Huadong Medicine Co., Ltd. 2020 Annual Report April 2021 To the shareholders In 2020, Huadong Medicine encountered unprecedented challenges, including COVID-19 pandemic impact on the entire manufacturing operation, the unsuccessful GPO participation of Acarbose products, as well as the impact of a series of subsequent policies such as the GPO process and National Drug Reimbursement List (NDRL) price negotiations. Nevertheless, we acknowledged that Huadong overcame these challenges and successfully met its full year operational & business targets. Although the Company’s total revenue was slightly delclined year on year while profit growth had been squeezed, the Pharmaceutical Industry business sector maintained its growth, while bucking market trends. Acarbose tablets maintained its market share and continued to increase its share of the ex-hospital and retail markets. This achievement was really a hard-won! Huadong Medicine’s R&D strategy has always adhered to the corporate philosophy of being “Devoted to science, Dedicated to patients”, with “clinical value, healthcare economical value and commercial value” as key focuses. It has established a pipeline of innovative products in the field of oncology, immunology and endocrinology. Through reconstruction of innovative drug R&D functions, the Company’s R&D capability has been significantly strengthened. The IND application in China for an in-licensed ADC product was completed within 100 days and has already obtained CTA approval from CDE. The excellent execution capability of the R&D team has underpinned our confidence in the long term transformation and growth of the Company’s innovative drug business. In the TA of diabetes, the Company continues to monitor cutting-edge technologies and innovative product pipeline globally, and will continue enriching its product portfolio. The Company has already participated and invested in a number of domestic and international biotech companies with leading technologies. Through establishing differentiated peptide innovation technology platform, autoimmune disease antibody technology platform, microbial fermentation cytotoxin technology platform and innovative linker technology platform, as well as mutually beneficial collaborations, Huadong Medicine is building and improving its pharmaceutical research and development ecosystem. Huadong commercial distribution business has been adhering to the philosophy of “caring the world with sincerity, integrity, persistence and being pragmatic”, transforming from a basic distributor to an integrated service provider with greater industry expertise. The Company’s cold chain business is positioned as the whole life-cycle precision management and control for biological specialty drugs. It has continuously strengthened the competitive advantage of the cold chain capability and driven the high-quality development of digital intelligent supply chain. The Company will vigorously expand e-commerce business, establish a new “online offline interaction” growth model, and actively explore the new healthcare services business of “internet + chronic disease management”. Huadong Medicine has begun expanding in the field of aesthetics when China’s aesthetics industry is in the ascendant. We have witnessed aesthetics products transitioning from discretionary consumer products to necessities and the industry is about to experience a long term high growth phase. This strengthened our commitment to expand in the field of aesthetics. There are still significant upside in aesthetics over the long term. Going forward, we will continue following the strategy of “global operational positioning, dual-cycle business development”, make China an important market for aesthetics and bring "first-in-class", high-end international products to China over time. We will leverage the Company’s established aesthetics distribution capabilities in China and the fast growth of the aesthetics industry, to support rapid availability of high quality international product portfolio in China and provide beauty seekers personalised and differentiated aesthetics product portfolios. Thus, a new model of domestic and international dual-cycle joint growth and mutual promotion is formed. 2021 will be another significant year for Huadong Medicine’s strategic transformation. As GPO policies and price reduction may continue to impact the Company’s overall operation, Huadong Medicine will also face the strongest pressure on its business growth in history. Nevertheless, we constantly remind ourselves: don’t waste a good crisis. The current situation of China’s pharmaceutical market represents a rare opportunity for Huadong Medicine to transform into an innovative company and expand globally. Expansion in innovative pharmaceutical business remains firmly as the main theme of Huadong Medicine. Aesthetics, as a core strategic focus of the Company’s healthcare business, marks the beginning of the Company’s globalization strategy. We are committed to continue strategically positioning across the global pharmaceutical and healthcare value chain, and actively integrate into global pharmaceutical innovation collaborations by strengthening our own innovative drug R&D capabilities and key advantages. This is an era of survival of the fittest and in the end all sands will be removed and only the gold left shinning. From now on to the foreseeable future, the only certainty is that we will continue experiencing various uncertainties caused by infrastructural changes in the industry. Huadong Medicine will remain committed to its course, continue to outperform in the current environment and strategically plan for the future. Thanks to all the investors for your recognition and long term support, which are the source of our commitment and confidence in pursuing the transformation! Huadong Medicine will strive to firmly meet shareholders expectations and continue delivering excellent results. Lv Liang On Behalf Of Huadong Medicine Grain Rain 2021 Section I. Important Declaration, Contents and Definitions The Board of Directors, Board of Supervisors, directors, supervisors and senior management of Huadong Medicine Co., Ltd. (hereinafter referred to as the “Company”) hereby guarantee that the information presented in this annual report is authentic, accurate and complete and free of any false records, misleading statements or material omissions, and shall undertake individual and joint legal liabilities. Lv Liang, the Company’s legal representative and the officer in charge of accounting, and Qiu Renbo, head of accounting department (accounting supervisor) hereby declare and guarantee that the financial statements in this annual report are authentic, accurate and complete. All directors have attended the Board of Directors meeting to review this annual report. The future plans, development strategies and other forward-looking statements in this annual report shall not be considered as substantial commitment of the Company to investor. Therefore, investors are kindly reminded to pay attention to possible investment risks. The profit distribution plan reviewed and adopted by this Board of Directors meeting is as follows: on the basis of 1,749,809,548 shares, a cash dividend of 2.3 yuan (tax included) is to be distributed to all shareholders for every 10 shares; no bonus share will be issued; and no capital reserve will be converted to increase the capital stock. According to “Stock Listing Rules of the Shenzhen Stock Exchange”, if listed companies have both Chinese or other language version of public notice, they should ensure the content of both versions are the same. In the case of discrepancy, the original version in Chinese shall prevail. Contents Definitions Section II. Company Profile and Key Financial Indicators I. Company information II. Contact persons and contact information III. Channels of disclosure and location of preparation IV. Registration changes IV. Registration changes VI. Key accounting data and financial indicators Whether the Company needs to perform a retroactive adjustment or restatement of previous accounting data □Yes √No The Company’s net profit before or after deducting non-recurring gains and losses, whichever is lower, in the last three fiscal years are all negative, and the audit report of last year shows doubt about the Company’s ability to continue as a going concern. □Yes √No The company's net profit before and after deducting non-recurring gains/losses in the last three fiscal years is negative. □Yes √No Capital stock of the Company as of the trading day before disclosure Capital stock of the Company as of the trading day before disclosure (share) 1,749,809,548 Fully diluted earnings per share calculated on the basis of the latest capital stock VII. Differences in accounting data under domestic and overseas accounting standards 1. Differences in net profit and net assets disclosed in financial statements under international and Chinese accounting standards □ Applicable √ N/A There are no differences in net profit and net assets disclosed in financial statements under international and Chinese accounting standards. 2. Differences in net profit and net assets disclosed in financial statements under overseas and Chinese accounting standards □ Applicable √ N/A There are no differences in net profit and net assets disclosed in financial statements under overseas and Chinese accounting standards. 3、Reasons for differences in accounting data under overseas and Chinese accounting standards □ Applicable √ N/A VIII. Key financial indicators by quarter Unit: RMB yuan Whether the above financial indicators or their totals are significantly different from relevant financial indicators in previous quarterly and semiannual reports by the Company □ Yes √ No IX. Items and amounts of non-recurring gains/losses √ Applicable □ N/A Unit: RMB yuan If the Company recognizes an item as a non-recurring gain/loss based on the “Interpretative Announcement No. 1 on Information Disclosure Criteria for Public Companies – Non-Recurring Profit/Loss” or recognizes an item satisfying the definition of non-recurring gain/loss in the announcement as a recurring gain/loss, reasons should be specified. □ Applicable √ N/A No such case during the reporting period. Section III. Overview of the Company’s Business I Main business of the company during the reporting period Huadong Medicine Co., Ltd. (stock code: 000963), founded in 1993 and headquartered in Hangzhou, Zhejiang Province, was listed on Shenzhen Stock Exchange in December 1999. After more than 20 years of development, the Company has developed into a large comprehensive listed pharmaceutical company integrating R&D, production and sales of medicine. The Company has more than 10,000 employees, and its business covers the whole pharmaceutical industrial chain. With the pharmaceutical industry as its core, the Company expands its medicine business and aesthetic medicine industry. The pharmaceutical industry of the Company focuses on R&D, production and sales of specialist medication, chronic disease medication and medication for special purposes. The Company has formed core product pipelines in such fields as chronic kidney diseases, transplantation immunity, internal secretion and gastrointestinal system, and owns a number of first-line clinical medications with market advantages in China. Meanwhile, through independent development, external introduction and project cooperation, the Company focuses on the R&D layout of innovative drugs and generic drugs with high technical barriers in the three core fields of anti-tumor, internal secretion and autoimmunity. Its pharmaceutical sales channels have covered more than ten thousand large and medium-sized hospitals in China. And its pharmaceutical R&D involves fungal and microbial fermentation, small molecule, biological macromolecule and peptide drugs, covering drug discovery, clinical and preclinical research, chemical manufacturing and control (CMC) and registration. The Company continues to carry out international product registration, international certification, consistency evaluation, etc., forming an international pharmaceutical industry system with a leading position in China. By means of pharmaceutical business, the Company becomes one of the leading and powerful comprehensive large-scale pharmaceutical business service providers in Zhejiang Province, ranking the top ten pharmaceutical business enterprises in China for many years consecutively. It has set up 11 regional subsidiaries in Zhejiang Province, with customers covering 11 cities and 90 counties (county-level cities) in the province. It has four business segments, including Traditional Chinese Medicine (TCM) and Western Medicine, medical devices, ginseng, antler and other herbs, and health industry, covering the whole field of pharmaceutical circulation, mainly including pharmaceutical wholesale (public health care, private health care, retail pharmacies and commercial distribution), pharmaceutical retail, third-party pharmaceutical logistics characterized by cold chain, pharmaceutical e-commerce, pharmaceutical service (hospital value-added service), market development and featured mega health industry, providing customers with integrated solutions. The Company’s aesthetic medicine business focuses on R&D, production and sales of the latest products and devices in facial micro-plastic surgery and skin management. Sinclair, a wholly-owned subsidiary of the Company that is headquartered in the United Kingdom and serves as the holding company of a Spanish firm named High Tech, has production bases in France, the Netherlands, the United States, Switzerland and Bulgaria, and promotes and sells long-effect microsphere fillers for injection, hyaluronic acid, as well as face thread lift and coolsculpting products in the global market. Sinclair is the global operation platform of the Company for aesthetic medicine business. Huadong Ningbo Medicine Co., Ltd., a controlled subsidiary of the Company, is a comprehensive aesthetic medicine health platform focusing on product R&D and professional promotion, and also acts as the general agent for the promotion and sales of Korean YVOIRE hyaluronic acid products and skin care products series of SanteMuse in the Chinese market. II. Significant changes in major assets 1. Significant changes in major assets 2、Major overseas assets Applicable □ N/A Note: In April 2019, the Company entered into strategic cooperation with R2 Dermatology, a US company specializing in medical devices and technology development related to dark spot removal and skin whitening using freezing technology in the field of aesthetic medicine, and made equity investment in R2 and became its shareholder. As of the date of this disclosure, the Company has invested 30 million US dollars, with a shareholding ratio of 34%. In July 2019, the Company entered into strategic cooperation with MediBeacon, a US company dedicated to the development of contrast agents and equipment in such medical fields as renal function and gastrointestinal function assessment, and invested 30 million US dollars for equity investment. As of the date of this report, the Company has contributed 15 million US dollars, or 4.3% of its shares. III. Analysis of core competitiveness 1. Open innovative drug R&D System and continuous improvement of innovation capability After years of development, the Company has established its independent R&D system, a global new drug R&D center as well as a global R&D strategic collaboration ecosystem centered on Hangzhou Zhongmei Huadong Pharmaceutical Co., Ltd., and cooperated with world-renowned colleges at home and abroad, research institutes, innovative R&D companies, professional technology platforms and so on in new drug R&D projects. The Company continuously has increased R&D investment, made an overall planning for the global innovative products in the three core areas of anti-tumor, internal secretion and autoimmunity, and carried out cooperation with the world’s leading AI drug discovery company Exscientia and XtalPi in anti-tumor drug R&D. Through independent R&D, external cooperation and product license-in, the Company has continuously enriched the product pipelines in core areas, formed a good development trend of continuous clinical promotion and marketing of innovative products, and provided new momentum for medium- and long-term growth. 2. Comprehensive capability in international business development The Company has actively promotes global expansion. Through the acquisition of the equity of UK Sinclair and Spanish High Teach engaged in aesthetic medicine, the Company has realized the global layout of aesthetic medicine sales network. Through strategic and equity collaboration with R2 (US), Medibeacon (US), ImmunoGen (US), Provention Bio (US), Kylane (Switzerland), LG (South Korea), Jetema (South Korea) and so on, the Company supplemented and enriched the commercial development rights of innovative drugs and high-end aesthetic medicine products at home and abroad. The Company also accelerated the international registration of products. Its online chemical raw medicines have been certified by the Food and Drug Administration (FDA) or EU and other authoritative authentication in markets; its Pantoprazole Sodium Lyophilized Powder for Injection has been temporarily approved by the FDA; and its Acarbose Tablets gained market access to the United States and the European Union Austria. The Company is the first Chinese medicine enterprise to achieve these results. In addition, the Company actively develops international logistics and purchasing suppliers to realize the internationalization of purchasing ability. It has promoted the internationalization level of CMO/CDMO business and integrate it into the global innovative drug R&D industry chain. 3. Abundant product pipelines for specialized departments and chronic diseases and overall competitive advantage in the field of diabetes medication Over the years, the Company has been deeply engaged in medication for specialized departments, chronic diseases and special drugs, and has built a good brand effect and solid market foundation in such fields as chronic kidney diseases, transplantation immunity, internal secretion, and digestive system, and has maintained a leading market share of similar products in China. The Company has formed a comprehensive pipeline of innovative drugs and differentiated generic drugs in the diabetes clinical mainstream therapeutic target. In the field of organ transplantation, it also realized full coverage of clinical first-line immunosuppressive drugs. The Company has established a global first-in-class distribution of new drugs in the three core areas of anti-tumor, internal secretion and autoimmunity, forming a differentiated advantage. At present, 24 core marketed products of the Company have been included in the 2020 Catalog of Medicines Covered by the National Medical Insurance System.  4. Leading professional pharmaceutical care team and extensive market network in China The pharmaceutical industry of the Company has a professional pharmaceutical care team of 6,000 people, takes the promotion of clinical value and academic results as the core, and promotes a multi-channel marketing model that combines general hospitals, primary medical institutions, retail and third terminals, and Internet online. It has gradually formed effective coverage through multiple channels and has a good competitive advantage. The business of the Company has been deeply rooted in the market of Zhejiang Province for many years, with complete commercial formats and rich distribution varieties, and has comprehensive competitive advantages in policy affairs, market access and network coverage. It has fully covered the customers from public medical institutions, key private medical institutions and retail pharmacies in Zhejiang Province, and maintained the leading order satisfaction rate. The Company has established business cooperation with 90% of the mainstream pharmaceutical enterprises at home and abroad. The Company has a complete cold chain logistics distribution service system and professional capabilities, and its cold chain logistics distribution business is in the lead in China. The Company has obtained the first express business license of pharmaceutical cold chain enterprise in Zhejiang Province, and got the exclusive qualification of third-party storing and transporting vaccine from Zhejiang Provincial Center for Disease Control and Prevention. 5. High end international aesthetic medicine product pipeline covering mainstream non-surgical fields In 2018, through the successful acquisition of Sinclair in UK, the Company strategically entered the aesthetic medicine industry, effectively completed the integration of products and businesses in less than three years, and realized the full layout of the non-invasive and minimally invasive aesthetic medicine industry chain. In the fields of facial fillers, body shaping, catgut embedding, energy source devices and so on, we have a number of patented products with global rights and also have an international aesthetic medicine operation and BD team. Focusing on the global high-end aesthetic medicine market, further integrating R&D resources and capabilities, and relying on the four global R&D centers of Sinclair in the UK, High Tech in Spain, R2 in the United States and Kylane in Switzerland, and five global production bases in the Netherlands, France, the United States, Switzerland and Bulgaria, the Company has formed its international aesthetic medicine business integrating R&D, production, and marketing, and set up a global aesthetic medicine marketing network, which has covered more than 60 countries and regions in the world. Huadong Ningbo Medicine Co., Ltd., the controlled subsidiary of the Company, has a sales team which has been deeply engaged in the Chinese aesthetic medicine market for many years, and a wide range of aesthetic medicine institutions, with outstanding sales and promotion ability. Its market share has been in the lead in the domestic hyaluronic acid market for many years continuously. 6. Prudent and pragmatic operation style and shareholder return The Company values management innovation, and strives to meet the demand of market competition by improving its quality of operation. High quality products, excellent commercialization ability, compliant and efficient marketing services, differentiated market positioning, innovative R&D layout and completed talent planning all boost the long-term and stable development of the Company. Since its listing, the Company has maintained steady growth in performance for 21 years. Since 2007, the Company has kept the return on equity (ROE) above 20% for 14 years consecutively, leading A-share listed companies and the medicine industry. Since its listing 21 years ago, the Company has paid dividends for 17 times, with a total value of RMB4.174 billion, far exceeding the RMB250 million raised in its IPO. The Company has brought continuous and stable returns of investment to shareholders. Section IV. Discussion and Analysis of Operations I. Overview For China and the world, 2020 is an extraordinary year. It is also a key year for the Company to fully implement strategic transformation and internationalization. In the past year, in the face of the sudden outbreak of COVID-19 pandemic, the reform of the domestic pharmaceutical industry, the new challenges brought by the changes in internal and external environments, the Company has suffered unprecedented operating and development pressures, coupled with the impact of failure in national centralized procurement tendering of acarbose and lower price for medical insurance reimbursement list through negotiations. However, with its bravery and tenacity, the Company survived in this challenging year, unswervingly promoted the transformation of R&D innovation and marketing mode, and steadily implemented various measures of operation and management by responding to changes and hardships with dedication, thus delivering strategic decisions and maintaining the steady development with joint forces in 2020. In this year, the Company completed the reform of R&D system, rapidly adjusted the marketing strategy, strengthened the cooperation in overseas new drugs, and accelerated the international layout of aesthetic medicine industry. It also actively explored new operation mode of pharmaceutical business, opened up new market areas, and laid a solid foundation for continuous innovation and transformation in 2021.  Growth trend of Huadong Medicine’s operating income over the past 10 years Growth trend of Huadong Medicine’s net profit attributable to the parent company over the past 10 years In 2020, due to the impacts of the COVID-19 pandemic and national medicine centralized procurement, the Company achieved annual operating income of RMB33.683 billion, down 4.97% year on year; the net profit attributable to the shareholders of the listed company was RMB2.82 billion, up 0.24% year on year, and the net profit attributable to the shareholders of the listed company after deducting non-operating profit was RMB2.43 billion, down 5.62% year on year. By the end of 2020, the total assets of the Company were RMB24.201 billion, and the net assets attributable to the shareholders of the parent company was RMB14.62 billion, and the asset-liability ratio was 37.28%, and the ROE was 20.95%, which has remained above 20% for 14 consecutive years. The core subsidiary of the Company in pharmaceutical industry, Hangzhou Zhongmei Huadong Pharmaceutical Co., Ltd., actively overcame the influence of national medicine centralized procurement, and stabilized the market and development. Its business performance continued to grow in adversity. During the reporting period, the operating income reached to RMB11.04 billion, up 5.07% year on year, and the net profit was RMB2.332 billion, up 6.13% year on year, which has maintained growth for 20 years on end. The annual ROE of Zhongmei Huadong was 35.53%, which has remained above 35% for 14 consecutive years. (i) Pharmaceutical industry 1. Accelerating R&D innovation and constantly enriching product pipelines ROE (%) of Huadong Medicine and Zhongmei Huadong during 2007-2020 In 2020, the Company continued to strengthen R&D innovation, reconstructed R&D system, arranged R&D personnel properly, and promoted R&D function return. The first stage of R&D system reform has been completed. In 2020, the Company’s innovative drug R&D center actively explored and learned from the international advanced innovative drug R&D system building, continuously optimized and adjusted the overall innovation R&D system framework of the Company, and improved the functional modules of innovation project R&D through introducing high-end R&D talents, so as to fully guarantee the realization of strategic planning objectives of the innovation project. During the reporting period, the Company completed 15 innovative projects, and introduced 47 innovative R&D talents at home and abroad, including 15 doctors and 27 masters. The Company has initially established a vigorous innovation team with international concept, international vision and international management ability. Meanwhile, we established a core expert consultant pool, including dozens of senior experts in statistics, medicine, registration and other fields. In addition, we started the recruitment of postdoctoral programme. The Company reached the cooperation intention of postdoctoral joint training with Zhejiang University, Institute of Nephrology of Peking University and other domestic first-class universities. We boosted ongoing projects and consistently evaluated projects as scheduled, and 10 products (11 quality specifications) obtained production approval and 13 products (14 quality specifications) were applied for production. We established and improved the decision-making management mechanism of R&D projects, centered on the strategic treatment field, and focused on the clinical value of the projects to complete the Company’s R&D pipeline analysis and dynamic evaluation of ongoing projects. We also strengthened the project management and the training of PM, and completed the user experience test of PLM system. The collaboration between R&D and BD was further deepened, which enriched the Company’s product pipelines in the fields of tumor, autoimmune and diabetes. (1) Anti-tumor: Introduced the phase III clinical research products of ImmunoGen (US), the world’s first targeting folate receptorα (FRα) Mirvetuximab Soravtansine (MIRV), an ADC candidate drug for ovarian cancer, and acquired exclusive development and commercial rights in Greater China (including Chinese mainland, Hongkong, Macao and Taiwan). And accelerated its clinical research in China. (2) Endocrinology: Signed an agreement with PEG-BIO BIOPHARM CO., LTD. (Chongqing) on the cooperative development and commercialization of somaluptide products, which would further enrich the important product pipeline in the field of diabetes and consolidate its leading position in the field of domestic diabetes drugs. (3) Autoimmunity: Introduced the ongoing QX001S product of Qyuns Therapeutics (a biosimilar similar to original drug Stelara®, used to treat psoriasis and Crohn’s disease), and gained the rights to develop and commercialize it in Chinese mainland, which further improved the macromolecule pipeline layout in the field of immunology. (For the details of the R&D work and product pipelines of the Company during the reporting period, please refer to R&D Section) 2. Initial building of agile production and operation system, and shifting from cost center to profit center In 2020, overcoming the impact of the COVID-19 pandemic and market uncertainty, the Company initially established an agile production and operation system, quickly integrated production resources according to market changes, took measures such as emergency resumption of production, shift adjustment and production capacity expansion, and successfully completed emergency production tasks of some products due to sudden increase in demand. We promoted outsourcing business to ensure the market supply throughout the year, fully implemented the cost control plan, boosted the cost management of the whole value chain, and achieved cost reduction through technology improvement, lean management, bidding and purchasing negotiation and asset utilization from many aspects, striving to improve labor efficiency per capita and production efficiency. We did a good job in risk management and control of EHS, practiced the “asset-light” production organization mode, and successfully developed a number of cooperative production enterprises, and gradually formed an open Huadong pharmaceutical manufacturing system. We took internal surprise inspection as the starting point to implement the GMP normal management, and successfully passed it four times, with no major safety accidents throughout the year. The manufacturing and CMC (including subsidiaries) center changed the original positioning concept of internal facilities, started CMO/CDMO mode by following international standards, and explored the transformation from cost center to profit center. We actively faced the international market, and participated in the international market competition to integrate with the global pharmaceutical R&D industry chain. In 2020, we made positive progress in export of raw materials and CDMO business customized by foreign customers, which laid a solid foundation for realizing a greater breakthrough in 2021. In 2020, the Company continued to construct production parks, and arranged the transfers of product and personnel, and the disposal of equipment and facilities in an orderly manner. Jiangdong Phase II project has been completed as planned and is expected to be officially put into operation in the second half of 2021 after completing equipment commissioning and certification; the project of international R&D and manufacturing center for preparations has also been completed and is expected to be put into use in 2021; the project approval, land acquisition, overall planning and design as well as construction preparation of Huadong Medicine Biomedical Science and Technology Park have been completed, and the project officially entered the construction stage in March 2021. 3. Making efforts in grass roots and out-of-hospital markets and improving all-round marketing ability During the reporting period, Hangzhou Zhongmei Huadong Pharmaceutical Co., Ltd. faced the pandemic situation and market challenges, turned the pressure into the driving force by facing difficulties and changing concepts, and improved marketing ability in all respects. According to the trend of national normalized centralized procurement, we quickly adjusted the market strategy, took the establishment of “pharmaceutical care management system to adapt to the modern pharmaceutical industry development” as the goal, and continued to deepen the organizational structure reform. We strengthened the organizational structure building of local pharmaceutical care companies with county-level markets, increased out-of-hospital teams and primary-level market personnel, and comprehensively promoted the development and coverage of primary-level markets, out-of-hospital markets and self-paying markets. We also actively explored new channels of retail pharmacies and online sales, developed online market, and seized the remaining markets. In terms of academic promotion, we continued to focus on the patient-centered concept to strengthen patient education and further improve the professional level of front-line marketing personnel, and to carry out clinical restudy of marketed products, and improved expert consensus and clinical value recognition through academic platform building. Through the differentiated market positioning of Acarbose Tablets and Acarbose Chewable Tablets, we continued to work hard in the primary-level, out-of-hospital and retail markets. The sales volume and overall market share of acarbose products remained stable throughout the year, and the proportions of out-of-hospital and retail markets increased steadily. The Company has confidence that the sales volume of acarbose will continue to grow in 2021.  National marketing network distribution map of pharmaceutical industry 4. Keeping up with international level and improving quality management to new level In 2020, the Company further strengthened the centralized and unified quality management, continuously improved the building of quality management system, innovated the normalized management methods of GMP, and implemented surprise inspection system. We optimized the management mode of public system, strengthened the linkage mechanism of quality management from R&D to large production, established a normalized management list for weak managements, and successfully completed the site verification for registration of all products with consistency evaluation and new products, onsite GMP compliance inspection and surprise inspection. Aiming at international quality level, we continued to improve the quality standard, completed the standard setting of olistar capsule, pioglitazone hydrochloride tablet and indobufen tablets, followed up the progress of pharmacopoeia, and participated in the standard setting of USP for pantoprazole sodium lyophilized powder for injection. After the Acarbose Tablets of Huadong Medicine Co., Ltd. obtained a marketing approval from Austria of EU and was approved by the FDA of the United States, the international quality management of the Company was lifted to a new level. 5. “Refusing Mediocrity and Pursuing Excellence” and Creating an Appropriate Human Resource Management System In 2020, the Company continued to improve the level of human resource management. We continuously optimized the talent structure, improved the talent ability and introduced 66 top talents in the fields of innovative medicines, international aesthetic medicine, strategic market as well as investment and financing, including 21 doctors and 12 international talents. We continuously optimized the organization and human resource allocation of companies, developed incentive and efficiency, improved the efficiency of human resources, and gradually established an assessment mechanism aiming at “rejecting mediocrity and pursuing excellence”. We innovated and developed performance management mode, set up a R&D performance appraisal management mechanism that was appropriate to the actual situation of R&D, and perfected matrix management mode for R&D, and formed a performance appraisal and management scheme for the three R&D centers. We further improved the building of leader echelon, standardized and unified the management of appointed leaders, and optimized the personnel training mechanism to realize the rapid transformation of talents. 6. Strengthening the integration of business and finance, and deeply innovating financial organization structure During the reporting period, the Company carried out the innovation of financial organization structure, and formed a headquarters financial structure based on the professional lines of treasury department, international business department, accounting information department (virtual), tax and information, which enabled the coordination of treasury management among headquarters, Zhongmei Huadong as well as business finance. By establishing a “3+X” financial analysis team and setting up business partner team of financial aesthetic medicine, R&D and innovation business, we strengthened the integration of business and finance and the continuous investment of the whole financial system in the professional line, and carried out works in the aspects of fine financial fund management and budget cost reduction, building and efficiency improvement of financial information system, financial internal control and compliance, investment merger and post-investment management. As a result, we straightened out the financial organizational structure and the centralized and unified management system with “one headquarters and three business sectors”, and the financial management ability was also continuously improved. 7. Achieving Positive Results in Central Purchasing and Access to Medical Insurance System In August 2020, Anastrozole Tablets (1mg) and Domperidone Tablets (10mg) respectively from the wholly-owned subsidiaries of the Company, Hangzhou Zhongmei Huadong Pharmaceutical Co., Ltd. and Huadong Medicine (Xi’an) Bohua Pharmacy Co., Ltd, won the bid in the third batch of national drug centralized procurement. In December 2020, Bailing Capsule and Acarbose Chewing Tablets from Hangzhou Zhongmei Huadong Pharmaceutical Co., Ltd. participated in the negotiations of medical insurance payment standard and renewal, and both of them were successful. In February 2021, Pantoprazole Injection (40mg) from Hangzhou Zhongmei Huadong Pharmaceutical Co., Ltd. won the bid in the fourth batch of national drug centralized procurement. (ii) Pharmaceutical commerce 1. With optimized and adjusted business structure of the Company, its pharmaceutical commerce continued to take the lead in Zhejiang In 2020, faced with the combined impact of the pandemic and the volume-based procurement, the pharmaceutical commerce of the Company took active measures and fulfilled the emergency medical instrument stockpile task of Zhejiang Province in an excellent way, and was commended by many government departments at provincial, municipal and district levels. Under the background of the normalization of volume-based procurement, the Company took the initiative to deal with it by reverse thinking, and sped up the adjustment, optimization and enrichment of its business structure. The Company has kept consolidating the intra-hospital markets, strengthened coordination between purchases and sales, and increased order fill rate, the market share and delivery rate in the province, taking the lead in the distribution volume of medicines procured centrally in the province. The Company has built a network-wide sales platform covering both the intra- and out-of-hospital markets, expanded and strengthened the cooperative relationship with upstream pharmaceutical enterprises, highlighted the advantageous capabilities of market access and policy matters, and became a trustworthy and respectable partner of the customers’ supply chain through integrated solutions and value-added services. The Company has continued to increase the introduction of high-quality products, accelerate the early intervention to and business undertaking of varieties included in volume-based procurement and newly-listed high-value innovative varieties, and improve service quality and brand influence. During the year, the Company carried out strategic and special cooperation with many multinational pharmaceutical companies such as Pfizer, AstraZeneca, Roche, Eli Lilly, Sanofi, Novartis and Merck with respect to the primary-level market of chronic disease products, realized the implementation of cooperative projects in a quite short time through its professional project management, and won universal recognition from customers. The Company has accelerated the optimization and transformation of its sales model, continued to expand the out-of-hospital markets while maintaining its competitive position in the intra-hospital markets, and sped up the transition from intra-hospital to out-of-hospital and from offline to online. Relying on its advantages in relationship with upstream suppliers and downstream offline sales channels, the Company effectively connected to Internet and mobile Internet technologies, built an information system from the supply end to the consumer end, and established an effective online and offline marketing system. Through management and empowerment, the Company gives full play to the centralized advantages of its products and the advantages of the branches and subsidiaries in the province regarding local sales, achieving the effect of 1+1>2. 2. Integrating e-commerce interconnection to win market opportunities In 2020, the Company’s pharmaceutical commerce explored and transformed the business model of retail pharmacies, provided “value-added services” such as pharmaceutical consultation, drug distribution and return visits for special patients through channels like self-operated DTP pharmacy, and built a pharmaceutical care and service system centered on patients’ needs. It optimized the promotion of marketing channels such as the “Huadong Medicine Commerce Network”, “Huadong Pharmacy Flagship Store”. It completed the establishment of the OTC Sales Management Department and the E-commerce Sales Department, and realized the rapid growth of e-commerce business during the pandemic. Relying on the first prescription distribution platform in the province developed by itself, the Company actively connected with the “Internet + diagnosis and treatment” service in Zhejiang Province, quickly connected with provincial and municipal health and health care departments at the beginning of the outbreak of COVID-19, launched the province’s first “online medical insurance settlement + medicine delivery services”, and opened up the full channel of “Internet + diagnosis and treatment”.  3. Improving ability concerning cold chain logistics and creating the “golden business card” of commerce business transformation Huadong business supply chain continued to improve the province-wide logistics system featuring multi-warehouse collaboration, promoted Jinhua supply chain projects, expanded the third-party services featuring “cold chain”, and actively explored logistics services under the new mode of “E-commerce logistics distribution, prescription outflow distribution”. With the goal of “to be the leader in the industry and become the leading role in the value chain”, Huadong business cold chain built a province-wide logistics system with the cold chain distribution of biopharmaceuticals and vaccines as the core, and established an industry brand. The Company has undertaken the vaccine business of a number of well-known pharmaceutical enterprises at home and abroad, with the business volume ranking first in Zhejiang Province. Besides, it has obtained the first delivery business license for pharmaceutical cold chain enterprises in Zhejiang Province, which promoted the expansion of the Company’s pharmaceutical cold chain business in the express delivery field, especially the Internet C-end business distribution. In addition, the Company actively involved in the delivery service of COVID-19 vaccines across the province, and obtained the exclusive qualification regarding third-party vaccine storage and transportation service from the Zhejiang Provincial Center for Disease Control and Prevention. It will give priority to guarantee the delivery of COVID-19 vaccines as required by the Zhejiang Provincial Center for Disease Control and Prevention, and complete the distribution of COVID-19 vaccines in 11 cities in the province within 24 hours after receiving the distribution task, to ensure the timely and safe delivery of COVID-19 vaccines, and support the nationwide vaccination of COVID-19 vaccines. (iii) Aesthetic medicine 1. Deeply engaging in the aesthetic medicine industry, and continuously optimizing and improving the pipeline of aesthetic medicine products Aesthetic medicine is one of the core business areas of the Company. Adhering to the operation philosophy of “focusing on those who pursue beauty and serving them with professionalism and preciseness”, Huadong Medicine focuses on the R&D, production, sales and service of the latest products and instruments in the field of facial micro plastic and skin management, and fully integrates the global aesthetic medicine resources. Being deeply engaged in the aesthetic medicine industry with its scientific and rigorous attitude, the Company continues to optimize the product structure, with emerging achievements in aesthetic medicine internationalization. Since its successful acquisition of Sinclair in the UK in 2018, the Company has been actively introducing high-tech new products and technologies in the field of aesthetic medicine around the world, and creating high-end, differentiated aesthetic medicine brands and product clusters. Up to now, the Company has many differentiated non-surgical mainstream aesthetic medicine products, such as full product portfolio of sodium hyaluronate, collagen stimulator, botulinum toxin type A, thread embedding and implanting, and energy source device. 2. Accelerating the introduction of new international aesthetic medicine products and pushing forward the international strategic layout of the aesthetic medicine sector In 2020, the Company’s aesthetic medicine business was significantly affected by the COVID-19 pandemic at home and abroad, and its revenue and net profit decreased year on year. But the Company seized the opportunity brought by the low ebb of the international aesthetic medicine industry during the pandemic, quickly promoted the internationalization strategy of the aesthetic medicine sector, and accelerated the arrangement and introduction of new international aesthetic medicine products. As a result, it achieved positive results. In March 2020, Sinclair, the global operating headquarters of the Company’s aesthetic medicine business, and Galderma, a world-renowned dermatology pharmaceutical company in Swiss, reached an agreement on the transfer of the distribution rights of Sculptra (PLLA microspheres) in western European market, and completed the transaction, resulting in an asset disposal earnings of approximately GBP30.65 million (after tax) for Sinclair. Later, it signed an agreement with Kylane, a Swiss professional aesthetic medicine R&D company, thereby obtaining from Kylane the exclusive worldwide license of the MaiLi-series lidocaine-containing hyaluronic acid fillers (hyaluronic acid) (which have been approved by the European Union for launch). In August 2020, the Company signed a strategic cooperation agreement with Jetema, a South Korean listed company, and obtained the sole agency of its botulinum toxin type A in China, thereby further supplementing the Company’s product pipelines in the aesthetic medicine sector. In October 2020, Sinclair and Kylane once again reached a deep strategic cooperation on equity investment and product development. Sinclair invested EUR6 million for all of Kylane’s ordinary shares, and after the transaction was completed, Sinclair held 20% of Kylane’s equity, becoming Kylane’s third largest shareholder. In addition, Sinclair and Kylane entered into a R&D partnership, enabling Sinclair to obtain the IP and global rights of Kylane’s two key products in the face and body fillers area, as well as the prioritized negotiation rights of Kylane’s other follow-up products. In February 2021, Sinclair has acquired the 100% equity in High Tech, a Spanish energy source aesthetic medicine devices company by paying a consideration of EUR65 million and a sales threshold of up to EUR20 million, intending to participate in the body shaping and skin repairing fields such as cryolipolysis and hair removal. The equity delivery was completed in April 2021.  3. Accelerating the registration and launch process of key aesthetic medicine products During the reporting period, the Company set up an aesthetic medicine international business department, which is responsible for the strategic planning and day-to-day operation management of the aesthetic medicine business. At the same time, the Company established Sinclair Aesthetics (Shanghai) Medical Technology Co., Ltd. and R2 (Shanghai) Medical Technology Co., Ltd., which will be served as the operating platform after products are launched on the market. The Company sped up the registration and launch process of key aesthetic medicine products in the Chinese market, and Ellansé™, a long-effect microsphere for injection, the key product of Sinclair, the Company’s subsidiary in UK, was officially approved for domestic launch and registration in April 2021 and is expected to go on sale in Chinese mainland in the second half of 2021. Silhouette®Instalift™, the only absorbable thread for midface tissue lifting approved by the FDA, is undergoing a domestic clinical trial as planned. The Company is actively preparing for the launch of Glacial™ Spa (F0), a cool-touch cosmetic instrument introduced from R2 located in the United States, in China, and is promoting the registration of Glacial™ Rx (F1), a frozen freckle-removing medical device in China in an orderly manner. MaiLi® series product, a new high-end lidocaine-containing hyaluronic acid filler using OXIFREE™ patented technology and process will be launched on the European market in the first half of 2021, and registration in the Chinese market has been initiated. Cooltech Define, a cryolipolysis product newly acquired by Sinclair from High Tech, a Spanish company, has obtained the CE certification from EU. The Company has actively expanded its teams in accordance with the launch progress of Ellansé and Glacial, and has started pre-launch preparations. The Company’s controlled subsidiary Huadong Ningbo Company actively responded to the adverse effects of the pandemic in 2020, took multiple measures to stabilize its sales performance, and launched the special “2020 YVOIRE Rising Star Program – Navigator Speaking Tour Program” during the post-pandemic period to promote the gradual recovery of performance in the second half of the year. The SanteMuse Biological Skin Care R&D Center was set up in Hangzhou, aiming to create a new product line of customized skin care based on skin genes centering on SanteMuse, a customized skin care brand. The center has functional modules such as gene testing laboratory, cosmetic formula R&D laboratory, ingredient R&D laboratory, cell culture in vitro, microbial fermentation and human efficacy evaluation laboratory, and has created a whole process R&D system including gene detection, product development and efficacy evaluation, realizing the one-stop closed-loop development of customized skin care. R&D of the Company’s main aesthetic medicine products In 2020, with its outstanding performance in various fields, the Company was granted for many honors and awards, including New Fortune’s Second “New Fortune Best Listed Company”, Securities Times’ 14th “Top 100 Chinese Listed Companies on Main Board”, MENET’s “Top 100 Pharma Companies in China in 2019”, “Jinzhi Award” in the financial industry, “Excellent Management Award” in the pharmaceutical and biological industry, China’s Top 100 Industrial Enterprises in Chemical-Pharmaceutical Industry in 2020, 21st Century Business Herald’s 2020 Sunshine Award of China’s Healthy Industry – Industry Benchmarking Enterprise Award, Chinese Radio Network’s Second “Listed Companies Most Trusted by Investors – Innovative Pioneers in Biomedicine”, Top 10 High-tech Enterprises in Zhejiang Province in the Field of Biological and New Pharmaceutical Technology in 2020, Commendation for the 40th Anniversary of Medical Economic News · Pharmaceutical Enterprises Making Outstanding Contributions to the Joint Prevention and Control of COVID-19 in China, and continued to be listed on the Fortune China 500 selected by FortuneChina.com, ranking 273rd in 2020. II. Analysis of main business 1. Overview Refer to “I. Overview” in “Discussion and Analysis of Operations”. 2. Income and cost (1) Composition of operating revenue Unit: RMB yuan [Note 1] The aesthetic medicine business of the Company includes both the domestic and the international aesthetic medicine business. There is a slight overlap between the income statistics of the domestic aesthetic medicine business and that of the pharmaceutical commerce and the pharmaceutical manufacturing industry. In order to truly reflect the Company’s business reality, the data is counted. (2) Sectors, products or regions that accounts for more than 10% of the Company’s operating revenue or operating profit: √ Applicable □ N/A Unit: RMB yuan If the statistical specifications of the Company’s main business data have been adjusted during the reporting period, the Company’s main business data of the most recent year should be adjusted according to the specifications at the end of the reporting period. □ Applicable √ N/A (3) Whether the Company’s income from in-kind sales is greater than that from labor services √ Yes □ No (4) Performance of major sales contracts signed by the Company as of the current reporting period □ Applicable √ N/A (5) Composition of operating cost By sector Unit: RMB yuan (6) Whether the scope of consolidation has changed during the reporting period √ Yes □ No For details, please refer to “VIII. Change of consolidation scope” in “Section XII. Financial Report”. (7) Significant changes or adjustments to the Company’s business, products or services during the reporting period □ Applicable √ N/A (8) Major customers and major suppliers The Company’s major customers Note: The customers under the control of the same actual controller shall be listed together, except those under the actual control of the same state-owned assets management institution. Information of the Company’s top five customers Other information of major customers □ Applicable √ N/A Information of the Company’s major suppliers Information of the Company’s top five suppliers Other information of major suppliers □ Applicable √ N/A 3. Expenses Unit: RMB yuan 4. R&D investment √Applicable □ N/A (1) Overall situation of R&D With “scientific research-based, patient-centered” as the corporate philosophy, the Company continued to increase investment in R&D, and continuously enriched its arrangements in the R&D of innovative drug pipeline. During the reporting period, the Company invested RMB1.444 billion on R&D in the pharmaceutical industry, an increase of 8.91% year on year, of which, RMB918 million was spent on direct R&D, down 12.96% from 2019 (RMB1.055 billion), and RMB525 million was spent on the introduction of external new drug technologies and rights, up 94.10% from 2019. The research and development work of the Company mainly involves the following aspects: 1) Continued to practice the new drug R&D model which combines independent R&D + cooperative development + product license-in, tracked the latest international drug action mechanism and target as well as advances in clinical application research, accelerated the development of innovative drugs and the introduction of innovative drug projects at home and abroad, and obtained the approval regarding potential innovative drugs in the fields of metabolism and nephrosis; 2) Focused on varieties with superior clinical effect and pharmacy for special population, accelerated the R&D of generic drugs with high technical barrier and improved new drugs (505b (2)), and initiated key projects centering on autoimmunity, antivirus and anti-tumor fields during the reporting period; 3) Continued to improve the process and quality level of bulk drugs and preparations, reduced the cost, actively developed dosage forms of on-line products, and strengthened the market competitiveness; and 4) Strengthened the evaluation on the comprehensive dynamic of varieties under research, ensured the R&D progress of key varieties under research to the greatest extent through the priority ranking of ongoing projects and the rational allocation of R&D resources. (2) R&D of projects regarding major innovative drugs and biosimilars The Company has drawn up a strategic plan for the development of innovative drugs for the next five years, clearly defined the key direction and number of innovation projects for each year during the planning period centering on the existing therapeutic fields, and proposed that no less than 15 innovative varieties (including original new drugs, improved new drugs, innovative medical devices and high-end products) should be established and reserved annually during the planning period. During the reporting period, the Company actively boosted the clinical research on innovative drugs under research and key biosimilars, seeking early approval for launch to the market. In addition, the Company actively explored and learned from the international advanced innovative drug R&D system building, continuously optimized and adjusted its overall R&D system structure, improved the functional modules on the R&D of innovative projects through the introduction of high-end R&D personnel, to achieve the objectives on the strategic planning of the Company’s innovative projects. (3) Progress on the clinical research of key innovative drugs, innovative medical devices and biosimilars 1) Mefatinib: Mefatinib for the treatment of advanced non-small cell lung cancer is under phase II clinical trial and the registration for phase III clinical trial is also under progress, and it is planned that the enrollment of the last subject will be completed in the third quarter of this year; 2) TTP273: the world’s first oral GLP-1 receptor agonist small-molecule innovative drugs, is currently undergoing multi-regional phase II clinical trials in Chinese mainland and Taiwan. The phase II clinical trial was led by Nanfang Hospital of Southern Medical University, and the first subject was administrated in December 2020; 3) HD-NP-102 (dynamic TGFR monitoring system): The renal function is evaluated through real-time monitoring of glomerular filtration rate. The application for carrying out the clinical trial of MB102 (fluorescent tracer), class 1 new drug used in the monitoring system, in China has been accepted. The MRCT clinical trial of the TGFR dynamic monitoring system will be carried out after the Clinical Trial Notification is officially obtained; 4) HDM3002 (PRV-3279): It is used for the treatment of systemic lupus erythematosus (SLE) and for preventing or reducing the immunogenicity of gene therapy, and two indications of it are being tested in the United States. Phase I 1a and 1b trials have been completed for the indications of SLE (systemic lupus erythematosus), and indications regarding preventing or reducing the immunogenicity of gene therapy are under preclinical trials. The phase II clinical research of PRV-3279 is expected to be carried out in the second half of 2021, and part of the trial will be carried out in China; 5) HDM2002 (IMGN853, ADC drug under research): the world’s first ADC drug under research for FRα-positive ovarian cancer, is used to treat platinum-resistant ovarian cancer with high expression of folate receptor. The clinical trials of HDM2002, including MRCT phase III clinical and PK bridging trials, have received clinical approval, and various pre-clinical preparations are currently being promoted as planned; 6) Overall arrangement of R&D of early innovative drugs: drug screening and activity characterization regarding oral GLP-1 innovative drugs for the treatment of type 2 diabetes, anti-tumor projects including CDK targeted drugs and innovative drugs such as PROTACT are under way as planned; and 7) Biosimilars: GLP-1 receptor agonist liraglutide injection, one of the Company’s key diabetes products, is undergoing phase III clinical research for indications for diabetes and weight loss in China. The phase III clinical trial on the indications for diabetes has basically been completed, and it is expected that all clinical work will be completed by the end of the second quarter of 2021, and application for registration will be submitted soon afterwards. The clinical work regarding the indications for weight loss is expected to be completed in the third quarter of this year, and registration will be submitted before the end of this year. It is planned that the investigational new drug (IND) domestic clinical trial application regarding semaglutide injection will be launched in 2021. Preparation regarding phase III clinical work of HDM3001 (QX001S) is being made, and phase III clinical trials are scheduled to be carried out in the second half of this year. Clinical application regarding ranibizumab injection has been submitted and supplementary information has been submitted. Insulin degludec injection, insulin aspart injection and glucagon are under preclinical study. (4) Progress of R&D of major generic drugs During the reporting period, the Company conducted earnest dynamic evaluation and combing of the existing generic drug varieties under research, and further clarified the varieties to be focused and prioritized. The progress regarding the key varieties is as follows: 1) Diabetes: On-site verification regarding Metformin Hydrochloride and Empagliflozin Tablets (5/500mg) has been completed, and approval is expected to be obtained within the year. Canagliflozin Tablets (specifications: 0.1g, 0.3g) has been declared for production. Sitagliptin Phosphate/Metformin Hydrochloride Tablets (50/850mg) has been declared for production. Pioglitazone Hydrochloride and Metformin Hydrochloride Tablets (15/850mg) is under laboratory research; 2) Immunity: Laboratory research regarding tacrolimus extended-release tablets, granules and ointment was carried out as planned; 3) Anti-tumor: On-site verification regarding letrozole tablets has been completed, and approval is expected to be obtained within the year. Sorafenib tablets has been declared for production. Ibrutinib capsules and olaparib tablets are under laboratory research; 4) Super antibiotic: On-site verification regarding Micafungin Sodium for Injection has been completed, and approval is expected to be obtained within the year; 5) Digestion: Supplementary materials regarding Compound Omeprazole and Sodium Bicarbonate Capsule have been submitted and approval is expected to be obtained within the year; and 6) Cardiovascular: Macitentan tablets has been declared for production. (5) R&D and registration of aesthetic medicine products During the reporting period, MaiLi® series products, new and high-end lidocaine-containing hyaluronic acid filler produced by Sinclair, a wholly-owned subsidiary of the Company, using OXIFREE™ patented technology and process have obtained CE certification of EU in June 2020, which will be launched in the European market in the first half of 2021, and registration in the Chinese market has already been started. F1, a medical device related to frozen freckle-removing and skin whitening introduced from R2, US, has obtained the 510(k) approved by the FDA. In August 2020, the Company signed a strategic cooperation agreement with Jetema, a South Korean listed company, to introduce its botulinum toxin type A. In February, 2021, Sinclair, a wholly-owned subsidiary of the Company, acquired the 100% equity in High Tech, a Spanish company engaged in energy source aesthetic medicine device. The design of the clinical protocols in China of the above products is being carried out in an orderly manner. Ellansé®, a novel collagen stimulator, the core product of Sinclair, has obtained the Medical Device Registration Certificate issued by the National Medical Products Administration on April 13, 2021, and will be officially marketed in Chinese mainland in the second half of 2021. Silhouette®Instalift™ is the only absorbable thread approved by the FDA for mid-face tissue lift, which adopts 3D cone suspension technology, can achieve immediate and long-lasting tissue repositioning, stimulate collagen regeneration, and effectively remodel face and neck contours. The clinical trial of Silhouette®Instalift™ in China is being carried out smoothly. The Glacial™ Spa (F0), a whitening and refreshing device imported from R2, is the life cosmetology version of the medical instrument for frozen freckle removal. It adopts aesthetic medicine technology and is introduced into the life cosmetology channel through the energy safety test, and is scheduled to go on sale in China in the second quarter of 2021. The registration of Glacial™ Rx (F1) in China, a medical instrument for frozen freckle removal, is being carried out in an orderly manner. MaiLi® series products, novel high-end lidocaine-containing hyaluronic acid filler using OXIFREE™ patented technology and process, will be launched in the European market in the first half of 2021, and registration in the Chinese market has been initiated. Cooltech Define, a non-invasive cryolipolysis equipment independently developed by High Tech, Spain, which is newly acquired by Sinclair, has officially obtained the CE certification of EU in February 2021, and Titania, an innovative radiofrequency product under research for skin tightening and body shaping, is expected to obtain the CE certification of EU in the fourth quarter of 2021 and will be available for sale globally once it is approved. The Company has actively expanded its teams in accordance with the launch progress of Ellansé and Glacial, and has started pre-launch preparations. (6) Progress of consistency evaluation During the reporting period and the first quarter of 2021, the consistency evaluation on the quality and efficacy of the Company’s generic drugs was progressing well, Mycophenolate Mofetil Capsules (0.25g), Clarithromycin Tablets (0.25g) and Pioglitazone Hydrochloride and Metformin Hydrochloride Tablets have all obtained consistency evaluation. Pioglitazone Hydrochloride Tablets (15mg) was granted the notice of acceptance of the supplementary application for consistency evaluation. On-site verification of Pioglitazone Hydrochloride Tablets (30mg) has been completed. Decitabine for injection and daptomycin for injection are under the stage of submitting supplementary materials, and the other varieties to be evaluated are under pharmaceutical research, pilot scale-up or process validation. (7) Progress of patent The Company has attached great importance to the protection of its intellectual property rights and the application of results in recent years, and the number of patent applications and grants are steadily increasing. The Company has applied for more than 560 patents at home and abroad over the years, of which more than 270 were granted. Hangzhou Zhongmei Huadong Pharmaceutical Co., Ltd., a wholly-owned subsidiary of the Company, is a national IP demonstration enterprise and is rated as excellent in the annual assessment in 2020. In November 2014, the Company passed the external audit of Zhongzhi (Beijing) Certification Co., Ltd., becoming one of the 147 enterprises who have firstly passed the standard implementation certification. During the reporting period, the Company successfully passed the reexamination review on supervising the standard implementation of corporates’ intellectual property. During the reporting period, the Company’s patent application and maintenance proceeded smoothly. Zhongmei Huadong, a wholly-owned subsidiary of the Company, applied and submitted a total of 67 patents, among which 58 were utility patents, 14 were authorized in China and 11 of the authorized ones were utility patents. In April 2020, the utility patent “Enzyme for synthesizing and metabolizing inosine monophosphate of Cordyceps sinensis (Berk.) Sacc. Hirsutella sinensis and application thereof” of Zhongmei Huadong was awarded the golden patent prize in Zhejiang Province, with the patent number: ZL201110267161.3. (8) Other important issues related to R&D 1) In January 2021, the Company entered into an agreement with Shanghai Yuanda Investment Management Co., Ltd. and Hangzhou High-tech Venture Capital Management Co., Ltd. and jointly set up Hangzhou Fuguang Hongxin Equity Investment Partnership (L.P.) (referred to as “Pharmaceutical Industry Fund”). The Pharmaceutical Industry Fund was established with a total scale of RMB200 million, of which RMB98 million is contributed by the Company with its own funds and the Company is a limited partner of the Pharmaceutical Industry Fund. The Pharmaceutical Industry Fund mainly invests in startup and early projects in the fields of aesthetic medicine, endocrinology, anti-rejection regarding organ transplantation, alimentary canal, tumor, nephrology, immunology, etc. As of the disclosure date of this report, the Pharmaceutical Industry Fund had completed the initial fund raising, finished the industrial and commercial registration procedures, and completed the filing with AMAC on April 2, 2021. 2) In December 2020, Zhongmei Huadong, a wholly-owned subsidiary of the Company, signed a strategic cooperation agreement with Sanyou Bio, a biotechnology company that focuses on the overall solution for the R&D of innovative antibody drugs. The two sides will jointly develop innovative dual-antibody and ADC molecules targeting high-quality targets to accelerate the launch of a new generation of anti-tumor drugs. 3) In November 2020, Zhongmei Huadong, a wholly-owned subsidiary of the Company, signed an agreement on the cooperative development of pipelines with XtalPi, an artificial intelligence (AI) drug R&D technology company driven by digital and intelligent technologies. The two sides will conduct in-depth cooperation on the discovery of high-quality new anti-tumor drug targets, and make full use of the advantages of AI technology featuring large exploration space, high computing efficiency and accurate computational results, as well as the advanced technologies and commercial integration capability of Huadong Medicine in the field of anti-tumor, to jointly develop a new generation of anti-tumor drugs. 4) In September 2020, the Company established a cooperative development partnership with Exscientia, the world’s leading AI drug R&D company, to accelerate the discovery of novel treatments for small-molecule drugs against tumor. The first project between the two sides is the development of drugs that target the transcriptional control of DNA damage response genes to treat patients with a high frequency of mutations in repair of DNA damage, such as patients with ovarian and breast cancer. R&D investment of the Company Notes: (1) The above R&D investment is from the R&D expenses of the Company’s main industrial controlled subsidiary, totaling RMB918 million, which is mainly used for clinical research of products under research, upgrading of existing product process, expenses for commissioned technological development, consistency evaluation and international registration certification. In terms of finances, most of R&D investment is listed in expense, and is recognized in the current period without subsequent annual amortization, which will not have a significant impact on the Company’s future operating results. In 2020, the Company’s total R&D investment in the pharmaceutical industry was RMB1.444 billion, a year-on-year increase of 8.91%; of which, RMB918 million was used for direct R&D, a decrease of 12.96% from 2019 (RMB1.055 billion), and RMB525 million was used for the introduction of external new drug technologies and rights, an increase of 94.10% over 2019. (2) The proportion of the number of R&D personnel means the proportion of the number of people in the Company’s subsidiaries mainly engaging in pharmaceutical manufacturing; the proportion of R&D investment in operating income means the proportion of the R&D investment of Company’s pharmaceutical industry in the operating income of the Company’s pharmaceutical manufacturing. (3) The above-mentioned R&D personnel for 2020 are: The total of R&D personnel of the Company’s R&D system and R&D personnel of the production system. Reasons for the year-on-year significant change in the proportion of total R&D investment in operating revenue □ Applicable √ N/A Reasons for the significant change in the capitalization rate of R&D investment and its rationality □ Applicable √ N/A 5. Cash flows Unit: RMB yuan Main influencing factors of significant changes in relevant data year on year √ Applicable □ N/A The cash inflows from investing activities in the current period are 3.86 billion yuan, a year-on-year decrease of 75 million yuan or 416.74%, mainly due to the transfer of distribution rights in the Western European market of related products of Sinclair, a wholly-owned subsidiary of the Company in the UK, during the current reporting period.. Reasons for the significant difference between the Company’s net cash flow from operating activities and the current year’s net profit during the reporting period □ Applicable √N/A II. Analysis of non-main business √ Applicable □ N/A Unit: RMB yuan IV. Assets and liabilities 1. Major changes in asset composition Since 2020, the Company has implemented new financial instrument standards, new income standards or new lease standards for the first time, and adjusted and implemented items related to financial statements at the beginning of the year √ Applicable □ N/A Unit: RMB yuan 2. Assets and liabilities measured at fair value √Applicable □ N/A Unit: RMB yuan Other changes None Whether there are significant changes in the main asset measurement attribute of the Company during the Report Period. □ Yes √ No 3. Limitation of asset rights at the end of the reporting period Unit: RMB yuan V. Investment 1. Overview √ Applicable □ N/A Note: The investment amount in the reporting period refers to the total capital expenditure in the reporting period. 2. Significant equity investments acquired during the reporting period √ Applicable □ N/A Unit: RMB ten thousand yuan Notes: 1. Zhongmei Huadong, a wholly-owned subsidiary of the Company, invested a total of RMB210 million to Peg-Bio Biopharm Co., Ltd. (Chongqing) by means of capital increase and acquisition of minority holding twice, and acquired 39.80% of its equity, becoming its second largest shareholder. As of December 31, 2020, Zhongmei Huadong had paid all the investment funds, and Peg-Bio Biopharm Co., Ltd. (Chongqing) had completed the relevant industrial and commercial change registration. 2. Zhongmei Huadong, a wholly-owned subsidiary of the Company, contributed RMB370 million to invest in the stock equity of Qyuns Therapeutics through the form of capital increase, and held 20.56% of its equity after investment, becoming its second largest shareholder. As of December 31, 2020, Zhongmei Huadong had paid all the investment funds, and Qyuns Therapeutics had completed the relevant industrial and commercial change registration. 3. Sinclair, a wholly-owned subsidiary of the Company, entered into an agreement on equity investment and collaborative product development with Kylane Laboratoires SA, a Swiss advanced aesthetic medicine R&D firm. Sinclair contributed EUR6 million for a 20% equity in Kylane, making it Kylane’s third-largest shareholder. As of December 31, 2020, all the investment funds had been paid. 4. In April 2019, the Company entered into a strategic partnership with R2, an American company specializing in the development of medical devices and technologies related to frozen freckle-removing and whitening. The Company invested USD30 million in R2’s equity and became a shareholder. As of the reporting date, the USD30 million for equity investment had been fully paid out and the Company held a 34% equity upon completion of the investment. 5. In July 2019, the Company entered into a strategic cooperation with MediBeacon, a US company dedicated to the development of contrast agents and equipment in the medical field such as renal function and gastrointestinal function evaluation, and invested USD30 million in its stock equity. As of the end of the reporting period, the Company had paid USD15 million to MediBeacon, accounting for 4.30% of its shares, and the remaining USD15 million will be paid as agreed in the contract. 3. Significant non-equity investments in progress during the reporting period √ Applicable □ N/A Unit: RMB yuan 4. Investment in financial assets (1) Securities Investment √ Applicable □ N/A Unit: RMB yuan Note: In 2019, Huadong Medicine Investment Holding (Hong Kong) Co., Ltd., a subsidiary of the Company, invested USD 3 million to purchase 218,102 preferred shares of RAPT Therapeutics, Inc. in C-2 series. RAPT Therapeutics, Inc. (stock code: RAPT) was listed on the NASDAQ Stock Exchange on October 30, 2019. Huadong Medicine Investment Holding (Hong Kong) Co., Ltd. holds 0.74% of the total shares of RAPT Therapeutics, Inc. (2) Derivatives investment □ Applicable √ N/A No such case during the reporting period. 5. Use of raised funds □ Applicable √ N/A No such case during the reporting period.. VI. Major assets and equity sales 1. Major assets sales □ Applicable √ N/A No such case during the reporting period. 2. Major equity sales □ Applicable √ N/A VII. Analysis of wholly-partially owned and shareholding companies √ Applicable □ N/A Main subsidiaries and the shareholding companies that have an impact on the Company’s net profit of more than 10% Unit: RMB yuan Acquisition and disposal of subsidiaries during the reporting period √ Applicable □ N/A Note: Sinclair (Shanghai) Medical Technology Co., Ltd. was renamed as Xinkeli Aesthetics (Shanghai) Medical Technology Co., Ltd. on April 1, 202 VIII. Structured entities controlled by the Company □ Applicable √ N/A IX. Prospect of the Company’s future development 1. Development status and prospect of macro economy and pharmaceutical industry In 2020, the sudden outbreak of the COVID-19 pandemic was intertwined with the world’s seismic changes not seen for a century, bringing a huge impact to the world. The pandemic has had a serious impact on people’s life, health and economic activities, which has aggravated the already weak world economy. Economic globalization has encountered headwinds. The international environment is becoming more and more complex. The world has entered a period of turbulent change, with significantly increasing instability and uncertainty. As pointed out by the Fifth Plenary Session of the 19th CPC Central Committee, peace and development are still the theme of the times, and China’s development is still in an important strategic opportunity period. On the one hand, a new round of scientific and technological revolution and industrial transformation has developed deeply in the world today, and international power contrast has been profoundly adjusted. Peace and development are still the theme of the times. The concept of a community with a shared future for mankind has become popular, and China’s appeal and influence as a responsible large country in the global pandemic control have increased significantly; on the other hand, China has turned to the stage of high-quality development, with significant institutional advantages, improved governance efficiency, long-term economic improvement, strong material basis, abundant human resources, broad market space, strong development resilience, and social stability, and has multiple advantages and conditions for continued development. The Chinese government controlled the spread of COVID-19 in China in a timely manner and achieved a rapid recovery of the national economy after the first quarter. However, the uncertainty factors faced by the domestic economy still exist. On the one hand, the foundation of economic recovery in China is still not solid. In the face of severe pandemic situation abroad, China still needs to consolidate the achievements of pandemic prevention and control and socio-economic recovery. On the other hand, external public opinions and challenges of anti-globalization and desinicization are rising, and domestic enterprises are facing more business risks in both supply chain and market environment. In the long term, the market size of the global pharmaceutical industry will still maintain a stable growth trend due to the growth of the total population and the aging of the population. According to the latest data of IQVIA, the total scale of the global pharmaceutical market was close to USD1.2 trillion in 2020, and maintained a growth rate of 3–4% for many consecutive years. The scale of the Chinese pharmaceutical market ranked second in the world. According to the data of the National Bureau of Statistics, the cumulative operating income and total profit of industrial enterprises above the scale of domestic pharmaceutical manufacturing industry in 2020 were RMB2,485.73 billion and RMB350.67 billion, respectively, showing an increase of 4.5% and 12.8%, respectively, compared with the same period of last year. Affected by the pandemic, the operating data of the pharmaceutical manufacturing industry were recovered in the second half of the year after experiencing negative growth in the first half of the year, and the year-on-year growth rate was significantly higher than the industrial growth rate above the national scale in the same period. With the gradual integration of drug review system with the world in China, the industrial chain of innovative drugs has been flourishing, and the global R&D industrial chain has also begun to shift to China. While the transfer of industrial chain has developed a large number of R&D talents, it has also made local pharmaceutical innovation enterprises flourish. It is the key for pharmaceutical companies to improve their pharmaceutical quality while innovating. Consumption upgrading will further drive high growth in high-quality consumer medical track. In 2020, China’s pharmaceutical industry played a very significant role in the process of fighting against the pandemic. Driven by the demand for prevention and control, production was rapidly resumed, laying an important foundation for the full recovery of the economy. China’s pharmaceutical industry has continuously promoted high-quality and standardized development in 2020, with a solid foundation, which has become one of the important cornerstones for the steady development of China’s economy. According to the data of Frost & Sullivan, the revenue scale of aesthetic medicine business service market in China reached RMB143.6 billion in 2019, and the compound annual growth rate is expected to reach 17.3% from 2019 to 2024; among them, the growth rate of non-surgical cosmetic diagnosis and treatment market (mainly injection and photoelectric projects) is fast. Due to fast recovery time and low-price risk, it has become increasingly popular with consumers in recent years, reaching a market size of RMB60 billion in 2019, with an expected compound annual growth rate of 19.2% from 2019 to 2024. 2. Analysis of the development trend of the pharmaceutical industry In 2020, under the superposition of various medical reform policies, the Chinese pharmaceutical industry was changed dramatically. As medical reform continues to be critical and the route of deepening the reform of the medical and health system gradually becomes clear, China’s biomedicine has entered the year of transformation. With the gradual introduction of key policies such as consistency evaluation, drug centralized procurement, medical insurance negotiation of innovative drugs, consumable centralized procurement and DRGs, medical reform has entered the deep-water zone, and a new era of medicine has been ushered in. The era of high gross profit of generic drugs has come to an end, and innovative drugs will occupy a larger market space in the future. The Chinese pharmaceutical industry is gradually changing from “generic” to “innovative”. With population aging in China and the substantial growth of medical insurance expenditure, “cost control” has become the main theme of medical reform. On January 17, August 20 and November 5, 2020, the State organized the second and third round of centralized drug procurement and centralized procurement of coronary stents, respectively, which significantly reduced the cost of patients. The expanding and normalizing scope of centralized procurement has become an industry consensus. In the future, injections, device consumables, insulin and other fields will be gradually included. 2021 is the opening year of the 14th Five-Year Plan period and the turning point for the dramatic changes in China’s pharmaceutical market landscape. It will also be a year of greater change and uncertainty as the policy continues and deepens. Each link from manufacturers, distributors to medical institutions, medical insurance supervision, doctors and patients among others of the medical industry faces different needs for transformation and innovation. Survival of the fittest is always the way for pharmaceutical companies to survive. In order to develop better, we can only actively adapt to the changes in the development of the industry, and at the same time actively make more flexible adjustments and changes in response to the market environment. With the normalization of centralized procurement at the national level, the transmission effect of low prices has been highlighted. The price of bid-winning drugs has been reduced to the lowest level in history, and centralized procurement has also expanded from drugs to the field of high-value medical consumables. In addition, the centralized procurement of provincial and cross-provincial alliances also includes the drugs that have not passed the consistency evaluation. The procurement variety is richer, covering a larger market, and the bid-winning rules are also continuously optimized, forming complementarity with the national centralized procurement, accelerating the change of the existing drug bidding mechanism and reshaping the drug price system and competitive pattern. The coordinated reform of medical services, health insurance, and the medicine industry has brought unprecedented changes in market environment and survival challenges, urging enterprises to improve the quality of drugs in the fierce competition through breaking through the existing production model and looking for new development focuses, thus to further achieve innovation, transformation and upgrading. Under the influence of domestic centralized procurement, many multinational pharmaceutical companies are accelerating the adjustment of business models by focusing on the promotion of core markets and optimizing product lines. In the future, focusing on core business by stripping off non-core assets will become the norm. From the overall point of view, the primary-level market has become a new development outlet for pharmaceutical companies under the pressure of medical reform policies such as centralized procurement. The change of the new medical system will definitely bring about the deconstruction and reshaping of China’s primary-level care industry. In this context, primary-level care is bound to become the flow entrance of future medical care, and it will also enable pharmaceutical companies that fully lay out the primary-level market to gain more development opportunities. Both internal pressure and pressure from foreign companies are pushing Chinese pharmaceutical companies to make innovations. The drug review system continues to deepen reform, which encourages pharmaceutical companies to innovate at a higher quality. The number of new drugs entering national health insurance negotiations has increased significantly, and drug prices have decreased rapidly, but the cost of new drug R&D is increasing. The threshold for domestic pharmaceutical innovation has been raised, and differentiated R&D has become the key. The number of innovative drugs is increasing year by year, but the degree of innovation is still insufficient. The R&D of innovative drugs is still based on chasing hot targets, especially the crowded R&D track of anti-tumor drugs, and the homogenization phenomenon is serious, which aggravates the market competition in the future. Therefore, the commercialization prospect is not optimistic. The licensing and cooperative development of innovative drug projects between Chinese pharmaceutical companies and various countries is increasingly active. Under the background of the “innovation plus internationalization” journey, the R&D capacity, commercialization, talent and business layout, strategic cooperation and globalization of capital of local innovative drug enterprises will be the key elements for the success of internationalization strategy in the future. The Company hasformulated a brand-newdevelopmentstrategy based on the pharmaceuticaland health industry, led by the pharmaceutical industry, while expanding the pharmaceuticalbusiness and aesthetic medicine business, adhering to the scientific research-based and patient-centered corporate philosophy, and becoming an international brand pharmaceuticalpowerhousedrivenbyscientificresearchinnovation. 3. Development plan for pharmaceutical innovation of the Company (1) Focusing on the core therapeutic field, the Company plans to move from producing generic drugs to innovative drugs, and from following to leading. In the future, the Company will be oriented to meeting clinical needs in scientific research and innovation. In the project approval and decision-making of new drug R&D, the Company will take innovation and differentiation as the scale, based on clinical value, clinical pharmacoeconomic value, and commercial value of products, and focus on the long-term pipeline layout, adhere to the upgrading of generic drugs and the development of innovative drugs. The R&D of generic drugs should be highly technical, differentiated, fast and cost effective, while the R&D of innovative drugs should have a high starting point, wide track, new targets and international participation. We take innovative drugs as the basis and direction to build our future core competitiveness, focus on and emphasize the development of innovative drugs and high-tech barrier generic drugs with outstanding clinical value in major diseases and chronic diseases such as anti-tumor, endocrine and autoimmune, and closely follow the technical development and R&D trends in the cutting-edge fields of biological drugs, gene therapy and antibody drugs at home and abroad. With a scientific and pragmatic attitude, based on our own capabilities and risk matching, we will start from differentiated innovation, gradually move towards the first of the same kind/the best breakthrough innovation model of the same kind, accelerate the pace of integration into the innovation chain and value chain of global new drug innovation, and eventually move from Chinese innovation to global innovation, so as to continuously improve the innovation level of the Company to a new height. (2) The Company will continuously increase R&D investment and enrich and optimize product pipelines. Since 2020, we have strived to invest more than 10% of the sales revenue of the pharmaceutical industry in R&D each year to provide sufficient material guarantee for innovation. While increasing the investment, we will continue to improve the efficiency of the use of R&D funds. Through independent project approval and external introduction, we will strive to complete at least 15 innovation projects (including drugs, medical devices, etc.) every year, of which the project approval of no fewer than 3 innovative drugs, so that each existing product line has the supplement and guidance of innovative products, eventually building a rich product pipeline and a good product ladder, forming a benign development rhythm of continuous marketing of innovative products since 2022, and striving to achieve the phased goal that the innovation business sector accounts for 30% of the overall industry in 2025. (3) The Company will accelerate the introduction of high-level talents and building high-level scientific research teams. Focusing on introducing R&D leaders and high-level R&D technical talents with rich experience, we will strengthen the building of internal R&D system and technical platform, and actively promote the building of domestic and overseas R&D platform. We will create an innovative cultural environment and atmosphere that is bold in innovation, encourages success, and tolerates failure, and establish a market-oriented performance mechanism oriented to success. We will build a scientific research team with outstanding ability, open thinking, passion, courage, pioneer and innovation, and promote the real implementation of the Company’s innovation internationalization strategy. We will establish a dynamic evaluation mechanism for R&D projects, and assist the Company in decision-making and management of R&D and product introduction by establishing an external expert academic committee to ensure the scientific nature, advancement and feasibility of scientific research and innovation. (4) The Company will deepen comprehensive cooperation with foreign partners and product introduction, and build a global R&D strategic cooperation ecosystem centered on Zhongmei Huadong. Integrating and connecting external advantageous resources and technologies, we will promote the introduction and development of high-quality innovation projects through cooperative development, licensing or acquisition, continuously enrich the Company’s product pipelines and improve the medium- and long-term layout of innovative products. At the same time, we will also continue to improve the international operation capacity of our products, and license our own advantageous products, advanced technologies and patents. Development plan of Huadong business: We will take service as the core and transform with innovation. Adhering to in-depth development in Zhejiang, we will continue to enhance the brand influence, and maintain the leading position of the industry in Zhejiang. Instead of pursuing simple scale expansion, scale and benefits should be paid equal attention. We will pursue high-quality and sustainable benefits through refined management. We will improve the modern pharmaceutical logistics network covering Zhejiang Province, make every effort to build a high-end third-party pharmaceutical logistics featuring cold chain and improve value-added service capacity. With the help of commercial forces to drive market networks and channel resources, we will transform and improve traditional business models, actively develop new business models such as general agent, business trusteeship, and BTC pharmacy, and cultivate innovative businesses. We will consolidate the in-hospital market, expand the out-of-hospital market, use the Internet platform, and innovate the services for suppliers through big data, AI, Internet of Things and other new technologies. We will also extend the service supply chain, and accurately connect downstream medical institutions and upstream pharmaceutical enterprises, so as to gradually develop towards modern pharmaceutical professional value-added services and take the path of sustainable development. Business development plan for the aesthetic medicine business: The Company’s aesthetic medicine business adopts the strategy of “global operation layout and dual-circulation operation and development”. Take Sinclair, a core subsidiary, as the global operating platform to realize the global operating layout of aesthetic medicine business, we will build it into an international first-class aesthetic medicine business enterprise and create a new development space in the future. As a special market for the Company’s aesthetic medicine business, the Chinese market has successively introduced the products with high scientific and technological content and great market potential. We will steadily expand the Chinese market with the help of the Company’s registration and marketing strength in China; internationally, relying on the Company’s domestic aesthetic medicine business marketing basis and the rapid development of the aesthetic medicine business industry, we will help the rapid implementation and commercialization of international high-quality products, so as to form a new pattern of joint development and mutual promotion of domestic and international circulations. In the future, the Company will continue to focus on the global high-end market of aesthetic medicine business, relying on four global R&D centers: wholly-owned subsidiaries Sinclair (UK), High Tech (Spain) and partially-owned companies R2 (US) and Kylane (Switzerland), to further integrate R&D resources and capacity, actively optimize and improve product structure, and enrich and improve industrial layout. The five global production bases located in the Netherlands, France, the United States, Switzerland and Bulgaria will provide a strong capacity guarantee for the internationalization of the Company’s aesthetic medicine business products and better meet the future development and market demand. 4. The Company’s business plan for 2021 2021 is a key year for Huadong Medicine’s innovation, transformation and reform to enter the deep-water zone, and it is also the closing year of the sixth three-year plan. The severe challenges brought about by policy changes and industry competition in the domestic pharmaceutical industry will continue, and the Company will face greater business difficulties and policy uncertainties. Although the positive conditions and favorable factors to promote operation are also gradually gathering, Zhongmei Huadong will still face major challenges of declining growth rate in its annual operation due to the prominent phased impact of the price reduction of key products on the Company’s operation. The Company has formulated specific plans and assessment plans for various work, striving to maintain the continued growth of the overall business of the pharmaceutical industry throughout the year. All officials and employees are required to further change their mindset, clarify their own positioning, stimulate their own vitality, innovate their own value and realize their own transformation with a more open, proactive and enterprising spirit under the annual business working policy of “repositioning, reshaping value, stimulating vitality and deepening transformation”. We will continue to maintain a brave and determined work style, so as to broaden the horizon and pursue excellence. We will work with the momentum of no time to lose and size the day to revive the entrepreneurial spirit of Huadong Medicine, create a new pattern of the development of Huadong Medicine, and reshape the core competitiveness of Huadong Medicine. (1) Pharmaceutical industry: We will promote the transformation of production system from cost center to profit center. In 2021, we will continue to optimize the production layout combining “self-built production parks” with “outsourced production sites”, align with the advanced, improve the light asset production and operation system, and do a good job in production planning and resource allocation. We will create an engineer culture, build agile production, lean material procurement, production organization and product delivery, continuously save production costs, improve per capita labor efficiency, and develop new business and create new value for the Company. Since production system preparations, raw materials and various technology platforms are important links in the global pharmaceutical manufacturing industry chain, we will strive to explore new moats and create more profit points in multiple ways and in multiple fields, and make concerted efforts in BD, quality, patent, R&D and manufacturing departments to accelerate CMO/CDMO projects and open up international markets to make a major breakthrough in international business development in 2021. We will make overall plans to promote fixed asset investment projects, and focus on doing a good job in the construction of Huadong Medicine Life Sciences Industrial Park, Jiangdong Phase II, International R&D and Manufacturing Center for Preparations, industrialization of Semaglutide APIs and other major projects. We will strengthen the management of project progress, cost, quality and safety, and ensure the advancement of technology while meeting the investment income indicators. We continue to carry out normal management, change and registration of GMP, product transfer and entrusted production and quality group management with the overall goal of “developing capacity and improving efficiency” in quality system. (2) R&D: We will continue to deepen the reform of R&D system, introduce international, professional and innovative high-quality R&D talents, enhance the overall combat ability of R&D teams by combining introduction and training, and form a refined and efficient R&D team with international vision. We will further optimize the R&D process, improve the R&D efficiency, promote the R&D internal order system, open up to undertake external R&D projects on the basis of ensuring the progress and quality of our own projects, and enhance the market competitiveness of our R&D organizations. We will also continue to strengthen cooperation with the world’s leading biomedical R&D companies to explore innovative R&D models suitable for the future development of the Company and build a unique core technology platform. We will continuously follow up and evaluate new targets and cutting-edge technologies in the field of global new drug R&D, and further consolidate the pipeline of innovative products through independent R&D and external introduction. Moreover, we will accelerate the cultivation of the Company’s R&D capabilities in early drug discovery and preclinical/translational medicine. In 2021, we will strive to complete project approval for no fewer than 15 innovative drugs, 6 generic drugs and 1 other new product, strive to obtain 3 manufacturing approvals, pass consistency evaluation for at least 2 product categories, complete 25 patent applications and have 2 product international registrations approved. (3) Marketing and pharmaceutical services of Zhongmei Huadong: We will accelerate the transformation of marketing strategy, implement the policy of “turning from in-hospital to out-of-hospital and from medical insurance to self-financing”, carry out the refined marketing of the Company’s products, and actively expand the out-of-hospital market, primary-level market and self-financing market. We will continue to improve the sales volume in the hospital market and primary-level market by means of four target management. We will vigorously improve the building and personnel allocation of out-of-hospital market organizations, expand personnel, and improve the coverage rate of key products of the Company in chain pharmacies and terminals. We will explore the self-financing market sales model to strive to achieve the breakthrough of self-financing market sales, and actively explore the new marketing model of online prescription drug purchase and chronic disease management in Internet hospitals to increase the coverage of Internet market and product sales. (4) Management: In 2021, the whole company should further change its concepts, advocate value culture and incentive culture, and fully activate the overall organizational vitality of the Company. We will improve the official management mechanism and accelerate the training of outstanding officials. We will continuously build the organization competitiveness of Huadong Medicine. We will strengthen the basic human resource management and consolidate the cornerstone of human resource management; continue to carry out the introduction and training of core talents and accelerate the introduction of talents in new business segments including devices, aesthetic medicine business and Internet hospitals; and innovate the performance and salary incentive mechanism and activate the organization through assessment; We will adapt to the development needs of the Company, keep promoting the overall financial planning objectives of “collective, compliant, IT-based and internationalized” management, take value as the center and performance as the orientation, and make every effort to carry out four basic tasks: energizing organization, aligning with the advanced, reducing costs and increasing efficiency, and operating finance. We will strengthen foreign exchange, improve working standards and requirements, vigorously improve the operation and management level of the financial system, and build a lean and efficient financial management team. We will earnestly do a good job in the building of the budget system based on value management, fully participate in the operation, provide decision support, promote efficiency improvement, and create financial value. (5) Pharmaceutical business: “Achieving four transformations, innovating for profit, and regulating for efficiency” is the main theme of Huadong business in 2021. We shall profoundly understand industrial changes, optimize the allocation and integration of internal resources, promote coordinated development, and improve operating efficiency. Taking customer satisfaction as the overall goal, we will change our operation mindset, optimize the in-hospital marketing, and layout the marketing outside the hospital. We will take the hospital as the base, keep up with the development of the hospital and achieve a steady increase of business; deeply explore the out-of-hospital and self-financing market; and firmly discovery a new model of the mega health industry and do a good job in the Internet market. We will build a province-wide market expansion network, establish three promotion teams, i.e., in-hospital team, private team and retail team, serve the suppliers with enriched product lines, expand the service scope and cultivate new profit models by relying on the advantages of “platform + product + network” of Huadong business. We will relocate the retail market, build a new retail in Huadong Medicine, pay close attention to the provincial expansion of OTC business, and focus on the development of DTP, in-hospital and out-of-hospital stores and special outpatient departments. We will also complete the layout of one DTP in one city as soon as possible to realize the varieties and management down to the community level, incorporate subsidiary pharmacies into the retail system of Huadong Medicine, and expand the coverage of the whole province with a unified retail brand image of Huadong Medicine. Aiming at profit improvement, we will integrate the e-commerce resources of Huadong Medicine and expand the Internet market. For instance, we will promote “Business Network of Huadong Medicine”, build “Flagship Store of Huadong Pharmacy”, introduce more varieties with online authorized sales, connect with “Internet plus medical care”, and cooperate with physical medical institutions and Internet hospitals with order taking online and delivering drugs to homes. We shall earnestly focus on the innovative development of professional cold chain of Huadong business cold chain, locate the precise management and control of the whole life cycle of special drugs, continuously strengthen the competitive advantage of cold chain capacity and promote the high-quality development of intelligent digital supply chain. We shall actively cultivate new businesses, improve the logistics system of the whole province in the cold chain, enhance the competitiveness of the tripartite businesses, and consolidate the industrial status. We will contribute to the universal inoculation of COVID-19 vaccines, make every effort to do a good job in the provincial distribution of COVID-19 vaccines, and ensure timely and safe delivery. (6) Aesthetic medicine business It is necessary to continue to improve the international operation system, focus on the international high-end market of aesthetic medicine, further integrate R&D resources and capacities, and continue to promote the structural adjustment of aesthetic medicine products and the innovative business development. Efforts also should be made to actively optimize and enhance the product structure, carry on the research and study of high-tech products and new technologies and the project introduction in the field of aesthetic medicine all over the world, and enrich and improve the industrial layout. Through accurate positioning, the Company gives full play to the brand value of the products, quickly gets to the market, and creates a new pattern of aesthetic medicine in the domestic market. It shall also accelerate the establishment of the promotion team for new products of aesthetic medicine, and actively introduce marketing talents from external established aesthetic medicine market. The Company shall implement the establishment of the marketing team, brand and market communication, and communication with aesthetic medicine institutions, doctor training, and other preparation related to launch and subsequent marketing promotion for the core products such as Ellansé, and Glacial™ Spa (F0) in Chinese market in 2021, realizing the quick coverage of mid-to-high aesthetic medicine institutions and the rapid increase of sales after the products are put into the market. Besides, the Company shall carry out the business development planning and market expansion after acquiring the equity of Spanish firm High Tech, speed up the domestic clinical registration of Sinclair embedding product Silhouette® Instalift™, MaiLi® hyaluronic acid of Kylane of Switzerland, and creotoxin of Jetema of South Korea, try to lower the impact of the COVID-19 pandemic on the domestic and overseas aesthetic medicine business of the Company, and build a solid foundation for the normal operation after the pandemic. X. Risks and Countermeasures 1. Industry policies and market risks The pharmaceutical industry is one of the industries influenced by national policies in the deepest manner. In recent years, the reform in the area of medical health has been deepened continuously with various policies introduced intensively, and the State has conducted the regulation and supervision of the pharmaceutical industry in a stricter manner. The pharmaceutical market is facing many uncertainties due to the trend of the normalization of the COVID-19 pandemic. With the further promotion of the policies such as volume-based procurement and health insurance negotiation, the production costs and profitability in the pharmaceutical industry are also facing challenges. Countermeasures: The Company will pay close attention to and study the national pharmaceutical policies and industrial development trends, increase the investment in R&D, speed up the layout of innovative varieties, enrich the product pipelines, and optimize the product structure. At the same time, it shall maintain lean production to realize lower costs and risks and higher efficiency in production and operation. Besides, it will make great efforts to expand the primary-level and self-funded market to increase the market coverage. Its task is also to continue to excavate the dominant products and subdivision of aesthetic medicine, improve brand competitiveness, and create new profit points. 2. New drug R&D risk The R&D of new medicine has the characteristics of high technology and high risks. The innovative drug products also experience long cycle and various links including R&D at the early stage, technology development, clinical trials, registration, and launch, and are subject to preclinical research, clinical trials, registration and declaration, production approval and other processes, which are time-consuming and have many uncertainties and risks in the process. In addition, the R&D of new medicine has extremely high requirements of personnel quality, and is apt to be affected by factors such as policies, approval, and technologies. The R&D expenses at the early stage will lead to some pressure on the Company for the current operation goal, meanwhile, the new medicine after its launch will be subject to the testing of market demands, which may result in consequences such as the return of the R&D investment lower than expectation, and the negatively affected profitability. Countermeasures: The Company will enrich and optimize the product pipelines, adopt generic drugs and innovative drugs with high barriers, and stoutly eliminate outmoded varieties through independent project approval and external introduction. It will also proactively promote the R&D system establishment of international innovative drugs, continuously conduct dynamic optimization and adjustment of the Company’s entire R&D system and framework, and improve the scientific and dynamic investigation, assessment, and decision-making system, based on the increasing investment in R&D of new medicine. The Company aims to continue to introduce high-level R&D talents, strengthen the cultivation and incentive of internal talents, create a scientific research team covering the whole cycle of new medicine R&D, and promote the establishment of the high-level pharmaceutical R&D base. 3. Price reduction risk With the more intensive competition in the pharmaceutical market, and more deepening medical insurance fee control, and the comprehensive launch of the national policies for volume-based procurement, the Chinese pharmaceutical market has entered into a stage of steady development when generic drugs have fallen from the golden age to the age with low profitability. With the foreign-invested enterprises targeting at the domestic market, the competition in the area of innovative drugs is more intensive. The national policies of medical insurance negotiation also have a profound impact on the pricing of innovative drugs, and the innovative drugs also face the risks of price reduction. Countermeasures: The Company will actively handle the changes in policies and market to enhance the technological quality advantages mainly driven by scientific R&D and technological innovation in line with the international standards. It will accelerate the transformation of marketing strategies, carry out the delicacy marketing of the Company’s products, and actively explore the marketing mode of the self-financing market, and new marketing mode of medicine purchase with the online hospital prescription and chronic disease management. It will also adopt primary-level marketing channels and academic promotion, enhance the market expansion, enlarge the market coverage, and increase the market access capacity. 4. Risk of change in exchange rate The changes in exchange rate have a profound and long-lasting impact on enterprises, which can not only bring good economic benefits but also cause serious economic risks. With the continuous promotion of the Company’s internationalization, international cooperation and communication have increased continuously with the aesthetic medicine marketing network covering all around the world, and the proportion of business settled by foreign currencies is increasing. The changes in exchange rate will have an impact on the asset, liability, and benefits of enterprises, further affecting the operation capacity, debt repayment capacity, and profitability. Countermeasures: The Company will pay attention to the changes in exchange rate all the time, and adjust the operation strategies and resolve negative impacts in a timely manner based on its own condition. It will foster the awareness of curreny risk prevention, and create a sound management system of foreign exchange risks while strengthening the professional skills of financial personnel and the training of risk awareness, and avoiding risks by means of financial methods. XI. Activities of receptions, including research, communication and interview 1. Registration form of receptions, including research, communication and interview, undertaken during the reporting period √ Applicable □ N/A Section V. Important Matters I. The Company’ s profit distribution of common shares and increase of capital stock by capital reserve conversion Formulation, implementation or adjustment of the profit distribution policy of common shares, especially the cash dividend policy, during the reporting period √ Applicable □ N/A During the reporting period, the Company’ s profit distribution policy conforms to the Articles of Association and the review procedure, and fully protects the legitimate rights and interests of small and medium investors. The independent directors have expressed their opinion, and there is a clear standard and ratio of dividends. The Company’ s common share dividend distribution plan (preplan) and plan for capital stock increase by capital reserve conversion (preplan) in recent three years (including the current reporting period): (1) The Company’ s distribution plan for 2018: Based on the total share capital of 1,458,174,624 shares, 3.3 yuan (tax included) is paid as a cash dividend for every 10 shares; the total share dividend distributed is 481,197,625.92 yuan, and 2 shares are added for every 10 shares by capital reserve conversion; (2) The Company’ s distribution plan for 2019: Based on the total share capital of 1,749,809,548 shares, 2.8 yuan (tax included) is paid as a cash dividend for every 10 shares; the total share dividend distributed is 489,946,673.44 yuan, and 0 shares are added for every 10 shares by capital reserve conversion. (3) The Company’ s distribution plan for 2020: Based on the total share capital of 1,749,809,548 shares, 2.3 yuan (tax included) is paid as a cash dividend for every 10 shares; the total share dividend distributed is 402,456,196.04 yuan, and 0 shares are added for every 10 shares by capital reserve conversion. The Company’ s cash dividends of common shares in recent three years (including the reporting period) Unit: RMB yuan During the reporting period, the Company made profits and the profit available to common shareholders of the parent company was positive, but no cash dividend plan for common shares was proposed □ Applicable √ N/A II. Profit distribution and capital stock increase by capital reserve conversion during the current reporting period √ Applicable □ N/A III. Fulfillment of commitments 1. Commitments made by interested parties such as the Company’s actual controller, shareholders, related parties, acquirer(s), and the Company that are fulfilled during the reporting period or unfulfilled by the end of the reporting period √ Applicable □ N/A 2. If there is a profit forecast for the Company’s assets or projects and the reporting period is in the profit forecast period, the Company should state the assets or projects that meet the original profit forecast and the reasons for that □ Applicable √ N/A IV. Controlling shareholder’s and related parties’ occupation of non-operating funds of the listed companies □ Applicable √ N/A No such case during the reporting period. V. Explanation by the Board of Directors, the Board of Supervisors and the independent directors (if any) on the “auditor’s nonstandard report” of the accounting firm during the current reporting period □ Applicable √ N/A VI. Changes in accounting policies, estimation and accounting methods as compared with the previous financial report √ Applicable □ N/A See section 12 of financial report five important accounting policies and accounting estimates 44 for details. VII. Retrospective restatement of the correction of significant accounting errors during the reporting period □ Applicable √ N/A No such case during the reporting period. VIII. Changes in the scope of consolidated statements as compared to the previous financial report √ Applicable □ N/A 1. Increase of the consolidation scope Note: No capital has been contributed as of December 31, 2020. 2. Reduction of the consolidation scope IX. Employment and dismissal of accounting firms Accounting firm employed by the Company for now Whether the accounting firm employed was replaced in the current period □ Yes √ No Information about the internal control audit accounting firm, financial consultant or sponsor employed by the Company √ Applicable □ N/A During the reporting period, the Company employed Pan-China Certified Public Accountants (special general partnership) as the audit institution of its annual financial report and internal control audit report; the annual financial report and internal control audit report audit fee paid is 1.65 million yuan. X. Delisting after annual report disclosure □ Applicable √ N/A XI. Bankruptcy reorganization □ Applicable √ N/A XII. Major litigation and arbitration □ Applicable √ N/A No such case during the reporting period. XIII. Punishment and rectification □ Applicable √ N/A No such case during the reporting period. XIV. Integrity of the Company and its controlling shareholder and actual controller □ Applicable √ N/A XV. Implementation of the Company’s equity incentive plan, employee stock ownership plan or other employee incentive measures √Applicable □ N/A In this period, Hangzhou Zhongmei Huadong Pharmaceutical Co., Ltd. invested 10 million yuan to establish Zhejiang Huida Biotechnology Co., Ltd. with a registered capital of 10 million yuan and a shareholding ratio of 100.00%. In August 2020, Hangzhou Zhongmei Huadong Pharmaceutical Co., Ltd. signed the team equity incentive agreement with the members of the core technology team, which agreed that the members of the core technology team would join Hangzhou Zhongmei Huadong or Zhejiang Huida , Hangzhou Zhongmei Huadong transferred its 49.00% incentive equity of Zhejiang Hunda to the core technology team at the price of 1.00 yuan. Hangzhou Zhongmei Huadong recorded the difference between the incentive equity price of 1.00 yuan and the incentive equity cost of 4899999.00 yuan into the management expenses. XVI. Implementation of the Company’s equity incentive plan, employee stock ownership plan or other employee incentive measures √Applicable □ N/A Hangzhou Zhongmei Huadong Pharmaceutical Co., Ltd. invested RMB10 million to the establishment of Zhejiang Huida Biotech Co., Ltd. with the registered capital of RMB10 million. The shareholding ratio of Zhongmei Huadong reaches 100.00%. In August 2020, Zhongmei Huadong entered into the Team Equity Incentive Agreement with its core technical team members, specifying that after the members join Zhongmei Huadong or Zhejiang Huida Biotech Co., Ltd., Zhongmei Huadong will transfer its 49.00% incentive equity of Huida Biotech to the core technical team at the price of RMB1.00, and Zhongmei Huadong includes the difference of RMB4,899,999.00 between the equity incentive price of RMB1.00 and the incentive equity costs into the management expenses. XVI. Major related transactions 1. Transactions related to daily operations √ Applicable □ N/A 2、Related transactions involving the acquisition or sale of assets and shares √ Applicable □ N/A 3、Related transactions of joint external investment □ Applicable √N/A No such case during the reporting period. 4、Associated claim and debt transactions □ Applicable √N/A No such case during the reporting period. 5、Other major related transactions □ Applicable √N/A No such case during the reporting period. XVII. Major contracts and their fulfilment 1. Entrustment, contracting and leasing (1) Entrustment □ Applicable √N/A No such case during the reporting period. (2) Contracting □ Applicable √N/A No such case during the reporting period. (3) Leasing □ Applicable √N/A During the company's reporting period, there was no lease project that brought the company's profits and losses to more than 10% of the company's total profit during the reporting period. 2. Important guarantees √ Applicable □ N/A (1) Guarantees Unit: RMB ten thousand yuan (2) External guarantees in violation of provisions □ Applicable √ N/A No such case during the reporting period. 3. Entrusted management of cash assets (1) Entrusted finances □ Applicable √ N/A No such case during the reporting period. (2) Entrusted loans □ Applicable √ N/A No such case during the reporting period. 4. Daily significant contracts □ Applicable √ N/A No such case during the reporting period. 5. Other significant contracts □ Applicable √ N/A No such case during the reporting period. XVIII. Social responsibilities 1. Fulfillment of social responsibilities 2020 is a crucial year for deepening the transformation of Huadong Medicine. It’s also a year of hard work to face challenges and overcome difficulties and a year of remarkable achievements and fruitful harvest. All members of Huadong Medicine have created innovative business management ideas and empowered the Company with wisdom and hard work, ensuring the steady development of Huadong Medicine. In the process of strategic transformation, the Company has strictly performed its social responsibilities as a corporate citizen; paid attention to the demands of shareholders, employees, customers, suppliers, communities and other stakeholders; assumed social responsibilities for environmental protection, saved energy and reduced emissions, and promoted the efficient and stable operation of the EHS system; and taken an active part in public welfare undertakings. The Company’s fulfillment of social responsibilities in 2020 can be found in “2020 Social Responsibility Report of Huadong Medicine”. 2. Fulfillment of social responsibility for targeted poverty alleviation The Company has not carried out targeted poverty alleviation in the reporting year, and there is no follow-up targeted poverty alleviation plan for the time being. 3. Environmental protection Whether the Company and its subsidiaries are the key pollutant discharging units announced by the environmental protection authorities Yes Construction and operation of pollution prevention and control facilities 1. Construction and operation of pollution prevention and control facilities of Hangzhou Zhongmei Huadong Pharmaceutical Co., Ltd.: (1) Waste water (2) Waste gas Note: Waste gas treatment process of 107 fermentation section: when the fermentation tank is not disinfected, the waste gas is discharged at high altitude after level 3 alkali spray; when the fermentation tank is disinfected, the waste gas is first condensed and then treated with level 1 alkali spray, and then discharged at high altitude. (3) Solid waste 2. Huadong Medicine (Xi’an) Bohua Pharmaceutical Co., Ltd.: (1) Waste water (2) Waste gas (3) Solid waste 3. Construction and operation of pollution prevention and control facilities of Jiangsu Joyang Laboratories Co., Ltd.: (1) Waste water (2) Waste gas (3) Solid waste Domestic waste yard Standardized storage 3 tons March 2015 Chengdong Garbage Disposal Station Environmental impact assessment of construction projects and other administrative permits for environmental protection All construction projects of the above three subsidiaries of the Company have be declared, constructed and accepted in strict accordance with the requirements of “three simultaneous” for environmental protection, have passed environmental impact assessment, and met the requirements of environmental impact assessment for construction projects. The Company has obtained the pollutant discharge permit and the discharge permit of urban sewage into the drainage pipe network according to the environmental protection requirements. On May 21, 2020, Zhongmei Huadong completed the filing of the environmental report form for the technical transformation project of the macromolecular drug research and development professional laboratory (pilot test), and obtained the filing acceptance letter (No.: Hangzhou Gonghuan Parts [2020] 01). Zhongmei Huadong completed the independent inspection and acceptance of environmental protection for the completion of the comprehensive production quality inspection building construction project, and disclosed the acceptance information in the National Completed Environmental Protection Acceptance Information System. Emergency plan for environmental emergencies The company has established a comprehensive emergency response plan for environmental emergencies, standardizes the emergency handling of environmental emergencies, and minimizes the impact on human health caused by the leakage of environmental risk substances into the air, water or soil due to fire, explosion, leakage or other unexpected emergencies. And environmental hazards, continue to improve the company's emergency response capabilities for sudden environmental pollution incidents. The company has comprehensively established the emergency plan for environmental emergencies, standardized the emergency treatment of environmental emergencies, minimized the harm to human health and environment caused by the leakage of environmental risk substances to air, water or soil due to fire, explosion, leakage or other unexpected emergencies, and continuously improved the emergency response capacity of the company for environmental pollution emergencies. The above three subsidiaries of the Company have compiled and established the mechanism of “Emergency Plan for Environmental Emergencies”, revised and improved it regularly according to the requirements, Huadong Pharmaceutical (Xi'an) Bohua Pharmaceutical Co., Ltd. and Huayin branch of Weinan Ecological Environment Bureau jointly held the emergency drill for environmental emergencies in Huayin City in 2020 on June 3, 2020. Jiangsu Joyang Laboratories Co., Ltd organized a fire emergency drill in the storage tank area of the 302 workshop in May 2020. In June and July 2020, it organized more than 30 comprehensive and special drills such as solvent leakage, fire emergency drills, and 119 fire protection publicity day activities, which standardized the emergency handling of environmental emergencies, minimized the hazards to human health and the environment caused by the leakage of environmental risk substances into the air, water or soil due to fire, explosion, leakage or other unexpected emergencies, and enhanced the emergency response capability for environmental pollution incidents. Environmental self-monitoring scheme The above three subsidiaries of the Company have all established the mechanism of “Self-monitoring Scheme for Pollution Sources” which has been put on record in the environmental protection authorities, and all the monitoring data are reported daily according to the regulations. Other environmental information that should be made public None Other information related to environmental protection None XIX. Other major events √ Applicable □ N/A Main drugs (products) included, newly included and withdrawn from the National Essential Drug List and the National Reimbursement Drug List during the reporting period: During the reporting period, the National Healthcare Security Administration and the Ministry of Human Resources and Social Security officially launched the “National Drug List for Basic Medical Insurance, Work-Related Injury Insurance and Maternity Insurance (2020)” (hereinafter referred to as the “Drug List”(2020 Edition)) , which will be officially implemented on March 1, 2021. As of the end of the reporting period, the Company has listed 24 core products and 15 products under research into the “Drug List” (2020 Edition), of which the Company's listed products, Acarbose Chewable Tablets and Bailing Capsules, are listed in the “Drug List” (2020 Edition) Negotiation varieties. As of the end of the reporting period, the Company had a total of 14 varieties (including 3 under-research varieties) included in the “National Essential Drug List (2018 Edition)”. XX. Major events of subsidiaries □ Applicable √ N/A Section VI. Share Change and Shareholders I. Changes in Share Capital 1. Table of Changes in share capital Unit: share Reasons for the changes in share capital √ Applicable □ N/A The Company held the 9th interim meeting of the Board of Directors on October 12, 2020, and approved the Proposal on Appointing Ms. Zhu Li as the Deputy General Manager of the Company, consenting to engage Ms. Zhu Li as the Deputy General Manager of Huadong Medicine Co., Ltd., who is responsible for commercial matters, and concurrently as the General Manager of Huadong Pharmaceutical Distribution Company. Ms. Zhu Li holds a total of 30,000 shares of the Company, among which 22,500 shares are restricted shares for senior executives according to relevant regulations. Approval for changes in share capital √ Applicable □ N/A The Company held the 9th interim meeting of the Board of Directors on October 12, 2020, and approved the Proposal on Appointing Ms. Zhu Li as the Deputy General Manager of the Company, consenting to engage Ms. Zhu Li as the Deputy General Manager of Huadong Medicine Co., Ltd., who is responsible for commercial matters, and concurrently as the General Manager of Huadong Pharmaceutical Distribution Company. Her term of office starts from the date on which the resolution was approved by the Board of Directors and ends on the expiration of the current Board of Directors (June 5, 2022). For details, please refer to the Announcement of the Resolution of the 9th Interim Board of Directors (Announcement No.: 2020-039) issued on the same day. Transfer of shares □ Applicable √ N/A Progress of share repurchase □ Applicable √ N/A Progress of reducing repurchased shares through centralized bidding □ Applicable √ N/A Effects of changes in share capital on the basic earnings per share, diluted earnings per share for the most recent year and the most recent period, the net assets per share attributable to the Company’s shareholders of common shares and other financial indicators □ Applicable √ N/A Other disclosures the Company deems necessary or required by securities regulatory authorities □ Applicable √ N/A 2. Changes in restricted shares √ Applicable □ N/A Unit: share II. Issuance and listing of securities 1. Securities (excluding preferred shares) during the reporting period □ Applicable √ N/A 2. Explanation on changes in share capital, the structure of shareholders and the structure of assets and liabilities □ Applicable √ N/A 3.Existent shares held by internal staff of the Company □ Applicable √ N/A III. Particulars about shareholders and the actual controller 1. Total number of shareholders and their shareholdings Unit: share Whether the Company’s Top 10 common shareholders or the Top 10 common shareholders without trading restriction have carried out any agreement to repurchase transaction during the reporting period □ Yes √ No No such case during the reporting period. 2. Particulars about controlling shareholder of the Company Nature of controlling shareholder: Natural individual holding Type of controlling shareholder: Corporation Change of the controlling shareholder during the reporting period □ Applicable √ N/A No such case during the reporting period. 3. Particulars about the Company’s actual controller & concerted parties Nature of actual controller: Domestic natural individual holding Type of actual controller: Natural individual Change of the actual controller during the reporting period □ Applicable √ N/A No such case during the reporting period. □ Applicable √ N/A 4. Other corporate shareholders with a shareholding ratioover 10% √ Applicable □ N/A 5. Reduction of restricted shares held by controlling shareholder, actual controller, restructuring parties and other commitment subjects □ Applicable √ N/A Section VIII. Convertible Corporate Bonds □ Applicable √ N/A No such case during the reporting period. Section VIII. Convertible Corporate Bonds □ Applicable √ N/A No such case during the reporting period. Section IX. Directors, Supervisors, Senior Managers and Employees I. Changes in shareholding of directors, supervisors and senior managers II. Change of directors, supervisors and senior managers of the Company √ Applicable □ N/A III. Positions and Incumbency Professional background, main working experiences and main responsibilities of the Company’s incumbent directors, supervisors and senior managers (1) Profile of directors Chairman–Mr.Lv Liang: born in 1974,holdsa master’sdegree.He hasserved asProjectManagerofGrand AssetManagementCo.,Ltd.fromJuly 1997 to July 2001;Deputy GeneralManagerand GeneralManagerofChangshu Leiyunshang PharmaceuticalCo.,Ltd.fromJuly 2001 to March 2010;Directorand Deputy GeneralManagerofthe Company fromApril2010 to January 2016; Director and General Manager of the Company from January 6, 2016 to June 5, 2019; and Chairman of the Board of the Company since June 6, 2019. Directorand GeneralManager–Mr.LiYuedong: born in 1972,holdsa master’sdegree.He hasserved asclerk and section chiefofZhejiang PharmaceuticalSupply and Marketing Company and Zhejiang Int’lMedicine Co.,Ltd.;GeneralManagerofAibang Health Care Products Company; Deputy General Manager and General Manager of Hangzhou Zhuyangxin Pharmaceutical Co., Ltd.; Deputy General Manager of Hangzhou Huadong Medicine Group Co., Ltd; Director of the Company since April 2014, and Deputy General Manager of the Company from August 17, 2016 to June 5, 2019; and Director and General Manager of the Company since June 6, 2019. Director–Mr.Niu Zhanqi: born in 1967,DoctorofPharmacy.He hasserved astechnicalresearcherofChengde Technical Supervision Bureau; Deputy Director of Hebei Pharmaceutical Group Research Institute; Manager of Technical Development Department of China Shijiazhuang Pharmaceutical Group; Manager of Medicine Department of CSPC Ouyi Pharmaceutical Co. Ltd.; Deputy General Manager of CSPC NBP Pharmaceutical Co., Ltd.; senior R&D director of CSPC; Vice President of Pharmaceutical Management Head Office and General Manager of R&D Management Department of China Grand Enterprises, Inc. from March 2013 to June 2016; CEO of Pharmaceutical Management Head Office of China Grand Enterprises, Inc. from June 2016 to November 2018; President of Pharmaceutical Management Head Office of China Grand Enterprises, Inc. since November 2018; and Director of the Company since June 2016. Director–Ms.Kang Wei: born in 1968,holdsa master’sdegree.She hasserved asManagerofthe Trade Division,ManageroftheCapitalDivision and ManagerofFinancialManagementofthe FinancialManagementDepartmentofChina Grand Enterprises,Inc.;ChiefFinancialOfficerand Deputy GeneralManagerofHeilongjiang Grand Shopping Center;currently ChiefFinancialOfficerofChina Grand Enterprises,Inc.;and Directorofthe Company since December2016. Director-Mr.Jin Xuhu: born in 1963,holdsa bachelor’sdegree.He hasserved asChairman and GeneralManagerofHangzhouHuadong Medicine Group Co.,Ltd.;Party Secretary and Chairman ofHangzhou State-owned CapitalInvestmentand Operation Co.,Ltd.,Executive Director&ManagerofHangzhou Huadong Medicine Group Co.,Ltd.,since January 2019;and Directorofthe Company since June 2019. Director-Mr.Zhu Liang: born in 1977,holdsa bachelor’sdegree.He hasserved asDirectorofthe LaborUnion ofHangzhou Huadong Medicine Group Co., Ltd., Vice Chairman of the Labor Union of Hangzhou Huadong Medicine Group Co., Ltd., Chairman of the Labor Union of Hangzhou Huadong Medicine Group Co., Ltd. and Huadong Medicine Co., Ltd.; Supervisor of the Company from April 2017 to June 2019; and Director of the Company since June 2019. IndependentDirector-Mr.Zhong Xiaoming: born in 1962,holdsa master’sdegree.He hasbeen Deputy Directorofthe NewDrugsOffice,professor,postgraduate studentand doctoralsupervisorofZhejiang Chinese MedicalUniversity since 1985;chief scientist of Zhejiang University since 2013; and Independent Director of the Company since January 2016. IndependentDirector-Ms.Yang Lan: born in 1969,holdsa master’sdegree.She hasserved in Guiyang AuditBureau,ZhuhaiLixin Certified Public Accountants,ShanghaiLixin Changjiang Certified Public AccountantsZhuhaiBranch,and Guangdong LixinChangjiang Certified Public Accountants.SeniorManagerofPan-China Certified Public AccountantsGuangdong Branch; Investment Director of Guangzhou Securities Innovation Investment Co., Ltd.; Deputy Director of Guangdong Pujin Xinghua Certified Tax Agent Co., Ltd.; Deputy Director of Guangdong Lixin Jiazhou Certified Public Accountants; and Independent Director of the Company since April 27, 2017. IndependentDirector-Ms.Yang Jun: born in 1972,holdsa bachelor’sdegree,Canadian citizenship.She hasserved asChief Financial Officer of Freedom Foundation of Ontario, Canada; Chief Knowledge Officer and lecturer partner of Shanghai EasyFinance Management Consulting Co., Ltd.; Chief Financial Officer of Dookbook Culture Co., Ltd.; founding partner and chief consultant of Shanghai Yuecheng Information Technology Co., Ltd. since June 2018; and Independent Director of the Company since June 2019. (2) Profile of supervisors The Chairman ofBoard ofSupervisors -Ms.BaiXinhua: born in 1966,holdsa master’sdegree.She hasserved asAssistant Auditor of Beijing Municipal Bureau of Audit; Accounting Manager of the Financial Management Head Office and Audit Manager of the Supervision and Audit Department of China Grand Enterprises, Inc.; now Deputy General Manager of the Financial Management Head Office of China Grand Enterprises, Inc.; Supervisor of the Company since 2003; Supervisor-Ms.Qin Yun: born in 1970,holdsa bachelor’sdegree.She hasserved asattending physician in the InternalMedicineDepartmentofBeijing Shougang Hospital;medicalrepresentative in the Beijing Office ofTianjin Takeda PharmaceuticalsCo.,Ltd.,seniormedicalrepresentative in the Beijing Office ofLilly Asia;and head ofproductdepartmentin the salesbranch ofChina National Pharmaceutical Foreign Trade Corporation. She worked for China Grand Enterprises, Inc. in 2002 and has served as Project Manager of Pharmaceutical Business Division, Business Director of Operation Department of Pharmaceutical Management Head Office; now Business Director of Bidding and Procurement Management Center of China Grand Enterprises, Inc.; and Supervisor of the Company since 2006; Supervisor–Mr.Liu Chengwei: born in 1973,holdsa master’sdegree.He hasserved asFinancialServicesManagerand ChiefFinancialOfficerofGEMedicalSystemsChina;FinancialManagerofECGmonitoring of GEHealthcare Asia.In 2001,he joinedChina Grand Enterprises,Inc.,where he served asDirectorofSupervision and Audit,Deputy GeneralManagerofthe InvestmentandOperation Head Office,Deputy GeneralManagerand GeneralManagerofthe PharmaceuticalBusinessDivision,and head ofthepreparatory group ofCGELife &Health Insurance Company.He served asDeputy GeneralManagerof Grandpharma (China)Co.,Ltd.fromAugust2016 to September2018;AssistantPresidentofChina Grand Enterprises,Inc.since September2018;Directorofthe Company from2003 to January 2016;and Supervisorofthe Company since January 2016. Supervisor - Ms.Hu Baozhen: born in 1973,holds a bachelor’s degree.She served as Chief FinancialOfficer and dispatchedfull-time supervisorofHangzhou State-owned AssetsSupervision and Administration Commission fromMarch 2009 to March 2019;Head ofthe Risk Controland LegalDepartmentofHangzhou State-owned CapitalInvestmentand Operation Co.,Ltd.since April2019;Supervisorofthe Company fromJune 2012 to April2014;Supervisorofthe Company since June 2019. Employee Supervisor–Ms.He Rufen: born in 1968,holdsa bachelor’sdegree,seniorcertified public accountant.Assistant Manager of the Financial Department of Hangzhou Zhongmei Huadong Pharmaceutical Co., Ltd. from July 1990 to March 1998; Manager of the Financial Department of the Company from April 1998 to December 1998; officer in charge of financial affairs of the Company from January 1999 to June 2010; Deputy General Manager of Business of the Company since July 2010; Employee Supervisor of the Company since June 2019. Employee Supervisor-Mr.Xu Zhifeng: born in 1975,holdsa bachelor’sdegree,economist.Commissionerofthe Business Administration Office and Director Assistant of the General Manager Office of Hangzhou Zhongmei Huadong Pharmaceutical Co., Ltd. from August 1997 to July 2011; Manager of the Risk Management and Audit Department of the Company from August 2011 to January 2018; Director of the Risk Management and Audit Department of the Company since February 2018; Employee Supervisor of the Company since June 2019. (3) Profile of senior managers Deputy GeneralManager-Mr.Zhou Shunhua: born in 1960,holdsa master’sdegree,economist.He worked in the Company inDecember1978,and hasserved asPublicity Officer,Managerofthe Operation Department,DirectorofShanghaiOffice,and Shanghai Regional Manager of the Company; Deputy General Manager of Hangzhou Zhongmei Huadong Pharmaceutical Co., Ltd.; Deputy General Manager of the Company since 2009. Deputy GeneralManager-Mr.Wu Hui: born in April1969,holdsa master’sdegree,professor-levelseniorengineer.He workedin the Company in July 1991,and hasserved astechnician,workshop directorand chiefengineerofHangzhou ZhongmeiHuadongPharmaceuticalCo.,Ltd.;Deputy GeneralManagerofHangzhou ZhongmeiHuadong PharmaceuticalCo.,Ltd.since 2015;DeputyGeneralManagerofthe Company since June 2019. Deputy GeneralManager–Ms.Zhu Li :born in 1975,hasobtained a master’sdegree,and servesasan accountant.She hasservedasthe accountant,deputy generalmanager,generalmanager,deputy director,and directorofthe Procurementand Management Department for Chinese and Western Medicine in the Chinese patent medicine branch of Huadong Pharmaceutical Distribution Company since August 1997. From September 2019 to September 2020, she served as the Deputy General Manager of Huadong Pharmaceutical Distribution Company (responsible for the overall work), and from October 2020, she serves as the Deputy General Manager (responsible for the commercial matters) of the Company and concurrently as the General Manager of Huadong Pharmaceutical Distribution Company.。 Secretary ofthe Board ofDirectors -Mr.Chen Bo: born in 1972,holdsa master’sdegree,economist.He joined the Company in2002,and hasserved asinvestmentcommissionerand Deputy Managerofthe Financing Department;Secretary ofthe Board of Directors since June 2009. Officerin Charge ofFinancialAffairs -Mr.Qiu Renbo: born in 1982,holdsa master’sdegree.He hasserved ascommissionerofthe FinancialManagementHead Office and Chiefofthe Finance Section ofthe Manufacturing Branch ofthe Company fromAugust2004 to July 2010;Managerofthe FinancialDepartmentofHangzhou ZhongmeiHuadong PharmaceuticalCo.,Ltd.fromAugust2010 to April2015;ChiefFinancialOfficerofHangzhou ZhongmeiHuadong PharmaceuticalCo.,Ltd.since May 2015;OfficerinCharge ofFinancialAffairs ofthe Company since December2019. Positions in shareholders’ entities √ Applicable □ N/A Position in other entities √ Applicable □ N/A Incumbent and off-office directors, supervisors and senior management personel during the reporting period that have been imposed administrative penalties by the SCRC during the last three years. □ Applicable √ N/A IV. Remuneration of directors, supervisors and senior managers The decision-making procedure, determination basis and actual remuneration for directors, supervisors and senior managers The remuneration plan of independent directors on the ninth Board of Directors of the Company was preliminarly approved by the Board of Directors. The final decision would be made by the general meeting of shareholders. In 2020, the annual allowance for the independent directors of the Company was 80,000 yuan (before tax), paid in a lump sum at the end of the year. The directors and supervisor appointed by shareholders will receive allowance of 30,000yuan (before tax),paid in a lump sum at the end of the year. Other directors, supervisors and senior managers of the Company will receive benefits in accordance with the Company’s current Salary System and Performance Appraisal Schemes. Remuneration of directors, supervisors and senior managers of the Company during the reporting period Unit: RMB ten thousand yuan Equity incentives granted to the Company’s directors and senior managers during the reporting period □ Applicable √ N/A V. Employees of the Company 1. Number of employees, profession composition and education level Note: (1)Sales staff include those engaged in academic promotion, retailpromotion,pharmaceuticalservice,marketing,aesthetic medicine businessdevelopment,etc. (2) Technical staff include those directly engaged in R&D and other R&D support personnel 2. Staff remuneration policy Based on its strategic development plan, the Company strives to create a high-quality talent team with the characteristics of Huadong Medicine, and stimulates employees’ innovation and creativity through flexible and diversified benefit policies. 3. Training program In order to meet the requirements of the sustainable development and international strategies of the Company, speed up the talent transformation, further improve the cultivation and development system for various talents, the Company’s Learning and Development Department has formulated the relevant training program for 2021 on a basis of comprehensively collecting the demands of training from the Company’s middle and senior management and employees. The Department divided various talent cultivation projects into four major categories with the guiding concept of “cost control, project refinement, focusing on actual effectiveness, and resource sharing”, including mature cultivation projects, new business cultivation projects, official cultivation projects, and system establishment projects. For mature cultivation projects, the goal of which is to follow the 2025 development strategy planning, the Company strictly controls the costs and realizes delicacy project implementation so as to ensure that the production costs and various expenses in 2021 will only decrease rather than increase. These projects mainly cover business capacity and leadership promotion in the sectors such as production, quality, and marketing. For new business projects, given that the Company is at the key stage of strategic transformation and scientific innovation, it is an urgent task to cultivate scientific research teams and management trainees. In addition, the Company will put forward higher requirements for such new businesses to match the demands of business departments in a more accurate manner, and focus on the R&D personnel inventory projects, R&D PM cultivation projects, and management trainee projects. The cultivation of officials will be carried out in the form of internal cultivation such as management case study, on-duty development and cultivation, and rotation and assignment in conjunction with certain advanced management concepts of external industries, so as to guide the officials to realize management innovation and concept innovation, and assist in the establishment of reserve teams for officials. The cultivation will mainly involve young managers. In the system establishment, in order to better connect all project resources of various companies, the Company will consider the system establishment and the implementation of various cultivation projects at the level of the entire Company, continuously improve teams of internal trainers and tutors and various courses, make overall planning for the demands of the subsidiaries, and provide branches and subsidiaries with courses and teaching resources to create the sharing culture and promote the establishment of collectivized and learning-oriented organizations. Besides, Jiangdong Company plans to take the lead in integrating the learning resources to cultivate the key primary-level personnel who are responsible for the production and quality of the industrial subsidiaries, and the online course resources will be open to all employee platforms of branches and subsidiaries。 4. Labor outsourcing □ Applicable √ N/A Section X. Corporate Governance I. Basic situation of corporate governance During the reporting period, the Company strictly complied with the requirements of the regulatory documents on corporate governance issued by the CSRC and the Shenzhen Stock Exchange, such as “Company Law”, “Securities Law”, “Governance Guidelines for Listed Companies”, and “Rules for Stock Listing of Shenzhen Stock Exchange”. In order to realize its strategic development goals and safeguard the interests of all shareholders, the Company carried out comprehensive internal control and standardized management, strengthened system construction and internal management, standardized information disclosure and improved the corporate governance structure. There is no difference between corporate governance and the requirements of “Company Law” and the relevant provisions of the CSRC. According to the regulatory documents on the governance of listed companies issued by the CSRC, the Company has formed a system that is legally compliant and in line with the actual operation of the Company. By the end of the reporting period, the actual corporate governance was basically consistent with the regulatory documents on corporate governance issued by the CSRC and the Shenzhen Stock Exchange, and there were no outstanding governance issues. Whether the actual corporate governance of the Company is significantly different from the normative documents on corporate governance issued by the CSRC □ Yes √ No No such case during the reporting period. II. The Company’s independence in Businesses, Management, Assets, Institutions and Finance from Controlling shareholders During the reporting period, the Company continuously strengthened the corporate governance structure and implemented standardized operation in accordance with the requirements of regulatory authorities. The Company and its controlling shareholder realized the separation of management and independent operation in terms of personnel, assets, finance, institutions and business. Note: The Company is independent in Businesses, Management, Assets, Institutions and Finance from Controlling shareholders.The Company does not have peer competition or related transactions caused by partial restructuring, industry characteristics, national policies or mergers and acquisitions. III. Horizongtal competition □ Applicable √ N/A IV. Annual and extraordinary general meetings held during the reporting period 1. Shareholders’ meetings in the reporting period 2. Extraordinary general meetings convened at the request of preferred shareholders with resumed voting rights: □ Applicable √ N/A V. Performance of duties of independent directors during the reporting period 1. Attendance of independent directors at Board meetings and general meetings Attendance of independent directors at Board meetings and general meetings 2. Objections from independent directors on relevant issues of the Company Whether the independent directors have raised any objection to relevant issues of the Company □ Yes √ No No such case during the reporting period. 3. Other details aboutthe performance of duties by independent directors Whether the independent directors’ suggestions were adopted or not √ Yes □ No Note on the adoption or non-adoption of the independent directors’ suggestions N/A VI. Performance of duties by special committees under the Board during the reporting period 1. Strategic Committee During the reporting period, the Strategic Committee, based on the domestic and foreign conditions and the characteristics of the industry,conducted an in-depth analysis of the Company’s current operating situation and made an effective guidance for the Company to respond to market changes in a timely manner. In addition, the Strategic Committee put forward valuable opinions and suggestions for the Company to ensure its sustainable and robust development. 2. Audit Committee During the reporting period, the Audit Committee strictly abided the rules of the CSRC, Shenzhen Stock Exchange and the Company’s “Rules of Procedure for the Audit Committee of the Board of Directors”. It listened to the reports of the internal audit department and deliberated on the external audit reports of the Company’s 2020 financial report. During the annually external auditing period, the Audit Committee held three regular meetings to fulfilled its obligation of fully communicating with the external auditors, carefully reviewing the external auditing plan, scrutinizing the financial statement data and effectively supervising the preparation of the annual report. 3. Remuneration and Appraisal Committee During the reporting period, the Remuneration and Appraisal Committee carefully investigated the implementation of the Company’s remuneration system in accordance to “Rules of Procedure for the Remuneration and Assessment Committee of the Board of Directors”. 4. Nomination Committee During the reporting period, the Nomination Committee fully performed its duties to exam and audit the criteria and procedure of selecting directors, senior managerial staff and other personnel. The Committee strickly acted in accordance with the relevant rules of the Articles of Association and “Rules of Procedure for the Nomination Committee of the Board of Directors” .。 VII. Performance of duties by the Board of Supervisors Whether the Board of Supervisors found any risks of the Company in the supervision activities during the reporting period □ Yes √ No No such case during the reporting period. VIII. Assessment and incentive mechanism for senior managers During the reporting period, the Company established a market-oriented assessment and incentive mechanism for senior managers.Based on their personal abilities, annual target achievements, market and industry salary level, the Company implemented a competitive renumeration policy and set up a sound renumeration management system to retain and attract talent. IX. Evaluation report on internal control 1. Details of major internal control deficiencies found during the reporting period □ Yes √ No 2. Self-evaluation report on internal control X. Audit report on internal control √ Applicable □ N/A Whether the accounting firm has issued the auditor’s report on internal control with non-standard opinions □ Yes √ No Whether the auditor’s report on internal control issued by the accounting firm is consistent with the self-evaluation report of the Board of Directors √ Yes □ No Section XI. Information about Corporate Bonds Whether the Company have any corporate bonds that are publicly issued and listed on the stock exchange and have not expired on the approval date of the annual report or have not been fully paid upon maturity No Section XII. Financial Report I. Audit report Main body of the audit report Audit Report T. J. S. (2021) No. 3608 Shareholders of Huadong Medicine Co., Ltd.: I. Audit opinion We audited the financial statements of Huadong Medicine Co., Ltd. (hereinafter referred to as “Huadong Medicine”), including the consolidated and the parent company’s balance sheets as at December 31, 2020, the consolidated and the parent company’s income statements for the year 2020, the consolidated and the parent company’s cash flow statements, the consolidated and the parent company’s statements of changes in ownership interest, and the notes to relevant financial statements. In our opinion, the attached financial statements are prepared in accordance with the accounting standards for business enterprises in all material aspects and fairly reflect the consolidated and the parent company’s financial condition of Huadong Medicine as at December 31, 2020, as well as the consolidated and the parent company’s operating results and cash flows in 2020. II. Basis opinion We conducted our audit in accordance with the auditing standards for certified public accountants of China. Our responsibilities under these standards are further elaborated in the section “CPA’s responsibility to audit the financial statements” of the auditor’s report. In accordance with the code of professional ethics for certified public accountants in China, we are independent of Huadong Medicine and have fulfilled other responsibilities in respect of professional ethics. We believe that the audit evidence we have obtained is sufficient and appropriate, providing a basis for auditor’s opinion. III. Key audit matters The key audit matters are those we consider most important to the audit of the financial statements for the current period in our professional judgment. The response to these items is based on an audit of the financial statements as a whole and the formation of auditor’s opinion. We do not comment on these items separately. (I) Revenue recognition 1. Description The relevant information disclosure is detailed in Notes III (XXIV) and V (II) 1 to the financial statements. The operating revenue of Huadong Medicine mainly comes from the production and sales of drugs. The operating revenue of Huadong Medicine in 2020 is RMB 336.83 hundred million yuan. The medicine sales business of Huadong Medicine is a performance obligation to be performed at a certain time.The recognition of revenue from domestic sales of products of Huadong Medicine shall meet the following conditions: the products have been delivered to the buyer according to the contract, and the amount of product sales revenue has been determined, the payment for goods has been recovered or the receipt certificate has been obtained, and the relevant economic benefits are likely to flow in, and the costs related to the products can be measured reliably. The recognition of revenue from overseas sales of products shall meet the following conditions: the products have been declared at the customs according to the contract, the bill of lading has been obtained, the amount of product sales revenue has been determined, the payment for goods has been recovered or the receipt certificate has been obtained, and the relevant economic benefits are likely to flow in, and the costs related to the products can be measured reliably. As the operating revenue is one of the key performance indicators of Huadong Medicine, there may be inherent risks for the management of Huadong Medicine (hereinafter referred to as the “Management”) to achieve specific goals or expectations through inappropriate revenue recognition. Therefore, we identified revenue recognition as a key audit matter. 2. Audit response For revenue recognition, the audit procedures we implemented mainly include: (1) Understanding the key internal controls related to revenue recognition, evaluating the design of these controls, determining whether they are implemented, and testing the operating effectiveness of relevant internal controls; (2) Reviewing the sales contract, understanding the main contract terms or conditions, and evaluating whether the revenue recognition method is appropriate; (3) Analyzing the operating revenue and gross profit rate by month, product, region, etc., identifying whether there are significant or abnormal fluctuations, and ascertaining the reasons for the fluctuations; (4) For domestic sales revenue, checking the supporting documents related to revenue recognition by sampling, including sales contracts, orders, sales invoices, outbound delivery orders, shipping orders, shipping documents and payment receipts. For overseas revenue, obtaining e-port information and checking with the accounting records, and checking the sales contracts, export declaration forms, bills of lading, sales invoices and other supporting documents by sampling; (5) In combination with accounts receivable confirmation, confirming the current sales with major customers by sampling; (6) Carrying out a cut-off test for the operating revenue recognized before and after the balance sheet date, and evaluating whether the operating revenue is recognized within an appropriate period; and (7)The medicine sales business of Huadong Medicine is a performance obligation to be performed at a certain time. (8) Checking whether the information relating to operating revenue has been properly presented in the financial statements. (II) Impairment of accounts receivable 1. Description The relevant information disclosure is detailed in Notes III (X) and V (I) 2 to the financial statements. As of December 31, 2020, the book balance of accounts receivable of Huadong Medicine was RMB 64.90 hundred million yuan, the bad debt reserve was 3.52 hundred million yuan, and the book value was 61.38 hundred million yuan. Based on the credit risk characteristics of various accounts receivable and the individual account receivable or the combination of accounts receivable, the Management measured its loss reserve according to the expected credit loss equivalent to the entire duration. For the accounts receivable with expected credit loss measured based on an individual item, the Management comprehensively considered the reasonable and reliable information about the past items, current conditions and future economic conditions, estimated the expected cash flow, and determined the bad debt reserve that should be accrued. For the accounts receivable with expected credit loss measured based on the combined items, the Management divided the accounts receivable based on age, made adjustments according to historical credit loss and prospective estimates, compiled a comparison table of accounts receivable ages and expected credit loss rates, and determined the bad debt reserve that should be accrued. Due to the significant amount of accounts receivable and significant management judgment involved in the impairment of accounts receivable, we determined the impairment of accounts receivable as a key audit matter. 2. Audit response For the impairment of accounts receivable, the audit procedures we implemented mainly include: (1) Understanding the key internal controls related to the impairment of accounts receivable, evaluating the design of these controls, determining whether they are implemented, and testing the operating effectiveness of relevant internal controls; (2) Reviewing the follow-up actual write-off or reversal of accounts receivable for which the bad debt reserve has been accrued in previous years, evaluating the accuracy of the Management’s past forecasts; (3) Reviewing the relevant considerations and objective evidence of the Management’s credit risk assessment of accounts receivable, and evaluating whether the Management has properly identified the credit risk characteristics of various accounts receivable; (4) For the accounts receivable with expected credit loss measured based on an individual item, obtaining and checking the Management’s forecast of the expected cash flow received, evaluating the rationality of the key assumptions used in the forecast and the accuracy of data, and checking with the external evidence obtained; (5) For the accounts receivable with expected credit loss measured based on the combined items, evaluating the rationality of the Management’s division of combinations according to the credit risk characteristics; evaluating the rationality of the comparison table of accounts receivable ages and expected credit loss rates determined by the Management based on historical credit loss experience and prospective estimates; testing the accuracy and completeness of the Management’s data (including the age of accounts receivable, historical loss rate, migration rate, etc.) and whether the calculation of bad debt reserve is accurate; (6) Checking the subsequent collection of accounts receivable, and evaluating the reasonability of the Management’s accrual of bad debt reserve for accounts receivable; and (7) Checking whether the information relating to the impairment of accounts receivable has been properly presented in the financial statements. (III) Goodwill impairment 1. Description The relevant information disclosure is detailed in Notes III (V), III (XIX) and V (I) 14 to the financial statements. As of December 31, 2020, the original book value of goodwill of Huadong Medicine was 14.72 hundred million yuan, the impairment reserve was 0.03 hundred million yuan, and the book value was 14.69 hundred million yuan. When there is any sign of impairment in the asset group or asset portfolio related to goodwill, and at the end of each year, the Management shall conduct a goodwill impairment test. The Management conducted the goodwill impairment test in combination with the relevant asset group or asset portfolio, and the recoverable amount of the relevant asset group or asset portfolio was determined by the present value of the expected future cash flow. The key assumptions used in the impairment test include: revenue growth rate in the detailed forecast period, growth rate in the perpetual forecast period, gross profit rate, related expenses and discount rate. Due to the significant amount of goodwill and the significant management judgment involved in the goodwill impairment test, we determined the goodwill impairment as a key audit matter. 2. Audit response For the goodwill impairment, the audit procedures we implemented mainly include: (1) Reviewing the Management’s forecast of the present value of future cash flows in previous years and actual operating results, and evaluating the accuracy of the Management’s past forecasts; (2) Understanding and evaluating the competence, professional quality and objectivity of external valuation experts employed by the Management; (3) Evaluating the rationality and consistency of the Management’s methods in the impairment test; (4) Evaluating the rationality of the key assumptions adopted by the Management in the impairment test, and verifying whether the relevant assumptions are consistent with the overall economic environment, industry conditions, operating conditions, historical experience, operating plans, approved budgets, meeting minutes, and other assumptions used by the Management in relation to the financial statements; (5) Testing the accuracy, completeness and relevance of the data used by the Management in the impairment test, and rechecking the internal consistency of the relevant information in the impairment test; (6) Testing whether the Management’s calculation of the present value of expected future cash flows is accurate; (7) Based on the methods and assumptions used by the Management, estimating the present value range of future cash flows and evaluating whether it differs significantly from the range estimated by the Management; and (8) Checking whether the information relating to the goodwill impairment has been properly presented in the financial statements. IV. Other information The Management is responsible for other information, including information covered in the annual report, but not the financial statements and the auditor’s report. The auditor’s opinion on the financial statements does not cover other information, and we do not publish any form of corroborating conclusions on other information. In conjunction with our audit of the financial statements, it is our responsibility to read other information and, in doing so, consider whether other information is materially inconsistent with the financial statements or what we learned during the audit or appears to be materially misrepresented. Based on the work we have performed, if we determine that other information is materially misrepresented, we should report that fact. In this connection, we have nothing to report. V. Responsibility of the Management and Governance for the Financial Statements The Management is responsible for preparing the financial statements in accordance with the accounting standards for business enterprises to achieve fair presentation and for designing, implementing and maintaining the necessary internal controls so that the financial statements are free from material misstatement due to fraud or error. In preparing the financial statements, the Management is responsible for assessing Huadong Medicine’s competence for continuing operations, disclosing matters relating to continuing operations (if applicable) and applying the going concern assumption, unless liquidation and termination are planned or there is no other realistic alternative. Those charged with governance of Huadong Medicine is responsible for overseeing the Company’s financial reporting process. VI. Responsibility of Certified Public Accountants on the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement due to fraud or error, and to issue an auditor’s report that includes our opinions. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit performed in accordance with the audit standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material when it is reasonably expected that misstatements, individually or collectively, may affect the economic decisions made by users based on the financial statements. As part of the audit in accordance with the audit standards, we exercise professional judgment and maintain professional skepticism throughout the process. We also: (I) Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than the risk of not detecting one resulting from error, as fraud may involve collusion, forgery, omissions, misrepresentations, or the override of internal control. (II) Understand the internal control associated with the audit to design appropriate audit procedures. (III) Evaluate the appropriateness of accounting policies used and the rationality of accounting estimates and related disclosures made by the Management. (IV) Conclude on the appropriateness of using the going concern assumption by the Management, and conclude, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on Huadong Medicine’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw the attention of users to relevant disclosures in the financial statements in our auditor’s report; if such disclosures are inadequate, we should offer qualified opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause Huadong Medicine to cease to continue as a going concern. (V) Evaluate the overall presentation, structure and content of the financial statements, including whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. (VI) Obtain sufficient and appropriate audit evidence on the financial information of entities or business activities of Huadong Medicine to express auditor’s opinions on the financial statements. We are responsible for the guidance, supervision and implementation of group audits and take full responsibility for the auditor’s opinions. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with the professional ethical requirements associated with our independence, and communicate to those charged with governance all relationships and other matters that may reasonably be deemed to affect our independence, as well as relevant precautions (if applicable). From the matters communicated to those charged with governance, we determine which matters are most important to the current financial statement audit and thus constitute key audit matters. We describe these matters in our auditor’s report, unless laws and regulations prohibit their public disclosure or, in rare cases, if it is reasonably expected that the negative consequences of communicating a matter in the auditor’s report outweigh the benefits in the public interest, we determine that the matter should not be communicated in the auditor’s report. II. Financial statements The unit of statements in the financial notes is: RMB yuan. 1. Consolidated balance sheet Prepared by: Huadong Medicine Co., Ltd. December 31, 2020 Unit: RMB yuan Legal representative: Lv Liang Person in charge of accounting work: Lv Liang Person in charge of the Accounting Department: Qiu Renbo 2. Balance sheet of the parent company Unit: RMB yuan 3. Consolidated income statement Unit: RMB yuan As for enterprise merger under the same control in the current period, the net profit generated by the merged party before the merger is 0.00 yuan, and that generated during the previous period is 0.00 yuan. Legal representative: Lv Liang Person in charge of accounting work: Lv Liang Person in charge of the Accounting Department: Qiu Renbo 4. Income statement of the parent company Unit: RMB yuan 5. Consolidated cash flow statement Unit: RMB yuan 6. Cash flow statement of the parent company Unit: RMB yuan 7. Consolidated statement of changes in owners’ Equity Amount in the current period Amount in the prior period Unit: RMB yuan 8. Statement of changes in ownership interest of the parent company Amount in the current period Unit: RMB yuan Amount in the prior period Unit: RMB yuan Huadong Medicine Co., Ltd. Chairman of the Board: Lv Liang April 21, 2021
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