##### Table of Contents



UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 20-F
 
 (Mark One)
 o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934ORþ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2009
  o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934ORo
    
    SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Date
of event requiring this shell company report
 Commission file number: 001-33398
 Simcere Pharmaceutical Group
 
  N/A
 
  Cayman Islands
 
  No. 699-18 Xuan Wu Avenue,
Xuan Wu District, Nanjing
Jiangsu Province 210042
Peoples Republic of China
 
  Zhigang Zhao
Chief Financial Officer
No. 699-18 Xuan Wu Avenue,
Xuan Wu District, Nanjing
Jiangsu Province 210042
Peoples Republic of China
Tel: (86) 25 8556 6666 x 8818
Fax: (86) 25 8547 7666
E-mail: zhaozhigang@simcere.com
 
  Securities registered or to be registered pursuant to Section 12(b) of the Act:
 Title of Each Securities
    
    Name of Each Exchange on Which RegisteredAmerican Depositary Shares, each representing two
ordinary shares, par value $0.01 per share
    
    New York Stock Exchange
 Securities registered or to be registered pursuant to Section 12(g) of the Act:
  
  Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
 None
 
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Table of Contents
 INTRODUCTIONPART IItem 1.
    
    Identity of Directors, Senior Management and Advisers
    
    
    1Item 2.
    
    Offer Statistics And Expected Timetable
    
    
    1Item 3.
    
    Key Information
    
    
    1Item 4.
    
    Information of the Company
    
    
    29Item 5.
    
    Operating and Financial Review and Prospects
    
    
    53Item 6.
    
    Directors, Senior Management and Employees
    
    
    82Item 7.
    
    Major Shareholder and Related Party Transactions
    
    
    93Item 8.
    
    Financial Information
    
    
    95Item 9.
    
    The Offer and Listing
    
    
    96Item 10.
    
    Additional Information
    
    
    97Item 11.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    103Item 12.
    
    Description of Securities Other Than Equity Securities
    
    
    105PART IIItem 13.
    
    Defaults, Dividend Arrearages and Delinquencies
    
    
    106Item 14.
    
    Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    
    106Item 15.
    
    Controls and Procedures
    
    
    107Item 16A.
    
    Audit Committee Financial Expert
    
    
    110Item 16B.
    
    Code of Ethics
    
    
    110Item 16C.
    
    Principal Accountant Fees and Services
    
    
    110Item 16D.
    
    Exemptions from the Listing Standards for Audit Committees
    
    
    110Item 16E.
    
    Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    
    
    110Item 16F.
    
    Change in Registrants Certifying Accountant
    
    
    111Item 16G.
    
    Corporate Governance
    
    
    111PART IIIItem 17.
    
    Financial Statements
    
    
    113Item 18.
    
    Financial Statements
    
    
    113Item 19.
    
    Exhibits
    
    
    113EX-8.1EX-12.1EX-12.2EX-13.1EX-13.2EX-15.1
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INTRODUCTION
  
    
    $ and U.S. dollars refer to the legal currency of the United States;
    
    ADRs refer to the American depositary receipts, which, if issued, evidence our
ADSs;
    
    ADSs refer to our American depositary shares, each of which represents two
ordinary shares;
    
    China and the PRC refer to the Peoples Republic of China, excluding, for the
purpose of this annual report on Form 20-F only, Taiwan and the special administrative
regions of Hong Kong and Macau;
    
    ordinary shares refer to our ordinary shares, par value $0.01 per share;
    
    RMB and Renminbi refer to the legal currency of China; and
    
    we, us, our company and our refer to Simcere Pharmaceutical Group, its
predecessor entities and its consolidated subsidiaries.
   
 PART I
 
 Item 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
 Not Applicable.
 
 Item 2. OFFER STATISTICS AND EXPECTED TIMETABLE
 Not Applicable.
 
 Item 3. KEY INFORMATION
 A. Selected Financial Data
  1




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##### Table of Contents



Year Ended December 31,2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    2009RMB
    
    RMB
    
    RMB
    
    RMB
    
    RMB
    
    $(in thousands, except share and ADS data)Selected
Consolidated
Statement of Income
DataRevenue
    
    
    737,014
    
    
    
    950,606
    
    
    
    1,368,748
    
    
    
    1,741,143
    
    
    
    1,857,071
    
    
    
    272,062Gross profit
    
    
    565,940
    
    
    
    760,046
    
    
    
    1,127,667
    
    
    
    1,420,261
    
    
    
    1,536,126
    
    
    
    225,043Operating expenses
(other than
impairment loss on
goodwill)
    
    
    (415,853
    )
    
    
    (575,295
    )
    
    
    (863,805
    )
    
    
    (1,063,282
    )
    
    
    (1,357,518
    )
    
    
    (198,877
    )Impairment loss on
goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (76,398
    )
    
    
    (11,192
    )Income from
operations
    
    
    150,087
    
    
    
    184,751
    
    
    
    263,862
    
    
    
    356,979
    
    
    
    102,210
    
    
    
    14,974Foreign currency
exchange gains, net
    
    
    
    
    
    
    
    
    
    
    24,670
    
    
    
    39,879
    
    
    
    382
    
    
    
    56Other income (1)
    
    
    
    
    
    
    
    
    
    
    20,526
    
    
    
    1,104
    
    
    
    2,971
    
    
    
    435Equity in losses of
equity method
affiliated
companies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (56,532
    )
    
    
    (8,283
    )Net income
attributable to
Simcere
Pharmaceutical
Group (2)
    
    
    102,745
    
    
    
    172,258
    
    
    
    301,261
    
    
    
    350,151
    
    
    
    26,428
    
    
    
    3,871Earnings per share
 basic
    
    
    1.49
    
    
    
    1.86
    
    
    
    2.56
    
    
    
    2.80
    
    
    
    0.23
    
    
    
    0.03Earnings per share
 diluted
    
    
    1.49
    
    
    
    1.86
    
    
    
    2.48
    
    
    
    2.80
    
    
    
    0.23
    
    
    
    0.03Earnings per ADS 
basic
    
    
    2.98
    
    
    
    3.72
    
    
    
    5.13
    
    
    
    5.61
    
    
    
    0.46
    
    
    
    0.07Earnings per ADS 
diluted
    
    
    2.98
    
    
    
    3.72
    
    
    
    4.95
    
    
    
    5.60
    
    
    
    0.45
    
    
    
    0.07Basic weighted
average number of
shares
    
    
    69,000,000
    
    
    
    92,695,890
    
    
    
    117,534,566
    
    
    
    124,921,934
    
    
    
    115,099,258
    
    
    
    115,099,258Diluted weighted
average number of
shares
    
    
    69,000,000
    
    
    
    92,695,890
    
    
    
    121,667,507
    
    
    
    125,005,803
    
    
    
    116,604,919
    
    
    
    116,604,919
 
 (1)
    
    In 2007, 2008 and 2009, other income included the incentive payment received from our
depositary in connection with the establishment of the ADR program following our initial
public offering.(2)
    
    Certain of our PRC operating subsidiaries were entitled to a tax holiday. The effect of the
tax holiday increased our net income for 2006, 2007, 2008 and 2009 by RMB38.8 million, RMB62.9
million, RMB55.7 million and RMB23.5 million ($3.4 million) respectively, or RMB0.42, RMB0.54,
RMB0.45 and RMB0.20 ($0.03) on the per share basis, respectively. Prior to 2006, none of our
PRC operating subsidiaries were entitled to the tax holiday. Year Ended December 31,2005
    
    2006
    
    2007
    
    2008
    
    2009(in percentages)Other Consolidated
Financial DataGross margin (1)
    
    
    76.8
    
    
    
    80.0
    
    
    
    82.4
    
    
    
    81.6
    
    
    
    82.7Operating margin (1)
    
    
    20.4
    
    
    
    19.5
    
    
    
    19.3
    
    
    
    20.5
    
    
    
    5.5Net margin (1)
    
    
    13.9
    
    
    
    18.2
    
    
    
    22.0
    
    
    
    20.1
    
    
    
    1.4
 
 (1)
    
    Gross margin, operating margin and net margin represent gross profit, operating profit and
net income attributable to our company divided by revenues, respectively. 2




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As of December 31,2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    2009RMB
    
    RMB
    
    RMB
    
    RMB
    
    RMB
    
    $(in thousands)Selected
Consolidated
Balance Sheet DataCash and cash
equivalents
    
    
    90,060
    
    
    
    106,027
    
    
    
    497,352
    
    
    
    812,814
    
    
    
    442,488
    
    
    
    64,825Held-to-maturity
investment
securities
    
    
    
    
    
    
    
    
    
    
    470,000
    
    
    
    
    
    
    
    
    
    
    
    Accounts and bills
receivables, net
    
    
    130,871
    
    
    
    162,781
    
    
    
    488,374
    
    
    
    748,997
    
    
    
    704,321
    
    
    
    103,184Inventories
    
    
    40,293
    
    
    
    39,483
    
    
    
    65,241
    
    
    
    95,948
    
    
    
    106,655
    
    
    
    15,625Amounts due from
related parties
    
    
    85,575
    
    
    
    434
    
    
    
    7,503
    
    
    
    24,365
    
    
    
    26,289
    
    
    
    3,851Total current assets
    
    
    391,461
    
    
    
    411,429
    
    
    
    1,557,153
    
    
    
    1,707,759
    
    
    
    1,371,864
    
    
    
    200,979Property, plant and
equipment, net
    
    
    125,365
    
    
    
    267,054
    
    
    
    374,058
    
    
    
    463,059
    
    
    
    744,713
    
    
    
    109,101Goodwill and
intangible assets,
net
    
    
    29,545
    
    
    
    263,782
    
    
    
    412,717
    
    
    
    453,455
    
    
    
    695,267
    
    
    
    101,857Total assets
    
    
    621,227
    
    
    
    1,034,547
    
    
    
    2,472,208
    
    
    
    2,778,222
    
    
    
    3,137,902
    
    
    
    459,705Accounts and bill
payables
    
    
    21,254
    
    
    
    20,089
    
    
    
    23,711
    
    
    
    25,219
    
    
    
    152,249
    
    
    
    22,305Short-term
borrowings and
current portion of
long-term debts
    
    
    171,000
    
    
    
    333,000
    
    
    
    29,000
    
    
    
    6,000
    
    
    
    76,000
    
    
    
    11,134Amounts due to
related parties
    
    
    78,153
    
    
    
    1,352
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total current
liabilities
    
    
    421,185
    
    
    
    568,173
    
    
    
    342,637
    
    
    
    335,013
    
    
    
    692,865
    
    
    
    101,505Long-term debts,
excluding current
portion
    
    
    
    
    
    
    
    
    
    
    52,000
    
    
    
    62,000
    
    
    
    122,685
    
    
    
    17,973Total shareholders
equity
    
    
    199,598
    
    
    
    442,740
    
    
    
    1,995,953
    
    
    
    2,301,322
    
    
    
    2,207,683
    
    
    
    323,428
 Exchange Rate Information
  3




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RMB per U.S. Dollar Exchange RatePeriodEnd
    
    Average (1)
    
    Low
    
    High(RMB per $1.00)2005
    
    
    8.0702
    
    
    
    8.1826
    
    
    
    8.2765
    
    
    
    8.07022006
    
    
    7.8041
    
    
    
    7.9579
    
    
    
    8.0702
    
    
    
    7.80412007
    
    
    7.2946
    
    
    
    7.5806
    
    
    
    7.8127
    
    
    
    7.29462008
    
    
    6.8225
    
    
    
    6.9193
    
    
    
    7.2946
    
    
    
    6.78002009
    
    
    6.8259
    
    
    
    6.8307
    
    
    
    6.8470
    
    
    
    6.81762009December
    
    
    6.8259
    
    
    
    6.8275
    
    
    
    6.8299
    
    
    
    6.82442010January
    
    
    6.8268
    
    
    
    6.8269
    
    
    
    6.8295
    
    
    
    6.8258February
    
    
    6.8258
    
    
    
    6.8285
    
    
    
    6.8330
    
    
    
    6.8258March
    
    
    6.8258
    
    
    
    6.8262
    
    
    
    6.8270
    
    
    
    6.8254April
    
    
    6.8247
    
    
    
    6.8256
    
    
    
    6.8275
    
    
    
    6.8229May
    
    
    6.8305
    
    
    
    6.8275
    
    
    
    6.8310
    
    
    
    6.8245June (through June 25)
    
    
    6.7911
    
    
    
    6.8227
    
    
    
    6.8323
    
    
    
    6.7911
 
 (1)
    
    Annual averages are calculated from month-end rates. Monthly averages are calculated using
the average of the daily rates during the relevant period.      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;
 4




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
    
    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 national and provincial medical
insurance catalogs or in the national essential drug list, together, the Essential Drug
List and Reimbursement List.
  The penalties imposed on Jiangsu Yanshen could have a
material adverse effect on our business, financial condition and results of operations and damage
our reputation.
  5




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We may be involved in litigation, arbitration or other legal proceedings from time to time that
require extensive management attention and resources and may be expensive, time-consuming and
disruptive.
    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.
   6




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
    
    we might not have been the first to make the inventions covered by each of our
pending patent applications and issued patents;
    
    we might not have been the first to file patent applications for these inventions;
    
    others may independently develop similar or alternative technologies or duplicate
our technologies without infringing our intellectual property rights;
    
    one or more of our pending patent applications may not result in issued patents;
    
    our issued patents may not provide a basis for commercially viable products, may not
provide us with any competitive advantages, or may be challenged and invalidated by
third parties;
    
    we may not develop additional proprietary technologies or product candidates that
are patentable; and
    
    the patents of others may prevent us from developing or commercializing our product
candidates.
   The existence of a patent may not necessarily protect us from competition as our patent may be
challenged, invalidated or held unenforceable. We may also be found to infringe the patents of
others.
   7




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Litigation to protect our intellectual property rights or defend against third-party allegations of
infringement may be costly.
  
    
    pay monetary damages to settle the results of such adverse determination, which
could adversely affect our business, financial condition and results of operations;
    
    cease selling, incorporating or using any of our products that incorporate the
challenged intellectual property, which would adversely affect our revenue or costs, or
both;
    
    obtain a license from the holder of the infringed intellectual property right, which
might be costly or might not be available on reasonable terms, or at all; or
    
    redesign our products to make them non-infringing, which would be costly and
time-consuming and may require additional clinical trials, or may not be possible at
all.
  Most of our products are branded generics that can be manufactured and sold by other pharmaceutical
manufacturers in China once the relevant protection or monitoring periods, if any, elapse.
  8




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We may be subject to damages resulting from claims that we or our employees have wrongfully used or
disclosed alleged trade secrets of their former employers.
  Our future research and development projects may not be successful.
   We rely on certain domestic and overseas research institutions and universities for the research
and development of new products and any failure of our research partners to meet our timing and
quality standards or our failure to continue such collaboration or enter into such new arrangements
could adversely affect our ability to develop new pharmaceuticals and our overall business
prospects.
  9




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We may not be able to obtain regulatory approval for any of the products resulting from our
development efforts and failure to obtain these approvals could materially harm our business.
  Our marketing activities are critical to the success of our products, and if we fail to grow our
marketing capabilities or maintain adequate spending on marketing activities, the market share of
our products and our brand name and product reputation would be materially adversely affected.
   We may not be successful in competing with other manufacturers of pharmaceuticals in the tender
processes for the purchase of medicines by state-owned and state-controlled hospitals.
  10




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We may not be able to successfully identify and acquire new products or businesses.
   
    
    failure to obtain regulatory approval for any newly acquired product candidates;
    
    the integration of the acquired businesses, operations, services and personnel with
our existing business and operations;
    
    the infringement of third parties intellectual property rights or intellectual
property right challenges as to the acquired pharmaceuticals;
    
    unforeseen or hidden liabilities;
    
    the diversion of resources from our existing businesses and technologies;
    
    our inability to generate sufficient revenue to recover costs and expenses of the
acquisitions; and
    
    potential loss of, or harm to, relationships with employees or customers, any of
which could significantly disrupt our ability to manage our business and materially and
adversely affect our business, financial condition and results of operations.
 We depend on distributors for a substantial portion 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.
  11




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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.
    12




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There is no assurance that our existing products will continue to be included or new products
developed by us will be included in the Essential Drug List and Reimbursement List.
  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.
  13




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
    
    retain and acquire customers;
    
    diversify our revenue sources by successfully developing and selling new products;
    
    effectively manage our business as it expands;
    
    respond to changes in our regulatory environment;
    
    manage risks associated with intellectual property rights;
    
    maintain effective control of our costs and expenses;
    
    raise sufficient capital to sustain and expand our business; and
    
    attract, retain and motivate qualified personnel.
  We may not be able to manage our expansion of operations effectively.
  We have no control over Hong Kong Medgenn or the development and sale of Endu outside of the PRC.
Our brand and reputation may be adversely affected if the development and sale of Endu outside of
the PRC violate the intellectual property rights of any third parties.
  14




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Our business depends substantially on the continuing efforts of our executive officers, research
personnel and other key personnel, and our business may be severely disrupted if we lose their
services.
   Delays in production due to regulatory restrictions or other factors could have a material adverse
impact on our business.
  15




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Our operating results may fluctuate considerably on a quarterly basis. These fluctuations could
have an adverse effect on the price of our shares and ADSs.
  
    
    the seasonal fluctuations in demand for our products, especially our antibiotics,
such as Zailin and Anqi;
    
    timing of research and development expenses;
    
    regulatory events;
    
    new product introductions by us or our competitors;
    
    variations in the demand for products we may introduce;
    
    litigation involving patents, licenses or other intellectual property; and
    
    product liability lawsuits.
  Our future liquidity needs are uncertain and we may need to raise additional funds in the future.
  
    
    we determine to devote significant amount of financial resources to the research and
development of projects that we believe to have significant commercialization
potential;
    
    we determine to acquire or license rights to additional product candidates or new
technologies;
    
    some or all of our product candidates fail in clinical trials or pre-clinical
studies or prove to be not as commercially promising as we expect and we are forced to
develop or acquire additional product candidates;
 16




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
    
    our product candidates require more extensive clinical or pre-clinical testing or
clinical trials of these product candidates take longer to complete than we currently
expect; or
    
    we determine or are required to conduct more high-throughput screening than expected
against current or additional disease targets to develop additional product candidates.
  
    
    our 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.
   17




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Our non-public shareholders have substantial influence over our company and their interests may not
be aligned with the interests of our other shareholders.
  Our production activities involve the controlled use of potentially harmful biological materials as
well as hazardous materials and chemicals.
  New labor laws in the PRC may adversely affect our results of operations.
  If we grant additional employee share options, restricted shares or other share-based compensation
in the future, our net income could be adversely affected.
  18




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CompensationStock Compensation
   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.
  19




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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.
  Risks Related to Our Industry
 Changes in economic conditions and consumer confidence in China may influence consumer preferences
and spending patterns, and accordingly, our results of operations.
  20




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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.
  21




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##### Table of Contents



Risks Related to Doing Business in China
 Uncertainties with respect to the PRC legal system could have a material adverse effect on us.
  22




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##### Table of Contents



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.
   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.
  23




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##### Table of Contents



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.
  Our financial results benefit from tax concessions granted by the PRC government, the change to or
expiration of which would materially change our results of operations.
   Dividends we receive from our operating subsidiaries located in the PRC may be subject to PRC
withholding tax.
  24




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##### Table of Contents



We may be deemed a PRC resident enterprise under the new CIT law and be subject to the PRC taxation
on our worldwide income.
  Dividends payable by us to our foreign investors and gain on the sale of our ADSs or ordinary
shares may become subject to taxes under PRC tax laws.
  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.
  25




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##### Table of Contents



We face risks related to health epidemics and other outbreaks of contagious diseases, including
avian flu, SARS, and swine flu.
  Risks Related to Our ADSs
 The market price for our ADSs may be volatile.
  
    
    announcements of technological or competitive developments;
    
    regulatory developments in China affecting us, our customers or our competitors;
    
    announcements regarding patent litigation or the issuance of patents to us or our
competitors;
    
    actual or anticipated fluctuations in our quarterly operating results;
    
    changes in financial estimates by securities research analysts;
    
    changes in the economic performance or market valuations of other pharmaceutical
companies;
    
    addition or departure of our executive officers and key research personnel;
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##### Table of Contents




    
    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.
  27




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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.
  28




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##### Table of Contents



You may have difficulty enforcing judgments obtained against us.
  
 Item 4. INFORMATION OF THE COMPANY
 A. History and Development of the Company
   B. Business Overview
   29




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##### Table of Contents



Our Products
   NumberofProduct Category
    
    Products
    
    Major Products
    
    BrandsAntibacterial and
Antiviral
    
    
    16
    
    
    Amoxicillin granules, capsules and
tablets ; Amoxicillin with
clavulanate potassium granules,
tablets and injection; biapenem
injection; cefaclor dry
suspension; azithromycin granules;
and ribavirin dispersible tablets
    
    Zailin, Anqi,
Anxin, Zaike, Zaiqi
and NanyuanAnti-cancer
    
    
    5
    
    
    Recombinant human endostatin
injection, nedaplatin injection,
lentinan injection and
fluorouracil implants
    
    Endu, Jiebaishu,
Yineng and SinofuanAnti-Allergic
    
    
    2
    
    
    Clemastine fumarate capsules and
clemastine fumarate dry suspension
    
    Langjing
 30




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##### Table of Contents



NumberofProduct Category
    
    Products
    
    Major Products
    
    BrandsAnti-Osteoporosis
    
    
    2
    
    
    Alfacalcidol soft capsules
    
    FanengCardiovascular and
Cerebrovascular
    
    
    6
    
    
    Edaravone injection; amlodipine
maleate tablets; sumatriptan
succinate tablets; Levamlodipine
Besylate Tablets
    
    Bicun, Yidasheng,
Ningliping, Youshu and
XintaDigestive Conditions
    
    
    3
    
    
    Smectite powder and aldioxa tablets
    
    Biqi and OdijiaNon-Steroidal 
Anti-Inflammatory
    
    
    2
    
    
    Diclofenac sodium
sustained-release capsules and
gelatin
    
    YingtaiqingRespiratory System
    
    
    6
    
    
    Herbal medicine used for the
treatment of cough in liquids and
tablets; artificial cowbezoar and
chlorphenamine maleate granules
compound paracetamol and
amantadine hydrochloride tablets;
compound zinc gluconate; pediatric
paracetamol
    
    Simcere
Kechuanning,
Zaikang, Boke,
Aiersi and BotingUrinary Conditions
    
    
    1
    
    
    Naftopidil tablets
    
    ZaichangVaccines
    
    
    
    
    
    H1N1 Influenza A Vaccine (Split
Virion), Inactivated; Influenza
Vaccine (Split Virion),
InactivatedOthers
    
    
    3
    
    
    Various herbal oral solutions
    
    Chengyuan and Shibo
 Our Innovative Pharmaceutical Endu (Recombinant Human Endostatin Injection)
   31




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Our Principal Branded Generic Pharmaceuticals
  
    
    Bicun (edaravone injection);
    
    Zailin (amoxicillin capsules, dispersible tablets, granules and injection);
    
    Yingtaiqing (diclofenac sodium sustained-release capsules and gelatin);
    
    Yidasheng (edaravone injection); and
 32




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##### Table of Contents




    
    Sinofuan (anti-tumor implants).
 Bicun
 Zailin.
 Yingtaiqing.
 Yidasheng.
 Sinofuan.
 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. Biqi has
been included in the national medical insurance catalog since 2000.
    
    Anqi. Anqi is the brand name of our amoxicillin and clavulanate potassium tablets,
granules, and injection for the treatment of infections.
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
    
    Zaike. Zaike is the brand name for our cefaclor in dry suspension antibiotics for
the treatment of infections. Regulatory approval to manufacture and sell Zaike was
obtained in February 1995. Zaike has been included in the national medical insurance
catalog since 2000.
    
    Simcere Kechuanning. Simcere Kechuanning is the brand name for our OTC herbal
medicine used for the treatment of coughs. It comes in oral liquid and tablet
formulations. Regulatory approvals to manufacture and sell Simcere Kechuanning oral
liquids were obtained in October 1995 and tablets in March 2004. Simcere Kechuanning
has been included in the national medical insurance catalog since 2000.
  Marketing and Distribution
  Our Marketing Strategy
    Distribution
  34




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##### Table of Contents



Manufacturing, Quality Control and Supplies
 Manufacturing
   Pharmaceutical AgentProduction Unit
    
    Delivery Form
    
    2009 CapacityHainan SimcerePenicillin family
    
    Granules
    
    630,000,000 packsPenicillin family
    
    Capsules
    
    288,000,000 pillsCefaclor family
    
    Granules
    
    240,000,000 packsCefaclor family
    
    Capsules
    
    60,000,000 pills
 35




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##### Table of Contents



Pharmaceutical AgentProduction Unit
    
    Delivery Form
    
    2009 CapacityCefaclor family
    
    Dry suspension
    
    240,000,000 packsGeneral
    
    Tablets
    
    200,000,000 pillsGeneral
    
    Granules
    
    240,000,000 packsGeneral
    
    Gelatin
    
    6,000,000 tubesGeneral
    
    Powder
    
    160,000,000 packsGeneral
    
    Capsules
    
    60,000,000 pillsGeneral
    
    Soft capsules
    
    120,000,000 pillsNanjing SimcerePenicillin family
    
    Powder injection
    
    10,000,000 vialsPenicillin family
    
    Granules
    
    40,000,000 packsPenicillin family
    
    Tablets
    
    70,000,000 pillsGeneral
    
    Oral solution
    
    55,000,000 bottlesGeneral
    
    Small volume parenteral solutions
    
    15,000,000 vialsGeneral
    
    Tablets
    
    150,000,000 packsGeneral
    
    Dry suspension
    
    20,000,000 packsGeneral
    
    Capsules
    
    160,000,000 pillsGeneral
    
    Granules
    
    20,000,000 packsGeneral
    
    Powder injection
    
    10,000,000 vialsGeneral
    
    Frozen-dry powder
    
    3,200,000 vialsSterile active pharmaceutical ingredients, or APIs
    
    600 kgextract liquid
    
    24,000,000 vialsShandong SimcereRecombinant human endostatin
    
    Injection
    
    1,000,000 vialsNanjing Tung ChitNedaplatin injection
    
    Frozen-dry powder injection
    
    700,000 bottlesJilin BodaEdavarone injection
    
    Low-dose injection
    
    10,000,000 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
    
    Phenytoinum Natricum
    
    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 kgSimcere Zhong RenFluorouracil implant
    
    Implant
    
    600,000 vialsJiangsu YanshenH1N1 Influenza A Vaccine (Split
Virion), Inactivated
    
    Injection
    
    10,000,000 vialsInfluenza Vaccine (Split Virion),
Inactivated
    
    Injection
    
    3,500,000 vials
 36




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Quality Control
  Raw Materials
    Competition
   37




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Environmental Matters
  Insurance
  Regulations on Pharmaceutical Products
 38




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Pharmaceutical Product Manufacturing
 Permits and Licenses for Pharmaceutical Manufacturers
  Good Manufacturing Practices
   Certification By Facilities
    
    Coverage
    
    Issue Date
    
    Expiration DateHainan SimcereTablets (Including Cephalosporins), Granules, Capsules, Dry Suspensions (Including Cephalosporins, Penicillin), Soft Capsules, Powders, Gelatin
    
    August 30, 2006
    

    
    August 29, 2011
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##### Table of Contents



Certification By Facilities
    
    Coverage
    
    Issue Date
    
    Expiration DateBulk Drug
(Montmorillonite,
Aluminium,
Dihydroxyallan-toninate,
Levamlodipine Besylate,
Pamidronate Disodium,
Valaciclovir Hydrochloride
and Benazepril
Hydrochloride)
    
    January 8, 2007
    
    
    January 7, 2012Bulk Drug (Sumatriptan
Succinate, Meloxicam,
Naftopidil, Edaravone and
Sibutramine Hydrochloride)
    
    November 26, 2008
    
    
    November 25, 2013Bulk Drug (Amlodipine
Maleate, Cefprozil and
Cefteram pivoxil)
    
    November 1, 2005
    
    
    October 31, 2010Bulk Drug (Naftopidil, amlodipine maleate)
    
    February 2, 2009
    
    
    February 1, 2014Nanjing SimcereSmall Volume Parenteral Solutions
    
    December 3, 2008
    
    
    December 2, 2013Mixture, Oral Solution
    
    October 27,2008
    
    
    October 26, 2013Powder for Injection
    
    August 6, 2008
    
    
    August 5, 2013Sterile Bulk (Biapenem)
    
    July 21, 2008
    
    
    July 20, 2013Tablets, Capsules, Dry Suspensions
    
    March 30, 2006
    
    
    March 29, 2011Granules
    
    May 11, 2006
    
    
    May 10, 2011Powder for Injection (Penicillin)
    
    April 19, 2006
    
    
    April 18, 2011Tablets, Capsules, Dry Suspensions(Penicillin)
    
    May 6,2008
    
    
    May 5, 2013Bulk Drug (Zanamivir), Powder
    
    April 9,2010
    
    
    April 8, 2015Nanjing Tung ChitFrozen-Dry Powder Injection (Anti-Cancer Drug)
    
    June 16,2009
    
    
    June 15, 2014Bulk Drug (Nedaplatin)
    
    June 19,2009
    
    
    June 18, 2014
 40




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Certification By Facilities
    
    Coverage
    
    Issue Date
    
    Expiration DateBulk Drug (Oxaliplatin)
    
    December 28,2009
    
    
    December 27, 2014Shandong SimcereRecombinant Human Endostatin Injection (Anti-cancer Drugs)
    
    August 18, 2009
    
    
    August 17, 2014Simcere Zhong RenAnti-cancer Implants
    
    May 18, 2009
    
    
    May 17, 2014Jilin BodaSmall Volume Parenteral Solutions, Edaravone Injection
    
    February 23, 2009
    
    
    February 22, 2014Low-Dose Injection
    
    December 9, 2005
    
    
    December 8, 2010Bulk Drug (Edaravone)
    
    December 12, 2005
    
    
    December 11, 2010Bulk Drug (Asparagine)
    
    December 23, 2006
    
    
    December 22, 2011Tablets, Capsules, Granules
    
    November 28, 2008
    
    
    November 27, 2013
  Approval and Registration of Pharmaceutical Products
  41




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Pre-clinical Research and Clinical Trials
   42




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
    
    Phase I  preliminary trial of clinical pharmacology and human safety evaluation
studies. The primary objective is to observe the pharmacokinetics and the tolerance
level of the human body to the new medicine as a basis for ascertaining the
appropriate methods of dosage.
    
    Phase II  preliminary exploration on the therapeutic efficacy. The purpose is to
assess preliminarily the efficacy and safety of pharmaceutical products on patients
within the target indication of the pharmaceutical products and to provide the basis
for the design research and dosage tests for Phase III. The design and methodology of
research in this phase generally adopts double-blind and random methods with limited
sample sizes.
    
    Phase III  confirm the therapeutic efficacy. The objective is to further verify
the efficacy and safety of pharmaceutical products on patients within the target
indication of the pharmaceutical products, to evaluate the benefits and risks and
finally to provide sufficient experimental proven evidence to support the registration
application of the pharmaceutical products. In general, the trial should adopt
double-blind, random methods with sufficient sample sizes.
    
    Phase IV  stage of application with research conducted by the applicants
themselves after the launch of a new pharmaceutical. The objective is to observe the
efficacy and adverse reaction of pharmaceutical products under extensive use, to
perform an evaluation of the benefits and risks of the application among ordinary or
special group of patients, and to ascertain and improve the appropriate dosage volume
for application.
 Continuing SFDA Regulation
   Regulations on Vaccine Products
 Classification of Vaccine
  Quality of Vaccine Products
 43




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Pricing Policy
  Other National and Local Laws and Regulations
   Distribution
 Pharmaceutical Distribution
  Vaccine Distribution
 44




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##### Table of Contents



Restrictions on Foreign Ownership of Pharmaceutical Wholesale and Retail Businesses in China
  Good Supply Practices
   Product Liability and Consumer Protection
   45




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##### Table of Contents



Price Controls
     Tendering System for Medicines Purchased by Healthcare Institutions
  46




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Reimbursement Under the National Medical Insurance Program
  PRC Patent Law
  Patent Prosecution
  47




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##### Table of Contents



Patent Enforcement
  Compulsory License
  International Patent Treaties
   Trademarks
  48




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##### Table of Contents




    
    use of a trademark that is identical with or similar to a registered trademark in
respect of the same or similar commodities without the authorization of the trademark
registrant;
    
    sale of commodities infringing upon the exclusive right to use the trademark;
    
    counterfeiting or making, without authorization, representations of a registered
trademark of another person, or sale of such representations of a registered
trademark;
    
    changing a registered trademark and selling products on which the changed
registered trademark is used without the consent of the trademark registrant; and
    
    otherwise infringing upon the exclusive right of another person to use a registered
trademark.
  
    
    The trademark owner can provide his trademark registration certificate and other
relevant evidence to the State or local Administration for Industry and Commerce, or
AIC, which can, at its discretion, launch an investigation. The AIC may take such
actions as: order the infringer to immediately cease the infringing behavior, seize
and destroy any infringing products and representations of the trademark in question,
close the facilities used to manufacture the infringing products or impose a fine. If
the trademark owner is dissatisfied with the State AICs decision, he may, within 15
days of receiving the AICs decision, institute civil proceedings in court.
    
    The trademark owner may institute civil proceedings directly in court. Civil
redress for trademark infringement includes:
 
    
    injunctions;
    
    requiring the infringer to take steps to mitigate the damage (i.e. print
notices in newspapers); and
 
    
    damages (i.e. compensation for the economic loss and injury to reputation as a
result of trademark infringement suffered by the trademark holder).
  
    
    If the case is so serious as to constitute a crime, the trademark owner may lodge a
complaint with the relevant public security organ and the infringer is subject to
investigation for criminal responsibility in accordance with PRC law.
  Foreign Exchange Regulation
  49




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Dividend Distribution Regulation
  C. Organizational Structure
  50




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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 64 pharmaceutical products;
    
    Nanjing Simcere Dongyuan Pharmaceutical Co., Ltd., or Nanjing Simcere, is our
wholly owned subsidiary that engages in the manufacturing of pharmaceutical products.
Nanjing Simcere is currently authorized to manufacture 87 pharmaceutical products;
    
    Jiangsu Simcere Pharmaceutical Co., Ltd., or Jiangsu Simcere, and Shanghai Simcere
Pharmaceutical Co., Ltd., or Shanghai Simcere, are both our wholly owned subsidiaries
that engage in the marketing, sales and distribution of pharmaceutical products;
    
    Jiangsu Simcere Pharmaceutical R&D Co., Ltd., or Simcere Research, is our wholly
owned subsidiary that engages in the research and development of pharmaceutical
products;
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
    
    Sichuan Zigong Yirong Industrial Co., Ltd., or Sichuan Simcere, is our wholly owned
subsidiary that owns the mining right to a smectite mine in Sichuan Province and
engages in the extraction of smectite, a raw material used for the manufacturing of
one of our pharmaceutical products;
    
    Hainan Qitian Pharmaceutical Co., Ltd., or Qitian Simcere, is our wholly owned
subsidiary that engages in the processing and refinement of smectite;
    
    Shandong Simcere Medgenn Bio-Pharmaceutical Co., Ltd., or Shandong Simcere,
formerly known as Yantai Medgenn Co., Ltd., is our wholly owned subsidiary that
engages in the manufacturing of Endu in China. We completed the acquisition of 80.0%
of the equity interest of Shandong Simcere in September 2006. We have since acquired
the remaining 20.0% of the equity interest in Shandong Simcere, which is now our
wholly owned subsidiary. In addition, Shandong Simcere owns a 40.0% equity interest in
Medgenn (Hong Kong) Co., Ltd., or Hong Kong Medgenn that was acquired for no cash
consideration. Hong Kong Medgenn has the exclusive right to engage in the development
and sale of Endu in any jurisdiction outside of the PRC until February 10, 2015. Hong
Kong Medgenn has not conducted any operations to date;
    
    Jilin Boda Pharmaceutical Co., Ltd., or Jilin Boda, is our 51.0% owned subsidiary
that engages in the manufacturing and sale of pharmaceutical products. In June 2010,
we entered into an agreement to further acquire approximately 39% of the equity
interest in Jilin Boda. Upon the completion of this acquisition, we will hold
approximately 90% of the equity interest in Jilin Boda.
    
    Nanjing Tung Chit Pharmaceutical Company Limited, or Nanjing Tung Chit, engages in
the manufacturing and sale of pharmaceutical products. We completed the acquisition of
85.71% of the equity interest of Nanjing Tung Chit in November 2007. We acquired the
remaining 14.29% of the equity interest in Nanjing Tung Chit in April 2010. Since
then, it is our wholly owned subsidiary;
    
    Simcere Zhong Ren Pharmaceutical Co., Ltd. is our 70.0% owned subsidiary that
engages in the manufacturing and sale of pharmaceutical products. We completed the
acquisition of the 70.0% equity interest in Simcere Zhong Ren in April 2008; and
    
    Jiangsu Yanshen Biological Technology Stock Co., Ltd., or Jiangsu Yanshen, engages
in the manufacturing and sale of vaccines. In May 2010, we acquired 37.5% equity
interest of Jiangsu Yanshen. In December 2009, we acquired the 100% stake in ChinaVax,
a Cayman Islands investment holding company, that held 15% equity interest in Jiangsu
Yanshen. Since then, we hold 52.5% equity interest in Jiangsu Yanshen.
 D. Property, Plant and Equipment
  52




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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 .
 A. Operating Results
 Overview
    
    
    the growth of the pharmaceutical market in China;
    
    our ability to successfully develop, acquire and launch first-to-market branded
generic and innovative pharmaceuticals;
    
    the extent of inclusion of our pharmaceuticals in the Essential Drug List and
Reimbursement List;
    
    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
  53




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Our Ability to Successfully Develop, Acquire and Launch First-to-Market Generic and Innovative
Pharmaceuticals
  The Extent of Inclusion of Our Pharmaceuticals in the Essential Drug List and Reimbursement List
  54




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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
    55




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##### Table of Contents



Acquisitions
      56




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Revenues
    57




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##### Table of Contents



Year Ended December 31,2007
    
    2008
    
    2009(in
    
    
    
    
    
    (in
    
    
    
    
    
    (inthousands of
    
    (% of
    
    thousands of
    
    (% of
    
    thousands of
    
    (% ofRMB)
    
    revenues)
    
    RMB)
    
    revenues)
    
    RMB)
    
    revenues)Bicun
    
    
    426,216
    
    
    
    31.1
    
    
    
    570,584
    
    
    
    32.8
    
    
    
    619,340
    
    
    
    33.3Zailin
    
    
    287,333
    
    
    
    21.0
    
    
    
    290,215
    
    
    
    16.7
    
    
    
    279,631
    
    
    
    15.0Yingtaiqing
    
    
    140,824
    
    
    
    10.3
    
    
    
    146,660
    
    
    
    8.4
    
    
    
    151,378
    
    
    
    8.2Sinofuan
    
    
    
    
    
    
    
    
    
    
    41,400
    
    
    
    2.4
    
    
    
    126,297
    
    
    
    6.8Yidasheng
    
    
    17,230
    
    
    
    1.3
    
    
    
    80,580
    
    
    
    4.6
    
    
    
    126,038
    
    
    
    6.8Endu
    
    
    216,193
    
    
    
    15.8
    
    
    
    239,439
    
    
    
    13.7
    
    
    
    124,186
    
    
    
    6.7
      Cost of Materials and Production and Operating Expenses
  Year Ended December 31,2007
    
    2008
    
    2009(in percentages)Cost of materials and production
    
    
    17.6
    
    
    
    18.4
    
    
    
    17.3
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Year Ended December 31,2007
    
    2008
    
    2009(in percentages)Operating expensesResearch and development expenses
    
    
    4.9
    
    
    
    4.9
    
    
    
    7.2Sales, marketing and distribution expenses
    
    
    46.4
    
    
    
    45.0
    
    
    
    53.9General and administrative expenses
    
    
    11.8
    
    
    
    11.2
    
    
    
    12.0Impairment loss on goodwill
    
    
    
    
    
    
    
    
    
    
    4.1Total operating expenses
    
    
    63.1
    
    
    
    61.1
    
    
    
    77.2
   Cost of Materials and Production
  
    
    costs of the pharmaceuticals in which we are the exclusive distributors of;
    
    costs of the necessary active ingredients and supporting ingredients of
pharmaceuticals we manufacture and various types of packaging materials;
    
    salaries and benefits for personnel directly involved in production activities;
    
    overhead costs, including utility, maintenance of production equipment and other
support expenses associated with the production of our products; and
    
    depreciation of property, plant and equipment used for production purposes.
Depreciation of property, plant and equipment attributable to production activities is
capitalized as part of inventory, and expensed as cost of materials and production
when products are sold.
  59




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Research and Development Expenses
     
    
    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;
 60




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##### Table of Contents




    
    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.
        61




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Sales, Marketing and Distribution Expenses
  General and Administrative Expenses
  Share-Based Compensation Expenses
     62




---



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Taxation and Incentives
       63




---



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Critical Accounting Policies and the Use of Estimates
   Acquisitions
 Business Combinations
 64




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##### Table of Contents



Allowance for Doubtful Accounts
   Year Ended December 31,2007
    
    2008
    
    2009
    
    2009RMB
    
    RMB
    
    RMB
    
    $(in thousands)Beginning allowance for
doubtful accounts
    
    
    6,834
    
    
    
    6,635
    
    
    
    6,995
    
    
    
    1,025Additions charged to bad debt
expense
    
    
    1,203
    
    
    
    1,576
    
    
    
    101
    
    
    
    15Write-off of accounts receivable
    
    
    (1,402
    )
    
    
    (1,216
    )
    
    
    (347
    )
    
    
    (51
    )Ending allowance for
doubtful accounts
    
    
    6,635
    
    
    
    6,995
    
    
    
    6,749
    
    
    
    989
 Inventories
   65




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Depreciation and Amortization
   Impairment of Long-Lived Assets and Goodwill
     66




---



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67




---



##### Table of Contents



Share-based Compensation
     Year ended December 31,2007
    
    2008Valuation assumptionsExpected term (in years)
    
    
    5.5
    
    
    
    5.19-5.35Expected volatility
    
    
    40
    %
    
    
    59%-74
    %Expected dividend
    
    
    0
    %
    
    
    0
    %Risk-free rate
    
    
    5.11
    %
    
    
    1.54%-3.69
    %
  68




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Income tax uncertainties and realization of deferred tax assets
     Results of Operations
  69




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##### Table of Contents



Year Ended December 31,2007
    
    2008
    
    2009% of Total
    
    
    
    
    
    % of Total
    
    
    
    
    
    % of TotalRMB
    
    Revenues
    
    RMB
    
    Revenues
    
    RMB
    
    Revenues(in thousands, except percentages)Revenue
    
    
    1,368,748
    
    
    
    100.0
    
    
    
    1,741,143
    
    
    
    100.0
    
    
    
    1,857,071
    
    
    
    100.0Cost of materials and
production
    
    
    (241,081
    )
    
    
    (17.6
    )
    
    
    (320,882
    )
    
    
    (18.4
    )
    
    
    (320,945
    )
    
    
    17.3Gross profit
    
    
    1,127,667
    
    
    
    82.4
    
    
    
    1,420,261
    
    
    
    81.6
    
    
    
    1,536,126
    
    
    
    82.7Operating expenses:Research and
development expenses
    
    
    (68,295
    )
    
    
    (4.9
    )
    
    
    (86,089
    )
    
    
    (4.9
    )
    
    
    (132,981
    )
    
    
    (7.2
    )Sales, marketing and
distribution expenses
    
    
    (634,449
    )
    
    
    (46.4
    )
    
    
    (782,960
    )
    
    
    (45.0
    )
    
    
    (1,002,419
    )
    
    
    (53.9
    )General and
administrative expenses
    
    
    (161,061
    )
    
    
    (11.8
    )
    
    
    (194,233
    )
    
    
    (11.2
    )
    
    
    (222,118
    )
    
    
    (12.0
    )Impairment loss on
goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (76,398
    )
    
    
    (4.1
    )Total operating expenses
    
    
    (863,805
    )
    
    
    (63.1
    )
    
    
    (1,063,282
    )
    
    
    (61.1
    )
    
    
    (1,433,916
    )
    
    
    (77.2
    )Income from operations
    
    
    263,862
    
    
    
    19.3
    
    
    
    356,979
    
    
    
    20.5
    
    
    
    102,210
    
    
    
    5.5Interest income
    
    
    24,361
    
    
    
    1.8
    
    
    
    34,302
    
    
    
    2.0
    
    
    
    8,861
    
    
    
    0.5Interest expense
    
    
    (6,346
    )
    
    
    (0.5
    )
    
    
    (4,693
    )
    
    
    (0.3
    )
    
    
    (12,126
    )
    
    
    (0.7
    )Foreign currency
exchange gains, net
    
    
    24,670
    
    
    
    1.8
    
    
    
    39,879
    
    
    
    2.3
    
    
    
    382
    
    
    
    0.0Other income (1)
    
    
    20,526
    
    
    
    1.5
    
    
    
    1,104
    
    
    
    0.1
    
    
    
    2,971
    
    
    
    0.2Equity in losses of
equity method
affiliated companies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (56,532
    )
    
    
    (3.0
    )Earnings before income
taxes
    
    
    327,073
    
    
    
    23.9
    
    
    
    427,571
    
    
    
    24.6
    
    
    
    45,766
    
    
    
    2.5Income tax expense
    
    
    (13,527
    )
    
    
    (1.0
    )
    
    
    (49,285
    )
    
    
    (2.8
    )
    
    
    (16,897
    )
    
    
    (0.9
    )Net income
    
    
    313,546
    
    
    
    22.9
    
    
    
    378,286
    
    
    
    21.8
    
    
    
    28,869
    
    
    
    1.6Less: net income
attributable to the
noncontrolling interest
    
    
    (12,285
    )
    
    
    (0.9
    )
    
    
    (28,135
    )
    
    
    (1.7
    )
    
    
    (2,441
    )
    
    
    (0.2
    )Net income attributable
to Simcere
Pharmaceutical Group
(1)(2)
    
    
    301,261
    
    
    
    22.0
    
    
    
    350,151
    
    
    
    20.1
    
    
    
    26,428
    
    
    
    1.4
 
 (1)
    
    In 2007, 2008 and 2009, other income included the incentive payment received from our
depositary in connection with the establishment of the ADR program following our initial
public offering.(2)
    
    Certain of our PRC operating subsidiaries were entitled to a tax holiday. The effect of the
tax holiday increase our net income for 2006, 2007, 2008 and 2009 by RMB38.8 million, RMB62.9
million, RMB55.7 million and RMB23.5 million ($3.4 million) respectively, or RMB0.42, RMB0.54,
RMB0.45 and RMB0.20 ($0.03) on the per share basis, respectively. Prior to 2006, none of our
PRC operating subsidiaries were entitled to the tax holiday. Comparison of Years Ended December 31, 2008 and December 31, 2009
 Revenue
 70




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Gross Profit and Gross Margin
 Operating Expenses
 
    
    Research and Development Expenses. Our research and development expenses increased
to RMB133.0 million ($19.5 million) in 2009 from RMB86.1 million in 2008. Research and
development expenses as percentage of our revenues increased to 7.2% in 2009 from 4.9%
in 2008. The increase was primarily due to the launch of new research and development
projects and increased research and development headcount as a result of the our
continued expansion of its research and development activities.
    
    Sales, Marketing and Distribution Expenses. Our sales, marketing and distribution
expenses increased by 28.0% to RMB1,002.4 million ($146.9 million) in 2009 from
RMB783.0 million in 2008. The increase was mainly attributable to the increased
marketing service fees paid to professional marketing companies for the promotion of
our products. Sales, marketing and distribution expenses as a percentage of our
revenues increased to 53.9% in 2009 from 45.0% in 2008.
    
    General and Administrative Expenses. Our general and administrative expenses
increased by 14.4% to RMB222.1 million ($32.5 million) in 2009 from RMB194.2 million
in 2008. The increase was primarily related to depreciation expenses and staff costs.
General and administrative expenses as a percentage of our revenues increased to 12.0%
in 2009 from 11.2% in 2008.
 Interest Income
 Interest Expense
 Foreign Currency Exchange Gains, Net
 71




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##### Table of Contents



Other Income
 Equity in Losses of Equity Method Affiliated Companies .
 Income Tax Expense
 Noncontrolling Interests
 Net Income Attributable to Simcere Pharmaceutical Group
 Comparison of Years Ended December 31, 2007 and December 31, 2008
 Revenue
 Gross Profit and Gross Margin
 Operating Expenses
 
    
    Research and Development Expenses. Our research and development expenses increased
to RMB86.1 million in 2008 from RMB68.3 million in 2007. The increase was primarily
due to the increased staff costs associated with the Phase IV clinical trials and
research of Endu and the increased activity level of our research and development
team. Research and development expenses as a percentage of our revenues remained
comparable between intervening years.
 72




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##### Table of Contents




    
    Sales, Marketing and Distribution Expenses. Our sales, marketing and distribution
expenses increased by 23.4% to RMB783.0 million in 2008 from RMB634.4 million in 2007.
The increase was mainly attributable to the increased marketing service fees paid to
professional marketing companies for the promotion of our products. Sales, marketing
and distribution expenses as a percentage of our revenues decreased to 45.0% in 2008
from 46.4% in 2007. This decrease was due primarily to improved economies of scale
associated with the expansion of our operations.
    
    General and Administrative Expenses. Our general and administrative expenses
increased by 20.6% to RMB194.2 million in 2008 from RMB161.1 million in 2007. This
increase was primarily related to staff costs, expense related to professional service
fees associated with being a public company since April 2007. General and
administrative expenses as a percentage of our revenues decreased to 11.2% in 2008
from 11.8% in 2007.
 Interest Income
 Interest Expense
 Foreign Currency Exchange Gains, Net
 Other Income
 Income Tax Expense
 Noncontrolling Interests
 Net Income Attributable to Simcere Pharmaceutical Group
 73




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B. Liquidity and Capital Resources
 Liquidity and Capital Resources
  Year Ended December 31,2007
    
    2008
    
    2009
    
    2009RMB
    
    RMB
    
    RMB
    
    $(in thousands)Net cash provided by
operating activities
    
    
    150,415
    
    
    
    147,158
    
    
    
    456,964
    
    
    
    66,946Net cash (used
in)/provided by
investing activities
    
    
    (668,910
    )
    
    
    252,668
    
    
    
    (457,672
    )
    
    
    (67,049
    )Net cash provided
by/(used in)
financing activities
    
    
    911,319
    
    
    
    (88,846
    )
    
    
    (369,735
    )
    
    
    (54,167
    )Effect of exchange
rate changes on cash
and cash equivalents
    
    
    (1,499
    )
    
    
    4,482
    
    
    
    117
    
    
    
    17Net increase/
(decrease) in cash
and cash equivalents
    
    
    391,325
    
    
    
    315,462
    
    
    
    (370,326
    )
    
    
    (54,253
    )Cash and cash
equivalents at
beginning of year
    
    
    106,027
    
    
    
    497,352
    
    
    
    812,814
    
    
    
    119,078Cash and cash
equivalents at end of
year
    
    
    497,352
    
    
    
    812,814
    
    
    
    442,488
    
    
    
    64,825
  Operating Activities
    74




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Investing Activities
   Financing Activities
    Capital expenditures
  Recently Issued Accounting Pronouncements
 Fair Value
Measurements Fair Value Measurements and Disclosures
 75




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##### Table of Contents



Noncontrolling Interests in Consolidated
Financial Statements  an Amendment of ARB No. 51 Consolidation
  C. Research and Development, Patents and Licenses, etc.
 Our Strategy
  76




---



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Our Capability
  Collaborative Research
     77




---



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®
      78




---



##### Table of Contents



Product Candidates
   PotentialTherapeutic Effects and Scope of
    
    
    
    
    
    MonitoringProduct Candidate
    
    Applications
    
    Status
    
    Patentable
    
    PeriodIguratimod tablets
    
    Treatment of osteoarthritis and rheumatoid arthritis
    
    New drug application
    
    No
    
    5 yearsPalonosetron for
injection
    
    Nausea and vomiting associated with chemotherapy
    
    New drug application
    
    No
    
    4 years
 Iguratimod Tablets
 Palonosetron for Injection
 Intellectual Property
   79




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D. Trend Information
  E. Off-Balance Sheet Arrangements
  80




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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 borrowings and current
portion of long-term debts
    
    
    76,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    76,000Interest payments
    
    
    8,951
    
    
    
    8,934
    
    
    
    3,681
    
    
    
    4,843
    
    
    
    26,409Payable for acquisitions
    
    
    40,631
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,631Long-term debts excluding current
portion
    
    
    
    
    
    
    85,085
    
    
    
    9,400
    
    
    
    28,200
    
    
    
    122,685Liabilities for uncertain tax position
    
    
    
    
    
    
    21,561
    
    
    
    
    
    
    
    
    
    
    
    21,561Operating lease commitments
    
    
    1,560
    
    
    
    268
    
    
    
    6
    
    
    
    34
    
    
    
    1,868Research and development projects
    
    
    5,038
    
    
    
    1,000
    
    
    
    
    
    
    
    
    
    
    
    6,038Capital commitments
    
    
    49,049
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49,049Purchase commitments
    
    
    8,876
    
    
    
    2,133
    
    
    
    
    
    
    
    
    
    
    
    11,009Total
    
    
    190,105
    
    
    
    118,981
    
    
    
    13,087
    
    
    
    33,077
    
    
    
    355,250
 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;
 81




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##### Table of Contents




    
    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 Essential Drug List and Reimbursement List;
    
    our ability to manage our expansion of operations;
    
    environmental compliance costs and liabilities;
    
    competition from other manufacturers of pharmaceutical products;
    
    the expected growth for the pharmaceutical industry in China;
    
    our ability to obtain permits and licenses to carry on our business; and
    
    fluctuations in general economic and business conditions in China.
  
 Item 6.
    
    DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 A. Directors and Senior Management
 Directors and Executive Officers
  Name
    
    Age
    
    Position/ TitleJinsheng Ren
    
    
    48
    
    
    Chairman of the board of directors and chief executive
officerGuoqiang Lin (1)(3)
    
    
    66
    
    
    Independent directorHongquan Liu (1)(2)(3)
    
    
    50
    
    
    Independent directorGary Siu Kwan Sik (1)(2)
    
    
    42
    
    
    Independent directorJohn Huan Zhao
    
    
    46
    
    
    DirectorYehong Zhang
    
    
    47
    
    
    PresidentJindong Zhou
    
    
    48
    
    
    Executive vice presidentXiaojin Yin
    
    
    51
    
    
    Senior vice president of research and developmentFrank Zhigang Zhao
    
    
    50
    
    
    Chief financial officerQuanfu Feng
    
    
    45
    
    
    Vice president and general manager of human resourcesQingsen Li
    
    
    50
    
    
    Vice president and general manager of training and
developmentJialun Tian
    
    
    45
    
    
    Vice president of hospital salesXiaohua Yang
    
    
    44
    
    
    Vice president of hospital salesHuaping Fu
    
    
    45
    
    
    Vice president of commercial sales
 82




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##### Table of Contents



Name
    
    Age
    
    Position/ TitlePeng Wang
    
    
    51
    
    
    Chief Scientific OfficerHaibo Qian
    
    
    47
    
    
    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
 Mr. Hongquan Liu
 Mr. Gary Siu Kwan Sik
 Mr. John Huan Zhao
 83




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##### Table of Contents



Mr. Yehong Zhang
 Mr. Jindong Zhou
 Mr. Xiaojin Yin
 Mr. Frank Zhigang Zhao
 Mr. Quanfu Feng
 Mr. Qingsen Li
 Mr. Jialun Tian
 84




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##### Table of Contents



Mr. Xiaohua Yang
 Mr. Huaping Fu
 Dr. Peng Wang
 Dr. Haibo Qian
  B. Compensation
 Compensation of Directors and Executive Officers
  2006 Share Incentive Plan
  85




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Termination of Awards
 Administration.
 Option Exercise.
 Third-party Acquisition
 Amendment and Termination of Plan
   86




---



##### Table of Contents



Number ofRestrictedShares
    
    Date of Grant of
    
    Date of Grant of
    
    End of VestingName
    
    Granted
    
    Restricted Shares
    
    Cancelled Option
    
    PeriodJinsheng Ren
    
    
    2,665,988
    
    
    May 7, 2009
    
    November 15, 2006
    
    November 14, 2011Frank Zhigang Zhao
    
    
    *(1)
    
    
    May 7, 2009
    
    November 15, 2006
    
    November 14, 2011Jindong Zhou
    
    
    *(1)
    
    
    May 7, 2009
    
    November 15, 2006
    
    November 14, 2011Xiaojin Yin
    
    
    *(1)
    
    
    May 7, 2009
    
    November 15, 2006
    
    November 14, 2011Huaping Fu
    
    
    *(1)
    
    
    May 7, 2009
    
    November 15, 2006
    
    November 14, 2011Jialun Tian
    
    
    *(1)
    
    
    May 7, 2009
    
    November 15, 2006
    
    November 14, 2011Xiaohua Yang
    
    
    *(1)
    
    
    May 7, 2009
    
    November 15, 2006
    
    November 14, 2011Quanfu Feng
    
    
    *(1)
    
    
    May 7, 2009
    
    November 15, 2006
    
    November 14, 2011Guoqiang Lin
    
    
    *(1)
    
    
    May 7, 2009
    
    March 29, 2007
    
    March 28, 2012Hongquan Liu
    
    
    *(1)
    
    
    May 7, 2009
    
    March 29, 2007
    
    March 28, 2012Gary Siu Kwan Sik
    
    
    *(1)
    
    
    May 7, 2009
    
    March 29, 2007
    
    March 28, 2012Qingsen Li
    
    
    *(1)
    
    
    May 7, 2009
    
    December 24, 2008
    
    August 31, 2013Peng Wang
    
    
    *(1)
    
    
    October 14, 2009
    
    n/a
    
    October 14, 2014Other employees as a group(2)
    
    
    839,858
    
    
    May 7, 2009
    
    November 15, 2006
    
    November 14, 2011Other employees as a group(2)
    
    
    12,024
    
    
    May 7, 2009
    
    March 29, 2007
    
    March 28, 2012Other employees as a group(2)
    
    
    188,414
    
    
    May 7, 2009
    
    May 5, 2008
    
    March 8, 2013Other employees as a group(2)
    
    
    100,000
    
    
    October 14, 2009
    
    n/a
    
    October 14, 2014Other employees as a group(2)
    
    
    40,000
    
    
    December 4, 2009
    
    n/a
    
    December 4, 2014
 
 (1)
    
    Beneficially own less than 1.0% of our outstanding ordinary shares.(2)
    
    None of these employees is our director or executive officer. 2008 Share Incentive Plan
  Termination of Awards
 Administration
 87




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##### Table of Contents



Option Exercise
 Third-party Acquisition
 Amendment and Termination of Plan
  Employee Pension and Other Retirement Benefits
  C. Board Practices
 Duties of Directors
   
    
    convening shareholders annual general meetings and reporting its work to
shareholders at such meetings;
    
    declaring dividends and distributions;
 88




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##### Table of Contents




    
    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.
 Compensation Committee
  89




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##### Table of Contents




    
    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
   90




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##### Table of Contents



Interested Transactions
  Remuneration and Borrowing
  D. Employees
  Number of
    
    PercentageEmployees
    
    of totalMarketing and brand management
    
    
    1,563
    
    
    
    39.3
    %Manufacturing and quality control
    
    
    1,474
    
    
    
    37.1
    %General and administration
    
    
    644
    
    
    
    16.2
    %Research and development
    
    
    292
    
    
    
    7.4
    %Total
    
    
    3,974
    
    
    
    100.0
    %
   E. Share Ownership
  
    
    each of our directors and executive officers; and
    
    each person known to us to own beneficially more than 5.0% of our ordinary shares.
 Shares Beneficially Owned (1)(2)Number
    
    %Directors and Executive Officers:Jinsheng Ren (3)
    
    
    43,081,510
    
    
    
    39.7Guoqiang Lin
    
    
    *
    
    
    
    *
 91




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##### Table of Contents



Shares Beneficially Owned (1)(2)Number
    
    %Hongquan Liu
    
    
    *
    
    
    
    *Gary Siu Kwan Sik
    
    
    *
    
    
    
    *John Huan Zhao (4)
    
    
    17,924,692
    
    
    
    16.5Jindong Zhou
    
    
    *
    
    
    
    *Xiaojin Yin
    
    
    *
    
    
    
    *Frank Zhigang Zhao
    
    
    *
    
    
    
    *Qingsen Li
    
    
    *
    
    
    
    *Jialun Tian
    
    
    *
    
    
    
    *Xiaohua Yang
    
    
    *
    
    
    
    *Huaping Fu
    
    
    *
    
    
    
    *Peng Wang
    
    
    *
    
    
    
    *Haibo Qian
    
    
    *
    
    
    
    *All directors and executive officers as a group
    
    
    61,006,202
    
    
    
    56.2Principal Shareholders:New Good Management Limited (5)
    
    
    42,015,102
    
    
    
    38.7Assure Ahead Investments Limited (6)
    
    
    17,924,692
    
    
    
    16.5King View Development International Limited (7)
    
    
    11,820,000
    
    
    
    10.9
 
 *
    
    Upon exercise of all options granted, would beneficially own less than 1.0% of our outstanding
ordinary shares.(1)
    
    Beneficial ownership is determined in accordance with Rule 13d-3 of the General Rules and
Regulations under the Exchange Act, and includes voting or investment power with respect to
the securities.(2)
    
    The number of shares outstanding in calculating the percentages for each listed person
includes, as applicable, (i) the ordinary shares underlying share options exercisable by such
person, and (ii) restricted shares awarded to such person that are vested but yet to be duly
registered or that can be vested, in each case within 60 days of the date of this annual
report. Percentage of beneficial ownership of each listed person is based on 108,643,738
ordinary shares outstanding as of May 31, 2010 and, as applicable, (i) the ordinary shares
underlying share options exercisable by such person and (ii) restricted shares awarded to such
person that are vested but yet to be duly registered or that can be vested, in each case
within 60 days of the date of this annual report.(3)
    
    Includes 42,015,102 ordinary shares directly held by New Good Management Limited, a British
Virgin Islands company, which is controlled by Mr. Ren, and 1,066,408 restricted shares that
have vested as of the date hereof. Mr. Ren is the chairman of the board of directors and the
controlling shareholder of New Good Management Limited.(4)
    
    Represents 17,924,692 ordinary shares directly held by Assure Ahead Investments Limited. Mr.
Zhao, a director of Assure Ahead Investments Limited, disclaims beneficial ownership of shares
held by Assure Ahead Investments Limited except to the extent of his pecuniary interests in
those shares.(5)
    
    New Good Management Limited is a British Virgin Islands company that is controlled by Mr.
Jinsheng Ren and beneficially owned by Messrs. Jinsheng Ren, Jindong Zhou, Feifei Gao, Xiaoxia
Chen, Weidong Ren, Xiaojin Yin, Haibo Qian, Suqin Peng and Yong Ren. Mr. Ren is the chairman
of the board of directors and the controlling shareholder of New Good Management Limited. The
address of New Good Management Limited is at the offices of Offshore Incorporations Limited,
P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, and British Virgin Islands.(6)
    
    Assure Ahead Investments Limited is a British Virgin Islands company that is 100.0% owned by
Hony Capital II, L.P., an exempted limited partnership formed under the laws of the Cayman
Islands; Hony Capital II, L.P.s general partner is Hony Capital II GP Ltd., which is wholly
owned by Legend Holdings Limited, an investment holding company incorporated in the Peoples
Republic of China. Legend Holdings Limited is 65.0% owned by the Chinese Academy of Sciences,
a national academic and research institution owned and controlled by the PRC government. The
address for Assure Ahead Investments Limited is at the offices of Offshore Incorporations
Limited, P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, and British Virgin
Islands. The directors of Assure Ahead Investments Limited, Messrs. John Huan Zhao, Shunlong
Wang and Yonggang Cao have voting and investment power over the shares that this shareholder
beneficially owns.(7)
    
    King View Development International Limited is a British Virgin Islands company and a wholly
owned subsidiary of Trustbridge Partners II, L.P., a limited partnership whose general partner
is TB Partners GP2, L.P. The general partner of TB Partners GP2, L.P. is TB Partners GP
Limited. The address of King View Development International Limited is 2701B, Azia Center,
1233 Lujiazui Ring Road, Shanghai, Peoples Republic of China. The investment committee of
Trustbridge Partners II, L.P. has voting and investment power over the shares that this
shareholder beneficially owns.  92




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Item 7.
    
    MAJOR SHAREHOLDER AND RELATED PARTY TRANSACTIONS
 A. Major Shareholders
  B. Related Party Transactions
 Transactions with Companies in Which a Major Shareholder had Equity Interests
   Transactions with a Minority Shareholder
   93




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Transaction with a Company with a Director who is also a Director of our Company
  Share Incentives
  Registration Rights Agreements
  
    
    Demand Registration Rights. At any time commencing the earlier of November 20, 2008
or six months after our initial public offering, shares held by Assure Ahead
Investments Limited or its transferees and assignees have the right to demand that we
file a registration statement under the Securities Act covering the offer and sale of
their securities, so long as the aggregate amount of securities to be sold under the
registration statement exceeds $20.0 million. We are obligated under the registration
rights agreement to use our best efforts to register our ordinary shares for resale if
Assure Ahead Investments Limited makes such request. However, we are not required to
provide for any payment or transfer any other consideration to Assure Ahead
Investments Limited in the event of non-performance. We have the ability to delay or
withdraw the filing of a registration statement for up to 90 days if we furnish to
Assure Ahead Investments Limited or their transferees and assignees a certificate
signed by our chief executive officer or our chairman of the board of directors
stating that, board of directors determines it would be seriously detrimental to us or
our shareholders for a registration statement to be filed in the near future. We are
not obligated to affect such demand registrations on more than two occasions.
    
    Form F-3 or S-3 Registration Rights. Upon our company becoming eligible for use of
Form F-3 or S-3, Assure Ahead Investments Limited or their transferees and assignees
have the right to request that we file a registration statement under Form F-3 or S-3,
so long as the aggregate amount of securities to be sold under the registration
statement exceeds $1.0 million. Such requests for registrations are not counted as
demand registrations.
    
    Piggyback Registration Rights. If we propose to file a registration statement with
respect to an offering for our own account or for the account of any person that is
not Assure Ahead Investments Limited or their transferees and assignees, we must offer
Assure Ahead Investments Limited or their transferees 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.
  94




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
    
    Pursuant to the registration rights agreement entered into among us, New Good
Management and King View Development International Limited on May 12, 2008, we agree
to file as promptly as practicable but in any event no later than thirty (30) days
after the earlier of (i) June 30, 2008 and (ii) the date on which we file our annual
report on Form 20-F for the fiscal year ended December 31, 2007 with the SEC, a shelf
registration statement for an offering to be made on a delayed or continuous basis
pursuant to Rule 415 registering the resale from time to time by holders of all of the
registrable securities. New Good Management will bear all costs associated with the
filing of such registration statements.
   C. Interests of Experts and Counsel
  
 Item 8.
    
    FINANCIAL INFORMATION
 A. Consolidated Statements and Other Financial Information
  Legal and Administrative Proceedings
   95




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Dividend Policy
    B. Significant Changes
  
 Item 9. THE OFFER AND LISTING
 A. Offering and Listing Details
   Sales PriceHigh
    
    Low2008
    
    $
    15.88
    
    
    $
    4.412009
    
    $
    10.03
    
    
    $
    4.76Quarterly High and LowFirst Quarter 2009
    
    $
    9.13
    
    
    $
    4.76Second Quarter 2009
    
    $
    8.81
    
    
    $
    5.05Third Quarter 2009
    
    $
    9.98
    
    
    $
    6.72Fourth Quarter 2009
    
    $
    10.03
    
    
    $
    6.77First Quarter 2010
    
    $
    9.94
    
    
    $
    8.06Monthly Highs and LowsDecember 2009
    
    $
    10.03
    
    
    $
    7.78January 2010
    
    $
    9.94
    
    
    $
    8.06February 2010
    
    $
    9.51
    
    
    $
    8.09
 96




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Sales PriceHigh
    
    LowMarch 2010
    
    $
    9.88
    
    
    $
    8.51April 2010
    
    $
    8.92
    
    
    $
    7.78May 2010
    
    $
    8.48
    
    
    $
    7.44June 2010
(through June 29)
    
    $
    8.43
    
    
    $
    7.95
 B. Plan of Distribution
  C. Markets
  D. Selling Shareholders
  E. Dilution
  F. Expenses of the Issue
  
 Item 10. ADDITIONAL INFORMATION
 A. Share Capital
  B. Memorandum and Articles of Association
  C. Material Contracts
  D. Exchange Controls
 Foreign Currency Exchange
  
    
    Foreign Currency Administration Rules (1996), as amended, or the Exchange Rules; and
    
    Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996),
or the Administration Rules;
 97




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E. Taxation
 Cayman Islands Taxation
  Peoples Republic of China Taxation
   United States Federal Income Taxation
  98




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
    
    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;
    
    regulated investment companies;
    
    real estate investment trusts;
    
    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.
   99




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ADSs
  Taxation of Dividends and Other Distributions on the ADSs or Ordinary Shares
   Taxation of Disposition of ADSs or Ordinary Shares
  100




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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.
  101




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Information Reporting and Backup Withholding
  102




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F. Dividends and Paying Agents
  G. Statement by Experts
  H. Documents on Display
       I. Subsidiary Information
  
 Item 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Foreign Currency Exchange Risk
  103




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Interest Rate Risk
  104




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Credit Risk with Financial Institutions
  
 Item 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
 Debt Securities
  Warrants and Rights
  Other Securities
  American Depositary Shares
  Persons depositing or withdrawing shares must pay:
    
    For:$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)
    
    
    
    Issuance of ADSs, including issuances resulting from a distribution of shares or rights or other property; or
    
    Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates$.02 (or less) per ADS
    
    
    
    Any cash distribution to youA fee equivalent to the fee that would be payable if
securities distributed to you had been shares and
the shares had been deposited for issuance of ADSs
    
    
    
    Distribution of securities distributed to holders of deposited securities that are distributed by the depositary to ADS holders$.02 (or less) per ADSs per calendar year
    
    
    
    Depositary servicesRegistration or transfer fees
    
    
    
    Transfer and registration of shares on our share register to or from the name of the depositary or its agent when you deposit or withdraw shares
 105




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Persons depositing or withdrawing shares must pay:
    
    For:Expenses of the depositary
    
    
    
    Cable, telex and facsimile transmissions (when expressly provided in the deposit agreement); or
    
    Converting foreign currency to U.S. dollarsTaxes and other governmental charges the depositary
or the custodian have to pay on any ADS or share
underlying an ADS, for example, stock transfer
taxes, stamp duty or withholding taxes
    
    
    
    As necessaryAny charges incurred by the depositary or its agents
for servicing the deposited securities
    
    
    
    As necessary
   
 PART II
 
 Item 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
  
 Item 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
    
    
    approximately RMB107.1 million ($15.7 million) for the acquisition of approximately
35% of the equity interest in Shanghai Celgen;
    
    approximately RMB267.4 million ($39.2 million) for the acquisition of 52.5% of the
equity interest in Jiangsu Yanshen;
    
    approximately RMB134.0 million ($19.6 million) to fund our research and development
efforts; and
    
    Approximately RMB336.7 ($49.3) for repurchase of our ordinary shares.
 106




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Item 15. Controls and Procedures
 Disclosure Controls and Procedures
  Managements Annual Report on Internal Control Over Financial Reporting
       107




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Changes in Internal Control over Financial Reporting
  108




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Report of Independent Registered Public Accounting Firm
 The Board of Directors  Simcere Pharmaceutical Group:
        109




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Item 16A. AUDIT COMMITTEE FINANCIAL EXPERT
  
 Item 16B. CODE OF ETHICS
  
 Item 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  Year Ended December 31,2008
    
    2009Audit fees (1)
    
    $
    1,929
    
    
    $
    1,181Audit-related fees (2)
    
    
    163
    
    
    
    146Tax fees
    
    
    
    
    
    
    Other fees
    
    
    
    
    
    
    Total
    
    $
    2,092
    
    
    $
    1,327
 
 (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 2009 involve principally limited reviews
performed on our consolidated financial statements.  
 Item 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
  
 Item 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
 110




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Period
    
    Totalnumber ofADSspurchased
    
    Average pricepaid per ADS(1)
    
    Total number ofADSs purchasedas part ofpubliclyannouncedprogram
    
    Approximate dollar value ofADSs that may yet be purchasedunder the programUS$
    
    RMB(2)
    
    
    
    US$
    
    RMB(1)November 10,
2008 to September 29, 2009
    
    7,216,920
    
    6.93
    
    47.29
    
    7,216,920November 18,
2009 to June 22, 2010
    
    1,615,027
    
    8.52
    
    58.19
    
    1,615,027
    
    36,233
    
    247,322
 
 (1)
    
    The average price paid per ADS is calculated using the execution price for each repurchase
excluding commissions paid to brokers.(2)
    
    The translations of U.S. dollar amounts into Renminbi amounts have been made at the noon
buying rate in effect on December 31, 2009, which was US$1.00 to RMB6.8259. See Introduction
and Part I.  Item 3. Key Information  Selected Financial Data  Exchange Rate
Information. 
 Item 16F. CHANGE IN REGISTRANTS CERTIFYING ACCOUNTANT
  
 Item 16G. CORPORATE GOVERNANCE
  111




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
    
    The New York Stock Exchange standards for domestic companies require that
non-management directors meet at regularly scheduled executive sessions without
management. Our non-management directors have not met in executive sessions without
management, and there is no requirement under the laws of the Cayman Islands that our
non-management directors meet in executive sessions.
 112




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PART III
 
 Item 16. FINANCIAL STATEMENTS
  
 Item 17. FINANCIAL STATEMENTS
  INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
 PageReport of Independent Registered Public Accounting Firm
    
    F-2Consolidated Balance Sheets as of December 31, 2008 and 2009.
    
    F-3Consolidated Statements of Income for the years ended December 31, 2007, 2008 and 2009.
    
    F-4Consolidated Statements of Shareholders Equity and Comprehensive Income for the years
ended December 31, 2007, 2008 and 2009.
    
    F-5Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2008 and 2009
    
    F-6Notes to the Consolidated Financial Statements
    
    F-10
 
 Item 18. EXHIBITS
 ExhibitNumber
    
    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 2002
 113




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##### Table of Contents



ExhibitNumber
    
    Description of Document12.2*
    
    CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 200213.1*
    
    CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 200213.2*
    
    CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 200215.1*
    
    Consent of KPMG
 
 *
    
    Filed herewith. 114




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SIGNATURES
  Simcere Pharmaceutical GroupBy:
    /s/ Jinsheng RenName:
    Jinsheng RenTitle:
    Chief Executive Officer  115




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##### 



SIMCERE PHARMACEUTICAL GROUP AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 Contents
    
    PageReport of Independent Registered Public Accounting Firm
    
    F-2Consolidated Balance Sheets as of December 31, 2008 and 2009
    
    F-3Consolidated Statements of Income for the years ended December 31, 2007, 2008 and 2009
    
    F-4Consolidated Statements of Shareholders Equity and Comprehensive Income for the years
ended December 31, 2007, 2008 and 2009
    
    F-5Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2008 and 2009
    
    F-6 to 7Notes to Consolidated Financial Statements
    
    F-8
  F-1




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Report of Independent Registered Public Accounting Firm
 The Board of Directors  Simcere Pharmaceutical Group:
    Business Combinations Consolidation
  Internal Control  Integrated Framework
  
 F-2




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##### Table of Contents



Simcere Pharmaceutical Group and Subsidiaries
 
 Consolidated Balance Sheets
 (Amounts expressed in thousands, except share data)
 December 31,Note
    
    2008
    
    2009
    
    2009RMB
    
    RMB
    
    US$AssetsCurrent assetsCash and cash equivalents
    
    
    
    
    812,814
    
    
    
    442,488
    
    
    
    64,825Pledged bank deposits
    
    
    
    
    952
    
    
    
    15,657
    
    
    
    2,294Accounts and bills receivables, net
    
    3
    
    
    748,997
    
    
    
    704,321
    
    
    
    103,184Inventories
    
    4, 19
    
    
    95,948
    
    
    
    106,655
    
    
    
    15,625Other current assets
    
    
    
    
    49,048
    
    
    
    102,743
    
    
    
    15,051Total current assets
    
    
    
    
    1,707,759
    
    
    
    1,371,864
    
    
    
    200,979Property, plant and equipment, net
    
    5
    
    
    478,850
    
    
    
    758,246
    
    
    
    111,084Land use rights
    
    6
    
    
    114,624
    
    
    
    146,158
    
    
    
    21,412Intangible assets, net
    
    7
    
    
    275,244
    
    
    
    385,331
    
    
    
    56,451Goodwill
    
    7
    
    
    178,211
    
    
    
    309,936
    
    
    
    45,406Investments in and advances to affiliated companies
    
    7, 19
    
    
    
    
    
    
    121,865
    
    
    
    17,853Other non-current assets
    
    
    
    
    23,534
    
    
    
    44,502
    
    
    
    6,520Total assets
    
    
    
    
    2,778,222
    
    
    
    3,137,902
    
    
    
    459,705LiabilitiesCurrent liabilitiesShort-term borrowings and current portion of long-term debts
    
    8, 9
    
    
    6,000
    
    
    
    76,000
    
    
    
    11,134Accounts and bills payables
    
    
    
    
    25,219
    
    
    
    152,249
    
    
    
    22,305Accrued payroll and employee benefits
    
    
    
    
    28,436
    
    
    
    50,668
    
    
    
    7,423Other current liabilities
    
    11
    
    
    275,358
    
    
    
    413,948
    
    
    
    60,643Total current liabilities
    
    
    
    
    335,013
    
    
    
    692,865
    
    
    
    101,505Long-term debts, excluding current portion
    
    9
    
    
    62,000
    
    
    
    122,685
    
    
    
    17,973Deferred tax liabilities
    
    10(d)
    
    
    59,358
    
    
    
    93,108
    
    
    
    13,640Other liabilities
    
    10(b)
    
    
    20,529
    
    
    
    21,561
    
    
    
    3,159Total liabilities
    
    
    
    
    476,900
    
    
    
    930,219
    
    
    
    136,277Shareholders equityOrdinary shares:Par value: US$0.01Authorized: 500,000,000 shares authorizedIssued and outstanding: 122,227,318 as of December 31, 2008110,534,932 as of December 31, 2009
    
    18
    
    
    9,624
    
    
    
    8,716
    
    
    
    1,277Additional paid-in capital
    
    
    
    
    1,505,252
    
    
    
    1,170,687
    
    
    
    171,507Accumulated other comprehensive loss
    
    
    
    
    (82,130
    )
    
    
    (43,886
    )
    
    
    (6,429
    )Retained earnings
    
    
    
    
    820,279
    
    
    
    846,707
    
    
    
    124,043Total equity attributable to Simcere Pharmaceutical Group
    
    
    
    
    2,253,025
    
    
    
    1,982,224
    
    
    
    290,398Noncontrolling interest
    
    
    
    
    48,297
    
    
    
    225,459
    
    
    
    33,030Total shareholders equity
    
    
    
    
    2,301,322
    
    
    
    2,207,683
    
    
    
    323,428Commitments and contingencies
    
    14Total liabilities and shareholders equity
    
    
    
    
    2,778,222
    
    
    
    3,137,902
    
    
    
    459,705
  F-3




---



##### Table of Contents



Simcere Pharmaceutical Group and Subsidiaries
 
 Consolidated Statements of Income
 (Amounts expressed in thousands, except share data)
 Year ended December 31,Note
    
    2007
    
    2008
    
    2009
    
    2009RMB
    
    RMB
    
    RMB
    
    US$Revenue
    
    16, 19
    
    
    1,368,748
    
    
    
    1,741,143
    
    
    
    1,857,071
    
    
    
    272,062Cost of materials and production
    
    19
    
    
    (241,081
    )
    
    
    (320,882
    )
    
    
    (320,945
    )
    
    
    (47,019
    )Gross profit
    
    
    
    
    1,127,667
    
    
    
    1,420,261
    
    
    
    1,536,126
    
    
    
    225,043Operating expenses:Research and development
    
    
    
    
    (68,295
    )
    
    
    (86,089
    )
    
    
    (132,981
    )
    
    
    (19,482
    )Sales, marketing and distribution
    
    
    
    
    (634,449
    )
    
    
    (782,960
    )
    
    
    (1,002,419
    )
    
    
    (146,855
    )General and administrative
    
    
    
    
    (161,061
    )
    
    
    (194,233
    )
    
    
    (222,118
    )
    
    
    (32,540
    )Impairment loss on goodwill
    
    7
    
    
    
    
    
    
    
    
    
    
    (76,398
    )
    
    
    (11,192
    )Income from operations
    
    
    
    
    263,862
    
    
    
    356,979
    
    
    
    102,210
    
    
    
    14,974Interest income
    
    
    
    
    24,361
    
    
    
    34,302
    
    
    
    8,861
    
    
    
    1,298Interest expense
    
    5
    
    
    (6,346
    )
    
    
    (4,693
    )
    
    
    (12,126
    )
    
    
    (1,776
    )Foreign currency exchange gains, net
    
    2(c)
    
    
    24,670
    
    
    
    39,879
    
    
    
    382
    
    
    
    56Other income
    
    14(d)
    
    
    20,526
    
    
    
    1,104
    
    
    
    2,971
    
    
    
    435Equity in losses of equity method affiliated companies
    
    
    
    
    
    
    
    
    
    
    
    
    (56,532
    )
    
    
    (8,283
    )Earnings before income taxes
    
    
    
    
    327,073
    
    
    
    427,571
    
    
    
    45,766
    
    
    
    6,704Income tax expense
    
    10
    
    
    (13,527
    )
    
    
    (49,285
    )
    
    
    (16,897
    )
    
    
    (2,475
    )Net income
    
    
    
    
    313,546
    
    
    
    378,286
    
    
    
    28,869
    
    
    
    4,229Less: net income attributable to the noncontrolling interest
    
    
    
    
    (12,285
    )
    
    
    (28,135
    )
    
    
    (2,441
    )
    
    
    (358
    )Net income attributable to Simcere Pharmaceutical Group
    
    
    
    
    301,261
    
    
    
    350,151
    
    
    
    26,428
    
    
    
    3,871Earnings per share:
    
    15Basic
    
    
    
    
    2.56
    
    
    
    2.80
    
    
    
    0.23
    
    
    
    0.03Diluted
    
    
    
    
    2.48
    
    
    
    2.80
    
    
    
    0.23
    
    
    
    0.03
  F-4




---



##### Table of Contents



Simcere Pharmaceutical Group and Subsidiaries
 
 Consolidated Statements of Shareholders Equity and Comprehensive Income
 (Amounts expressed in thousands, except share data)
 Accumulated
    
    
    
    
    
    Equity attributable
    
    
    
    
    
    TotalNumber of
    
    
    
    
    
    Additional
    
    other
    
    
    
    
    
    to Simcere
    
    
    
    
    
    shareholdersordinary
    
    
    
    
    
    paid-in
    
    comprehensive
    
    Retained
    
    Pharmaceutical
    
    Non-controlling
    
    equity
    
    ComprehensiveNote
    
    shares
    
    Par value
    
    capital
    
    loss
    
    earnings
    
    Group
    
    interests
    
    (note 13)
    
    incomeRMB
    
    RMB
    
    RMB
    
    RMB
    
    RMB
    
    RMB
    
    RMB
    
    RMBBalance as of January 1, 2007
    
    
    
    
    100,000,000
    
    
    
    7,909
    
    
    
    265,964
    
    
    
    
    
    
    
    168,867
    
    
    
    442,740
    
    
    
    
    
    
    
    442,740Issuance of ordinary shares in
connection with public
offering, net of issuance
costs of RMB46,099
    
    
    
    
    25,000,000
    
    
    
    1,931
    
    
    
    1,253,778
    
    
    
    
    
    
    
    
    
    
    
    1,255,709
    
    
    
    
    
    
    
    1,255,709Share-based compensation
    
    17
    
    
    
    
    
    
    
    
    
    
    30,764
    
    
    
    
    
    
    
    
    
    
    
    30,764
    
    
    
    
    
    
    
    30,764Issuance of ordinary shares
upon exercise of share options
    
    17
    
    
    6,200
    
    
    
    
    
    
    
    191
    
    
    
    
    
    
    
    
    
    
    
    191
    
    
    
    
    
    
    
    191Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    301,261
    
    
    
    301,261
    
    
    
    8,236
    
    
    
    309,941
    
    
    
    301,261Foreign currency translation
adjustments, net of nil tax
    
    2(c)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (46,849
    )
    
    
    
    
    
    
    (46,849
    )
    
    
    
    
    
    
    (46,849
    )
    
    
    (46,849
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    254,412Acquisition of Boda
    
    7(c)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,538
    
    
    
    1,538Acquisition of Tung Chit
    
    7(c)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,363
    
    
    
    2,363Balance as of December 31, 2007
    
    
    
    
    125,006,200
    
    
    
    9,840
    
    
    
    1,550,697
    
    
    
    (46,849
    )
    
    
    470,128
    
    
    
    1,983,816
    
    
    
    12,137
    
    
    
    1,995,953Share-based compensation
    
    17
    
    
    
    
    
    
    
    
    
    
    25,536
    
    
    
    
    
    
    
    
    
    
    
    25,536
    
    
    
    
    
    
    
    25,536Issuance of ordinary shares
upon exercise of share options
    
    17
    
    
    198,000
    
    
    
    14
    
    
    
    5,722
    
    
    
    
    
    
    
    
    
    
    
    5,736
    
    
    
    
    
    
    
    5,736Repurchase of ordinary shares
    
    18
    
    
    (2,976,882
    )
    
    
    (230
    )
    
    
    (76,703
    )
    
    
    
    
    
    
    
    
    
    
    (76,933
    )
    
    
    
    
    
    
    (76,933
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    350,151
    
    
    
    350,151
    
    
    
    28,135
    
    
    
    378,286
    
    
    
    350,151Foreign currency translation
adjustments, net of nil tax
    
    2(c)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (35,281
    )
    
    
    
    
    
    
    (35,281
    )
    
    
    
    
    
    
    (35,281
    )
    
    
    (35,281
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    314,870Acquisition of Simcere Zhong Ren
    
    7(b)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,025
    
    
    
    8,025Balance as of December 31, 2008
    
    
    
    
    122,227,318
    
    
    
    9,624
    
    
    
    1,505,252
    
    
    
    (82,130
    )
    
    
    820,279
    
    
    
    2,253,025
    
    
    
    48,297
    
    
    
    2,301,322Share-based compensation
    
    17
    
    
    
    
    
    
    
    
    
    
    23,677
    
    
    
    
    
    
    
    
    
    
    
    23,677
    
    
    
    
    
    
    
    23,677Issuance of ordinary shares
upon exercise of non-vested
shares
    
    17
    
    
    467,780
    
    
    
    32
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32
    
    
    
    
    
    
    
    32Repurchase of ordinary shares
    
    18
    
    
    (12,160,166
    )
    
    
    (940
    )
    
    
    (335,736
    )
    
    
    
    
    
    
    
    
    
    
    (336,676
    )
    
    
    
    
    
    
    (336,676
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,428
    
    
    
    26,428
    
    
    
    2,441
    
    
    
    28,869
    
    
    
    26,428Foreign currency translation
adjustments, net of nil tax
    
    2(c)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38,244
    
    
    
    
    
    
    
    38,244
    
    
    
    
    
    
    
    38,244
    
    
    
    38,244Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    64,672Acquisition of Shandong Simceres
shares from noncontrolling
interests
    
    7(a)
    
    
    
    
    
    
    
    
    
    
    (22,506
    )
    
    
    
    
    
    
    
    
    
    
    (22,506
    )
    
    
    (7,622
    )
    
    
    (30,128
    )Acquisition of Jiangsu Yanshen
    
    7(a)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    182,343
    
    
    
    182,343Balance as of December 31, 2009
    
    
    
    
    110,534,932
    
    
    
    8,716
    
    
    
    1,170,687
    
    
    
    (43,886
    )
    
    
    846,707
    
    
    
    1,982,224
    
    
    
    225,459
    
    
    
    2,207,683Balance
as of December 31 2009  US$
    
    
    
    
    
    
    
    
    1,277
    
    
    
    171,507
    
    
    
    (6,429
    )
    
    
    124,043
    
    
    
    290,398
    
    
    
    33,030
    
    
    
    323,428
  F-5




---



##### Table of Contents



Simcere Pharmaceutical Group and Subsidiaries
 
 Consolidated Cash Flow Statements
 (Amounts expressed in thousands)
 Year ended December 31,Note
    
    2007
    
    2008
    
    2009
    
    2009RMB
    
    RMB
    
    RMB
    
    US$Operating activities:Net income
    
    
    
    
    313,546
    
    
    
    378,286
    
    
    
    28,869
    
    
    
    4,229Adjustments to reconcile net income to net cash provided by
operating activities:Bad debt expense
    
    
    
    
    1,203
    
    
    
    1,576
    
    
    
    101
    
    
    
    15Inventory write-downs
    
    
    
    
    3,213
    
    
    
    3,000
    
    
    
    2,855
    
    
    
    418Depreciation of property, plant and equipment
    
    
    
    
    27,770
    
    
    
    39,791
    
    
    
    55,405
    
    
    
    8,117Amortization of intangible assets
    
    
    
    
    15,084
    
    
    
    29,433
    
    
    
    29,413
    
    
    
    4,309Impairment loss on goodwill
    
    7
    
    
    
    
    
    
    
    
    
    
    76,398
    
    
    
    11,192Equity in losses of equity method affiliated companies
    
    
    
    
    
    
    
    
    
    
    
    
    56,532
    
    
    
    8,283Acquired in-process research and development
    
    
    
    
    884
    
    
    
    
    
    
    
    
    
    
    
    Gain on disposal of property, plant and equipment
    
    
    
    
    (2,526
    )
    
    
    (21
    )
    
    
    (1,289
    )
    
    
    (189
    )Deferred tax expense (benefit)
    
    
    
    
    11,009
    
    
    
    (2,770
    )
    
    
    (21,366
    )
    
    
    (3,131
    )Share-based compensation expense
    
    
    
    
    30,764
    
    
    
    25,536
    
    
    
    23,677
    
    
    
    3,469Unrealized foreign currency exchange losses (gains)
    
    
    
    
    (45,350
    )
    
    
    (39,763
    )
    
    
    38,127
    
    
    
    5,586Changes in assets and liabilities, net of effects from acquisitionsDecrease (increase) in accounts and bills receivables
    
    
    
    
    (316,010
    )
    
    
    (257,135
    )
    
    
    87,799
    
    
    
    12,863Decrease (increase) in inventories
    
    
    
    
    (14,304
    )
    
    
    (32,648
    )
    
    
    5,876
    
    
    
    861Decrease (increase) in other current assets
    
    
    
    
    49,660
    
    
    
    (12,755
    )
    
    
    16,551
    
    
    
    2,425Decrease (increase) in amounts due from related parties
    
    
    
    
    166
    
    
    
    3,138
    
    
    
    (324
    )
    
    
    (47
    )Increase in accounts and bills payables
    
    
    
    
    1,084
    
    
    
    1,275
    
    
    
    99,231
    
    
    
    14,537Increase (decrease) in accrued payroll and employee benefits
    
    
    
    
    4,946
    
    
    
    (1,424
    )
    
    
    13,851
    
    
    
    2,029Increase (decrease) in other current liabilities
    
    
    
    
    70,628
    
    
    
    11,639
    
    
    
    (54,742
    )
    
    
    (8,020
    )Decrease in amounts due to related parties
    
    
    
    
    (1,352
    )
    
    
    
    
    
    
    
    
    
    
    Net cash provided by operating activities
    
    
    
    
    150,415
    
    
    
    147,158
    
    
    
    456,964
    
    
    
    66,946Investing activities:Payment for purchase of land use rights
    
    
    
    
    (20,449
    )
    
    
    (926
    )
    
    
    
    
    
    
    Payment for purchase of intangible assets
    
    
    
    
    
    
    
    
    (2,554
    )
    
    
    
    
    
    
    Purchase of property, plant and equipment
    
    
    
    
    (78,143
    )
    
    
    (117,541
    )
    
    
    (120,795
    )
    
    
    (17,697
    )Payment of deposits for purchase of property, plant and equipment
and intangible assets
    
    
    
    
    
    
    
    
    (15,791
    )
    
    
    (20,533
    )
    
    
    (3,008
    )Proceeds from disposal of property, plant and equipment and land
use right
    
    
    
    
    
    
    
    
    1,942
    
    
    
    4,780
    
    
    
    700Payment for acquisition of subsidiaries, net of cash acquired
    
    7
    
    
    (131,511
    )
    
    
    (62,420
    )
    
    
    (175,058
    )
    
    
    (25,646
    )Payment for acquisition of affiliated companies
    
    7(a)
    
    
    
    
    
    
    
    
    
    
    (110,000
    )
    
    
    (16,115
    )(Increase) decrease in held-to-maturity investment securities
    
    
    
    
    (470,000
    )
    
    
    470,000
    
    
    
    
    
    
    
    (Increase) decrease in pledged bank deposits
    
    
    
    
    19,877
    
    
    
    (42
    )
    
    
    (14,705
    )
    
    
    (2,154
    )Advances made to an affiliated company
    
    19
    
    
    
    
    
    
    
    
    
    
    (19,761
    )
    
    
    (2,895
    )Proceeds from repayments of loans and advances due from related
parties
    
    19
    
    
    212
    
    
    
    
    
    
    
    
    
    
    
    Proceeds from disposal of property, plant and equipment, and land
use right to related parties
    
    19
    
    
    11,104
    
    
    
    
    
    
    
    
    
    
    
    Loans and advances made to related parties
    
    19
    
    
    
    
    
    
    (20,000
    )
    
    
    (1,600
    )
    
    
    (234
    )Net cash (used in) provided by investing activities
    
    
    
    
    (668,910
    )
    
    
    252,668
    
    
    
    (457,672
    )
    
    
    (67,049
    )Financing activities:Proceeds from issuance of ordinary shares
    
    
    
    
    1,301,808
    
    
    
    
    
    
    
    
    
    
    
    Proceeds from exercise of share options
    
    
    
    
    191
    
    
    
    5,736
    
    
    
    
    
    
    
    Proceeds from exercise of non-vested shares
    
    
    
    
    
    
    
    
    
    
    
    
    32
    
    
    
    5Payments for offering costs
    
    
    
    
    (39,346
    )
    
    
    
    
    
    
    
    
    
    
    Payments for repurchase of ordinary shares
    
    
    
    
    
    
    
    
    (76,933
    )
    
    
    (336,676
    )
    
    
    (49,323
    )Principal repayments of bank loans and other borrowings
    
    
    
    
    (314,000
    )
    
    
    (17,000
    )
    
    
    (2,963
    )
    
    
    (435
    )Payments for acquisition of additional noncontrolling interests
    
    7
    
    
    (27,064
    )
    
    
    
    
    
    
    (30,128
    )
    
    
    (4,414
    )Distribution by a subsidiary to its noncontrolling shareholder
    
    
    
    
    (10,270
    )
    
    
    (649
    )
    
    
    
    
    
    
    Net cash provided by (used in) financing activities
    
    
    
    
    911,319
    
    
    
    (88,846
    )
    
    
    (369,735
    )
    
    
    (54,167
    )
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Simcere Pharmaceutical Group and Subsidiaries
Consolidated Cash Flow Statements
 (Amounts expressed in thousands)
 Year ended December 31,2007
    
    2008
    
    2009
    
    2009RMB
    
    RMB
    
    RMB
    
    US$Effect of exchange rate changes on
cash and cash equivalents
    
    
    
    
    (1,499
    )
    
    
    4,482
    
    
    
    117
    
    
    
    17Net increase(decrease) in cash and
cash equivalents
    
    
    
    
    391,325
    
    
    
    315,462
    
    
    
    (370,326
    )
    
    
    (54,253
    )Cash and cash equivalents at
beginning of year
    
    
    
    
    106,027
    
    
    
    497,352
    
    
    
    812,814
    
    
    
    119,078Cash and cash equivalents at end of
year
    
    
    
    
    497,352
    
    
    
    812,814
    
    
    
    442,488
    
    
    
    64,825(a) Supplemental cash flow and
non-cash information:Cash and cash equivalents paid
during the period for:Income taxes
    
    
    
    
    3,056
    
    
    
    40,401
    
    
    
    40,404
    
    
    
    5,919Interest, net of capitalized interest
    
    
    
    
    6,418
    
    
    
    4,693
    
    
    
    12,126
    
    
    
    1,776Non-cash investing transactions:Payable and accruals for acquisition
of property, plant and equipment and
land use right
    
    
    
    
    39,791
    
    
    
    32,890
    
    
    
    54,360
    
    
    
    7,964Payable for acquisition of Jiangsu
Yanshen
    
    
    
    
    
    
    
    
    
    
    
    
    30,801
    
    
    
    4,511Payable for acquisition of Boda
    
    
    
    
    8,323
    
    
    
    
    
    
    
    
    
    
    
    (b) Analysis of net cash outflow in
respect of acquisitions is as
follow:i) Acquisition of Boda in 2007Cash consideration paid
    
    7(c)
    
    
    (114,738
    )Cash and cash equivalents acquired
    
    
    
    
    13,003Net cash outflow in respect of
acquisition of Boda
    
    
    
    
    (101,735
    )ii) Acquisition of Tung Chit in
2007Cash consideration paid
    
    7(c)
    
    
    (32,927
    )Cash and cash equivalents acquired
    
    
    
    
    3,151Net cash outflow in respect of
acquisition of Tung Chit
    
    
    
    
    (29,776
    )iii) Acquisition of Simcere Zhong
Ren in 2008Cash consideration paid
    
    7(b)
    
    
    
    
    
    
    (65,090
    )Cash and cash equivalents acquired
    
    
    
    
    
    
    
    
    2,670Net cash outflow in respect of
acquisition of Simcere Zhong Ren
    
    
    
    
    
    
    
    
    (62,420
    )iv) Acquisition of 52.5% equity
interest in Jiangsu Yanshen in 2009Cash consideration paid
    
    7(a)
    
    
    
    
    
    
    
    
    
    
    (267,398
    )
    
    
    (39,176
    )Cash and cash equivalents acquired
    
    
    
    
    
    
    
    
    
    
    
    
    92,340
    
    
    
    13,530Net cash outflow in respect of
acquisition of Jiangsu Yanshen
    
    
    
    
    
    
    
    
    
    
    
    
    (175,058
    )
    
    
    (25,646
    )
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 1
    
    Principal activities, significant concentrations and risks, and basis of presentation
 (a)
    
    Principal activities
 Simcere Pharmaceutical Group (the Company) and its subsidiaries (the Group), are
principally engaged in the research, development, manufacture and distribution of
pharmaceutical products in the Peoples Republic of China (the PRC).
 (b)
    
    Significant concentrations and risks
 Revenue concentrationsThe Group sells its products to pharmaceutical and vaccine distributors and the PRC
government. 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 and vaccine 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 the failure to
renew existing distribution agreements with desired distributors, could negatively affect the
Groups 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, 2007, 2008 and 2009, no single customer contributed 10% or more of the Groups
revenue or gross accounts and bills receivables.The Group derives a substantial portion of revenue from the sales of six products, namely
Bicun, Zailin, Yingtaiqing, Sinofuan, Yidasheng and Endu of which revenues were over
RMB100,000 (US$14,650) individually for the year ended December 31, 2009. Aggregate sales of
these products accounted for 79.5%, 78.6% and 76.8% of the Groups revenue for the years
ended December 31, 2007, 2008 and 2009, 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 authoritiesThe retail prices of certain pharmaceuticals sold in China, primarily those included in the
Chinas national drug reimbursement list, the essential drug list and the national and
provincial medical insurance catalogs, issued by Chinas Ministry of Human Resources and
Social Security and those pharmaceuticals whose production or trading are deemed to
constitute monopolies, are subject to price controls in the form of fixed prices or price
ceilings. Manufacturers and distributors cannot set the retail price for any given
price-controlled product above the price ceilings or deviate from the fixed price imposed by
the government. The prices of medicines that are not subject to price controls are determined
freely, subject to notification to the provincial pricing authorities.Certain of the Groups products are subject to such 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, 2007, 2008 and 2009, 73%, 72% and
82%, respectively of the Groups revenue were from products that were subject to government
pricing controls.Concentration of suppliersThe Group sources raw materials, as well as packaging materials, from various suppliers
in the PRC. Historically, the majority of the Groups raw materials have been readily
available. The Group generally maintains two vendors for each major raw material in order to
diversify its vendor base and help to ensure a reliable supply of raw materials at reasonable
prices. For the years ended December 31, 2007, 2008 and 2009,
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 the Group purchased 50.9%, 40.3% and 37.6%, respectively, of its total supply of raw
materials from its five largest suppliers.Concentrations of cash and cash equivalents held at financial institutionsThe Groups cash and cash equivalents are held at financial institutions in the PRC, the Hong
Kong Special Administrative Region (the HK SAR) and the United States of America (the
U.S.) as follows:
 December 31, 2008Denominated
    
    Denominatedin United
    
    in Hong Kong
    
    DenominatedStates Dollars
    
    Dollars
    
    in Renminbi
    
    TotalRMB
    
    RMB
    
    RMB
    
    RMBLocation:PRC
    
    
    126,057
    
    
    
    
    
    
    
    648,824
    
    
    
    774,881Hong Kong
    
    
    2,648
    
    
    
    1,361
    
    
    
    
    
    
    
    4,009United States
    
    
    33,924
    
    
    
    
    
    
    
    
    
    
    
    33,924Total
    
    
    162,629
    
    
    
    1,361
    
    
    
    648,824
    
    
    
    812,814
 December 31, 2009Denominated
    
    Denominatedin United
    
    in Hong Kong
    
    DenominatedStates Dollars
    
    Dollars
    
    in Renminbi
    
    TotalRMB
    
    RMB
    
    RMB
    
    RMBLocation:PRC
    
    
    55,622
    
    
    
    
    
    
    
    364,058
    
    
    
    419,680Hong Kong
    
    
    7,479
    
    
    
    1,393
    
    
    
    
    
    
    
    8,872United States
    
    
    13,936
    
    
    
    
    
    
    
    
    
    
    
    13,936Total
    
    
    77,037
    
    
    
    1,393
    
    
    
    364,058
    
    
    
    442,488Total
 US$
    
    
    11,286
    
    
    
    204
    
    
    
    53,335
    
    
    
    64,825
 Cash and cash equivalents held at financial institutions located in the PRC were uninsured;
cash and cash equivalents held at major financial institutions located in the HK SAR were
fully insured; and cash and cash equivalents held at major financial institutions located in
the U.S. were insured up to US$200 (RMB1,365). Management believes that these major financial
institutions have high credit ratings.
 (c)
    
    Basis of presentation
 The accompanying consolidated financial statements have been prepared in accordance with U.S.
generally accepted accounting principles (U.S. GAAP).
 2
    
    Summary of significant accounting policies
 (a)
    
    Consolidation
 The consolidated financial statements include the financial statements of the Company and its
majority-owned subsidiaries. For consolidated subsidiaries where the Companys ownership is
less than 100%, the outside shareholders interests are shown as noncontrolling interests.
All significant intercompany balances and transactions have been eliminated upon
consolidation.
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 (b)
    
    Use of estimates
 The preparation of the consolidated financial statements in conformity with U.S. GAAP
requires management of the Group to make a number of estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Significant items subject to such
estimates and assumptions include recoverability of the carrying amount of property, plant
and equipment, goodwill and intangible assets (including acquired in-process research and
development (IPR&D) assets in a business combination); the allocation of the purchase price
for the Groups acquisitions; allowances for doubtful receivables and deferred income tax
assets; depreciation and amortizable lives; realizablility of inventories; and amounts
recognized for contingencies. These estimates are often based on complex judgments and
assumptions that management believes to be reasonable but are inherently uncertain and
unpredictable. Actual results could differ from those estimates.
 (c)
    
    Foreign currency translation
 The reporting currency of the Group is the Renminbi (RMB).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 in foreign currencies are translated into the functional currency at the
exchange rate at the date of the transactions. Monetary assets and liabilities denominated in
foreign currencies are translated into the functional currency at the applicable exchange
rate at the balance sheet date. The resulting exchange differences are recognized in the
consolidated statements of income.Assets and liabilities of subsidiaries, whose functional currency are not the RMB, are
translated into RMB at the exchange rate at the balance sheet date. Income and expense items
are translated at the average rates of exchange prevailing during the period. The adjustment
resulting from translating the financial statements of such entities is reflected as a
component of accumulated other comprehensive loss within shareholders equity.For the U.S. dollar convenience translation amounts included in the accompanying financial
statements, the RMB amounts were translated into U.S. dollars at the rate of
US$1.00=RMB6.8259, representing the noon buying rate in New York for cable transfers of RMB
per U.S. dollar as set forth in the H.10 weekly statistic release of the Federal Reserve
Board, as of December 31, 2009. 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, 2009 or on any other date.
 (d)
    
    Cash and cash equivalents and pledged bank deposits
 Cash and cash equivalents consist of cash on hand, cash in bank accounts, interest-bearing
savings accounts, money market funds, time deposits and short-term fixed income investments
with original maturities of three months or less at the date of purchase. Cash that is
restricted as to withdrawal for use or pledged as security is disclosed separately on the
face of the balance sheet, and is not included in the cash and cash equivalents total in the
consolidated statements of cash flows. The pledged bank deposits represent cash maintained at
a bank as security for short-term bills payable issued by the subsidiaries of the Company to
third party suppliers. These pledged bank deposits are restricted as to withdrawal or use by
the subsidiaries as long as the related short-term bills payable are outstanding. Upon
maturity of the bills payable which generally ranges from three to six months, the cash is
available for use by the Group.
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 (e)
    
    Accounts receivable and bills receivable
 Accounts receivable are recognized at the invoiced amount and do not bear interest. The Group
maintains an allowance for doubtful accounts for estimated losses resulting from inability of
its customers to make required payments. The allowance for doubtful accounts is based on a
review of specifically identified accounts, aging data and historical write-off experience.
Judgments are made with respect to the collectibility of accounts receivable based on
historical experience, customer specific facts and current economic conditions. Account
balances are charged off against the allowance after all means of collection have been
exhausted and the potential for recovery is considered remote. Apart from those disclosed in
note 14(d), the Group does not have any off-balance-sheet credit exposure related to accounts
receivable.To reduce the Groups credit risk, the Group has required certain customers to pay for the
sale of the Groups products by bills receivable. A bill receivable primarily represents a
short-term note receivable issued by a financial institution that entitles the Group to
receive the full face amount from the financial institution at maturity, which generally
ranges from 3 to 6 months from the date of issuance. Historically, the Group has not
experienced any collection losses on bills receivable and therefore no allowance for doubtful
accounts has been provided.
 (f)
    
    Inventories
 Inventories are stated at the lower of cost or market value. Cost is determined using the
weighted average cost method. Costs of work-in-progress and finished goods comprise direct
materials, direct labor and related manufacturing overhead based on normal operating
capacity.
 (g)
    
    Investments in and advances to affiliated companies
 Investments in entities where the Group does not have a controlling financial interest, but
has the ability to exercise significant influence over the operating and financial policies
of the investee, are accounted for using the equity method of accounting. Under the equity
method of accounting, the Groups share of the investees results of operations is included
in the consolidated statements of income.The Group recognizes a loss when there is a loss in value of an equity method investment
which is other than a temporary decline. The process of assessing and determining whether an
impairment on a particular equity investment is other than temporary requires a significant
amount of judgment. To determine whether an impairment is other-than-temporary, management
considers whether the Group has the ability and intent to hold the investment until recovery
and whether evidence indicating the carrying value of the investment is recoverable outweighs
evidence to the contrary. Evidence considered in this assessment includes the reasons for
the impairment, the severity and duration of the decline in value, any change in value
subsequent to year end, and forecasted performance of the investee. Based on managements
evaluation, there was no impairment charges related to its investments in any affiliated
companies for the year ended December 31, 2009.
 (h)
    
    Long-lived assets
 Property, plant and equipmentProperty, plant, and equipment are stated at cost. Depreciation is provided over the
estimated useful lives of the assets, using the straight-line method. When items are retired
or otherwise disposed of, income is charged or credited for the difference between net book
value and proceeds realized thereon. Ordinary maintenance and repairs are charged to expense
as incurred, and replacements and betterments are capitalized. The estimated useful lives of
property, plant and equipment are as follows:
 Building and leasehold improvements
    
    20 - 50 yearsMachinery and equipment
    
    3 - 10 yearsMotor vehicles
    
    3 - 8 yearsFurniture, fixtures and office equipment
    
    3 - 5 years
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(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 materials and
production when the inventory is sold.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 with finite lives 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
    
    7 - 16 yearsProduct trademarks
    
    6 - 10 yearsManufacturing and supply licenses
    
    1 - 5 years
 IPR&D represents the fair value assigned to incomplete research projects that the Group
acquires through business combinations, which at the time of acquisition, have not reached
technological feasibility. For business combinations for which the acquisition date is before
January 1, 2009, the fair value of IPR&D projects was expensed upon acquisition. For business combinations for which
the acquisition date that is on or after January 1, 2009, the fair value of IPR&D projects is
recognized as intangible asset on the consolidated balance sheet rather than expensed. The
amounts capitalized are accounted for as indefinite-lived intangible assets, subject to
impairment testing until completion or abandonment of the projects. Upon successful
completion of each project, the Group will make a determination as to the useful life of the
intangible asset and begin amortization.The Group tests indefinite-lived intangibles, including IPR&D, for impairment at least
annually and whenever impairment indicators are present. The impairment test consists of a
comparison of the fair value of the IPR&D with its carrying amount. If the carrying amount of
an IPR&D exceeds its fair value, an impairment loss is recognized in an amount equal to that
excess.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. No impairment loss of intangible assets was recognized in 2007, 2008 and
2009.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 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.For the years ended December 31, 2007 and 2008, management determined that the Group was the
reporting unit for the purposes of goodwill impairment testing. The Group used its market
capitalization based on the
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 quoted market price of its ordinary shares in determining the fair value of the reporting
unit. No impairment loss of goodwill was recognized in 2007 and 2008.Following the acquisition of Jiangsu Yanshen Biological Technology Stock Co., Ltd (Jiangsu Yanshen) in 2009, management evaluated and determined
that the Company has two reporting units: pharmaceutical business unit
and vaccines business unit. The goodwill recognized in the acquisition of Jiangsu Yanshen (see note 7(a) was assigned to the
vaccine reporting unit. For the year ended December 31, 2009, the Group recognized an impairment loss on
goodwill of the vaccine reporting unit of RMB76,398 (US$11,192).
 (i)
    
    Land use rights
 A land use right in the PRC represents an exclusive right to occupy, use, develop, lease,
transfer a piece of land during the contractual term of the land use right. Land use rights
are usually paid in one lump sum at the date the right is granted. The payment usually covers
the entire duration period of the land use right. The lump sum advance payments are
capitalized as land use right assets and then charged to expenses on a straight-line basis
over the respective periods of the rights of 24-75 years.
 (j)
    
    Income taxes
 Income taxes are accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to temporary
differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit carryforwards. A
valuation allowance is provided to reduce the amount of deferred tax assets if it is
considered more likely than not that some portion or all of the deferred tax assets will not
be realized. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in consolidated statements of income in the period that
includes the enactment date.On January 1, 2007, the Company adopted the provisions of Financial Accounting Standards
Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes  an
Interpretation of FASB Statement No. 109 (FIN 48) which was codified into Accounting
Standards Codification (ASC) Subtopic 740-10, Income Taxes. Under this Interpretation,
management determines whether it is more likely than not that a tax position will be
sustained upon examination, including resolution of any related appeals or litigation
processes, based solely on the technical merits of the position. In evaluating whether a tax
position has met the more-likely-than-not recognition threshold, it is presumed that the
position will be examined by the appropriate taxing authority that has full knowledge of all
relevant information. In addition, a tax position that meets the more-likely-than-not
recognition threshold is measured to determine the amount of benefit to recognize in the
financial statements. A recognized income tax position is measured at the largest amount of
benefit that is greater than 50 percent likely of being realized. 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.
 (k)
    
    Revenues
 Sales of pharmaceutical products represent the invoiced value of products sold, net of value
added taxes (VAT).The Group recognizes revenue from the sale of products when the following criteria are met:
1) persuasive evidence of an arrangement exits (sales agreements and customer purchase orders
are used to determine the
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 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 reasonably assured. 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 recognized as revenue. VAT
collected from customers, net of VAT paid for purchases, is recognized as a liability in the
consolidated balance sheets until it is paid to the authorities.Certain of the Groups subsidiaries 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 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 tax bureau.
 (l)
    
    Government grants
 Government grants are recognized when there is reasonable assurance that the Group will
comply with the conditions attaching to them, and the grants are receivable. Grants that
compensate research and development expenses are recognized as a reduction to the related
research and development expenses. Grants that compensate the Group for the cost of property,
plant and equipment and land use rights are recognized as a reduction of the cost of the
related asset and are recognized over the useful life of the asset by way of reduced
depreciation expense or lease expense.For the years ended December 31, 2007, 2008 and 2009, RMB10,000, RMB2,697, and RMB500
(US$73), respectively, have been recognized as a reduction of research and development
expenses.
 (m)
    
    Research and development
 Research and development costs are expensed as incurred. These expenses include the costs of
the Groups internal research and development activities and the costs of research and
development conducted by others on behalf of the Group, such as through third-party
collaboration arrangements. Research and development costs in connection with third-party
collaboration arrangements prior to regulatory approval are expensed when the research and
development activities are performed. Once a regulatory approval is obtained, subsequent
payments are recognized as intangible assets and, unless the assets are determined to have an
indefinite life, amortized over the remaining agreement terms or the expected product life
cycle, whichever is shorter.The costs of acquired technology know-how (drugs in a development stage) that are purchased
from others for a particular research and development project either singly, or as part of a
group of assets, 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.
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 (n)
    
    Advertising costs
 Advertising costs are expensed as incurred and included in sales, marketing and distribution
expenses. Advertising costs for the years ended December 31, 2007, 2008 and 2009 amounted to
RMB31,016, RMB41,816, and RMB51,914 (US$7,605), respectively.
 (o)
    
    Shipping and handling fees and costs
 Costs incurred by the Group for shipping and handling 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, 2007, 2008 and 2009 amounted to RMB11,912,
RMB12,408 and RMB12,491 (US$1,830), respectively.
 (p)
    
    Retirement and other postretirement benefits
 Contributions to defined contribution retirement plans are charged to the consolidated
statements of income as and when the related employee service is provided. The Group does not
have any defined benefit retirement plans.
 (q)
    
    Share-based payment
 The Company measures the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award and recognizes that cost
on a straight-line basis over the requisite service period.
 (r)
    
    Commitments and contingencies
 In the normal course of business, the Group is subject to loss contingencies, such as legal
proceedings and claims arising out of its business, that cover a wide range of matters,
including, among others, government investigations, shareholder lawsuits, product and
environmental liability, and tax matters. The Group records accruals for such loss
contingencies when it is probable that a liability will be incurred and the amount of loss
can be reasonably estimated. Historically, the Group has experienced no product liability
claims.
 (s)
    
    Earnings per share
 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 dilutive ordinary
equivalent shares outstanding during the period. Dilutive ordinary equivalent shares consist
of the ordinary shares issuable upon the exercise of outstanding share options calculated
using the treasury stock method. Dilutive ordinary equivalent shares in the diluted earnings
per share computation are excluded to the extent that their effect is anti-dilutive.
 (t)
    
    Segment reporting
 For the years ended December 31, 2007, 2008 and 2009, the Group as
a whole is the only operating segment. The Groups chief operating decision maker regularly
receives and reviews the financial information on a consolidated
group basis to make decisions about resource allocation and assess
performance. All of the Groups operations and customers
are located in the PRC. Consequently, no geographic information is presented.
 (u)
    
    Fair value measurement
 On January 1, 2008, the Group adopted the provisions of FASB Statement No. 157, Fair
Value Measurements, included in FASB ASC 820, Fair Value Measurements and Disclosures, for
fair value measurements of financial assets and financial liabilities and for fair value
measurements of nonfinancial items that are
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 recognized or disclosed at fair value in the financial statements on a recurring basis.
ASC 820 defines fair value as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement
date. ASC 820 also establishes a framework for measuring fair value and expands disclosures
about fair value measurements.On January 1, 2009, the Group adopted the provisions of FASB ASC 820 to fair value
measurements of nonfinancial assets and nonfinancial liabilities that are recognized or
disclosed at fair value in the financial statements on a nonrecurring basis. For the year
ended December 31, 2009, a goodwill impairment charge of
RMB76,398 (US$11,192) was recognized based on the reporting unit's
fair value (see note 7(a) and 21).
 (v)
    
    Recently adopted accounting standards
 ASC 805, Business CombinationsIn December 2007, the FASB issued SFAS No. 141R, Business Combinations(codified as FASB ASC
805, Business Combinations). ASC 805 modifies the accounting for business combinations and
requires, with limited exceptions, the acquirer in a business combination to recognize 100% of the assets acquired, liabilities assumed, and noncontrolling interest in the
acquiree at the acquisition-date fair value. In addition, ASC Topic 805 requires the
expensing of acquisition-related transaction and restructuring costs, and certain contingent
acquired assets and liabilities, as well as contingent consideration, to be recognized at
fair value. ASC 805 is applied prospectively to business combinations for which the
acquisition date is on or after January 1, 2009.ASC 810, ConsolidationIn December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements  an Amendment of ARB No. 51(codified as FASB ASC 810, Consolidation).
ASC 810 establishes accounting and reporting standards for the treatment of noncontrolling
interests in a subsidiary. Noncontrolling interests in a subsidiary will be reported as a
component of equity in the consolidated financial statements and any retained noncontrolling
equity investment upon deconsolidation of a subsidiary will initially be measured at fair
value. ASC 810 is effective, on a prospective basis, for fiscal years beginning on or after
December 15, 2008. However, presentation and disclosure requirements must be retrospectively
applied to comparative financial statements. The Group adopted the provisions of ASC 810 on
January 1, 2009. The Group classified earnings attributable to noncontrolling interests
(previously referred to as minority interests) as part of consolidated net income and to
include the accumulated amount of noncontrolling interests as part of
shareholders equity. The Group also classified payments for
acquisition of additional noncontrolling interests as financing activities in
the consolidated statements of cash flows.ASC 808, Collaborative ArrangementsIn December 2007, the FASB issued Emerging Issues Task Force (EITF) No. 07-1, Accounting
for Collaborative Arrangements (codified as FASB ASC 808, Collaborative Arrangements). ASC
808 establishes reporting requirements regarding financial statement presentation and
disclosure of collaborative arrangements, which includes arrangements entered into regarding
development and commercialization of products. It requires certain transactions between
collaborators to be recorded in the statements of income on either a gross or net basis when
certain characteristics exist in the collaborative relationship. ASC 808 became effective for
the Group on January 1, 2009. The initial adoption of ASC 808 did not have a significant
impact on the Groups financial position and results of operations.3
    
    Accounts and bills receivables, netAccounts and bills receivables, net are summarized as follows:
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 December 31,2008
    
    2009
    
    2009RMB
    
    RMB
    
    US$Accounts receivable
    
    
    316,139
    
    
    
    303,255
    
    
    
    44,428Less: allowance for doubtful accounts
    
    
    (6,995
    )
    
    
    (6,749
    )
    
    
    (989
    )Accounts receivable, net
    
    
    309,144
    
    
    
    296,506
    
    
    
    43,439Bills receivable
    
    
    439,853
    
    
    
    407,815
    
    
    
    59,745Total accounts and bills receivables, net
    
    
    748,997
    
    
    
    704,321
    
    
    
    103,184
 The movements of the allowance for doubtful accounts are as follows:
 Year ended December 31,2007
    
    2008
    
    2009
    
    2009RMB
    
    RMB
    
    RMB
    
    US$Beginning allowance for doubtful accounts
    
    
    6,834
    
    
    
    6,635
    
    
    
    6,995
    
    
    
    1,025Additions charged to bad debt expense
    
    
    1,203
    
    
    
    1,576
    
    
    
    101
    
    
    
    15Write-off of accounts receivable
    
    
    (1,402
    )
    
    
    (1,216
    )
    
    
    (347
    )
    
    
    (51
    )Ending allowance for doubtful accounts
    
    
    6,635
    
    
    
    6,995
    
    
    
    6,749
    
    
    
    989
 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 require collateral or
other security to support credit sales.Several subsidiaries of the Company sold bills receivable with recourse to third party
financial institutions. Under this arrangement, control over the transferred bills receivable
is surrendered and the subsidiaries do not retain beneficial interests in the transferred
bills receivables. All of the transferred bills receivables were accounted for as sales and
derecognized upon transfer pursuant to the provisions of FASB ASC 860, Transfer and
Servicing.For the years ended December 31, 2007, 2008 and 2009, the Group received proceeds from the
sale of bills receivable of RMB51,720, RMB274,183 and RMB1,038,053 (US$152,076),
respectively. The Group recognized discounts of RMB521, RMB2,993 and RMB7,392 (US$1,083) in
respect of bills receivable sold for the years ended December 31, 2007, 2008 and 2009,
respectively, which have been included in interest expense.4
    
    InventoriesInventories by major categories are summarized as follows:
 December 31,2008
    
    2009
    
    2009RMB
    
    RMB
    
    US$Raw materials
    
    
    14,537
    
    
    
    21,801
    
    
    
    3,194Consumables and packaging materials
    
    
    12,914
    
    
    
    9,890
    
    
    
    1,449Work-in-progress
    
    
    17,924
    
    
    
    21,888
    
    
    
    3,207Finished goods
    
    
    50,573
    
    
    
    53,076
    
    
    
    7,775Total inventories
    
    
    95,948
    
    
    
    106,655
    
    
    
    15,625
 Inventory write-downs of RMB3,213, RMB3,000 and RMB2,855 (US$418) were recognized in cost of
materials and production in the consolidated statements of income during the years ended
December 31, 2007, 2008 and 2009, respectively.
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 5
    
    Property, plant and equipment, netProperty, plant and equipment, net consist of the following:
 December 31,2008
    
    2009
    
    2009RMB
    
    RMB
    
    US$Buildings and leasehold improvements
    
    
    326,120
    
    
    
    441,970
    
    
    
    64,749Machinery and equipment
    
    
    165,958
    
    
    
    307,230
    
    
    
    45,009Motor vehicles
    
    
    38,058
    
    
    
    40,709
    
    
    
    5,964Furniture, fixtures and office equipment
    
    
    31,766
    
    
    
    51,315
    
    
    
    7,518Construction-in-progress
    
    
    64,927
    
    
    
    147,280
    
    
    
    21,577626,829
    
    
    
    988,504
    
    
    
    144,817Less: accumulated depreciation and amortization
    
    
    (163,770
    )
    
    
    (243,791
    )
    
    
    (35,716
    )463,059
    
    
    
    744,713
    
    
    
    109,101Deposits for purchase of property, plant and equipment
    
    
    15,791
    
    
    
    13,533
    
    
    
    1,983Property, plant and equipment, net
    
    
    478,850
    
    
    
    758,246
    
    
    
    111,084
 The Group capitalizes interest cost as a component of the cost of construction in progress.
Interest incurred consists of the following:
 Year ended December 31,2007
    
    2008
    
    2009
    
    2009RMB
    
    RMB
    
    RMB
    
    US$Interest cost capitalized
    
    
    763
    
    
    
    2,133
    
    
    
    137
    
    
    
    20Interest cost charged to income
    
    
    6,346
    
    
    
    4,693
    
    
    
    12,126
    
    
    
    1,776Total interest cost incurred
    
    
    7,109
    
    
    
    6,826
    
    
    
    12,263
    
    
    
    1,796
 6
    
    Land use rightsLand use rights consist of the following items:
 December 31,2008
    
    2009
    
    2009RMB
    
    RMB
    
    US$Land use rights: non-current portion
    
    
    114,624
    
    
    
    146,158
    
    
    
    21,412 current portion
    
    
    2,472
    
    
    
    3,200
    
    
    
    469Total land use rights
    
    
    117,096
    
    
    
    149,358
    
    
    
    21,881
 As of December 31, 2009, land use rights with carrying value of RMB26,154 (US$3,832) were
pledged to banks as collateral for long-term bank loans of RMB20,000 (US$2,930). No land use
rights were pledged to banks as of December 31, 2008.
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 7
    
    Acquisitions, goodwill and intangible assets
 (a)
    
    2009 acquisitions
 Acquisition of a 10% equity interest in Shandong SimcereOn January 6, 2009, the Group acquired 10% equity interest in Shandong Simcere Medgenn
Bio-Pharmaceutical Co., Ltd. (Shandong Simcere) for cash consideration of RMB30,128
(US$4,414). The additional purchase of ownership interests in Shandong Simcere did not
constitute a change in control. The noncontrolling interest was reduced by RMB7,622
(US$1,117) and the Group recognized RMB22,506 (US$3,297) as a reduction to additional
paid-in-capital which represented the difference between the fair value of the consideration
and the carrying amount of the 10% noncontrolling interest acquired as of the purchase date.
As a result of the acquisition of the additional 10% equity interest, Shandong became a
wholly owned subsidiary of the Group.Acquisition of a 52.5% equity interest in Jiangsu YanshenThe Group acquired acquire 37.5% equity interest in Jiangsu Yanshen, a China-based developer
and manufacturer of human vaccines, for cash consideration of RMB195,540 (US$28,647). The
37.5% equity interest acquisition was completed on May 22, 2009 and the Group commenced
accounting for its equity interest of 37.5% under the equity method on that date. The
purchase consideration was paid in full in July 2009.In October and November, 2009, the Group entered into share
purchase agreements to acquire 100% equity interest in ChinaVax for
aggregate cash consideration of RMB102,654 (US$15,039). ChinaVax is a Cayman Islands investment holding company which then held 15%
equity interest in Jiangsu Yanshen. As of December 31, 2009, 70% of the purchase consideration
relating to the acquisition of China Vax, or RMB71,858 (US$10,529), was paid.As a result, the Group obtained 100% controlling interest in ChinaVax and therefore, combined
with its previous 37.5% equity interest held in Jiangsu Yanshen, the Group holds 52.5%
controlling interest in Jiangsu Yanshen.The Group ceased using the equity method and began consolidating Jiangsu Yanshen on December
9, 2009, the date the Group obtained a 52.5% controlling interest in Jiangsu Yanshen through
the acquisition of China Vax. The acquisition of Jiangsu Yanshen was accounted for by the
Group as a business combination. As required under ASC 805, the Group remeasured its previously held equity interest of
37.5% in Jiangsu Yanshen which was determined to be RMB143,956 (US$21,089) and recognized a resulting loss
of RMB55,587 (US$8,144) in equity in losses of equity method affiliated companies for the
year ended December 31, 2009. The remeasurement of the
previously held equity interest of 37.5% resulted in a loss because
the fair value of the equity interest in Jiangsu Yanshen on the date
of remeasurement was less than its carrying value. The decline in the fair value was due to reduced estimated future cash flows as a result
of the SFDA investigation on Jiangsu Yanshens sales of human use rabies vaccines and its subsequent resolution (see note 7(e)).The acquisition of the 52.5% equity interest in Jiangsu Yanshen resulted in the recognition
of goodwill of RMB208,123 (US$30,490) which has been allocated to the vaccines reporting unit
and intangible assets of RMB139,500 (US$20,437). Goodwill and the amortization of intangible
assets arising from the acquisition 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. Contingent liabilities were recognized to the extent the amounts
were probable and reasonably estimable. The final determination of fair value for certain
assets
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 and liabilities will be subject to the resolution of contingency which may result in
adjustments to the preliminary values presented below:
 AmountRMBCash and cash equivalents
    
    
    92,340Other current assets
    
    
    97,863Deferred tax assets
    
    
    25,463Property, plant and equipment
    
    
    203,287Developed technology
    
    
    41,200Manufacturing licenses
    
    
    5,200In-process research and development
    
    
    93,100Land use right
    
    
    34,800Goodwill
    
    
    208,123Total assets acquired
    
    
    801,376Current liabilities
    
    
    (264,135
    )Deferred tax liabilities
    
    
    (39,482
    )Other long term liabilities, primarily long term loans
    
    
    (68,804
    )Net assets acquired
    
    
    428,955
 In connection with the acquisition of Jiangsu Yanshen, the Group recognized in-process
research and development projects at their fair value of RMB93,100 (US$13,639), which at the
time of the acquisition, had not reached technological feasibility. The IPR&D of RMB93,100
(US$13,639) is comprised of RMB66,300 (US$9,713) of the Hepatitis A vaccine IPR&D project and
RMB26,800 (US$3,926) of the rabies vaccines IPR&D project.The estimated useful lives of the identifiable intangible assets acquired in the acquisition
are 7.1 years for developed technology and 0.5 years for manufacturing licenses. At the date
of acquisition, the intangible assets acquired have a weighted-average useful life of 6.4
years and the developed technology acquired have a weighted-average useful life of 7.1
years.The acquisition broadens the Groups product portfolio. The goodwill recognized as part of
the acquisition of Jiangsu Yanshen consists primarily of the opportunity to enter into the
vaccines market in the PRC and the expected synergies and other benefits that will result
from combining the sales and distribution network.Unaudited proforma financial informationThe following unaudited pro forma financial information represents the results of operations
of the Group as if the acquisition of Jiangsu Yanshen had occurred as of the beginning of
2008 and 2009. 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 2008 and 2009. In addition, the unaudited pro
forma financial information does not attempt to project the future results of operations of
the combined entity.
 Year ended December 31,2008
    
    2009RMB
    
    RMB(unaudited)
    
    (unaudited)Revenue
    
    
    1,861,526
    
    
    
    2,013,505Income (loss) from operations
    
    
    241,862
    
    
    
    102,687Net income attributable to
Simcere Pharmaceutical Group
    
    
    300,775
    
    
    
    18,951Earnings per share attributable
to Simcere Pharmaceutical GroupBasic
    
    
    2.41
    
    
    
    0.16Diluted
    
    
    2.41
    
    
    
    0.16
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 Acquisition of an approximately 35% equity interest in Shanghai CelgenOn August 21, 2009, the Group acquired approximately 35% equity stake in Shanghai Celgen
Bio-Pharmaceutical Co., Ltd. (Shanghai Celgen) for cash consideration of RMB110,000
(US$16,115) through the 100% acquisition of Pearl Ocean. Pearl Ocean holds approximately 47%
of the equity interest of Kanda Biotech Holdings Ltd. (Kanda Biotech), which in turn holds
75% of the equity of Shanghai Celgen. Pearl Ocean and Kanda Biotech are holding companies
with no substantive operations. The Group accounts for its investment in Shanghai Celgen
using the equity method of accounting.Under the terms of the share purchase agreement, the Group has the option (the put option)
to sell 100% equity interest in Pearl Ocean to the original selling shareholders for the same
consideration paid by the Group plus accrued interest if i) Shanghai Celgens major
biogeneric drug candidate is not approved by the SFDA within 24 months from the date of
agreement; or ii) anytime within 24 months from the date of agreement when Shanghai Celgen
determines that it would be unable to obtain the SFDA approval for the biogeneric drug
candidate.The purchase consideration was allocated between the equity investment and the put option
based on a relative fair value model at inception. Management determined the fair value of
the put option based on Black-Scholes model and allocated RMB2,950 (US$432) of the purchase
consideration to the put option at inception. The put option is classified as other
non-current asset and is amortized over its estimated economic useful life of 2 years.The excess of cost over the Groups share of net assets of the equity method investees was
RMB35,595 (US$5,215) as of December 31, 2009. In accordance with ASC 350, the investment is
analyzed for impairment in accordance with FASB ASC 323, Investments  Equity Method and
Joint Ventures.
 (b)
    
    2008 acquisition
 Acquisition of a 70% equity interest in Simcere Zhong RenOn May 5, 2008, the Group completed the acquisition of 70% of the outstanding equity interest
in Wuhu Simcere Zhong Ren Pharmaceutical Co., Ltd. (Simcere Zhong Ren), a PRC company based
in Wuhu, for cash consideration of RMB65,090. Simcere Zhong Ren is a PRC-based drug
manufacturer that specializes in the production of a 5-FU sustained release anti-tumor
implant, Sinofuan. Sinofuan is the sustained release anti-tumor implant approved by the SFDA.
The acquisition furthers the Groups growth strategy, enhances the offerings in the
anti-tumor drug market and creates synergies with Endu, the Groups anti-tumor drug. In
particular, it can achieve economies of scales through increased utilization of the Groups
existing distribution channels. The acquisition of Simcere Zhong Ren was accounted for as a
business combination and the purchase price was allocated to the assets acquired and
liabilities assumed on the basis of their respective estimated fair values on the acquisition
date. The financial results of Simcere Zhong Ren have been consolidated and included in the
Companys consolidated financial statements from May 1, 2008 onwards.
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 The following table summarizes the purchase price allocation of the assets acquired and
liabilities assumed at the date of acquisition:
 AmountRMBCash and cash equivalents
    
    
    1,869Other current assets
    
    
    5,808Deferred tax assets
    
    
    2,415Property, plant and equipment
    
    
    6,985Developed technology
    
    
    45,542Manufacturing license
    
    
    763Other non-current assets, primarily land use right
    
    
    154Goodwill
    
    
    16,715Total assets acquired
    
    
    80,251Current liabilities
    
    
    (5,783
    )Deferred tax liabilities
    
    
    (9,378
    )Net assets acquired
    
    
    65,090
 The estimated useful lives of the identifiable intangible assets acquired in the acquisition
of Simcere Zhong Ren are 12 years for developed technology, and 1.1 years for manufacturing
license. The intangible assets acquired have a weighted-average useful life of 11.8 years
from the date of acquisition. Goodwill and the amortization of these intangibles assets are
not deductible for tax purposes.
 (c)
    
    2007 acquisitions
 Acquisition of an additional 10% equity interest in Shandong SimcereOn June 13, 2007, upon receiving relevant regulatory approval, the Group completed its
acquisition of an additional 10% equity interest in Shandong Simcere for RMB27,064. Following
the acquisition, the Group held 90% equity interest in Shandong Simcere. The Group accounted
for this transaction as a step acquisition using the purchase method of accounting.The following table summarizes the purchase price allocation of the assets acquired and
liabilities assumed at the date of acquisition:
 AmountRMBCash and cash equivalents
    
    
    590Other current assets
    
    
    2,011Property, plant and equipment
    
    
    1,830Developed technology
    
    
    17,358Manufacturing license
    
    
    104Customer relationship
    
    
    1,254Other non-current assets, primarily land use right
    
    
    1,569Goodwill
    
    
    10,576Total assets acquired
    
    
    35,292Current liabilities
    
    
    (4,527
    )Deferred tax liabilities
    
    
    (3,701
    )Net assets acquired
    
    
    27,064
 The estimated useful lives of the identifiable intangible assets acquired in the acquisition
of the additional 10% interest in Shandong Simcere are 5.6 years for customer relationship,
15 years for developed technology, and 3.8 years for manufacturing license. The intangible
assets acquired have a weighted-average useful life of 14.3 years from the date of
acquisition. Goodwill and the amortization of these intangible assets are not deductible for
tax purposes.Acquisition of 51% equity interest of BodaOn October 18, 2007, the Group completed its acquisition of 51% of the outstanding equity
interest in Jilin Province Boda Pharmaceutical Co., Ltd. (Boda), a PRC based company that
manufactures and sells
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 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 at the acquisition date. The acquisition of Boda is expected to help the Group
capture the majority share of the edaravone injection market in the PRC and to create
synergies with Bicun and the Groups other existing products. RMB114,738 of the
consideration was paid in 2007 with the remaining balance paid in 2008. The acquisition of
Boda was accounted for as a business combination and the purchase price was allocated to the
assets acquired and liabilities assumed on the basis of their respective estimated fair
values on the acquisition date. The financial results of Boda have been consolidated and
included in the Companys consolidated financial statements from October 1, 2007 onwards.The acquisition of the 51% equity interest in Boda resulted in the recognition of goodwill of
RMB46,105 and intangible assets of RMB76,031. Goodwill and the amortization of these
intangible assets are not deductible for tax purposes. The following table summarizes the
purchase price allocation of the assets acquired and liabilities assumed at the date of
acquisition:
 AmountRMBCash and cash equivalents
    
    
    6,632Other current assets
    
    
    17,937Property, plant and equipment
    
    
    27,349Developed technology
    
    
    59,981Manufacturing license
    
    
    719Customer relationship
    
    
    15,331Other non-current assets, primarily land use right
    
    
    7,711Goodwill
    
    
    46,105Total assets acquired
    
    
    181,765Current liabilities
    
    
    (37,540
    )Deferred tax liabilities
    
    
    (21,164
    )Net assets acquired
    
    
    123,061
 The estimated useful lives of the identifiable intangible assets acquired in the acquisition
of Boda are 5 years for customer relationship, 12 years for developed technology, and 2.7
years for manufacturing license. The intangible assets acquired have a weighted-average
useful life of 10.5 years from the date of acquisition.Unaudited proforma financial informationThe following unaudited pro forma financial information represents the results of operations
of the Group as if the acquisition of Boda had occurred as of the beginning of 2007. The
unaudited pro forma financial information is not necessarily indicative of what the Companys
consolidated results of operations actually would have been had it completed the acquisition
at the beginning of 2007. In addition, the unaudited pro forma financial information does not
attempt to project the future results of operations of the combined entity.
 Year endedDecember 31, 2007RMB(unaudited)Revenue
    
    
    1,414,439Income from operations
    
    
    272,833Net income
    
    
    299,054Earnings per shareBasic
    
    
    2.54Diluted
    
    
    2.46
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 Acquisition of an 85.71% equity interest in Tung ChitOn November 21, 2007, the Group acquired 100% of the outstanding ordinary shares of Master
Luck Corporation (Master Luck), an investment holding company which owns 85.71% of the
outstanding equity interest in Nanjing Tung Chit Pharmaceutical Co., Ltd. (Tung Chit), a
PRC company based in Nanjing that manufactures and sells pharmaceutical products in the PRC,
for cash consideration of RMB32,927. Tung Chit is the manufacturer of nedaplatin injection, a
chemotherapy pharmaceutical that is marketed under the brand name Jiebaishu. This
acquisition further complements the Groups current portfolio of products and is expected to
create synergies with the Groups existing antineoplastic pharmaceuticals. The acquisition
of Tung Chit 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 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.
 (d)
    
    Intangible assets
 The Groups intangible assets related to the Groups acquisitions consisted of the following:
 December 31, 2008GrossAmortization
    
    carrying
    
    Accumulated
    
    Net carryingperiod
    
    amount
    
    amortization
    
    amountYears
    
    RMB
    
    RMB
    
    RMBCustomer relationships
    
    4-11
    
    
    37,418
    
    
    
    (12,900
    )
    
    
    24,518Developed technologies
    
    10-16
    
    
    284,995
    
    
    
    (38,174
    )
    
    
    246,821Product trademarks
    
    6-10
    
    
    4,303
    
    
    
    (2,077
    )
    
    
    2,226Manufacturing and supply licenses
    
    1-5
    
    
    4,344
    
    
    
    (2,665
    )
    
    
    1,679Total intangible assets
    
    
    
    
    331,060
    
    
    
    (55,816
    )
    
    
    275,244
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 December 31, 2009GrossAmortization
    
    carrying
    
    Accumulated
    
    Net carryingperiod
    
    amount
    
    amortization
    
    amountYears
    
    RMB
    
    RMB
    
    RMBCustomer relationships
    
    4-11
    
    
    37,418
    
    
    
    (18,323
    )
    
    
    19,095Developed technologies
    
    7-16
    
    
    323,640
    
    
    
    (56,933
    )
    
    
    266,707Product trademarks
    
    6-10
    
    
    4,303
    
    
    
    (2,547
    )
    
    
    1,756Manufacturing and supply licenses
    
    1-5
    
    
    9,544
    
    
    
    (4,871
    )
    
    
    4,673In-process research and development
    
    
    
    
    93,100
    
    
    
    
    
    
    
    93,100Total intangible assets
    
    
    
    
    468,005
    
    
    
    (82,674
    )
    
    
    385,331Total  US$
    
    
    
    
    68,563
    
    
    
    (12,112
    )
    
    
    56,451
 Amortization expense for intangible assets for the years ended December 31, 2007, 2008 and
2009, was RMB15,084, RMB29,433 and RMB29,413 (US$4,309), respectively. Amortization expense
of customer relationships is recognized in sales, marketing and distribution expenses and
amortization expense for developed technology, product trademarks and manufacturing and
supply licenses is recognized in cost of materials and production. As of December 31, 2009,
the estimated amortization expense for the years ended December 31 is as follows:
 RMB2010
    
    
    37,1282011
    
    
    32,4102012
    
    
    30,9882013
    
    
    27,9372014
    
    
    26,746
 (e)
    
    Goodwill
 The changes in the carrying amount of goodwill for the years ended December 31, 2008 and 2009
are as follows:
 Year ended December 31,2008
    
    2009
    
    2009RMB
    
    RMB
    
    US$Balance at the beginning of the year
    
    
    161,496
    
    
    
    178,211
    
    
    
    26,108Acquisition of Simcere Zhong Ren
    
    
    16,715
    
    
    
    
    
    
    
    Acquisition of Jiangsu Yanshen
    
    
    
    
    
    
    208,123
    
    
    
    30,490Impairment loss
    
    
    
    
    
    
    (76,398
    )
    
    
    (11,192
    )Balance at the end of year
    
    
    178,211
    
    
    
    309,936
    
    
    
    45,406
 During the course of the Groups acquisition of the additional 15% equity interest in Jiangsu
Yanshen from China Vax in October and November 2009, the SFDA issued a public notice
announcing four batches of human use rabies vaccines manufactured by Jiangsu Yanshen between
July and October 2008 were found to have quality problems based on preliminary investigation
by the SFDA. The SFDA announced the initiation of a comprehensive investigation into the
quality controls on the production of human use rabies vaccines and ordered Jiangsu Yanshen
to halt marketing and production of all products, including human use rabies vaccines.In May 2010, upon the completion of the SFDA investigation, Jiangsu Yanshen was fined
RMB25,638 (US$3,756) for sale of substandard human use rabies vaccines; Jiangsu Yanshen was
required to bear the cost
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 of patient re-vaccinations of approximately RMB23,034 (US$3,375); Jiangsu Yanshen had its GMP
license for the production of human use rabies vaccines revoked and; certain of Jiangsu
Yanshens employees were prohibited to engage in the production and marketing of
pharmaceutical products for a period of ten years. Such employees are also subject to a
criminal investigation. The criminal investigation is still ongoing at the date of this
report. It is uncertain whether Jiangsu Yanshen itself will be subject to any criminal
investigations or whether Jiangsu Yanshen will be subject to additional charges or penalties
as a result.As of December 31, 2009, the Group had recognized an accrual of RMB50,300 (US$7,369) for the
matter described in this note. Management does not expect any further claims and charges,
individually or in aggregate, will have a material adverse impact on the financial position,
results of operations, or cash flows of the Group. This matter is subject to inherent
uncertainties and managements view of it may change in the future.Management determined that the contingency that existed as of December 31, 2009, which is the SFDA
investigation that was based on events and facts and circumstances that existed at the
acquisition date, and the resolution of the contingency subsequent to December 31, 2009, provides an
indication that the fair value of the reporting unit is below its carrying amount as of December 31, 2009.Therefore, management performed impairment testing of goodwill of the vaccines reporting unit
as of December 31, 2009.Based on such impairment testing, the carrying amount of the vaccine reporting unit as of
December 31, 2009 was greater than the fair value of the vaccine reporting unit as determined
using the present value of expected future flows, and the carrying amount of the vaccine
reporting unit goodwill as of December 31, 2009 exceeded the implied fair value of that
goodwill. As a result, the Group recognized a goodwill impairment charge of RMB76,398
(US$11,192) as of December 31, 2009 to reduce the vaccine reporting unit goodwill to its
implied fair value.There was no impairment loss in the pharmaceutical reporting unit goodwill as of December 31, 2009.
 8
    
    Short-term borrowings
 Short-term borrowings and current portion of long-term debts consist of the following:
 December 31,2008
    
    2009
    
    2009RMB
    
    RMB
    
    US$Unsecured government loan
    
    
    3,000
    
    
    
    3,000
    
    
    
    439Unsecured bank loans
    
    
    
    
    
    
    65,000
    
    
    
    9,523Current portion of long-term government loan
    
    
    3,000
    
    
    
    8,000
    
    
    
    1,172Total
    
    
    6,000
    
    
    
    76,000
    
    
    
    11,134
 Short-term unsecured bank loans bear fixed interest rates ranging from 4.37% to 5.50% per
annum. The weighted average effective interest rates on short-term borrowings outstanding as
of December 31, 2008 and 2009 were nil and 4.76% per annum, respectively.As of December 31, 2008 and 2009, the Group had unutilized banking facilities of RMB50,000
and RMB800,000 (US$117,201), respectively.
 9
    
    Long-term debts
 Long-term debts consist of the following:
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 December 31,2008
    
    2009
    
    2009RMB
    
    RMB
    
    US$Unsecured bank loans, interest at
floating rate equal to RMB benchmark
lending rate of financial institutions
multiplied by 105%, payable in
semiannual installments from 2011 to
2012
    
    
    
    
    
    
    48,685
    
    
    
    7,132Secured bank loans, interest at
floating rate equal to RMB benchmark
lending rate of financial institutions
multiplied by 105%, payable in
semiannual installments from 2011 to
2012
    
    
    
    
    
    
    20,000
    
    
    
    2,930Unsecured government loan, interest at
floating rate, payable in annual
installments from 2010 to 2020
    
    
    52,000
    
    
    
    52,000
    
    
    
    7,618Secured government loan, interest at
fixed rate of 5.40%, payable in annual
installments from 2010 to 2011
    
    
    13,000
    
    
    
    10,000
    
    
    
    1,465Total long-term debts
    
    
    65,000
    
    
    
    130,685
    
    
    
    19,145Less: current portion (note 8)
    
    
    (3,000
    )
    
    
    (8,000
    )
    
    
    (1,172
    )Long-term debts, excluding current
portion
    
    
    62,000
    
    
    
    122,685
    
    
    
    17,973
 As of December 31, 2008 and 2009, long term debts include an unsecured government loan
obtained from a local district government to finance the construction of a new production
plant in a city in Jilin Province, and a secured government loan from a local district
government for working capital needs.The weighted-average effective interest rates on long-term loans outstanding as of December
31, 2008 and 2009 were 6.90% and 5.85% per annum, respectively. None of the short-term and
long-term loans contain any financial covenants or subjective acceleration clauses.The aggregate maturities of long-term debts for each of the five years subsequent to December
31, 2009 are as follows:
 December 31,2009RMB2010
    
    
    8,0002011
    
    
    61,7002012
    
    
    23,3852013
    
    
    4,7002014
    
    
    4,700Thereafter
    
    
    28,200Total
    
    
    130,685
 10
    
    Income tax
 Cayman Islands and British Virgin IslandsUnder the current laws of the Cayman Islands and British Virgins Islands, the Company and
State Good Group Limited (SGG) are not subject to tax on their income or capital gains. In
addition, upon any payment or dividend paid by these companies, no Cayman Islands or British
Virgins Islands withholding tax is imposed.
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 Peoples Republic of ChinaThe Companys subsidiaries incorporated in the PRC file separate income tax returns.Prior to January 1, 2008, the PRCs statutory income tax rate was 33%, consisting of 30%
state tax and 3% local tax. Under the then effective tax laws and regulations, subsidiaries
that were production-oriented foreign investment enterprises were entitled to a tax holiday
of a two-year 100% exemption followed by a three-year 50% exemption commencing from the first
profit-making year after offsetting accumulated tax losses (2+3 tax holiday), and certain
subsidiaries located in Special Economic Zones or Economic and Technological Development
Zones were subject to preferential lower tax rate of 15%.On March 16, 2007, the National Peoples Congress passed the Corporate Income Tax Law of the
PRC (CIT law), which unified the income tax rate to 25% for all enterprises. The CIT law
was effective as of January 1, 2008. The CIT law and its relevant regulations provide a
five-year transition period for those enterprises which were established before March 16,
2007 and which were entitled to a preferential income tax rate of 15% under the then
effective tax laws and regulations, and also provides a grandfather of certain tax holidays.
The transitional tax rates are 18%, 20%, 22%, 24% and 25% for 2008, 2009, 2010, 2011 and 2012
onwards, respectively. In addition, manufacturing entities that were previously entitled to
the 2+3 tax holidays under the then effective tax laws and regulations shall continue to
enjoy the tax holidays until they expire. Further, entities that qualify as Advanced and New
Technology Enterprises (ANTEs) under the CIT law are entitled to a preferential ANTE
income tax rate of 15%.The Companys major PRC subsidiaries are subject to the following tax rates:
 
    
    Jiangsu Simcere Pharmaceutical Co., Ltd. (Jiangsu Simcere) and Jiangsu Simcere
Pharmaceutical R&D Co., Ltd. (Simcere Research) are subject to income tax at 33% in
2007, and at 25% from 2008 onwards.
    
    Simcere Pharmaceutical Co., Ltd. (Hainan Simcere) is subject to income tax at 0%,
9%, 10%, 11%, 24% and 25% for 2007, 2008, 2009, 2010, 2011 and 2012 onwards,
respectively.
    
    Shandong Simcere is subject to income tax at 0%, 0%, 10%, 11%, 12% and 25% for 2007,
2008, 2009, 2010, 2011 and 2012 onwards, respectively.
    
    Nanjing Simcere Dongyuan Pharmaceutical Co., Ltd. (Nanjing Simcere) and Tung Chit
are subject to income tax at 0% for 2007, 12.5% from 2008 to 2010 and 25% from 2011
onwards.
    
    Shanghai Simcere Pharmaceutical Co., Ltd. (Shanghai Simcere) is subject to income
tax at 15%, 18%, 20%, 22%, 24% and 25% for 2007, 2008, 2009, 2010, 2011 and 2012
onwards, respectively.
    
    Boda is subject to income tax rate at 33% for 2007, 15% for 2008 to 2010 and 25% from
2011 onwards.
    
    Simcere Zhong Ren is subject to income tax at 33% for 2007, 25% for 2008, 15% for
2009 to 2010 and 25% from 2011 onwards.
    
    Jiangsu Yanshen is subject to income tax at 15% for 2009 and 2010 and 25% from 2011
onwards.
 The CIT law and its relevant regulations impose a withholding tax at 10%, unless reduced by a
tax treaty or agreement, for dividends distributed by a PRC-resident enterprise to its
non-PRC-resident corporate investor for earnings generated beginning on January 1, 2008.
Undistributed earnings generated prior to January 1, 2008 are exempt from such withholding
tax. As of December 31, 2009, the Group has not recognized a deferred tax liability of
RMB56,101 (US$8,219) for undistributed earnings of RMB561,007 (US$82,188) generated by the
PRC subsidiaries for 2008 and 2009 since the Group plans to indefinitely reinvest these
earnings in the PRC.
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##### Table of Contents



Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 The components of earnings (losses) before income taxes and noncontrolling interests are as
follows:
 Year ended December 31,2007
    
    2008
    
    2009
    
    2009RMB
    
    RMB
    
    RMB
    
    US$Cayman Islands
    
    
    (409
    )
    
    
    (30,377
    )
    
    
    (49,348
    )
    
    
    (7,230
    )British Virgin Islands
    
    
    (7,795
    )
    
    
    (1,080
    )
    
    
    (6,865
    )
    
    
    (1,005
    )PRC
    
    
    335,277
    
    
    
    459,028
    
    
    
    101,979
    
    
    
    14,939Total
    
    
    327,073
    
    
    
    427,571
    
    
    
    45,766
    
    
    
    6,704
 (a)
    
    Income taxes
 Income tax expense (benefit) consists of the following:
 Year ended December 31,2007
    
    2008
    
    2009
    
    2009RMB
    
    RMB
    
    RMB
    
    US$PRCCurrent
    
    
    2,518
    
    
    
    52,055
    
    
    
    38,263
    
    
    
    5,606Deferred
    
    
    11,009
    
    
    
    (2,770
    )
    
    
    (21,366
    )
    
    
    (3,131
    )Total income tax expense
    
    
    13,527
    
    
    
    49,285
    
    
    
    16,897
    
    
    
    2,475
 (b)
    
    Income tax contingencies
 The following table summarizes the movement of unrecognized tax benefits:
 2007
    
    2008
    
    2009RMB
    
    RMB
    
    RMBBalance at January 1
    
    
    14,195
    
    
    
    19,928
    
    
    
    19,928Increase related to current year tax positions
    
    
    5,733
    
    
    
    
    
    
    
    Balance at December 31
    
    
    19,928
    
    
    
    19,928
    
    
    
    19,928Balance at December 31  US$
    
    
    
    
    
    
    
    
    
    
    2,921
 The balance of total unrecognized tax benefits as of each year end, if recognized, would
affect the Groups effective income tax rate. For the years ended December 31, 2007, 2008 and
2009, the Group accrued interest of Nil, RMB601 and RMB1,032 (US$151) respectively, related
to unrecognized tax benefits. As of December 31, 2007, 2008 and 2009, the Group recognized
cumulative interest related to unrecognized tax benefit of Nil, RMB601 and RMB1,633 (US$239)
respectively. Management does not expect that the total amount of unrecognized tax benefits
as of December 31, 2009 will significantly change over the next twelve months.According to the PRC Tax Administration and Collection Law, the statute of limitation is
three years if the underpayment of taxes is due to computational errors made by the taxpayer
or the withholding agent. The statute of limitation is extended to five years under special
circumstances where the underpayment of taxes is more than RMB100 (US$15). In the case of
transfer pricing issues, the statute of limitation is ten years. There is no statute of
limitation in the case of tax evasion. The PRC tax returns for the Companys PRC subsidiaries
are open to examination by the PRC state and local authorities for the tax years beginning in
2004.
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##### Table of Contents



Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 (c)
    
    Reconciliation of expected income tax to actual income tax expense
 The actual income tax expense reported in the consolidated statements of income differs from
the amounts computed by applying the PRC statutory income tax rate to earnings before income
taxes as a result of the following:
 Year ended December 31,Note
    
    2007
    
    2008
    
    2009
    
    2009RMB
    
    RMB
    
    RMB
    
    US$PRC statutory tax rate
    
    
    
    
    33
    %
    
    
    25
    %
    
    
    25
    %
    
    
    25
    %Computed expected income tax expense
    
    
    
    
    107,935
    
    
    
    106,893
    
    
    
    11,441
    
    
    
    1,676Non-deductible expenseResearch and development
    
    
    
    
    2,871
    
    
    
    1,509
    
    
    
    
    
    
    
    Remeasurement
loss of previously held equity interest in Jiangsu Yanshen
    
    
    
    
    
    
    
    
    
    
    
    
    13,878
    
    
    
    2,033Impairment on goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    13,643
    
    
    
    1,999Deemed income for free samples
    
    
    
    
    
    
    
    
    640
    
    
    
    5,046
    
    
    
    739Non-taxable income
    
    
    
    
    (1,735
    )
    
    
    (252
    )
    
    
    (4,741
    )
    
    
    (695
    )Tax rate differential
    
    
    
    
    (70,782
    )
    
    
    (23,980
    )
    
    
    (20,653
    )
    
    
    (3,026
    )Effect of tax holiday
    
    (a)
    
    
    (63,539
    )
    
    
    (56,407
    )
    
    
    (23,500
    )
    
    
    (3,442
    )Non-PRC entities not subject to income tax
    
    
    
    
    2,707
    
    
    
    7,864
    
    
    
    13,072
    
    
    
    1,915Change in valuation allowance
    
    
    
    
    15,619
    
    
    
    13,111
    
    
    
    9,148
    
    
    
    1,340Tax rebate
    
    
    
    
    (4,888
    )
    
    
    
    
    
    
    
    
    
    
    Tax credit for purchase of domestic equipment
    
    
    
    
    (2,124
    )
    
    
    (4,255
    )
    
    
    
    
    
    
    Other
    
    
    
    
    4,846
    
    
    
    5,311
    
    
    
    3,995
    
    
    
    585Change in enacted tax rates or tax status
    
    
    
    
    22,617
    
    
    
    (1,149
    )
    
    
    (4,432
    )
    
    
    (649
    )Actual income tax expense
    
    
    
    
    13,527
    
    
    
    49,285
    
    
    
    16,897
    
    
    
    2,475
 
 Notes:(a)
    
    The effect of tax holiday increased the Groups net income by RMB62,916,
RMB55,675 and RMB23,500 (US$3,442) for the years ended December 31, 2007, 2008 and 2009,
respectively. Consequently, the effect of the tax holiday also increased the Groups
basic and diluted earnings per share for such periods as follows: Year ended December 31,2007
    
    2008
    
    2009
    
    2009RMB
    
    RMB
    
    RMB
    
    US$Increase in earnings per share:Basic
    
    
    0.54
    
    
    
    0.45
    
    
    
    0.20
    
    
    
    0.03Diluted
    
    
    0.52
    
    
    
    0.45
    
    
    
    0.20
    
    
    
    0.03
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##### Table of Contents



Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 (d)
    
    Deferred taxes
 The tax effects of the Groups temporary differences that give rise to significant portions
of the deferred tax asset and liabilities are as follows:
 December 31,2008
    
    2009
    
    2009RMB
    
    RMB
    
    US$Deferred tax assets:Property, plant and equipment
    
    
    4,356
    
    
    
    5,366
    
    
    
    786Intangible assets
    
    
    2,797
    
    
    
    2,147
    
    
    
    315Accounts receivable
    
    
    2,168
    
    
    
    14,474
    
    
    
    2,120Inventories
    
    
    467
    
    
    
    4,927
    
    
    
    722Tax loss carryforwards
    
    
    4,646
    
    
    
    18,427
    
    
    
    2,700Accruals
    
    
    21,122
    
    
    
    40,136
    
    
    
    5,880Others
    
    
    65
    
    
    
    1,232
    
    
    
    180Total gross deferred tax assets
    
    
    35,621
    
    
    
    86,709
    
    
    
    12,703Valuation allowance
    
    
    (24,481
    )
    
    
    (33,629
    )
    
    
    (4,927
    )Net deferred tax assets
    
    
    11,140
    
    
    
    53,080
    
    
    
    7,776Deferred tax liabilitiesIntangible assets
    
    
    (65,403
    )
    
    
    (94,479
    )
    
    
    (13,841
    )Property, plant and equipment
    
    
    (534
    )
    
    
    (6,050
    )
    
    
    (886
    )(65,937
    )
    
    
    (100,529
    )
    
    
    (14,727
    )Net deferred tax liabilities
    
    
    (54,797
    )
    
    
    (47,449
    )
    
    
    (6,951
    )
 In assessing the realizability of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences become
deductible and tax loss carryforwards are utilized. Management considers the scheduled
reversal of deferred tax liabilities (including the impact of available carryforward
periods), projected future taxable income, and tax planning strategies in making this
assessment.The increase (decrease) in the valuation allowance during the years ended December 31, 2008
and 2009 were (RMB1,604) and RMB9,148 (US$1,340), respectively. As of December 31, 2008, full
valuation allowances were provided against the deferred tax assets of Jiangsu Simcere and
Simcere Research, which were at cumulative loss positions. The decrease in valuation
allowance in 2008 was primarily due to an increase in valuation allowance for the additional
deferred tax assets in Jiangsu Simcere, which was offset by a reduction of valuation
allowance in Simcere Research, of which RMB14,715 was utilized by the significant earnings in
2008 arising from the intercompany sale transactions that had been eliminated upon
consolidation and such tax benefit is recognized in consolidation as the transferred
intellectual properties are amortized. The increase in valuation allowance in 2009 was mainly
due to the increase in the deferred tax assets of Jiangsu Simcere.The amount of the deferred tax assets considered realizable, however, could be reduced in the
near term if estimates of future taxable income during the carryforward period are reduced.Tax loss carryforwards of the Groups PRC subsidiaries amounted to RMB79,500 (US$11,647) as
of December 31, 2009, of which RMB89, RMB4,057, RMB19,534 ,RMB14,318 and RMB41,502 will
expire if unused by December 31, 2010, 2011, 2012, 2013 and 2014, respectively.
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 11
    
    Other current liabilities
 Other current liabilities consist of the following:
 December 31,2008
    
    2009
    
    2009RMB
    
    RMB
    
    US$Accrued traveling and conference expenses
    
    
    90,760
    
    
    
    82,059
    
    
    
    12,022Accrued construction costs and payable for
acquisition of property, plant and equipment and land
use right
    
    
    32,890
    
    
    
    54,360
    
    
    
    7,964VAT payable
    
    
    36,562
    
    
    
    50,640
    
    
    
    7,419Provision for rabies vaccine re-inoculation cost and
penalty (note 7(a))
    
    
    
    
    
    
    50,300
    
    
    
    7,369Government grants (note (a))
    
    
    12,753
    
    
    
    41,969
    
    
    
    6,148Payable for acquisitions (note (b))
    
    
    9,830
    
    
    
    40,631
    
    
    
    5,952Security deposits from employees and agents (note (c))
    
    
    21,714
    
    
    
    23,345
    
    
    
    3,420Customer receipts in advance
    
    
    11,239
    
    
    
    4,965
    
    
    
    727Accrued research and development expenses
    
    
    6,929
    
    
    
    4,003
    
    
    
    586Accrued legal and professional fees
    
    
    1,555
    
    
    
    2,916
    
    
    
    427Other accrued liabilities (note (d))
    
    
    27,611
    
    
    
    34,918
    
    
    
    5,116Income taxes payable (note 10)
    
    
    23,290
    
    
    
    23,842
    
    
    
    3,493Deferred tax liabilities (note 10(d))
    
    
    225
    
    
    
    
    
    
    
    Total other current liabilities
    
    
    275,358
    
    
    
    413,948
    
    
    
    60,643
 
 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)
    
    As of December 31, 2008 and 2009, the outstanding balance includes RMB9,830 unpaid
consideration related to the acquisition of 80% of Shandong Simcere which was to be paid upon
completion of the trial period of certain quality control procedures in relation to Endu,
which are procedural in nature. The amount was paid in May 2010. The outstanding balance as
of December 31, 2009 also includes the unpaid consideration payable of RMB30,801 (US$4,511)
for the acquisition of the additional 15% equity interest in Jiangsu Yanshen .(c)
    
    The amounts represent refundable cash security deposits received from certain employees and
from third party marketing agents.(d)
    
    Other accrued liabilities relate to accruals for purchase of technology know-how, selling
expenses, utilities expenses and other miscellaneous expenses. 12
    
    Statutory reserves
 Under PRC rules and regulations, the Companys PRC operating subsidiaries are required to
provide for certain statutory reserves as follows:Statutory surplus reserveAccording to the respective Articles of Association, the Companys PRC operating subsidiaries
are required to transfer 10% of the net profit, as determined in accordance with PRC GAAP, to
a statutory surplus reserve until the reserve balance reaches 50% of the registered capital
of the respective companies. The transfer to this reserve must be made before distribution of
dividends to shareholders can be made.The statutory surplus reserve can be used to make good previous years losses, if any, and
may be converted into share capital by the issue of new shares to shareholders in proportion
to their existing shareholdings or by
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 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.For the years ended December 31, 2007, 2008 and 2009, the Companys subsidiaries made
appropriation to these statutory reserve funds of RMB45,450, RMB38,614 and RMB31,809
(US$4,660), respectively. The accumulated balance of the statutory reserve funds maintained
at the Companys PRC operating subsidiaries as of December 31, 2008 and 2009 were RMB133,931
and RMB165,740 (US$24,281), respectively.
 13
    
    Pension and other postretirement benefits
 Pursuant to the relevant PRC regulations, the Group is required to make contributions for
each employee at a rate of 20% on a standard salary base as determined by the local Social
Security Bureau to a defined contribution retirement scheme organized by the local Social
Security Bureau in respect of the retirement benefits for the Groups employees in the PRC.
Contributions of RMB5,149, RMB7,062 and RMB10,181 (US$1,492) for the years ended December 31,
2007, 2008 and 2009, respectively, were charged to expense. The Group has no other obligation
to make payments in respect of retirement benefits of the employees.
 14
    
    Commitments and contingencies
 (a)
    
    Operating lease commitments
 The Group leases certain laboratories, offices and warehouses under various operating lease
arrangements. The rental expense under the operating leases was approximately RMB1,812,
RMB3,304 and RMB2,909 (US$426) for the years ended December 31, 2007, 2008 and 2009,
respectively. In the normal course of business, leases that expire are renewed or replaced by
leases on other properties. As of December 31, 2009, the Groups future minimum rental
payment under non-cancellable operating leases was as follows:
 December 31,2009RMB2010
    
    
    1,5602011
    
    
    2652012
    
    
    32013
    
    
    32014
    
    
    3Thereafter
    
    
    34Total
    
    
    1,868
 (b)
    
    Commitments
 As of December 31, 2009, the Groups capital commitments for construction projects and
purchase of machinery and equipment were RMB49,049 (US$7,186).As of December 31, 2009, the Group had commitments for advertising and research and
development projects of RMB17,047 (US$2,498) of which RMB13,914 and RMB3,133 are payable in
2010 and 2011, respectively.
 (c)
    
    Depositary receipt facility
 During the years ended December 31, 2007, 2008 and 2009, the Company received an incentive
payment of RMB20,526, RMB1,104 and RMB1,092 (US$160) respectively, which is recognized as
other non-operating income in the consolidated statements of income, from a bank in order to
provide that bank with the exclusive right to manage the Companys American Depositary
Receipt (ADR) program. Under the terms of the depositary receipt facility with the bank, the
Company has a contingent obligation to compensate the bank in
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##### Table of Contents



Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 the event the Company terminates the ADR program or the number of ADRs outstanding declines
by more than 50%.
 (d)
    
    Sales of bills receivable commitments
 As of December 31, 2008 and 2009, outstanding bills receivable discounted with third party
financial institutions that have not matured for which the Group has a recourse obligation
amounted to RMB103,965 and RMB384,358 (US$56,309), respectively. The Group has not
historically experienced credit losses with respect to bills receivables sold with recourse.
No recourse liability was recognized as of December 31, 2008 and 2009 as the estimated fair
value of the recourse obligation was immaterial.
 15
    
    Earnings per share
 The following table sets forth the computation of basic and diluted earnings per share:
 Year ended December 31,2007
    
    2008
    
    2009
    
    2009RMB
    
    RMB
    
    RMB
    
    US$Numerator for basic and diluted earnings per share:Net income attributable to Simcere Pharmaceutical Group
    
    
    301,261
    
    
    
    350,151
    
    
    
    26,428
    
    
    
    3,871Denominator:Basic weighted average number of ordinary shares outstanding
    
    
    117,534,566
    
    
    
    124,921,934
    
    
    
    115,099,258
    
    
    
    115,099,258Effect of dilutive options and non-vested shares
    
    
    4,132,941
    
    
    
    83,869
    
    
    
    1,505,661
    
    
    
    1,505,661Diluted weighted average number of ordinary shares outstanding
    
    
    121,667,507
    
    
    
    125,005,803
    
    
    
    116,604,919
    
    
    
    116,604,919Basic earnings per share
    
    
    2.56
    
    
    
    2.80
    
    
    
    0.23
    
    
    
    0.03Diluted earnings per share
    
    
    2.48
    
    
    
    2.80
    
    
    
    0.23
    
    
    
    0.03
 The computation of diluted earnings per share for the years ended December 31, 2007, 2008 and
2009 did not assume conversion of nil, 630,000 share options and nil, respectively because
the exercise prices of the share options were greater than or equal to the average price of
the ordinary shares during the year, and therefore their inclusion would have been
anti-dilutive.
 16
    
    Revenue
 Revenue by product category and other revenue are summarized as follows:
 Year ended December 31,2007
    
    2008
    
    2009
    
    2009RMB
    
    RMB
    
    RMB
    
    US$Anti-stroke medication
    
    
    443,446
    
    
    
    651,164
    
    
    
    745,469
    
    
    
    109,212Antibiotics
    
    
    390,107
    
    
    
    395,721
    
    
    
    389,478
    
    
    
    57,059Anti-cancer
    
    
    217,867
    
    
    
    322,862
    
    
    
    302,710
    
    
    
    44,347Anti-inflammatory drugs
    
    
    168,497
    
    
    
    147,765
    
    
    
    151,396
    
    
    
    22,180Other medicines
    
    
    143,097
    
    
    
    219,320
    
    
    
    254,632
    
    
    
    37,303Total product revenue
    
    
    1,363,014
    
    
    
    1,736,832
    
    
    
    1,843,685
    
    
    
    270,101Other revenue
    
    
    5,734
    
    
    
    4,311
    
    
    
    13,386
    
    
    
    1,961Total revenue
    
    
    1,368,748
    
    
    
    1,741,143
    
    
    
    1,857,071
    
    
    
    272,062
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 17
    
    Share-based compensation
 (a)
    
    2006 Share Incentive Plan
 On November 13, 2006, the shareholders of the Company adopted the 2006 Share Incentive Plan
(the 2006 Share Incentive Plan) which provides for the granting of options, share
appreciation rights, and other share-based awards such as non-vested shares to the directors
and employees of the Group. The board of directors and shareholders of the Company has
authorized the issuance of up to 12,000,000 ordinary shares upon exercise of awards granted
under the 2006 Share Incentive Plan.Share optionsThe following is a summary of share options granted during the years ended December 31, 2007
and 2008 under the 2006 Share Incentive Plan. No share options were granted during the year
ended December 31, 2009.
 Year ended December 31,2007
    
    2008Total number of share options granted
    
    
    1,045,000
    
    
    
    500,000Weighted average exercise price per share (US$/share)
    
    US$
    6.750
    
    
    US$
    6.093Weighted average vesting period (in years)
    
    
    5.00
    
    
    
    4.82Weighted average contractual life (in years)
    
    
    6.00
    
    
    
    5.82
 Management has determined, based on the Black-Scholes option pricing model, that the weighted
average grant-date fair value per option was approximately RMB22.25 (US$3.05), and RMB23.27
(US$3.41) or an aggregate of RMB23,251 and RMB11,637 for the years ended December 31, 2007
and 2008.The assumptions used in determining the fair value of the share options granted on each
respective date are, shown at their weighted average values, as follows:
 Year ended December 31,2007
    
    2008Valuation assumptionsExpected term (in years)
    
    
    5.5
    
    
    
    5.19-5.35Expected volatility
    
    
    40
    %
    
    
    59%-74
    %Expected dividend
    
    
    0
    %
    
    
    0
    %Risk-free rate
    
    
    5.11
    %
    
    
    1.54%-3.69
    %
 For options granted prior to 2008, the expected volatility was estimated based upon the
average volatility of several comparable U.S. listed companies in the pharmaceutical
industry. Since the Company did not have a trading history at the time the options were
issued, management estimated the potential volatility of its ordinary share price by
referring to the average volatility of these comparable companies because management believes
that the average volatility of such companies was a reasonable benchmark to use in estimating
the expected volatility of the Companys ordinary shares. For the 2008 options, the
historical volatility of the Companys shares was used to estimate the volatility of the
Companys shares.Because the Companys share options have certain characteristics that are significantly
different from traded options, and because changes in the subjective assumptions can
materially affect the estimated value, in managements opinion, the existing valuation model
may not provide an accurate measure of the fair value of the Companys employee stock
options. Although the fair value of share options is determined in accordance with ASC 718,
Compensation- Stock Compensationusing the Black-Scholes option pricing model, that value may
not be indicative of the fair value observed in a willing buyer/willing seller market
transaction.
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 A summary of stock option activity is as follows:
 WeightedWeighted
    
    averageaverage
    
    remaining
    
    AggregateNumber of
    
    exercise
    
    contractual
    
    intrinsicoptions
    
    price
    
    term
    
    valueUS$
    
    Years
    
    US$Balance as of January 1, 2007
    
    
    10,000,000
    
    
    
    4.20Granted
    
    
    1,045,000
    
    
    
    6.75Exercised
    
    
    (6,200
    )
    
    
    4.20Forfeited
    
    
    (41,000
    )
    
    
    4.20Balance as of December 31, 2007
    
    
    10,997,800
    
    
    
    4.44Granted
    
    
    500,000
    
    
    
    6.09Exercised
    
    
    (198,000
    )
    
    
    4.20Forfeited
    
    
    (1,361,800
    )
    
    
    5.91Balance as of December 31, 2008
    
    
    9,938,000
    
    
    
    4.33Forfeited
    
    
    (135,600
    )
    
    
    4.22Cancelled
    
    
    (9,802,400
    )
    
    
    4.33Balance as of December 31, 2009
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercisable as of December 31, 2009
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 The total fair value of share options vested during the years ended December 31, 2007, 2008
and 2009 was RMB103,394, RMB50,524 and RMB1,993 (US$292), respectively. The total intrinsic
values of options exercised during the years ended December 31, 2007, 2008 and 2009 were
RMB102, RMB3,331 and nil, respectively.Non-vested sharesOn April 15, 2009, the Compensation Committee of the Company approved a share option exchange
program that offered the directors, employees and consultants the right to exchange vested
and unvested outstanding share options to purchase ordinary shares of the Company under the
2006 Share Incentive Plan for the Companys non-vested shares. Non-vested shares are subject
to restrictions on their sale or transfer by the holder. Under the share option exchange
program, the replacement non-vested shares vest on the same term as the original grants made
under 2006 Share Incentive Plan.A total of 154 directors and employees accepted the offer and tendered an aggregate of
9,802,400 options in exchange for 1,833,990 vested shares and 2,916,028 non-vested shares on
May 7, 2009, the modification date. The exchange ratio is determined based on the fair value
of replacement non-vested shares divided by the fair value of the share options surrendered.
The exchange of the share option awards for non-vested shares was accounted for as a
modification for awards which involves a cancellation of the original award and an issuance
of a new award. The effect of this award modification on share-based compensation expense
over the remaining requisite service period was not significant. All non-vested shares were
granted in the year ended December 31, 2009 under the 2006 Share Incentive Plan.
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 A summary of non-vested shares activity is as follows:
 Number of
    
    Weightednon-vested
    
    average grant-shares
    
    date fair valueUS$Balance as of January 1, 2009
    
    
    
    
    
    
    Replacement awards granted on May 7, 2009
    
    
    2,916,028
    
    
    
    3.38Granted
    
    
    240,000
    
    
    
    3.91Vested
    
    
    (885,656
    )
    
    
    3.38Forfeited
    
    
    (213,542
    )
    
    
    3.38Balance as of December 31, 2009
    
    
    2,056,830
    
    
    
    3.44
 The total fair value of non-vested shares vested during the year ended December 31, 2009 was
RMB22,493 (US$3,295).As of December 31, 2009, there was RMB49,321 (US$7,226) of total unrecognized compensation
cost related to non-vested shares that is expected to be recognized on a straight-line basis
over a weighted average period of 2.23 years.Share-based compensation cost is included in the following captions:
 Year ended December 31,2007
    
    2008
    
    2009
    
    2009RMB
    
    RMB
    
    RMB
    
    US$Research and development expenses
    
    
    1,733
    
    
    
    1,512
    
    
    
    1,772
    
    
    
    260Sales, marketing and distribution expenses
    
    
    2,871
    
    
    
    2,665
    
    
    
    2,058
    
    
    
    301General and administrative expenses
    
    
    26,160
    
    
    
    21,359
    
    
    
    19,847
    
    
    
    2,908Total share-based compensation
    
    
    30,764
    
    
    
    25,536
    
    
    
    23,677
    
    
    
    3,469
 (b)
    
    2008 Share Incentive Plan
 On July 31, 2008, the Company adopted a new Share Incentive Plan (the 2008 Share Incentive
Plan) that allows the board of directors to grant options, share appreciation rights and
other share-based awards such as non-vested shares to directors, employees and consultants of
the Group to purchase up to an aggregate of 6,250,000 ordinary shares upon exercise of awards
granted under the 2008 Share Incentive Plan. No share-based awards were granted under the
2008 Share Incentive Plan in the years ended December 31, 2008 and 2009.
 18
    
    Share repurchases
 On November 4, 2008, the board of directors of the Company approved a share repurchase
program that allows the Company to purchase up to US$50,000 of its issued and outstanding
ADSs. On November 18, 2009, the board of directors of the Company approved a new share
repurchase program that allows the Company to purchase up to US$50,000 of its issued and
outstanding ADSs.In 2008, the Company repurchased and cancelled 1.5 million ADSs at an average per share price
of US$3.31 (RMB22.59) for a total cost of US$9,961 (RMB67,959), including US$105 (RMB716) of
handling charges. In 2009, the Company repurchased and cancelled an aggregate of 6.1 million
ADSs at an average per share price of US$3.54 (RMB24.19) for a total cost of US$43,594
(RMB297,567), including US$497 (RMB3,392) handling charges.
 19
    
    Related party transactions
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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 For the years presented, the principal related party transactions and amounts due from and
due to related parties are summarized as follows:
 Year ended December 312007
    
    2008
    
    2009
    
    2009RMB
    
    RMB
    
    RMB
    
    US$Purchase of packaging and raw materials from related
parties (note (a))
    
    
    7,335
    
    
    
    109
    
    
    
    364
    
    
    
    53Purchase of products from a related party (note (b))
    
    
    
    
    
    
    
    
    
    
    2,108
    
    
    
    309Sales of products to related parties (note (c))
    
    
    2,966
    
    
    
    6,775
    
    
    
    4,596
    
    
    
    673Sales of property, plant and equipment and land use right
to a related party (note (d))
    
    
    18,551
    
    
    
    
    
    
    
    
    
    
    
    Professional fee paid to a related party (note (e))
    
    
    
    
    
    
    
    
    
    
    2,000
    
    
    
    293Interest income from loan due to a related party (note (f))
    
    
    
    
    
    
    1,108
    
    
    
    1,192
    
    
    
    175Interest income from advances to an affiliated company
(note (g))
    
    
    
    
    
    
    
    
    
    
    908
    
    
    
    133
 December 31,2008
    
    2009
    
    2009RMB
    
    RMB
    
    US$Due from related parties:Current portion
    
    
    4,365
    
    
    
    3,989
    
    
    
    584Non-current portion
    
    
    20,000
    
    
    
    22,300
    
    
    
    3,267Due from related parties (note (f))
    
    
    24,365
    
    
    
    26,289
    
    
    
    3,851Advances to an affiliated company (note (g))
    
    
    
    
    
    
    19,762
    
    
    
    2,895
 
 Notes:(a)
    
    The Company purchased packaging and raw materials from companies in which a major shareholder
of the Company has an equity interest. Management believes that the materials purchased by the
Company were in the normal course of business at prices determined on an arms length basis.(b)
    
    The Company purchased pharmaceutical products from a company in which a noncontrolling
shareholder of a subsidiary has an equity interest. Management believes that the purchase was
conducted in the normal course of business at prices determined on an arms length basis.(c)
    
    The Company sold pharmaceutical products to the companies in which a major shareholder has an
equity interest. Management believes that the sales were conducted in the normal course of
business at prices determined on an arms length basis.(d)
    
    The Company sold property, plant and equipment and land use right to a company in which a
major shareholder has an equity interest. Management believes that the sale price was
negotiated on an arms length basis.(e)
    
    The Company paid professional service fee to an entity for corporate consultancy service. The
Group and this entity have common directors. Management believes that the professional service
fee was negotiated on an arms length basis.(f)
    
    The non-current portion of amounts due from related parties represented a RMB20,000 secured
loan as of December 31, 2008. This loan together with the accumulated interest of RMB1,600
(US$234) was renewed on July 1, 2009. The secured loan was provided to a noncontrolling
shareholder of a subsidiary. The loan has a one-year term with an option to extend for two
years, bears a floating interest rate equal to RMB benchmark lending rates of financial
institutions multiplied by 110% and is secured by noncontrolling shareholders entire equity
interest in the subsidiary. The secured loan was classified as non-current as of December 31,
2008 and 2009 because management expects the loan to be renewed and extended beyond 12 months
from the balance sheet date.The remaining balance of the non-current portion of amount due from related parties as of
December 31, 2009 represented the accrued loan interest. The accrued interest was
classified as non-current as of December 31, 2009 due to the same basis as the secured loan
mentioned above. The accrued loan interest as of December 31, 2008 was included in the
current portion of amount due from related parties.The current portion of amounts due from related parties related to transactions described
in note (b) and note (c) above as of December 31, 2008 and 2009 were RMB3,257 and RMB2,873
(US$420), respectively. These amounts were interest-free, unsecured and repayable F-38




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Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 
 on demand. The current portion as of December 31, 2009 also included an advance payment of
RMB1,116 (US$164) to a related party and the amount is interest-free, unsecured and
repayable on demand.(g)
    
    The amounts included a RMB19,500 (US$2,857) loan made by the Company to its affiliated
company and the related accrued interest of RMB261 (US$38). The loan has a one-year term,
bears a fixed interest rate at 5.31% per annum and is guaranteed by a shareholder of the
affiliated company. 20
    
    Collaborative arrangements
 As discussed in note 2(v), on January 1, 2009, new guidance issued by the FASB was adopted
which defines collaborative arrangements and establishes reporting requirements for
transactions between participants in a collaborative arrangement and between participants in
the arrangement and third parties. The Group reviewed its third party arrangements to
determine if any arrangement is within the scope this new guidance. The Groups significant
collaborative arrangement is discussed below:On December 12, 2008, the Group entered into an agreement to collaborate on the
co-development and production of humanized antibody therapeutics for tumors with Epitomics,
Inc., a provider of humanized rabbit monoclonal antibodies for therapeutic use. Under the
agreement, the Group and Epitomics, Inc. will collaborate on pre-clinical and clinical
trials, product manufacturing, and product distribution in the international markets. The
Group will have the exclusive production and distribution rights in China. The Group agreed
to pay a total funding of up to US$5,000 (RMB34,130) of which US$1,000 (RMB6,826) was paid in
2009 to acquire the license rights of in-process R&D materials in China. The remaining
US$4,000 (RMB27,304) will be paid at various dates upon the achievement of certain milestones
as set forth under the agreement.The Group holds the exclusive rights to commercialize the drug in China and Epitomics, Inc.
will hold the rights to commercialize the drug outside China. In addition, if the anti-cancer
pharmaceutical is successfully developed and commercialized, the Group will pay Epitomics,
Inc. royalties on the net sales derived from the sales of this drug in China upon achieving
certain agreed annual net sales level.Prior to the drug entering Phase I clinical trial in the United States or Europe, the Group
receives 40% of the income derived from the sale, transfer, assignment, license and/or
disposition of the drug outside China. After the drug enters Phase I clinical trial in the
United States or Europe, the Group receives 50% of the income derived from the sale,
transfer, assignment, license and/or disposition of the drug outside China. However, this is
subject to a condition that the Group is required to share 50% of the related development
costs, as defined in the agreement, incurred outside China. Also, the Group will enjoy 50% of
the profit arising from the sales of the drug outside China.As at December 31, 2009, the subject pharmaceutical was still undergoing development and has
not reached the stage of commercialization in China or outside of China, and therefore no
revenue or profits have been generated from this project. There was also no significant
related development costs incurred outside of China during 2009.
 21
    
    Fair value measurements
 (a)
    
    Fair value of financial instruments
 Management used the following methods and assumptions to estimate the fair value of financial
instruments as December 31, 2008 and 2009:
 
    
    Short-term financial instruments (cash equivalents, pledged bank deposits, trade
accounts receivable, bills receivable and other receivables, amounts due from related
parties, short-term borrowings, trade accounts payable, amounts due to related parties,
and other payables and accrued liabilities)  their carrying amounts approximated their
respective fair values because of the short maturity period.
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##### Table of Contents



Simcere Pharmaceutical Group and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts expressed in thousands, except share data)
 
    
    Long-term loans and long-term loan receivable  their fair values are based on the
amount of future cash flows associated with these instruments discounted at the
borrowing and lending rates currently available for similar instruments of comparable
terms. Their carrying values of the long-term loans and long-term receivable
approximated their fair values as all these instruments carry variable interest rates
which approximated rates currently offered by the Groups financial institutions for
similar instruments of comparable maturities.
    
    Reporting unit (for goodwill impairment)  the fair value of the reporting unit is
determined by estimating the expected present value of future cash flows without
reference to observable market transactions as the fair value of an entity that has
comparable operations and economic characteristic is not observable and the relevant
multiples of a comparable entity are not known.
 (b)
    
    Fair value hierarchy
 FASB ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted
quoted prices in active markets for identical assets or liabilities (Level 1 measurements)
and the lowest priority to measurements involving significant unobservable inputs (Level 3
measurements). The three levels of the fair value hierarchy are as follows:
 
    
    Level 1 inputs are based upon unadjusted quoted prices for identical instruments
traded in active markets.
    
    Level 2 inputs are based upon quoted prices for similar instruments in active
markets, quoted prices for identical or similar instruments in markets that are not
active, and model-based valuation techniques for which all significant assumptions are
observable in the market or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.
    
    Level 3 inputs are generally unobservable and typically reflect managements
estimates of assumptions that market participants would use in pricing the asset or
liability. The fair values are therefore determined using model-based techniques that
include option pricing models, discounted cash flow models, and similar techniques.
 The level in the fair value hierarchy within which a fair measurement in its entirety falls
is based on the lowest level input that is significant to the fair value measurement in its
entirety.The reporting unit for which goodwill was allocated to was measured at
fair value on a nonrecurring basis and was classified in Level 3 of the valuation hierarchy.
Goodwill with a carrying amount of RMB386,334 (US$56,598) was written down to its implied
fair value of RMB309,936 (US$45,406), resulting in an impairment charge of RMB76,398
(US$11,192), which was included in earnings for the year ended December 31, 2009.
 22
    
    Subsequent events
 (a)
    
    Acquisition of approximately 39% of the equity interest in Boda
 In June 2010, the Group entered into a definitive share purchase agreement to acquire
approximately 39% of the equity interest of Boda, an existing 51% owned subsidiary through an
acquisition of 80% equity interest in Xiangao Investment Company Ltd. (Xiangao Investment),
an investment holding company which holds approximately 49% of the equity interest of Boda.
The purchase consideration consists of RMB116.8 million (US$17.1 million) in cash as well as
a contingent consideration which will be determined based on net
income generated by Boda in 2010. Upon the completion of this acquisition, the Group will hold
approximately 90% controlling interest in Boda.
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