Shanghai Pharmaceuticals Holdings Co, China's second-largest drug distributor and third-largest drug maker, said on Monday that it expects to boost its portfolio of innovative drugs through a major acquisition in the next six months to a year.

The company laid out its intentions after reporting its first set of interim results since its Hong Kong initial public offering. It called for more acquisitions to build up its core strength on the back of fierce completion and a complex macro environment.

"The potential target could be a mid-sized drug company in the US or Europe owning patent drugs," said Lu Mingfang, chairman of Shanghai Pharma via a teleconference call.

"We hope to make structural improvements to our product portfolio by raising the proportion of innovative drugs, so as to better weather industry risks in the future," Lu added.

Shanghai Pharma, which made its debut on the Hong Kong stock market on May 20, reported on Monday that its net income for the six months ended June 30 surged 65.7 percent to 1.3 billion yuan. Revenue increased 36 percent to 25.21 billion yuan over a year ago.

Revenue from its drug production business reached 4.21 billion, up 11 percent year-on-year. Its distribution business, the other pillar revenue contributor, surged 46.2 percent to 21.17 billion in the first half of 2011.

Xu Guoxiong, executive director and chairman of the company, described the macro-economic and industry environment in the first half as "intricate and complicated."

Industry headwinds included the 27th drug price cut initiated by the National Development and Reform Commission, the nationwide EDL (essential drug list) tendering and the subsequent fall in EDL drug prices driven by the process, and surging prices of raw materials such as Chinese medicine and chemical drugs, according to Xu.

Surging input costs accounted for 70 percent of the decline in Shanghai Pharma's first-half gross profit margin, according to Lu. The gross profit margin of the drug making business dropped 3.3 percentage points to 45.3 percent, while that of the drug distribution business retreated 0.7 percentage point to 7.4 percent.

"The company's full-year gross profit margin of its drug making business is likely to further decline, given that their drug portfolio will not be upgraded in a short period of time and downside policy factors persist," analyst Ding Dan at Guosen Securities wrote in a research note after the company posted its results.

Chairman Lu believes that the deteriorating gross profit margin is a headache facing the entire industry. He said that policy makers will probably intervene in the market for traditional Chinese herbs in the second half of this year.

Lu reaffirmed that the company is "confident" in achieving its profit forecast pledged at its IPO through market expansion and cost reduction.

The company expects its profit attributable to shareholders this year to be no less than 2.1 billion yuan, according to its IPO prospectus.

joyli@chinadailyhk.com

China Daily

(HK Edition 08/16/2011 page2)