Business Review

Distribution of Gene Testing Services

On 13 December 2010, the acquisition (the “Acquisition”) of the entire equity interests in Fudan Guang Dong and Fudan HK was completed and both Fudan Guang Dong and Fudan HK have since become wholly owned subsidiaries of the Company.

After completion of the Acquisition, the Group obtained the permanent exclusive distribution rights for gene testing services in the PRC, Hong Kong and Macau, the permanent non-exclusive distribution rights in the other regions as well as the right of use of certain logos on gene testing services distributed by the Group. As the cost of gene testing services is much lower than previously obtained under the original nonexclusive arrangement, the Group has enjoyed a higher profit margin since the Acquisition.

On 3 May 2011, in view of the significant decrease in turnover generated by the distributors under the Franchise Agreements, and in order to manage the distribution channels more effectively and to achieve higher profit margin by reducing the selling expenses, the Group entered into five termination agreements (the “Termination Agreements”) with relevant distributors to terminate the Franchise Agreements with effect from the same date.

The Group has begun to segment its market geographically and to establish marketing and distribution channels in the PRC which are under its direct supervision and management since March 2010. During the Financial Year, distributors for each market segment have been engaged, and marketing policies together with measures, which will be constantly reviewed and fine-tuned in response to the varying market factors in different market segment, have been drawn up. In addition, to ensure the quality of services provided by the distributors, the Group would provide comprehensive training on gene testing services to the distributors, particularly on interpretation of the test report.

For the Financial Year, the turnover of distribution of gene testing services decreased from approximately HK$253 million in the Previous Financial Year to approximately HK$71.2 million. This was mainly due to the significant drop of turnover of the distributors under the Franchise Agreements, and the transitional period brought by the change of market segmentation since March 2010.

Nevertheless, the effect of the Group’s newly adopted sales and marketing strategy as well as the Acquisition was clearly reflected in the improvement of the Group’s gross profit margin, which increased substantially from approximately 14.71% in the Previous Financial Year to approximately 41.77%. The selling expenses also dropped approximately HK$6.3 million to HK$2.6 million compared with the Previous Financial Year.

山東特利爾醫藥有限公司Co-operative Joint Venture (the “CJV”) for sales of pharmaceutical products

In view of the prolonged succession problem of the CJV, First Jumbo Trading Limited (“First Jumbo”), the CJV’s immediate holding company, resolved to voluntarily wind up on 8 March 2011. No turnover had been generated by the CJV since July 2010. Liquidators had been appointed to carry out the winding-up of First Jumbo and they would realise its assets where appropriate. The Group recorded a gain of approximately HK$161,000 upon deconsolidation of First Jumbo and its subsidiaries.

Distribution of bio-industrial products

Subsequent to the acquisition of CNL (Pinghu), which owns the exclusive distribution rights for distribution of bone chips and bone fat in the PRC for a period of 5 years commencing from 1 January 2010 (renewable for another ten years subject to no objection is raised by either party before 31 December 2014), the Group has been engaged in the trading of biological raw materials through CNL (Pinghu) since July 2010. During the Financial Year, turnover of bio-industrial products generated from wholesale of bone chips in the PRC was approximately HK$19 million, and the gross profit margin was approximately 19.78%.

Provision of health care management services

For the Financial Year, the Group incurred net expenses of approximately HK$3.1 million for the start-up of health care management services projects in Shanghai, the PRC. As these health care management services projects had not yet commenced operation during the Financial Year, no turnover had been generated by
the Group.

Prospects

Distribution of Gene Testing Services

The Directors believe that the acquisition of Fudan Guang Dong would substantially increase the Group’s market share in the distribution of gene testing services under the permanent exclusive and non-exclusive distribution rights. The Group will continue to diversify its business within the PRC and other regions and to expand its market share in distribution of gene testing services. The Group has commenced establishing distribution channels in Macau and other regions. Currently, the Group has set up different marketing policies and measures for its different geographical market segments in response to their varying market factors and for their further development. Moreover, in order to achieve higher profit margin, the Group has been frequently reviewing of the performance of each distribution channel. The Directors are confident that the Group would be able to achieve more sustainable and stable growth in this business sector.

The Group has started establishing laboratories for the manufacture, research and development of gene testing products in Hong Kong and Shanghai, the PRC after the acquisition of Fudan HK. Fudan HK entered into a deed of gift on 8 November 2010, pursuant to which Fudan HK was delivered at nil consideration certain information and documents in relation to gene testing services, namely (i) the four product design schemes for Human Diseases Susceptibility Gene Tests (inclusive of Classic v2008 series, Happy Life III series, Gene Tests for Single Disease series and Happy Family series); and (ii) technology and management system standards for laboratory of the grantor of the gene testing services (inclusive of technology standards, quality control manual, standard operation procedure (“SOP”) for management, SOP for experiments). The Group will continue to strengthen its ongoing research and development capacity in respect of gene testing products.

Distribution of bio-industrial products

In December 2010, CNL (Pinghu) commenced the construction of production plant, research and development laboratories and office in Pinghu, the PRC. With a team of experts including Mr. A. H.Grobben, who is a Dutch expert in hydrolyzed gelatin and bone fat refining technology, CNL (Pinghu) is expected to start production of hydrolyzed gelatin around March 2012. The total estimated costs inclusive of construction, production equipments and renovation costs would be approximately RMB40 million. Looking ahead, the Group will continue to explore other opportunities for further growth in bio-industrial business through strategic cooperation with the world’s leading biotechnology enterprises, whether in terms of business, product or technology. In particular, the Group strives to build a sound product portfolio which offers high profitability potential.

Provision of Health Care Management Services

The Group is committed to providing high-end health care management services in respect of disease prevention and treatment to the public. The Group’s health care management centre, the “United Gene (Shanghai) Health Care Centre”, which commenced business in September 2011, serves as a high-end health care management and service centre with genome technology as its competitive edge. Operation of the United Gene (Shanghai) Health Care Centre would adopt the “4P medical services model” which refers to predictive, preventive, personalised and participatory medical services model. The Group would also extend its services to set up an individualised comprehensive and lifelong health service model. The Group would research, develop and provide further health care management services, such as (i) testing of nutrition and metabolism and provision of treatment consultancy; (ii) provision of diet treatment; (iii) provision of medicine treatment consultancy and (iv) testing for gene mutation. The Directors believe that the establishment of the United Gene (Shanghai) Health Care Centre could help in enhancing the Group’s branding in the health care management and service industry, widening the Group’s business model and strengthening its profitability in the forthcoming years.

The Group intends to set up more health care centres in other cities of the PRC, which would be funded by the net proceeds raised from the rights issue of the Company in May 2010.

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