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2003 Fourth Quarter and Full Year Results (Part 2 of 2)


During the third quarter of 2003, Dragon signed a development agreement with a European research institute to collaborate in developing a new cell line and proprietary production process for a newly developed EPO product for the European market. In addition, Dragon has completed an upgrade of its current production facility in Nanjing, China, doubling the production capacity of its roller bottle technology to fulfill demand from China and other developing markets, which currently include India, Egypt, Brazil and Peru.

Subsequent to year end, Dragon announced that it has entered into an agreement with Suzhou Zhongkai Bio-Pharmaceuticals Company Limited (“Zhongkai”) to in-license the exclusive right to commercialize its Recombinant Human Granulocyte Colony Stimulating Factor (“rhG-CSF”) product worldwide, excluding China. “This is an excellent opportunity for both Dragon and Zhongkai. Under the agreement, Dragon will leverage its regulatory approval knowledge and expertise from launching its own EPO business internationally and will also utilize its existing licensing partnerships developed over time around the world to bring Zhongkai’s rhG-CSF to the international market” said Dr. Wick. “The competition is fierce in China with about 20 products already in the market. As a result, we decided to partner with a leading producer in the market and focusing on developing the international market outside of China. This will bring much better economic value to Dragon without incurring significant risk in research and developing an in-house product and the high investment to bring the drug into the production” For details, please refer to the press release on April 22, 2004 “Dragon Announces Worldwide Licensing Rights, excluding China, for Recombinant Human Granulocyte Colony Stimulating Factor (rhG-CSF)”

Due to the availability of alternative products, the slow progress of the research projects, and the desire to avoid any conflict of interest issues in the future, Dragon has decided not to pursue the research projects with Dr. Liu and his associated research partners on G-CSF, insulin and a patent project in exchange for Dragon to receive $1.33 million reimbursement of expenses. In addition, the 1 million warrants granted to Dr. Liu for the patent development project will also be cancelled. Together with the $3.71 million of principal and interest owing under the Hepatitis B vaccine project, Dr. Liu will pay Dragon a total of $5.04 million, which will be due on December 31, 2004. Dr. Liu has agreed to provide 2.6 million common shares of the Company, to be held in escrow, as security for the amounts owing. It is a condition of the agreement that 2.2 million common shares of the Company be placed in escrow by June 30, 2004.

“The cancellation of the research partnership with Dr. Liu enables Dragon to finally move on and disengage itself from any non-arm’s length transactions and potential conflict of interest in the future. Now, the Company can concentrate on what is important to create better shareholders’ value by focusing on growth in both top and bottom lines. We believe that the event will prove to have a positive impact on the Company in the long run especially as we are negotiating diligently with Oriental Wave Holding Limited on a potential merger as previously announced” said Dr. Wick. Letter of Intent to Merge with Oriental Wave

On March 24, 2004, Dragon announced that it has entered into a letter of intent to combine with Oriental Wave Holding Ltd (“Oriental Wave”) and its subsidiary in a merger. Subject to a number of conditions and if the proposed merger is consummated, the combined company will create a fully-integrated pharmaceutical company with diverse and proven product lines and 3 existing cGMP manufacturing facilities for biotech drugs, chemical generic drugs and chemical intermediate (Active Pharmaceutical Ingredient or API) and the fourth facility for another chemical intermediate, which is under final installation of equipment.

Oriental Wave is a privately held holding company of a China-based pharmaceutical company, which is primarily engaged in the production of chemical intermediates and active pharmaceutical ingredients, formulation, marketing and sale of generic drugs. Oriental Wave currently has 2 Chinese SFDA certified GMP production facilities on stream: a pharmaceutical facility with a capacity of producing 1.6 billion tablets and capsules, 80 million injectables and 10 million suppositories per year as well as a chemical plant with an annual capacity of producing 30 tons clavulanic acid by a fermentation process. A third facility with an annual capacity of producing 400 tons of 7-ACA, an intermediate for Cephalosporin antibiotics, is under final installation of equipments. In addition, Oriental Wave Group has a total of approximately 280 drug approvals from the SFDA of which about 35, mainly anti-infectious drugs, were actively exploited in China in 2003.

For the year ended December 31, 2003, Oriental Wave’s audited consolidated revenues and earnings were US$26 million and US$7.5 million. 2003 revenues only consisted of sales in China by Oriental Wave’s Chemical Drug division because the Clavulanic Acid facility of the Chemical Intermediate division commenced production, operation and sales in January 2004 and the 7-ACA facility, which is under final installation of equipment, is expected to start operation during the third quarter of 2004. Such results from the two facilities of the Chemical Intermediate division, together with the existing operation of the Chemical Drug division, will be reflected in the full year financials of 2004.

“The proposed merger will be an important milestone for the history of Dragon by transforming the Company into a serious player in the global pharmaceutical industry with proven product lines (biotech drugs, chemical generic drugs and chemical intermediate), significant infrastructure, operations and revenues from the prominent Chinese market and a competitive edge to be successful in the international market covering both developing and developed countries” said Dr. Wick.

If the proposed merger is consummated, it is anticipated that Dragon, the surviving company, will continue to be a public company listed on the Toronto Stock Exchange (Ticker: DDD) and quoted on the Over-the-counter Bulletin Board (Ticker: DRUG). “Our listing status in both U.S. and Canada stock markets would allow the combined company to access the North American capital market, where there is tremendous investor interest in the generic drug sector as well as company with material access to the significant Chinese market” said Dr. Wick.

Dragon’s and Oriental Wave’s proposed merger is conditioned upon a number of events including entering into a definitive agreement which is currently being negotiated by the parties. Both companies intend to conclude the negotiation as soon as practical so as to start the regulatory process with the US Securities and Exchange Commission and Toronto Stock Exchange

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