date.(d)
    
    Cash and cash equivalents and pledged bank depositsCash and cash equivalents consist of cash on hand, cash in bank accounts, interest-bearing savings
accounts, 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 or to another subsidiary of the Company.
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 the use by the Group.
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
Years ended December 31, 2005, 2006 and 2007
(Amounts expressed in thousands, except share data)
 (e)
    
    Short-term investmentsThe 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 balance sheet because the Company has the intent and ability to hold these investments to
maturity. All short-term investments are denominated in RMB, and have maturity terms ranging from
six to twelve months and fixed interest rates ranging from 4.4% to 6.4% per annum as of December
31, 2007. 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 receivableAccounts 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, ageing 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. 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. Bills receivable primarily represents a short-term notes
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)
    
    InventoriesInventories 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 assetsProperty, 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
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
Years ended December 31, 2005, 2006 and 2007
(Amounts expressed in thousands, except share data)
 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 revenues when the inventory
is sold.Total depreciation expense for the years ended December 31, 2005, 2006 and 2007 amounted to
RMB14,543, RMB17,202 and RMB 27,770 (US$3,807), respectively.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
    
    2 -   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. Fair
value of the reporting unit is determined using a discounted cash flow analysis. For the year
ended December 31, 2007, the Group performed its annual impairment review of goodwill and concluded
that there was no impairment.(i)
    
    Land use rightsA 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
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
Years ended December 31, 2005, 2006 and 2007
(Amounts expressed in thousands, except share data)
 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 taxesIncome taxes are accounted for under the asset and liability method. Deferred income 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 losses and tax credit carryforwards. A valuation
allowance is provided to reduce the carrying amount of deferred income tax assets if it considered
more likely than not that some portion or all of the deferred income tax assets will not be
realized. Deferred income 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. The effect on deferred income tax assets and liabilities of a change in tax
rates is recognized in 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, the Group 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 ultimate 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. As a result of the adoption of FIN 48, the Group evaluated its
income tax position and reclassified RMB14,195 of unrecognized tax benefits from current
liabilities to long-term liabilities as of January 1, 2007.(k)
    
    RevenuesSales 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.
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
Years ended December 31, 2005, 2006 and 2007
(Amounts expressed in thousands, except share data)
 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 grantsGovernment 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 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.For the years ended December 31, 2005, 2006 and 2007, RMB1,850, RMB2,183 and RMB10,000 (US$1,371),
respectively, have been recognized as a reduction of research and development expenses.(m)
    
    Research and developmentResearch 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.
Upfront and milestone payments made by the Group to third parties in connection with research and
development collaboration arrangements prior to regulatory approval are expensed as research and
development costs when the milestone results are achieved.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 costsAdvertising costs are expensed as incurred and included in sales, marketing and distribution
expenses. Advertising costs for the years ended December 31, 2005, 2006 and 2007 amounted to
RMB16,562, RMB78,701 and RMB31,016 (US$4,252), respectively.
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
Years ended December 31, 2005, 2006 and 2007
(Amounts expressed in thousands, except share data)
 (o)
    
    Shipping and handling fees and costsCosts 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, 2005, 2006 and 2007 amounted to RMB14,155, RMB13,819 and RMB11,912 (US$ 1,633),
respectively.(p)
    
    Retirement and other postretirement benefitsContributions 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 paymentThe Company adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004),
Share-based Payment(SFAS No. 123R) beginning January 1, 2006. Under SFAS No. 123R, the Company
is required to measure 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 in
the Companys consolidated statements of income over the period during which an employee is
required to provide service in exchange for the award, which generally is the vesting period.For the year ended December 31, 2005, the Company did not entered into any share-based payment
arrangements.(r)
    
    Commitments and contingenciesIn 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 shareIn 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 years ended December 31, 2005 and 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 January 1, 2005 and March 28, 2006, respectively.
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
Years ended December 31, 2005, 2006 and 2007
(Amounts expressed in thousands, except share data)
 (t)
    
    Segment reportingThe 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)
    
    Recently issued accounting standardsFASB Statement No. 157 (SFAS No. 157)In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value,
provides a framework for measuring fair value, and expands the disclosure required for fair value
measurement. SFAS No. 157 applies to other accounting pronouncements that require fair value
measurements and does not require any new fair value measurements. SFAS No. 157 is effective for
fiscal years beginning after November 15, 2007 and is effective for the Group on January 1, 2008.
However, FASB Staff Position FAS No. 157-2 delayed the adoption date until January 1, 2009 for
nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair
value in the financial statements on a recurring basis. Although
management will continue to
evaluate the application of SFAS No. 157, management does not expect the initial adoption of SFAS
No. 157 to have a material impact on the Groups financial position and results of operations.FASB Statement No. 159 (SFAS No.159)In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities, including an Amendment of SFAS No. 115, which allows an entity to choose to
measure certain financial assets and liabilities at fair value. Subsequent measurements for the
financial assets and liabilities an entity elects to measure at fair value will be recognized in
earnings. SFAS No. 159 also establishes additional disclosure requirements. SFAS No. 159 is
effective for financial statements issued for fiscal years beginning after 15 November 2007. On
January 1, 2008, management elected not to adopt this optional standard.FASB Statement No. 141R (SFAS No. 141R)In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combination, which replaces
FASB Statement No. 141. SFAS No. 141R establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired. SFAS
No. 141R also establishes disclosure requirements that will enable users to evaluate the nature and
financial effects of the business combination. SFAS No. 141R applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 31, 2008. SFAS No. 141R is required to be adopted
by the Group on January 1, 2009. SFAS No. 141R will have an impact on accounting for business
combinations but the effect is dependent upon acquisitions at that time.
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
Years ended December 31, 2005, 2006 and 2007
(Amounts expressed in thousands, except share data)
 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 requires that accounting and reporting for
minority interests will be characterized as noncontrolling interests and classified as a component
of equity. SFAS No. 160 also establishes reporting requirements that provide sufficient
disclosures that clearly identify and distinguish between the interests of the parent and the
interests of the noncontrolling owners. SFAS No. 160 applies to all entities that prepare
consolidated financial statements, except not-for-profit organizations, but will affect only those
entities that have an outstanding noncontrolling interest in one or more subsidiaries or that
deconsolidate a subsidiary. Moreover, SFAS No. 160 establishes a single method of accounting for
changes in a parents ownership interest in a subsidiary that do not result in deconsolidation by
requiring those transactions to be accounted for as equity transactions. SFAS No. 160 is effective
for financial statements issued for fiscal years beginning on or after December 15, 2008. SFAS No.
160 will be required to be adopted by the Group on January 1, 2009. Management currently does not
expect the initial adoption of SFAS No. 160 to have a material impact on the consolidated financial
position and results of operations.
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
Years ended December 31, 2005, 2006 and 2007
(Amounts expressed in thousands, except share data)
 3
    
    Accounts and bills receivables, net of allowance for doubtful accountsAccounts and bills receivables, net of allowance for doubtful accounts, are summarized as follows:
 December 31,2006
    
    
    2007
    
    
    2007RMB
    
    
    RMB
    
    
    US$Accounts receivable
    
    
    68,557
    
    
    
    175,495
    
    
    
    24,058Less: allowance for doubtful accounts
    
    
    (6,834
    )
    
    
    (7,709
    )
    
    
    (1,057
    )Accounts receivable, net
    
    
    61,723
    
    
    
    167,786
    
    
    
    23,001Bill receivable, net
    
    
    101,058
    
    
    
    320,588
    
    
    
    43,949162,781
    
    
    
    488,374
    
    
    
    66,950
 The movements of allowance for doubtful accounts are as follows:
 Years ended December 31,2005
    
    
    2006
    
    
    2007
    
    
    2007RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Balance at the beginning of the year
    
    
    7,658
    
    
    
    5,556
    
    
    
    6,834
    
    
    
    937Additions charged to bad debt expense
    
    
    426
    
    
    
    1,433
    
    
    
    1,203
    
    
    
    165Additions related to acquisitions of subsidiaries
    
    
    
    
    
    
    
    
    
    
    1,074
    
    
    
    147Write-off of accounts receivable charged against
the allowance
    
    
    (2,528
    )
    
    
    (155
    )
    
    
    (1,402
    )
    
    
    (192
    )Balance at the end of the year
    
    
    5,556
    
    
    
    6,834
    
    
    
    7,709
    
    
    
    1,057
 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.4
    
    InventoriesInventories by major categories are summarized as follows:
 December 31,2006
    
    
    2007
    
    
    2007RMB
    
    
    RMB
    
    
    US$Raw materials
    
    
    11,407
    
    
    
    15,548
    
    
    
    2,131Consumables and packaging materials
    
    
    5,639
    
    
    
    10,445
    
    
    
    1,432Work-in-progress
    
    
    3,589
    
    
    
    4,337
    
    
    
    595Finished goods
    
    
    18,848
    
    
    
    34,911
    
    
    
    4,78639,483
    
    
    
    65,241
    
    
    
    8,944
 Inventory write-downs amounting to RMB1,407, RMB2,143 and RMB3,213 (US$440) were recognized in cost
of materials and production in the statements of income during the years ended December 31, 2005,
2006 and 2007, respectively.
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
Years ended December 31, 2005, 2006 and 2007
(Amounts expressed in thousands, except share data)
 5
    
    Prepaid expenses and other current assetsPrepaid expenses and other current assets consist of the following:
 December 31,2006
    
    
    2007
    
    
    2007RMB
    
    
    RMB
    
    
    US$Current portion of land use rights (note 7)
    
    
    1,630
    
    
    
    2,473
    
    
    
    339Prepaid expenses and advances to employees (note (a))
    
    
    2,097
    
    
    
    7,019
    
    
    
    961Prepaid VAT (note (b))
    
    
    40,865
    
    
    
    
    
    
    
    Prepaid research and development costs
    
    
    
    
    
    
    2,003
    
    
    
    275Interest receivable
    
    
    
    
    
    
    3,480
    
    
    
    477Deferred offering cost (note (c))
    
    
    18,528
    
    
    
    
    
    
    
    Short-term loan receivable (note (d))
    
    
    8,800
    
    
    
    
    
    
    
    Security and other deposits
    
    
    7,272
    
    
    
    2,736
    
    
    
    376Deposit for the acquisition of Master Luck (note (e))
    
    
    
    
    
    
    2,000
    
    
    
    274Prepaid legal and professional fees
    
    
    
    
    
    
    2,238
    
    
    
    307Others
    
    
    
    
    
    
    4,088
    
    
    
    56079,192
    
    
    
    26,037
    
    
    
    3,569
 Notes:(a)
    
    The amounts represented primarily advances to marketing agencies, prepaid expenses for
marketing and promotion activities.(b)
    
    The amount represented value added tax that was prepaid to a local tax authority to be used
to offset VAT payments to be made within 12 months from the balance sheet date.(c)
    
    The amount represented third-party legal and professional fees incurred in connection with
the IPO. Such costs were incremental to the Company as a result of the IPO and have been
charged against the gross proceeds on April 20, 2007, being the date on which the IPO was
consummated.(d)
    
    The amount represented short-term loan to a third-party which was non-interest bearing and
unsecured. The loan was fully repaid in 2007.(e)
    
    The amount represented a deposit placed with the selling shareholders in relation to the
acquisition of Master Luck (note 8). The amount was refunded in March 2008. F-21




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##### Table of Contents



Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
Years ended December 31, 2005, 2006 and 2007
(Amounts expressed in thousands, except share data)
 6
    
    Property, plant and equipmentProperty, plant and equipment consist of the following:
 December 31,2006
    
    
    2007
    
    
    2007RMB
    
    
    RMB
    
    
    US$Buildings and leasehold improvements
    
    
    134,154
    
    
    
    253,354
    
    
    
    34,732Machinery and equipment
    
    
    78,193
    
    
    
    110,987
    
    
    
    15,215Motor vehicles
    
    
    21,720
    
    
    
    29,184
    
    
    
    4,001Furniture, fixtures and office equipment
    
    
    12,186
    
    
    
    26,828
    
    
    
    3,678Construction-in-progress
    
    
    111,884
    
    
    
    79,541
    
    
    
    10,904358,137
    
    
    
    499,894
    
    
    
    68,530Less: accumulated depreciation and amortization
    
    
    (91,083
    )
    
    
    (125,836
    )
    
    
    (17,251
    )267,054
    
    
    
    374,058
    
    
    
    51,279
 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, 2005, 2006 and
2007:
 Years ended December 31,2005
    
    
    2006
    
    
    2007
    
    
    2007RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Interest cost capitalized
    
    
    
    
    
    
    1,550
    
    
    
    763
    
    
    
    105Interest cost charged to income
    
    
    14,999
    
    
    
    10,705
    
    
    
    6,346
    
    
    
    870Total interest cost incurred
    
    
    14,999
    
    
    
    12,255
    
    
    
    7,109
    
    
    
    975
 All of the Groups buildings are located in the PRC. As of December 31, 2006, property, plant and
equipment with carrying value of RMB55,041 were pledged to banks as collateral for short-term bank
loans of RMB81,000 (note 9). No property, plant and equipment were pledged to banks as of December
31, 2007.7
    
    Land use rightsThe balance consists of the following items:
 December 31,2006
    
    
    2007
    
    
    2007RMB
    
    
    RMB
    
    
    US$Deposits for land use rights
    
    
    4,000
    
    
    
    
    
    
    
    Land use rights:- non-current portion
    
    
    78,522
    
    
    
    116,386
    
    
    
    15,95582,522
    
    
    
    116,386
    
    
    
    15,955- current portion (note 5)
    
    
    1,630
    
    
    
    2,473
    
    
    
    339Total land use rights
    
    
    80,152
    
    
    
    118,859
    
    
    
    16,294
 Land lease expense (representing the recognition of the expense on a straight-line basis over the
terms of the land use right agreements) for the years ended December 31, 2005, 2006 and 2007, were
RMB1,143, RMB1,458 and RMB1,956 (US$268), respectively. As of December 31, 2006, land use rights
with carrying value of RMB 24,301 were pledged to banks as collateral for short-term bank loans of
RMB81,000 (note 9). No land use right was pledged to banks as of December 31, 2007.
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##### Table of Contents



Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
Years ended December 31, 2005, 2006 and 2007
(Amounts expressed in thousands, except share data)
 8
    
    Acquisitions, goodwill and intangible assets(a)
    
    AcquisitionsAcquisition of an additional 10% equity interest in Yantai MedgennOn June 13, 2007, upon receiving relevant regulatory approval, the Group completed its acquisition
of an additional 10% equity interest in Yantai Medgenn 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 economic lives of the identifiable intangible assets acquired in the
acquisition of the additional 10% interest in Yantai Medgenn 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 a 51% equity interest of BodaOn October 18, 2007, the Group completed its acquisition of 51% of the outstanding equity interest
in Boda, a PRC company based in Jilin 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. As of December 31, 2007, RMB114,738
(US$15,729) has been paid and RMB8,323 (US$1,141) will be 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.
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
Years ended December 31, 2005, 2006 and 2007
(Amounts expressed in thousands, except share data)
 The acquisition of the 51% equity interest in Boda resulted in the recognition of goodwill of
RMB46,105 (US$6,320) and intangible assets of RMB76,031 (US$10,423). 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:
 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 economic 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 each year. 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
each year. 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
    
    2007
    
    2007RMB
    
    RMB
    
    US$(unaudited)
    
    (unaudited)
    
    (unaudited)Product revenues
    
    
    983,910
    
    
    
    1,414,439
    
    
    
    193,902Income from operations
    
    
    179,014
    
    
    
    272,833
    
    
    
    37,402Net income
    
    
    163,695
    
    
    
    299,054
    
    
    
    40,997Earnings per shareBasic
    
    
    1.77
    
    
    
    2.54
    
    
    
    0.35Diluted
    
    
    1.77
    
    
    
    2.46
    
    
    
    0.34
 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
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
Years ended December 31, 2005, 2006 and 2007
(Amounts expressed in thousands, except share data)
 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:
 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 economic 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.(b)
    
    GoodwillThe changes in the carrying amount of goodwill for the years ended December 31, 2006 and 2007 are
as follows:
 Years ended December 31,2006
    
    
    2007
    
    
    2007RMB
    
    
    RMB
    
    
    US$Balance at the beginning of the year
    
    
    13,814
    
    
    
    100,634
    
    
    
    13,796Acquisition of Yantai Medgenn
    
    
    86,453
    
    
    
    10,576
    
    
    
    1,450Minority interest share in the post acquisition income of Yantai Medgenn
    
    
    (1,190
    )
    
    
    (4,049
    )
    
    
    (555
    )Acquisition of Simcere Research
    
    
    878
    
    
    
    
    
    
    
    Acquisition of Jiangsu Simcere
    
    
    679
    
    
    
    
    
    
    
    Acquisition of Boda
    
    
    
    
    
    
    46,105
    
    
    
    6,320Acquisition of Tung Chit
    
    
    
    
    
    
    8,230
    
    
    
    1,128Balance at the end of year
    
    
    100,634
    
    
    
    161,496
    
    
    
    22,139
 In July 2006, the Group acquired 10%, 15.96%, 5%, 20% and 22.23% of the equity interest in Shanghai
Simsere, Sichuan Simcere, Qitian Simcere, Simcere Research and Jiangsu Simcere, respectively, for a
total consideration of RMB10,927 payable in cash. As a results of these transactions, goodwill of
RMB1,557 was recorded. The remaining balance of goodwill as of December 31, 2006 of RMB99,077
related to the Groups acquisition of Nanjing Simcere in 2003 and 80% of the equity interest in
Yantai Medgenn in September 2006. The increase in goodwill in 2007 related to the Companys
acquisitions of 10% of Yantai Medgenn, the acquisition of 51% of Boda
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
Years ended December 31, 2005, 2006 and 2007
(Amounts expressed in thousands, except share data)
 and of 85.71% of Tung Chit. Goodwill arising from these acquisitions was allocated to the
reporting unit for the purpose of testing goodwill for impairment.
 (c)
    
    Intangible assets
 As of December 31, 2006 and 2007, the Groups intangible assets related to the Groups acquisitions
consisted of the following:
 December 31, 2006Gross
    
    
    
    
    
    NetAmortization
    
    Carrying
    
    Accumulated
    
    carryingPeriod
    
    Amount
    
    amortization
    
    amountYears
    
    RMB
    
    RMB
    
    RMBCustomer relationships
    
    
    10-11
    
    
    
    19,745
    
    
    
    (4,695
    )
    
    
    15,050Developed technology
    
    
    10-16
    
    
    
    149,004
    
    
    
    (4,652
    )
    
    
    144,352Product trademarks
    
    
    6-10
    
    
    
    4,303
    
    
    
    (1,136
    )
    
    
    3,167Manufacturing and supply licenses
    
    
    2-5
    
    
    
    1,395
    
    
    
    (816
    )
    
    
    579Total
    
    
    
    
    
    
    174,447
    
    
    
    (11,299
    )
    
    
    163,148
 December 31, 2007Gross
    
    
    
    
    
    NetAmortization
    
    Carrying
    
    Accumulated
    
    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
    )
    
    
    251,221Total  US$
    
    
    
    
    
    
    38,056
    
    
    
    (3,617
    )
    
    
    34,439
 The aggregate amortization expenses for intangible assets for the years ended December 31, 2005,
2006 and 2007, were RMB2,289, RMB4,812 and RMB15,084 (US$2,068), respectively. Amortization
expense of customer relationships is recorded in sales, marketing and distribution expense 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, 2007, the estimated
amortization expense for the next five years is as follows:
 December 31, 2007RMB1st year
    
    
    23,6122nd year
    
    
    23,5463rd year
    
    
    22,7754th year
    
    
    22,3915th year
    
    
    20,973113,297
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##### Table of Contents



Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
Years ended December 31, 2005, 2006 and 2007
(Amounts expressed in thousands, except share data)
 9
    
    Short-term bank loans and other borrowingsAs of December 31, 2006, short-term bank loans are denominated in RMB, and have maturity terms
ranging from three to twelve months and fixed interest rates ranging from 4.88% to 6.44% per annum.
None of the short-term loans contain any financial covenants. As of December 31, 2007, all
short-term bank loans were repaid. The weighted average effective interest rate on short-term
loans during the years ended December 31, 2005, 2006 and 2007, were 5.28%, 5.62% and 5.97% per
annum respectively.As of December 31, 2007, the Group had unutilized banking facilities of RMB390,000 with various
banks available to be drawn upon. As of December 31, 2006, the Group had no unutilized credit
facilities for which it can draw upon. As of December 31, 2006 and 2007, short-term bank loans and
borrowings are as follows:
 December 31,2006
    
    
    2007
    
    
    2007RMB
    
    
    RMB
    
    
    US$Unsecured
    
    
    79,000
    
    
    
    29,000
    
    
    
    3,976Secured by assets
    
    
    81,000
    
    
    
    
    
    
    
    Amount guaranteed by related parties
    
    
    160,000
    
    
    
    
    
    
    
    Amount guaranteed by third parties
    
    
    13,000
    
    
    
    
    
    
    
    333,000
    
    
    
    29,000
    
    
    
    3,976
 The RMB29,000 balance as of December 31, 2007 includes a RMB19,000 short-term, unsecured and
interest-free loan from a local district government in Shandong, PRC, which the Group obtained for
working capital needs, and a RMB10,000 short-term loan from a third party, that was non-interest
bearing and unsecured. The RMB10,000 loan was fully paid in 2008.10
    
    Long-term loanAs of December 31, 2007, the Group has a floating interest rate long-term loan obligation of
RMB52,000 (US$7,129) which is repayable over a 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
weighted-average effective interest rate of the long-term loan during the year ended December 31,
2007 was 7.03% per annum. The loan agreement does not require the Group to comply with any
financial covenants.Principal repayments required on the long-term loan outstanding as of December 31, 2007, are nil in
2008, nil in 2009, RMB5,000 in 2010, RMB4,700 in 2011, RMB4,700 in 2012 and RMB37,600 thereafter.11
    
    Income taxCayman IslandsUnder the current laws of the Cayman Islands, the Company is not subject to tax on its income or
capital gains. In addition, upon any payment or dividend paid by the Company, no withholding tax
is imposed.
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##### Table of Contents



Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
Years ended December 31, 2005, 2006 and 2007
(Amounts expressed in thousands, except share data)
 Peoples Republic of China
   
    
    Jiangsu Simcere, Simcere Research and Boda are subject to a tax rate of 33% from 2005 to
2007.
    
    Hainan Simcere is subject to 15% in 2005 and under a tax holiday in 2006 and 2007.
    
    Shanghai Simcere is subject to a tax rate of 33% in 2005 and 2006, and a tax rate of 15% in
2007.
    
    Yantai Medgenn is subject to a tax rate of 15% in 2005 and 2006 and is under a tax holiday
in 2007.
    
    Nanjing Simcere is subject to a tax rate of 33% in 2005 and is under a tax exemption period
in 2006 and 2007.
    
    Tung Chit is subject to a tax rate of 27% in 2005 and is under a tax holiday in 2006 and
2007.
    F-28




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##### Table of Contents



Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
Years ended December 31, 2005, 2006 and 2007
(Amounts expressed in thousands, except share data)
    December 31,2005
    
    
    2006
    
    
    2007
    
    
    2007RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Cayman Islands
    
    
    
    
    
    
    (3,454
    )
    
    
    (409
    )
    
    
    (56
    )British Virgin Islands
    
    
    
    
    
    
    22,819
    
    
    
    (7,795
    )
    
    
    (1,069
    )PRC
    
    
    136,020
    
    
    
    157,508
    
    
    
    335,277
    
    
    
    45,963Total earnings before
income taxes and minority
interest
    
    
    136,020
    
    
    
    176,873
    
    
    
    327,073
    
    
    
    44,838
 (a) Income taxes
  December 31,2005
    
    
    2006
    
    
    2007
    
    
    2007RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Current
    
    
    33,950
    
    
    
    9,076
    
    
    
    2,518
    
    
    
    345Deferred
    
    
    (1,436
    )
    
    
    (2,124
    )
    
    
    11,009
    
    
    
    1,509Income tax expense
    
    
    32,514
    
    
    
    6,952
    
    
    
    13,527
    
    
    
    1,854
 (b) Tax contingencies
  RMBBalance at January 1, 2007
    
    
    14,195Increase in unrecognized tax benefits
    
    
    5,733Balance at December 31, 2007
    
    
    19,928
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##### Table of Contents



Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
Years ended December 31, 2005, 2006 and 2007
(Amounts expressed in thousands, except share data)
   (c) Reconciliation of expected income tax to actual income tax expense
  Years ended December 31,Note
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2007RMB
    
    
    RMB
    
    
    RMB
    
    
    US$PRC statutory tax rate
    
    
    
    
    
    
    33
    %
    
    
    33
    %
    
    
    33
    %
    
    
    33
    %Computed expected tax expense
    
    
    
    
    
    
    44,883
    
    
    
    58,367
    
    
    
    107,935
    
    
    
    14,796Non-deductible expensesSalaries and benefits exceeding allowable limit
    
    
    
    
    
    
    1,099
    
    
    
    7,228
    
    
    
    958
    
    
    
    131Advertising and promotion expense exceeding
allowable limit
    
    
    
    
    
    
    1,956
    
    
    
    11,322
    
    
    
    2,862
    
    
    
    392Research and development expense exceeding
allowable limit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,871
    
    
    
    394Others
    
    
    
    
    
    
    459
    
    
    
    1,207
    
    
    
    1,026
    
    
    
    141Non-taxable income
    
    
    
    
    
    
    
    
    
    
    (62
    )
    
    
    (3,859
    )
    
    
    (529
    )Tax rate differential
    
    
    (a
    )
    
    
    (12,365
    )
    
    
    (37,506
    )
    
    
    (68,075
    )
    
    
    (9,333
    )Effect of tax holiday
    
    
    (b
    )
    
    
    
    
    
    
    (38,775
    )
    
    
    (63,539
    )
    
    
    (8,710
    )Change in valuation allowance
    
    
    
    
    
    
    3,895
    
    
    
    4,161
    
    
    
    15,619
    
    
    
    2,142Tax rebate
    
    
    (c
    )
    
    
    (7,413
    )
    
    
    (769
    )
    
    
    (4,888
    )
    
    
    (670
    )Effect of change in tax law
    
    
    
    
    
    
    
    
    
    
    1,779
    
    
    
    22,617
    
    
    
    3,100Actual income tax expense
    
    
    
    
    
    
    32,514
    
    
    
    6,952
    
    
    
    13,527
    
    
    
    1,854
  
 (a)
    
    The provision for PRC current income tax is based on a statutory rate of 33% of the
assessable income of the Group as determined in accordance with the relevant income tax rules
and regulations of the PRC, except for certain F-30




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##### Table of Contents



Simcere Pharmaceutical Group and Subsidiaries 
Notes to Consolidated Financial Statements 
Years ended December 31, 2005, 2006 and 2007 
(Amounts expressed in thousands, except share date)
 subsidiaries of the Company which are taxed at a preferential rate of 15% as discussed
above.(b)
    
    The effect of tax holiday increased the Groups net income by nil, RMB38,775 and RMB62,916
(US$8,625) for the years ended December 31, 2005, 2006 and 2007, 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 31,2005
    
    2006
    
    2007
    
    2007RMB
    
    RMB
    
    RMB
    
    US$Increase in earnings per
share:Basic
    
    
    
    
    
    
    0.42
    
    
    
    0.54
    
    
    
    0.07Diluted
    
    
    
    
    
    
    0.42
    
    
    
    0.52
    
    
    
    0.07
 (c)
    
    Amounts represent income tax rebate received by Nanjing Simcere for operating in Jiangsu
Nanjing Pukou Economic Development Zone, an area in Nanjing, PRC. The tax rebate is reported
as a reduction to income tax expense in the consolidated statements of income and is
recognized upon receipt since the tax rebate 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 Jiangsu Province.
 (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 31,2006
    
    
    2007
    
    
    2007RMB
    
    
    RMB
    
    
    US$Deferred tax assetsProperty, plant and equipment
    
    
    3,328
    
    
    
    3,131
    
    
    
    429Accounts receivable
    
    
    2,255
    
    
    
    2,639
    
    
    
    362Inventories
    
    
    384
    
    
    
    680
    
    
    
    93Intangible assets
    
    
    2,298
    
    
    
    3,414
    
    
    
    468Tax loss carryforwards
    
    
    10,544
    
    
    
    26,272
    
    
    
    3,602Others
    
    
    86
    
    
    
    
    
    
    
    Total gross deferred tax assets
    
    
    18,895
    
    
    
    36,136
    
    
    
    4,954Valuation allowance
    
    
    (10,466
    )
    
    
    (26,085
    )
    
    
    (3,576
    )Net deferred tax assets
    
    
    8,429
    
    
    
    10,051
    
    
    
    1,378Deferred tax liabilitiesResearch and development and intangible assets
    
    
    (23,316
    )
    
    
    (61,491
    )
    
    
    (8,430
    )Property, plant and equipment
    
    
    (318
    )
    
    
    (199
    )
    
    
    (27
    )(23,634
    )
    
    
    (61,690
    )
    
    
    (8,457
    )Net deferred tax liabilities
    
    
    (15,205
    )
    
    
    (51,639
    )
    
    
    (7,079
    )
 The increase in the valuation allowance during the years ended December 31, 2005, 2006 and 2007 was
RMB3,895, RMB4,161and RMB15,619 (US$2,141), respectively. The realization of the future tax
benefits of a deferred tax asset is dependent on future
 F-31




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##### Table of Contents



Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
Years ended December 31, 2005, 2006 and 2007
(Amounts expressed in thousands, except share data)
 taxable income against which such tax benefits can be applied and the consideration of the
scheduled reversal of deferred tax liabilities, projected future taxable income, and any available
tax planning strategies. Tax loss carryforwards of the Group amounted to RMB105,089 as of December
31, 2007 of which RMB2,324, RMB4,253, RMB19,883 and RMB78,629 expire if unused on December 31,
2009, 2010, 2011 and 2012, respectively. The valuation allowance as of December 31, 2007 primarily
relates to deferred tax assets of Jiangsu Simcere and Simcere Research primarily while the
valuation allowance as of December 31, 2006 primarily relates to deferred tax assets of Shanghai
Simcere and Simcere Research.Simcere Research has been loss making since its inception and is not expected to be able to
generate sufficient income in the foreseeable future to utilize its deferred tax assets. As of
December 31, 2006 and 2007, Simcere Research had tax loss carryforwards of RMB19,105 and RMB44,651,
and a full valuation allowance was provided for its net deferred tax assets of RMB8,344 and
RMB11,146, respectively.Jiangsu Simcere incurred taxable loss for the first time in the fiscal year 2007. In assessing the
realizability of its deferred tax assets, management considered whether it is more likely than not
that some portion or all of Jiangsu Simceres deferred tax assets will not be realized. Based on
the available evidence including the projected financial performance of Jiangsu Simcere in the
future periods, the market environment in which it operates, and the length of relevant carryover
periods, management concluded that it is more likely than not that all tax loss carryforwards of
Jiangsu Simcere will expire unused. Jiangsu Simcere did not have any tax loss carryforwards at
December 31, 2006 and no valuation allowance was required to be recorded. As of December 31, 2007,
Jiangsu Simcere had tax loss carryforwards of nil and RMB59,095, and a full valuation was provided
for its net deferred tax assets of RMB13,020.Shanghai Simcere was not profitable until 2007 when it received the sales and distribution rights
of Endu which positively changed the performance outlook of Shanghai Simcere. As of December 31,
2006, Shanghai Simcere had tax loss carryforwards of RMB4,555 and a full valuation allowance was
provided for its net deferred tax assets of RMB1,812. Shanghai Simcere used up its tax loss
carryforwards in 2007 and no valuation allowance was required to be set up at December 31, 2007.Based upon the level of historical taxable income and projections for future taxable income over
the periods in which the deferred tax assets are deductible, management believes it is more likely
than not that the Group will realize the benefits of the remaining deductible differences
recognized at December 31, 2006 and 2007. 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 amounted to RMB105,089 as of December 31, 2007 of which
RMB2,324, RMB4,253, RMB19,883 and RMB78,629 expire if unused on December 31, 2009, 2010, 2011 and
2012, respectively.
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##### Table of Contents



Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
Years ended December 31, 2005, 2006 and 2007
(Amounts expressed in thousands, except share data)
 12
    
    Other payables and accrued liabilities
 Other payables and accrued liabilities consist of the following:
 December 31,2006
    
    
    2007
    
    
    2007RMB
    
    
    RMB
    
    
    US$Accrued traveling and conference expenses
    
    
    20,415
    
    
    
    85,452
    
    
    
    11,714Government grants (note (a))
    
    
    12,300
    
    
    
    3,777
    
    
    
    518Payable for acquisitions (note (b))
    
    
    9,830
    
    
    
    18,153
    
    
    
    2,489Payable for acquisition of property, plant and
equipment and land use right
    
    
    9,184
    
    
    
    6,515
    
    
    
    893Accrued construction costs for property, plant and
equipment
    
    
    59,092
    
    
    
    33,276
    
    
    
    4,562Receipts in advance (note (c))
    
    
    5,816
    
    
    
    10,685
    
    
    
    1,465Security deposits from employees and agents (note (d))
    
    
    16,665
    
    
    
    16,067
    
    
    
    2,203VAT payable
    
    
    7,815
    
    
    
    31,062
    
    
    
    4,258Accrued IPO costs
    
    
    11,775
    
    
    
    
    
    
    
    Accrued research and development expenses
    
    
    
    
    
    
    11,839
    
    
    
    1,623Accrued legal and professional fees
    
    
    
    
    
    
    5,437
    
    
    
    745Other accrued liabilities (note (e))
    
    
    16,982
    
    
    
    33,514
    
    
    
    4,594169,874
    
    
    
    255,777
    
    
    
    35,064
 
 Notes:(a)
    
    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.(b)
    
    The amounts as of December 31, 2007 represent the unpaid consideration payable for the
acquisition of 80% of the equity interest in Yantai Medgenn in 2006 and the acquisition of 51%
of the equity interest in Boda in 2007 (note 8). The outstanding balance related to the
acquisition of 80% of Yantai Medgenn will be paid upon completion of the trial period of
certain quality control procedures in relation to Endu, which are procedural in nature. The
outstanding balance related to the acquisition of Boda will be settled in 2008.(c)
    
    The amounts represent cash received in advance from customers in connection with the sales of
products.(d)
    
    The amounts represent refundable cash security deposits received from certain employees and
from third party marketing agents.(e)
    
    Other accrued liabilities relate to accruals for purchase of technology know-how, selling
expenses, utilities expenses and other miscellaneous expenses. 13
    
    Statutory reservesUnder 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 reserveAccording 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
 F-33




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##### Table of Contents



Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
Years ended December 31, 2005, 2006 and 2007
(Amounts expressed in thousands, except share data)
 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 fundThrough December 2005, the Companys operating subsidiaries were required to transfer 5% to 10% of
the net profit, as determined in accordance with PRC GAAP, to a statutory public welfare fund.
This fund can only be utilized on capital items for the collective benefit of the employees such as
the construction of dormitories, canteen and other staff welfare facilities. This fund is
non-distributable other than on liquidation. The transfer to this fund must be made before
distribution of dividends to shareholders can be made.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.For the years ended December 31, 2005, 2006 and 2007, the Companys subsidiaries made appropriation
to these statutory reserve funds of RMB4,913, RMB4,617 and RMB45,450 (US$6,231), respectively. The
accumulated balance of the statutory reserve funds maintained at the Companys operating
subsidiaries as of December 31, 2006 and 2007 were RMB49,867 and RMB95,317 (US$13,067),
respectively.
 14
    
    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
RMB2,012, RMB2,704 and RMB5,149 (US$706) for the years ended December 31, 2005, 2006 and 2007,
respectively, were charged to expense. The Group has no other obligation to make payments in
respect of retirement benefits of the employees.
 F-34




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##### Table of Contents



Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
Years ended December 31, 2005, 2006 and 2007
(Amounts expressed in thousands, except share data)
 15
    
    Commitments and contingencies(a)
    
    Operating lease commitments
  December 31,2007RMB2008
    
    
    1,6082009
    
    
    1,4422010
    
    
    2432011
    
    
    32012
    
    
    3Thereafter
    
    
    403,339
 (b)
    
    Capital and purchase commitments
   December 31,2007RMB2008
    
    
    62,1702009
    
    
    15,75077,920
 (c)
    
    Guarantees
  Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others
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##### Table of Contents



Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
Years ended December 31, 2005, 2006 and 2007
(Amounts expressed in thousands, except share data)
   (d)
    
    Research and developments commitments
  (e)
    
    Depositary Receipt Facility
  16
    
    Earnings per share
  Years ended December 31,2005
    
    2006
    
    2007
    
    2007RMB
    
    RMB
    
    RMB
    
    US$Numerator for basic and diluted earnings per share:Net income
    
    
    102,745
    
    
    
    172,258
    
    
    
    301,261
    
    
    
    41,300Denominator:Basic weighted average number of ordinary shares Outstanding
    
    
    69,000,000
    
    
    
    92,695,890
    
    
    
    117,534,566
    
    
    
    117,534,566Effect of dilutive options
    
    
    
    
    
    
    
    
    
    
    4,132,941
    
    
    
    4,132,941Diluted weighted average number of ordinary shares
Outstanding
    
    
    69,000,000
    
    
    
    92,695,890
    
    
    
    121,667,507
    
    
    
    121,667,507Basic earnings per share
    
    
    1.49
    
    
    
    1.86
    
    
    
    2.56
    
    
    
    0.35Diluted earnings per share
    
    
    1.49
    
    
    
    1.86
    
    
    
    2.48
    
    
    
    0.34
 F-36




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##### Table of Contents



Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
Years ended December 31, 2005, 2006 and 2007
(Amounts expressed in thousands, except share data)
  F-37




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##### Table of Contents



Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
Years ended December 31, 2005, 2006 and 2007
(Amounts expressed in thousands, except share data)
 17
    
    Revenue informationRevenues from external customers by product category are summarized as follows:
 Years ended December 31,2005
    
    
    2006
    
    
    2007
    
    
    2007RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Antibiotics
    
    
    373,106
    
    
    
    389,843
    
    
    
    390,107
    
    
    
    53,479Anti-inflammatory drugs
    
    
    151,439
    
    
    
    174,899
    
    
    
    168,497
    
    
    
    23,099Anti-stroke medication
    
    
    139,475
    
    
    
    230,867
    
    
    
    443,446
    
    
    
    60,791Anti-cancer
    
    
    
    
    
    
    34,726
    
    
    
    217,867
    
    
    
    29,867Other medicines
    
    
    72,200
    
    
    
    117,462
    
    
    
    143,097
    
    
    
    19,616736,220
    
    
    
    947,797
    
    
    
    1,363,014
    
    
    
    186,852
 18
    
    Share-based compensation
     Options granted on
    
    
    Options granted onNovember 15, 2006
    
    
    March 29, 2007Valuation assumptionsExpected life (years)
    
    
    5.5
    
    
    
    5.5Expected volatility
    
    
    40 %
    
    
    
    40 %Expected dividend yield
    
    
    0 %
    
    
    
    0 %Risk-free interest rate
    
    
    5.11 %
    
    
    
    5.11 %
  F-38




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##### Table of Contents



Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
Years ended December 31, 2005, 2006 and 2007
(Amounts expressed in thousands, except share data)
    Years ended December 31,2006

    
    
 2007
    
    
 2007RMB
    
    
    RMB
    
    

        US$Research and development expenses
    
    
    204
    
    
    
    1,733
    
    
    
    238Sales, marketing and distribution expenses
    
    
    365
    
    
    
    2,871
    
    
    
    393General and administrative expenses
    
    
    2,868
    
    
    
    26,160
    
    
    
    3,5863,437
    
    
    
    30,764
    
    
    
    4,217
   WeightedWeighted
    
    average
    
    AggregateNumber of
    
    average exercise
    
    remaining
    
    intrinsicOptions


    
    price

    
   contractual term

    
   valueUS$
    
    Years
    
    US$Balance at January 1, 2006
    
    
    
    
    
    
    Granted on November 15, 2006
    
    
    10,000,000
    
    
    
    4.20Balance at December 31, 2006
    
    
    10,000,000
    
    
    
    4.20Granted on March 29, 2007
    
    
    1,045,000
    
    
    
    6.75Exercised
    
    
    (6,200
    )
    
    
    4.20Forfeited
    
    
    (41,000
    )
    
    
    4.20Balance at December 31, 2007
    
    
    10,997,800
    
    
    
    4.44
    
    
    
    4.91
    
    
    
    27,304Exercisable at December 31, 2007
    
    
    1,988,800
    
    
    
    4.20
    
    
    
    4.87
    
    
    
    5,419
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##### Table of Contents



Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
Years ended December 31, 2005, 2006 and 2007
(Amounts expressed in thousands, except share data)
 19
    
    Related party transactions
  Years ended December 31,2005
    
    
        2006
    
    
        2007
    
    
        2007RMB
    
    

    RMB
    
    

    RMB
    
    
    US$Purchase of packaging materials from a related party (note (a))
    
    
    6,066
    
    
    
    7,420
    
    
    
    7,335
    
    
    
    1,006Sales of products to a related party (note (b))
    
    
    628
    
    
    
    1,432
    
    
    
    2,966
    
    
    
    407Sales of property, plant and equipment and land use right to a
related party (note (c))
    
    
    
    
    
    
    
    
    
    
    18,551
    
    
    
    2,543
 December 31,2006
    

            2007

    
            2007RMB
    
    
    RMB
    
    
    US$Due from related parties (note (d))
    
    
    434
    
    
    
    7,503
    
    
    
    1,029Due to related parties (note (e))
    
    
    1,352
    
    
    
    
    
    
    
    
  (a)
    
    The Company purchases certain of its packaging materials from a company 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 some of its pharmaceutical products to a company in which a major
shareholder has an equity interest. Management believes that the sale was conducted in the
normal course of business at prices determined on an arms length basis.(c)
    
    The Company sold certain 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 amounts due from related parties (companies where the shareholders hold an equity
interest) related to transactions described in note (b) and note (c) above as of December 31,
2006 and 2007 were RMB14, and RMB7,503 (US$1,029), respectively. The remaining balances of
RMB420 as of December 31, 2006 related to expenses paid by the Company on behalf of certain
related parties and there was no such expense in 2007. These amounts were interest-free,
unsecured and repayable on demand.(e)
    
    The amounts due to related parties (companies where the shareholders hold an equity interest)
as at December 31, 2006 related to purchase transactions described in note (a) above. These
amounts were interest-free, unsecured and have been repaid in 2007.
 F-40




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##### Table of Contents



Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
Years ended December 31, 2005, 2006 and 2007
(Amounts expressed in thousands, except share data)
 20
    
    Fair value of financial instruments
  21
    
    Foreign currency exchange risk
    22
    
    Subsequent events
   F-41