UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended:
December 31, 2016
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________
to _____________
Commission File No. 001-34566
CHINA BIOLOGIC PRODUCTS, INC.
(Exact name of registrant as specified in
its charter)
Delaware
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75-2308816
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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18th Floor, Jialong International Building,
19 Chaoyang Park Road
Chaoyang District, Beijing 100125
People’s Republic of China
(Address of principal executive offices)
(+86) 10-6598-3111
(Registrant’s telephone number, including
area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
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Name of each exchange on which registered
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Common Stock, par value $0.0001 per share
Preferred Share Purchase Rights
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NASDAQ Global Select Market
NASDAQ Global Select Market
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Securities registered pursuant to Section 12(g)
of the Exchange Act: None
Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
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No
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Indicate by check
mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
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No
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Indicate by check
mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes
x
No
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Indicate by check
mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was required to submit and post such files) Yes
x
No
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Indicate by check
mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
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Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act.
Large Accelerated Filer
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Accelerated Filer
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Non-Accelerated Filer
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(Do not check if a smaller reporting company)
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Smaller reporting company
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Indicate by check mark whether registrant is a shell company (as
defined in Rule 12b-2 of the Act). Yes
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No
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The aggregate market value of common stock
held by non-affiliates of the registrant, based upon the closing sale price on June 30, 2016 as reported on the NASDAQ Global Select
Market, was approximately $2,162 million.
There were a total of 27,184,780 shares of the registrant’s
common stock outstanding as of February 23, 2017.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for its 2017
Annual Meeting of Stockholders to be filed with the Commission within 120 days after the close of the registrant’s fiscal
year are incorporated by reference into Part III of this annual report on Form 10-K.
Annual Report on Form 10-K
Year Ended December 31, 2016
TABLE OF CONTENTS
Special Note Regarding Forward Looking Statements
In addition to historical information, this
report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. We use words such as “believe,” “expect,” “anticipate,”
“project,” “target,” “plan,” “optimistic,” “intend,” “aim,”
“will” or similar expressions which are intended to identify forward-looking statements. Such statements include, among
others, those concerning market and industry growth and demand and acceptance of new and existing products; expectations regarding
governmental approvals of our new products; any projections of sales, earnings, revenue, margins or other financial items; any
statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic
conditions or performance; as well as all assumptions, expectations, predictions, intentions or beliefs about future events. You
are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties,
as well as assumptions, which, if they were to ever materialize or prove incorrect, could cause the results of our company to differ
materially from those expressed or implied by such forward-looking statements. Risks and uncertainties that could cause actual
results to differ materially from those anticipated include risks related to, among others, our ability to overcome competition
from local and international pharmaceutical enterprises; decrease in the availability, or increase in the cost, of plasma; failure
to renew plasma collection permits for plasma collection stations; failure to meet the GMP standard or other mandatory requirements
for any of our facilities; failure to obtain PRC governmental approval to increase retail prices of certain of our biopharmaceutical
products; loss of key members of our senior management; and unexpected changes in the PRC government’s regulation of the
biopharmaceutical industry in China, or changes in China’s economic situation and legal environment. Additional disclosures
regarding factors that could cause our results and performance to differ from results or performance anticipated by this report
are discussed in Item 1A “Risk Factors.”
Readers are urged to carefully review and consider
the various disclosures made by us in this report and our other filings with the SEC. These reports attempt to advise interested
parties of the risks and factors that may affect our business, prospects, financial condition and results of operations. The forward-looking
statements made in this report speak only as of the date hereof and we disclaim any obligation, except as required by law, to provide
updates, revisions or amendments to any forward-looking statements to reflect changes in our expectations or future events.
Use of Terms
Except as otherwise indicated by the context
and for the purposes of this report only, references in this report to:
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“China Biologic,” “we,” “us,”
“our company,” or “our” are to China Biologic Products, Inc., a Delaware corporation, and, unless the context
requires otherwise, its direct and indirect subsidiaries;
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“China” or “PRC” are to the People’s
Republic of China, excluding, for the purposes of this report only, Taiwan and the special administrative regions of Hong Kong
and Macau;
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“CFDA” are to China Food and Drug Administration;
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“Exchange Act” are to the Securities Exchange Act of
1934, as amended;
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“GMP” are to good manufacturing practice;
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“Guizhou Taibang” are to Guizhou Taibang Biological Products
Co., Ltd., a PRC company indirectly wholly owned by us, formerly known as Guiyang Qianfeng Biological Products Co., Ltd.;
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“Huitian” are to Xi’an Huitian Blood Products Co.,
Ltd., a PRC company in which we hold an indirect minority equity interest;
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“NDRC” are to the PRC National Development and Reform
Commission;
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“NHFPC” are to the PRC National Health and Family Planning
Commission, formerly known as the PRC Ministry of Health;
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“RMB” are to the legal currency of China;
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“PFDA” are to PRC provincial food and drug administration;
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“SEC” are to the Securities and Exchange Commission;
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“Securities Act” are to the Securities Act of 1933, as
amended;
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“Shandong Taibang” are to Shandong Taibang Biological
Products Co., Ltd., a PRC company indirectly majority owned by us;
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“Taibang Biological” are to Taibang Biological Ltd.,
a British Virgin Islands company wholly owned by us, formerly known as Logic Express, Ltd.;
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“Taibang Holdings” are to Taibang Holdings (Hong Kong)
Limited, a Hong Kong company indirectly wholly owned by us, formerly known as Logic Holdings (Hong Kong) Limited; and
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“U.S. dollars” or “$” are to the legal currency
of the United States.
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PART I
ITEM 1. BUSINESS.
OVERVIEW
We are a biopharmaceutical company principally
engaged in the research, development, manufacturing and sales of human plasma-based biopharmaceutical products, or plasma products,
in China. We are among the top three producers of plasma products in China in terms of 2016 sales, based on our industry knowledge.
We operate our business through a majority owned subsidiary, Shandong Taibang, a company based in Tai’an, Shandong Province
and a wholly owned subsidiary, Guizhou Taibang, a company based in Guiyang, Guizhou Province. We also hold a minority equity interest
in Huitian, a plasma products company based in Xi’an, Shaanxi Province.
We have a strong
product portfolio with over 20 different dosage forms of plasma products and other biopharmaceutical products across nine categories.
All of our products are prescription medicines administered in the form of injections. Our principal products are human albumin
and immunoglobulin for intravenous injection, or
IVIG. Albumin has been used for almost 50
years to treat critically ill patients by assisting the maintenance of adequate blood volume and pressure. IVIG is used for certain
disease prevention and treatment by enhancing specific immunity. These products use human plasma as their principal raw material.
Sales of human albumin products represented approximately 39.2%, 37.6% and 39.3% of our total sales for 2016, 2015 and 2014, respectively.
Sales of IVIG products represented approximately 34.6%, 42.2% and 40.4% of our total sales for 2016, 2015 and 2014, respectively.
Our sales model focuses on direct sales to
hospitals and inoculation centers and is complemented by distributor sales. In 2016, we generated sales of $341.2 million, an increase
of 15.1% from 2015, and recorded net income attributable to our company of $104.8 million, an increase of 17.8 % from 2015. In
2015, we generated sales of $296.5 million, an increase of 21.9% from 2014, and recorded net income attributable to our company
of $89.0 million, an increase of 25.5% from 2014.
We operate and manage our business as one single
segment. We do not account for the results of our operations on a geographic or other basis.
Corporate History and Structure
China Biologic Products, Inc. was originally
incorporated on December 20, 1989 under the laws of the State of Texas as Shepherd Food Equipment, Inc. On November 20, 2000, Shepherd
Food Equipment, Inc. changed its corporate name to Shepherd Food Equipment, Inc. Acquisition Corp., or Shepherd. Shepherd is the
survivor of a May 28, 2003 merger between Shepherd and GRC Holdings, Inc., or GRC, a Texas corporation. In the merger, the surviving
corporation adopted the articles of incorporation and bylaws of GRC and changed its corporate name to GRC Holdings, Inc. On January
10, 2007, a plan of conversion became effective pursuant to which GRC was converted into a Delaware corporation and changed its
name to China Biologic Products, Inc. On July 19, 2006, we completed a reverse acquisition with Logic Express Ltd., or Logic Express,
a British Virgin Islands company, as a result of which Logic Express became our wholly owned subsidiary, the former shareholders
of Logic Express became our then controlling stockholders, and Logic Express’s majority owned PRC subsidiary, Shandong Taibang,
became our majority owned indirect subsidiary.
Our common stock was initially quoted on the
over-the-counter market maintained by Pink Sheets LLC. On February 29, 2008, our common stock was approved for quotation on the
Over-The-Counter Bulletin Board under the trading symbol “CBPO.OB.” On November 25, 2009, our common stock was approved
for listing on the NASDAQ Global Market under the symbol “CBPO” and subsequently approved for listing on the NASDAQ
Global Select Market on December 7, 2010.
The following chart reflects our current corporate
structure as of the date of this report:
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(1)
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In April 2016, Guiyang Dalin Biologic Technologies Co., Ltd. increased its equity interest in Guizhou
Taibang from 81.81% to 85.27% following a series of capital injections. In November 2016, two former minority shareholders withdrew
their respective capital contributions in Guizhou Taibang, and as a result, Guizhou Taibang became a wholly owned subsidiary of
Guiyang Dalin Biologic Technologies Co., Ltd. See “Legal Proceedings — Dispute with Jie’an over Certain Capital
Injection into Guizhou Taibang” for further details.
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(2)
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Pursuant to an investment entrustment agreement dated September 12, 2008, Shandong Taibang holds
the 35.0% equity interest in Huitian as a nominee for the benefit of Taibang Biological. For further details on the investment
entrustment agreement, see our Current Report on Form 8-K filed with the SEC on October 16, 2008.
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(3)
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On September 3, 2016, the Company disposed of its 100% equity interest in Shandong Taibang Medical
Company for a cash consideration of $128,654. The carrying value of net identifiable assets (including currency translation difference)
amounted to $204,545 as at September 3, 2016, resulting in a disposal loss of $75,891.
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Corporate Information
Our principal executive offices are located
at 18th Floor, Jialong International Building, 19 Chaoyang Park Road, Chaoyang District, Beijing 100125, People’s Republic
of China. Our corporate telephone number is (8610) 6598-3111 and our fax number is (8610) 6598-3222. We maintain a website at
http://www.chinabiologic.com
that contains information about our company, but that information is not part of this report or incorporated by reference herein.
INDUSTRY
Overview
We operate in the plasma industry in China.
We derive certain industry-related data from reports and written analysis prepared by The Marketing Research Bureau, Inc., or MRB,
an independent research firm focused on blood and plasma industry data on a global level, including a China-specific report from
January 2017.
China is the second largest plasma products
market in the world, after the United States. According to MRB, China’s plasma products market (excluding recombinant products)
grew from $0.80 billion in 2009 to $2.47 billion in 2015 in terms of sales revenue, representing a compound annual growth rate,
or CAGR, of 20.7%. MRB expects that by 2018, China’s plasma-derived products market will reach over $3.3 billion, representing
about a 35% increase from 2015, assuming domestic plasma supply continues to grow at least 8% annually. Based on our industry knowledge,
human albumin products dominated China’s plasma products market with a market share of 64.7% in terms of sales revenue in
2016, and IVIG products accounted for 25.2% of the market. Other plasma products, including coagulation factors, accounted for
the remaining 10.1% of the market in 2016.
Compared to more developed countries, China
has a lower per capita usage level of plasma products, and China’s plasma products market is significantly different in terms
of product composition and range. In more developed countries such as the United States, IVIG products account for a majority of
plasma product sales. This difference reflects the maturity levels of the plasma industries in these countries. According to MRB,
plasma fractionation came into existence in the 1940s in the United States, whereas in China, plasma processing appeared in the
1960s or 1970s. Until the early 1970s, the U.S. plasma products market was dominated by albumin products, as is the case in China’s
market presently. The current low per capita consumption of IVIG products in China is primarily attributable to a lack of awareness
of the benefits of IVIG therapy, especially in medical conditions such as primary immune deficiency or chronic inflammatory demyelinating
polyneuropathy, and lower per capita healthcare spending in China. China’s plasma products market is expected to be increasingly
driven by IVIG products in the future as IVIG therapy becomes more widespread as a result of the combined efforts of physician
education and product promotion, among other factors.
Based on our industry knowledge, China National
Biotec Group, or CNBG, Hualan Biological Engineering Inc., or Hualan, and China Biologic, were the top three plasma product manufacturers
in terms of sales revenue in 2016.
Overall Plasma Products Market Trends
Compared to more developed countries, China’s
plasma products market has distinctive characteristics and trends, including the following:
High Entry Barriers
. The PRC State Council
has ceased issuing new plasma fractionation licenses since 2001, and there are approximately 30 licensed producers of plasma products
in China, of which only approximately 28 are currently in operation. Nearly all of these producers make albumin and IVIG products,
but only five of them, including China Biologic, make factor VIII products. Furthermore, foreign investment in domestic producers
of plasma products is subject to stringent government approval process. As a result, existing China-based producers with large
production capacities face limited competition and are well positioned to gain more market share during the industry consolidation
phase.
Stringent
regulation.
China’s plasma products market is stringently regulated. Because of the public health crises of
contaminated plasma products experienced by China over the past decade, China has implemented, and is expected to continue to
maintain, stringent regulations for the plasma products industry in the foreseeable future. The opening of a new plasma
collection station in China requires the approval by three levels of government authorities, namely the provincial, municipal
and county level authorities, which is a time-consuming and difficult process. To be eligible to open a new collection
station, a company must produce no fewer than six types of plasma products, which
must include products in three
mandatory categories, namely
human albumin, immunoglobulin and coagulation factors. From 2010 to 2015, various local governments approved the opening of plasma collection
stations by small companies that were not able to produce all the mandatory products. In response, in December 2016, the
NHFPC and CFDA jointly released a new guideline on the regulation of plasma collection stations. The guideline aims to
strengthen regulatory oversight for existing collection stations and approval requirements for new plasma collection
stations, and to tighten safety control at the plasma collection stations to improve the quality of plasma collected. The
guideline states that in considering the applications for the opening of new plasma collection stations, the relevant
authorities should give priority to companies with strong research and development capabilities, high plasma utilization rate
and good management practice. We believe this guideline will benefit large plasma products manufacturers like China Biologic
by reducing the chance for smaller manufacturers to open new plasma collection stations.
Demand outstripping
supply.
Due to stringent regulations on the collection of raw plasma from human beings and a lack of plasma donation,
China has experienced a shortage of plasma products since the 1980s. There are fewer than 220 plasma
collection centers in China, compared to over 530 in the United States. The restriction on approving new collection centers in
China, cultural barriers to plasma donation, concerns over plasma donation safety, and low quantity per donation and long intervals
between donations contribute to the supply shortage. According to the National Health and Family Planning Committee (NHFPC), the
demand for raw plasma materials in China is estimated to be over 10,000 tons per annum. Total plasma collected in 2015 was 5600
tonnes in China, in comparison with over 30,000 tonnes in the United States. As a result, the tendering prices for plasma products
by various provincial and regional governments have been slightly increased or stabilized in contrast to price cuts for other drugs.
Ban on imports.
As a measure to prevent
a range of viral risks, China strictly prohibits the import of plasma products, except for human albumin and recombinant factor
VIII products. In other market segments, such as IVIG, where import is prohibited, domestic producers are shielded from competition
from their multinational peers, and the demand for such products in China has been supplied entirely by domestically-sourced plasma
only.
Low consumption level and huge growth potential.
While
China’s plasma products market has experienced rapid growth in recent years, China’s per capita consumption of plasma
products lags substantially behind more developed countries. The following chart sets forth the comparison of per capita consumptions
of selected plasma products in China and the United States in 2015:
Source: MRB
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(1)
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Based on 2015 per capita consumption (kilogram per million inhabitants) in the Unites States divided by 2015 per capita consumption
in China.
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(2)
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Based on 2015 per capita consumption (international units per capita) in the Unites States divided by 2015 per capita consumption
in China.
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Based on our industry knowledge, as a result
of the growing number of patients seeking treatment of plasma products, an increasing awareness of health benefits of plasma products
and the rising affordability of plasma products since the commencement of China’s healthcare reform, China’s plasma
products market is expected to continue to have substantial growth potential.
Improved fractionation technologies.
In
the early years of plasma fractionation in China, technologies used were not as sophisticated as those in the United States, resulting
in relatively low yields and a product portfolio limited to only two or three products (albumin, IVIG and hyper-immune globulin
products). Technologies used by and yields from leading domestic manufacturers are, however, on par with international standards,
and these manufacturers are well positioned to manufacture safer products and have higher production efficiency compared with other
domestic companies.
Increasing
market concentration of top players.
China’s current landscape of plasma products market is relatively fragmented. However,
factors such as stringent regulations, tightened quality control and heavy capital expenditure requirements have contributed to
increasing industry consolidation in recent years. For instance, the CFDA issued new GMP requirements to re-certify all the fractionation
plants by the end of 2013, which has resulted in the shutdown of smaller fractionation plants that were unable to upgrade their
production lines by the deadline.
China’s plasma industry has also witnessed multiple
merger and acquisition transactions in recent years. Market leaders with stable plasma supplies complemented by further collection
expansion potentials, strong product portfolios and robust research and development capabilities are expected to be able to continue
to solidify their positions and further gain development advantages.
Albumin Market Trends
According to MRB, human albumin products achieved
sales revenue of $1.57 billion in 2015, accounting for 63.8% of China’s plasma products market (excluding recombinant factors)
in 2015 and representing a CAGR of approximately 25.3% from 2009.
The robust demand
for albumin products in China continues to grow as a result of the high incidence of hypo-albuminemia from liver cirrhosis, cancer
and in cardiac surgeries. Unlike many other plasma products, albumin products may be imported from other countries
due
to the acute shortage of albumin products from domestic manufacturers, and as a result, many multinational plasma product manufacturers
are expected to continue to divert a large portion of their albumin products to China’s market in the future so long as the
price in China remains competitive. Based on our industry knowledge, imported albumin products accounted for approximately 56.2%
of China’s albumin products market in 2016. CNBG, Hualan, and China Biologic were the three largest domestic albumin product
manufacturers with a combined market share close to 19.9%,
and China Biologic ranked the third
with a market share of approximately 6.5%, in terms of sales revenue in 2016.
IVIG Market Trends
According to
MRB, China’s IVIG products achieved sales revenue of $671.0 million in 2015, representing a CAGR of approximately 14.5% from
2009. Based on our industry knowledge, CNBG, Hualan, and China Biologic were the three largest domestic albumin product manufacturers
with a combined market share close to 48.5%,
and China Biologic ranked the third with a market
share of approximately 14.7%, in terms of sales revenue in 2016.
In more developed countries, major applications
of IVIG therapy are for chronic diseases such as primary immune deficiency and chronic inflammatory demyelinating polyneuropathy,
which require treatment for a number of years or even lifetime. In contrast, IVIG therapy is only used to treat acute diseases
and infections in China. The substantial growth in China’s IVIG products market in recent years was mainly due to increasing
awareness by doctors of the benefits of IVIG therapy. Compared with the markets in more developed countries, China’s IVIG
products market is far from mature. In 2015, for instance, the per capita consumption of IVIG products in China was 15.0 grams
per 1,000 inhabitants, as compared to over 200 grams per 1,000 inhabitants in the United States, according to MRB, and therefore
there is tremendous growth potential as China’s IVIG per capita consumption draws closer to that of the United States. Developing
this market requires significant efforts from IVIG manufacturers to educate physicians, the public and the health authorities on
the benefits of IVIG therapy for a number of medical conditions. In countries with higher per capita consumption of IVIG products,
the efficacy of IVIG therapy in a number of medical conditions has been promoted over the years by clinical trials, anecdotal reports,
scientific articles, educational activities for physicians and medical students, medical conferences and seminars, and promotional
campaigns such as advertisements in medical journals. The role of a specialized sales force was also instrumental in the rapid
acceptance of IVIG therapy in North America and Europe. In addition, patient organizations, which are largely supported by IVIG
manufacturers, have also become increasingly important in recent years, as they are able to draw physicians’ attention to
antibody deficiency tests. All of these factors may be replicated in China as a result of IVIG manufacturers’ educational
and promotional efforts as well as economic development and healthcare spending growth in China.
Factor VIII Market Trends
According to
MRB, China’s market size for plasma-derived factor VIII was $36.2 million in terms of sales revenue in 2015, representing
a CAGR of approximately 22.7% from 2009. Based on our industry knowledge, only five domestic plasma product manufacturers offered
plasma-derived factor VIII in 2016. Hualan, Green Cross (China)
Biological Products Co., Ltd.,
and China Biologic were the largest three
domestic
manufacturers
of plasma-derived factor VIII with a combined market share close to 84.9%, and China Biologic ranked the third with a market share
of approximately 21.8%, in terms of sales revenue in 2016.
There were over 15,000 registered hemophilia
patients in China as of December 31, 2016, according to China Hemophilia Association, which underpins a significant market demand
for factor VIII products. Due to an acute shortage of plasma-derived coagulation factor concentrates available in China as a result
of limited coagulation factor manufacturers, recombinant factor VIII products have taken a growing role in hemophilia care in China.
However, since recombinant products are approximately twice more expensive than plasma-derived factor VIII products and not covered
by national health insurance for full reimbursement in China, they are used only in the absence of suitable plasma-derived products.
As an increasing number of China-based manufacturers, including China Biologic, commercially launched factor VIII products, the
supply is expected to increase and lead to overall market growth. It is unlikely, however, that plasma-derived factor VIII will
be able to fully meet the market demand if hemophilia care continues to improve in China. China’s market for factor VIII
products is expected to experience a continued shortage of plasma-derived factor VIII products in the foreseeable future.
BUSINESS
Our Competitive Strengths
We believe that the following competitive strengths
enable us to compete effectively in and capitalize on the growth of the plasma products market:
Leading producer of plasma products in
China with strong growth potential
We are one of
the top three producers of plasma products in terms of 2016 sales revenue based on our industry knowledge. In the albumin segment,
which accounts for a majority of the plasma products market in China, we are the third largest domestic producer with a market
share of approximately 6.5% in terms of 2016 sales
revenue, based on our industry knowledge.
In the IVIG segment, which is the second largest segment of the plasma products market in China, we are also the third largest
producer overall in China with a market share of approximately 14.7% in terms of 2016 sales revenue,
based
on our industry knowledge.
We have a strong product portfolio with over
20 different dosage forms of plasma products and other biopharmaceutical products across nine categories and a robust near-term
product pipeline of seven products. We believe that we are one of the only four plasma products manufacturers in China with the
product portfolio comprising at least eight categories of plasma products. Since different types of plasma products utilize different
protein components of plasma, different types of plasma products can be produced from the same raw plasma supply with minimal incremental
increase in raw material cost. Our broad product portfolio, supported by our strong research and development capabilities, therefore,
provides us with the benefit of more comprehensive plasma utilization, which in turn contributes to higher profit margins.
We believe that product safety and supply stability
are the most critical considerations for hospitals and inoculation centers in making purchase decisions on plasma products. We
implement stringent quality control measures throughout our production process, and have not historically experienced failure to
receive pre-sale approval or had a recall with respect to any of our plasma products. We currently have a manufacturing facility
in Guizhou Province and expect to launch a new manufacturing facility in Shandong Province by the end of 2017 to replace our old
facility in Shandong Province, which together will reach a production capacity of 1,600 tonnes. As a leading producer of plasma
products, we have been able to maintain a steady plasma supply volume and sales volume over the years. Our safety record and the
stability of our supply, we believe, have strengthened our business relationship with existing customers and enhanced our ability
to acquire new customers.
China’s plasma products market is, and
will continue to be, subject to stringent government regulation. In recent years, however, PRC regulators have also taken initiatives
to increase plasma collection volume by approving more new plasma collection stations and expanding plasma collection coverage
for existing plasma collection stations. We are well positioned to benefit from these favorable regulatory trends as we are able
to meet the associated quality control and technology investment requirements.
Stable and growing supply of plasma with
strategically located collection stations
Our ability to secure and expand our supply
of plasma, a critical raw material for our operations, is one of our key strengths. Our plasma collection network consists of 14
captive plasma collection stations (including one branch collection facility). In addition, Huitian, a company in which we hold
a minority equity interest, operates three plasma collection stations. In 2016, we were among the top five plasma collectors in
China in terms of collection volume with approximately 12.4% of the total national supply, based on our industry knowledge.
We operate nine plasma collection stations
(including one branch collection facility) in Shandong Province, two in Guangxi Province, two in Guizhou Province, and one in Hebei
Province, covering 33 cities and counties with an aggregate population of approximately 42.6 million. Shandong Province has one
of the largest population, and Guangxi Province and Guizhou Province are among the least economically developed regions in China
— both favorable characteristics underpinning a strong and stable plasma supply. Hebei Province is an underdeveloped province
for plasma collection that provides convenient and economic transportation to our manufacturing facilities in adjacent Shandong
Province.
We continue to seek innovative ways to identify
and attract potential plasma donors. We regularly organize a variety of community events to deliver our messages that focus on
the life-saving and other social contribution aspects of plasma donation. We also regularly review our donor compensation to ensure
that it remains competitive. In addition, we actively seek to expand the geographic coverage of our existing collection stations
to gain access to additional donor populations. As a result of our collection efforts, our average plasma collection volume is
greater than the national average by approximately 78.0% in 2016 based on our industry knowledge. Our total plasma collection volume
increased by approximately 16.9% from 2015 to 2016.
In addition to increasing our collection volume
at existing plasma collection stations, we also seek to build new plasma collection stations to expand our donor base. For example,
in October 2014, we received regulatory approval to build two new plasma collection stations in Xinglong and Daming Counties, respectively,
in Hebei Province. In June 2016, we received the operating permit for and commenced operations at our new plasma collection station
in Xinglong County. The Daming station is still under construction as of the date of this report and is expected to open in 2017.
In December 2016, we received the regulatory approvals to build a new plasma collection station in Ju County in Shandong Province
and to build a branch collection facility in Feicheng County to operate under our Ningyang plasma collection station in Shandong
Province.
Robust near-term product pipeline to
capture full plasma value chain backed by strong research and development capabilities
We currently have six new products under development,
with one of them in registration stage and expected to be commercially launched in the second half of 2017. We expect our expanding
product portfolio to further increase our comprehensive plasma utilization, which will in turn lead to higher profit margins. With
our current and pipeline products, we believe that by 2018, our product offerings will be able to capture substantially all of
the value along the plasma products value chain.
Benefiting, in part, from our direct sales
to hospitals and inoculation centers, our ability to bring new products to market reflects a research and development process that
is demand-driven and highly responsive to physician feedback and the latest market trends in medicine. To complement our research
and development efforts, we also work closely with a number of leading research institutes in China specializing in plasma products.
As of December 31, 2016, we held 55 patents for plasma products.
Leading position in China’s fast-growing
IVIG products market
We are the third largest producer of IVIG products
in China in terms of 2016 sales revenue based on our industry knowledge. Our IVIG sales, accounting for approximately 34.6% of
our total sales, increased to $117.9 million in 2016 from $98.4 million in 2014, representing a CAGR of 9.5% between 2014 and 2016.
We attribute our rapid growth and leading position in the IVIG products market, in part, to our continued efforts to promote IVIG
therapy to physicians in tier one cities.
Compared with markets in more developed countries,
China’s IVIG products market is far from mature. In more developed countries, major applications of IVIG therapy are for
chronic diseases, which require treatment for a number of years or even lifetime, while in China, IVIG therapy is only used to
treat acute diseases and infections. Also, the per capita consumption of IVIG products in China is significantly lower than that
in the more developed countries, and therefore there is significant growth potential as China’s IVIG consumption draws closer
to that of the more developed countries as a result of growing awareness of IVIG therapy and favorable government reimbursement
policies. For details of the IVIG products market comparison, see “Industry — IVIG Market Trends.” As a leading
player in China’s IVIG products market, we are uniquely positioned to benefit from the anticipated increase in demand from
the popularization of IVIG therapy.
Flexible and effective sales and distribution
model aimed to maximize penetration
We have a flexible sales model that focuses
on direct sales to hospitals and inoculation centers and is complemented by distributor sales. Under this sales model, our products
reach 30 provinces, municipalities and autonomous regions in China.
In 2016, 55.3% of our product sales were generated
from direct sales, and in 2016, our direct sales network covered approximately 605 hospitals and inoculation centers. Our sales
and marketing team, consisting of 114 employees as of December 31, 2016, is responsible for the sales and marketing efforts to
our end customers and provide product educational programs and other sales support directly to doctors and nurses. These efforts
are designed to ensure effective and seamless communications with our end customers, particularly with respect to clinical education,
which provides us with first-hand intelligence on the latest industry trends and market demands and enables us to provide better
after-sale services and support. For example, our sales and marketing team actively promotes new IVIG indications that are widely
accepted in more developed countries but less known among Chinese physicians.
Our direct sales network is complemented by
sales through distributors, which accounted for 38.9% of our plasma sales in 2016. We select our distributors through a rigorous
process, which focuses on market leadership in the covered region, the degree of control we have over to which hospitals our products
are sold (i.e., larger and higher tiered hospitals are preferred), and the level of access we have to our customers (i.e., greater
access enables us to better track the sales of our products).
We believe that our flexible sales model of
focusing on direct sales is cost-effective and has helped us to achieve strong financial performance. Our selling expenses as a
percentage of sales were 3.4%, 3.4% and 4.4% in 2016, 2015 and 2014, respectively; and our operating margin was 42.1%, 44.7% and
45.7% during these periods, respectively.
Experienced and committed management
team
We have an experienced, dedicated and visionary
management team with an in-depth understanding of the pharmaceutical industry in China. Our Chairman and Chief Executive Officer,
Mr. David (Xiaoying) Gao, with more than 14 years of experience in the pharmaceutical industry, was instrumental in the development
and implementation of our business strategy. Before joining our company, Mr. Gao was the chief executive officer of BMP Sunstone
Corporation before that company was acquired by Sanofi. Our Chief Financial Officer, Ming Yang, has more than 19 years of financial
management and accounting experience. Mr. Guangli Pang and Mr. Gang Yang, the general manager of Shandong Taibang and Guizhou Taibang,
respectively, have more than 30 and 20 years of experience in the plasma products industry in China, respectively. Since our current
senior management team was put in place in 2012, we have been committed to improving corporate governance and enhancing shareholder
value. We believe our management team, with their extensive industry background and strong management talent, provides a strong
foundation for the execution of our growth strategy and achievement of our goals.
Our Business Strategy
Our mission is to become a first-class biopharmaceutical
enterprise in China. To achieve this objective, we have implemented a business strategy with the following key components:
Securing the supply of plasma
Due to the shortage of plasma, we plan to build
new plasma collection stations in regions not covered by our existing collection network as well as to expand collection territories
of existing plasma collection stations in order to secure our plasma supply. We currently have a total of 14 plasma collection
stations (including one branch collection facility) in operation, of which nine are in Shandong Province, two in Guangxi Province,
two in Guizhou Province and one in Hebei Province. In October 2014, we received the regulatory approval to build two new plasma
collection stations in Xinglong and Daming Counties, respectively, in Hebei Province. In June 2016, we received the operating permit
for and commenced operations at our new plasma collection station in Xinglong County. The Daming station is still under construction
as of the date of this report and is expected to open in 2017. In December 2016, we received the regulatory approvals to build
a new plasma collection station in Ju County in Shandong Province and to build a branch collection facility in Feicheng County
to operate under our Ningyang plasma collection station in Shandong Province. Meanwhile, we are carrying out various promotional
activities to stabilize and expand our donor base for our existing plasma collection stations. A majority of our plasma collection
stations recorded increases in plasma collection volume in 2016 as compared to 2015.
Further strengthening of research and
development capability
We believe that, unlike other more developed
countries such as the United States, China’s plasma products are at an early stage of development. There are many other plasma
products that are being used in the United States, which are not currently manufactured or used widely in China. We intend to strengthen
our research and development capabilities through in-house development and partnership with leading international players to expand
our product line to include plasma products that have higher margins and are technologically more advanced. We also intend to continue
to improve the yield for our products. As a result of our research and development efforts, we currently have six products under
development, with one of them in registration stage and expected to be commercially launched in the second half of 2017. For further
details of our pipeline products, see “— Our Research and Development Efforts” below. We believe that our increased
focus on research and development will give us a competitive advantage in China over our competitors.
Market development and network expansion
Leveraging on
the high quality and steady supply of our products, we intend to expand our geographic coverage in China to include markets where
we envision significant growth potential. In particular, we plan to further strengthen our direct sales by growing our sales and
marketing team and expanding our coverage among hospitals and inoculation centers. We also plan to strengthen our relationships
with major distributors in tier-one cities to deepen our penetration in those markets
and
to obtain higher market share.
Organic growth complemented by acquisition
of competitors and/or other biologic-related companies
We have expanded organically by securing sufficient
plasma supply and strengthening in-house development efforts. In addition to organic growth, acquisition is an important part of
our expansion strategy. Although there are approximately 30 approved plasma-based biopharmaceutical manufacturers in the market,
we believe that there are approximately 28 manufactures currently in operation in China, only about half of which are competitive.
We estimate that the top five manufacturers in China accounted for more than 70.5% market share (excluding imports) in terms of
sales revenue in 2016. Furthermore, we believe that the regulatory authorities are considering further industry reform and those
smaller, less competitive manufacturers will face possible revocation of their manufacturing permits by the regulators due to the
compliance cost, making them potential targets for acquisition. If we are presented with appropriate opportunities, we may acquire
additional companies, products or technologies in the biologic-related sectors (e.g., medical, pharmaceutical and biopharmaceutical)
to complement our current business operations.
Our Products
Our principal products are our approved human
albumin and IVIG products. Human albumin is principally used to treat critically ill patients by replacing lost fluid and maintaining
adequate blood volume and pressure. IVIG products are primarily used to enhance specific immunity, a defense mechanism by which
the human body generates certain immunoglobulin, or antibodies, against invasion by potentially dangerous substances. In a situation
where the human body cannot effectively react to these foreign substances, injection of IVIG products can provide sufficient antibodies
to neutralize such substances. We are currently approved to produce over 20 different dosage forms of plasma products, which are
listed in the table below.
Approved Products
(1)(2)
|
|
Treatment/Use
|
Human albumin – 20%/10ml, 20%/25ml, 20%/50ml, 10%/100ml, 10%/20ml, 10%/50ml, 25%/50ml and 20%/50ml (10g, from factor IV)
|
|
Shock caused by blood loss trauma or burn; raised intracranial pressure caused by hydrocephalus or trauma; oedema or ascites caused by hepatocirrhosis and nephropathy; prevention and treatment of low-density-lipoproteinemia; and neonatal hyperbilirubinemia.
|
|
|
|
Human immunoglobulin – 10%/3ml and 10%/1.5ml
|
|
Original immunoglobulin deficiency, such as X chain low immunoglobulin, familiar variable immune deficiency, immunoglobulin G secondary deficiency; secondary immunoglobulin deficiency, such as severe infection, newborn sepsis; and auto-immune deficiency diseases, such as original thrombocytopenia purpura or Kawasaki disease.
|
|
|
|
IVIG – 5%/25ml, 5%/50ml, 5%/100ml and 5%/200ml
|
|
Same as above.
|
|
|
|
Human hepatitis B immunoglobulin – 100 IU, 200IU and 400IU
|
|
Prevention of measles and contagious hepatitis. When applied together with antibiotics, its curative effect on certain severe bacteria or virus infection may be improved.
|
|
|
|
Human rabies immunoglobulin – 100IU, 200IU and 500IU
|
|
Mainly for passive immunity from bites or claws by rabies or other infected animals. All patients suspected of being exposed to rabies are treated with a combined dose of rabies vaccine and human rabies immunoglobulin.
|
|
|
|
Human tetanus immunoglobulin – 250IU
|
|
Mainly used for the prevention and therapy of tetanus. Particularly applied to patients who have allergic reactions to tetanus antitoxin.
(3)
|
|
|
|
Placenta polypeptide – 4ml/vial
|
|
Treatment for cell immunity deficiency diseases, viral infection and leucopenia caused by various reasons, and assist in postoperative healing.
|
|
|
|
Factor VIII – 200IU and 300IU
|
|
Treatment for coagulopathies such as hemophilia A and increased concentration of coagulation factor VIII.
|
|
|
|
Human prothrombin complex concentrate (or PCC) – 300IU
|
|
Treatment for congenital and acquired clotting factor II, VII, IX, X deficiency, such as Hemophilia B, excessive anticoagulant, and vitamin K deficiency, etc.
|
|
(1)
|
“%” represents the degree of dosage concentration for the product and each product
has its own dosage requirement. For example, human albumin 20%/10ml means 2g of human albumin is contained in each 10ml packaging
and human immunoglobulin 10%/3ml means 300mg of human immunoglobulin is contained in each 3ml packaging. Under PRC law, each variation
in the packaging, dosage and concentration of medical products requires separate registration and approval by CFDA before it may
be commercially available for sale. For example, among our human albumin products, only human albumin 20%/10ml, 20%/25ml, 20%/50ml,
10%/100ml, 10%/20ml, 10%/50ml, 25%/50ml and 20%/50ml (10g, from factor IV) products are currently approved and are commercially
available.
|
|
(2)
|
“IU” means International Units. IU is a unit used to measure the activity of many vitamins,
hormones, enzymes, and drugs. An IU is the amount of a substance that has a certain biological effect. For each substance there
is an international agreement on the biological effect that is expected for 1 IU. In the case of immunoglobulin, it means the number
of effective units of antibodies in each package.
|
|
(3)
|
Tetanus antitoxin is a cheaper injection treatment for tetanus. However, it is not widely used because most people are allergic
to it.
|
Our approved human albumin, immunoglobulin
(including IVIG), factor VIII and PCC products all use human plasma as the primary raw material. All of our approved products are
prescription medicines administered in the form of injections.
We have two product liability insurance policies
covering Shandong Taibang’s and Guizhou Taibang’s products in the amount of RMB20 million (approximately $2.9 million)
each. Since our establishment in 2002, we have been subject to four lawsuits filed by patients who were treated with our products
and received blood and/or plasma transfusions. See “Risk Factors — Risks Relating to Our Business — Product liability
claims or product recalls involving our products could have a material adverse effect on our business” for further details.
We do not expect these four claims to have a material adverse effect on our company.
Raw Materials
Plasma from in-house collection
Plasma is the principal raw material for our
biopharmaceutical products. We currently operate 12 plasma collection stations (including one branch collection facility) through
Shandong Taibang and two plasma collection stations through Guizhou Taibang. We plan to build new plasma collection stations throughout
China as well as to expand collection territories of existing plasma collection stations. In October 2014, we received the regulatory
approval to build two new plasma collection stations in Xinglong and Daming Counties, respectively, in Hebei Province. In June
2016, we received the operating permit for and commenced operations at our new plasma collection station in Xinglong County. The
new station in Daming County is under construction as of the date of this report and is expected to open in 2017. In December 2016,
we received the regulatory approvals to build a new plasma collection station in Ju County in Shandong Province and to build a
branch collection facility in Feicheng County to operate under our Ningyang plasma collection station in Shandong Province. We
believe that our plasma collection stations give us a stable source of plasma supply and control over product quality. Also, we
believe that we have enjoyed benefits of economies of scale, including sharing certain administration and management expenses across
our several plasma collection stations. A majority of our plasma collection stations recorded increases in plasma collection volume
in 2016 as compared to 2015.
Plasma sourced from Xinjiang Deyuan
We purchased approximately 143 tonnes of source
plasma and plasma pastes from Xinjiang Deyuan Bioengineering Co., Ltd., or Xinjiang Deyuan, for a total consideration of approximately
RMB139 million (approximately US$20.0 million) in 2015. The final products made from such raw materials were fully released into
the market by the first half of 2016.
We entered into
a cooperation agreement with Xinjiang Deyuan and its controlling shareholder in August 2015, pursuant to which Xinjiang Deyuan
agreed to sell to us no less than 500 tonnes of source plasma in batches from August 2015 to August 2018. As required and approved
by the local regulator, all plasma used for production must be able to be traced to plasma collection stations, and therefore,
we monitor the quality of the plasma collection process at Xinjiang Deyuan
.
We purchased approximately 210.7 tonnes of source plasma from Xinjiang Deyuan in 2016, which
was 17.8% more than the expected volume according to the agreement as of December 31, 2016. The final products made from this plasma
began to be released to the market from the fourth quarter of 2016. Our transactions with Xinjiang Deyuan will provide us a significant
volume of additional raw material over the contracted period and enable us to efficiently enhance our production capacity utilization
and supply more plasma products to satisfy growing market demand.
Other raw materials and packaging materials
Other raw materials used in the production
of our biopharmaceutical products include reagents and consumables such as filters and alcohol. The principal packaging materials
we use include glass bottles for our injection products as well as external packaging and printed instructions for our biopharmaceutical
products. We acquire our raw materials and packaging materials from our approved suppliers in China and overseas. We select our
suppliers based on quality, consistency, price and delivery of the raw materials which they supply.
Our five largest suppliers for other raw materials
and packaging materials in the aggregate accounted for approximately 42.5%, 36.2% and 30.2% of our total procurement for the years
ended December 31, 2016, 2015 and 2014, respectively. We have not experienced any shortage of supply or significant quality issue
with respect to any raw materials and packaging materials.
Plasma Collection
Our plasma collection stations purchase, collect,
examine and deepfreeze plasma on behalf of Shandong Taibang and Guizhou Taibang and are subject to provincial health bureau’s
rules, regulations and specifications for quality, packaging and storage. Each station is only allowed to collect plasma from healthy
donors within its respective districts and in accordance with a time table set by its respective parent company, Shandong Taibang
or Guizhou Taibang. The plasma must be tested negative for HBsAb, HCV and HIV antibodies and the RPR test, contain ALT 25 units
(ALT) and plasma protein 55g/l, and contain no virus pollution or visible erythrolysis, lipemia, macroscopic red blood cell or
any other irregular finding. The plasma is packaged in 25 to 30 separate 600g bags in each box and then stored at a temperature
of -20°C or lower within limited time after collection to ensure that it will congeal within six hours. Each bag is labeled
with a computer-generated tracking code. Shandong Taibang and Guizhou Taibang are responsible for the overall technical and quality
supervision of the plasma collection, packaging and storage at each plasma collection station.
Sales, Marketing and Distribution
Because all of our products are prescription
drugs, we can only sell to hospitals and inoculation centers directly or through approved distributors. For 2016, 2015 and 2014,
direct sales to hospitals and inoculation centers represented approximately 61.1%, 59.0% and 65.4%, respectively, of our total
plasma products sales. Our five largest customers in the aggregate accounted for approximately 15.5%, 13.0% and 14.6% of our total
sales for 2016, 2015 and 2014, respectively. Our largest customer accounted for approximately 5.4%, 4.0% and 4.2% of our total
sales for 2016, 2015 and 2014, respectively.
We select our distributors through a rigorous
process, which focuses on market leadership in the covered region, the degree of control we have over to which hospitals our products
are sold (i.e. larger and higher tiered hospitals are preferred), and the level of access we have to our customers (i.e. greater
access enables us to better track the sales of our products). As part of our effort to ensure the quality of our distributors,
we also conduct due diligence to verify whether potential distributors have obtained necessary permits and licenses and facilities
(such as cold storage) for the distribution of our biopharmaceutical products and assess their financial condition. Certain of
our regional distributors are appointed on an exclusive basis within a specified geographic territory. Our supply contracts set
out the quantity and price of products to be supplied by us. For distributors, our contracts also contain guidelines for the sale
and distribution of our products, including restrictions on the geographical territory in which the products may be sold. We provide
our distributors with training in relation to our products and on sales techniques. We generally require our distributors to pay
in advance before we deliver products, with a few exceptions for a credit period of no longer than 60 days to major distributors
in tier-one cities. For hospitals and clinics, we generally grant a credit period of no longer than 90 days, with exceptions to
certain high credit-worthy customers of up to six months. For 2016, 2015 and 2014, we had not incurred any significant bad debts
from our customers.
Our largest geographic market is Shandong Province,
representing approximately 24.3%, 23.2% and 23.9% of our total sales for 2016, 2015 and 2014, respectively. Jiangsu Province is
our second largest geographic market, representing 10.0%, 10.0% and 9.3% of our total sales for 2016, 2015 and 2014, respectively.
In addition to Shandong Province and Guizhou Province, we also have sales presence in 28 other provinces, municipalities and autonomous
regions.
As of December 31, 2016, our marketing and
after-sales services department consisted of 114 employees.
We believe that due to the nature of our products,
our competitiveness centers on product safety, steady supply, brand recognition, timely availability and pricing. As all of our
products are prescription medicines, we are not allowed to advertise our products in the mass media. For 2016, 2015 and 2014, total
sales and marketing expenses amounted to approximately $11.7 million, $10.0 million and $10.7 million, respectively, representing
approximately 3.4%, 3.4% and 4.4%, respectively, of our total sales.
Our Research and Development Efforts
Each of Shandong Taibang and Guizhou Taibang
has its own research and development department. All of our research and development researchers hold degrees in medicine, pharmacy,
biology, biochemistry or other relevant fields. Our research and development departments are responsible for the development and
registration of our products. We also cooperate with a number of leading institutions in China specializing in plasma products
to strengthen our research and development capacity.
We employ a market driven approach to initiate
research and development projects, including both product and production technique development. We believe that the key to our
industry’s developments is the safety of products and maximizing the yield per unit volume of plasma. Our research and development
efforts are focused on the following areas:
|
·
|
broaden the breadth and depth of our portfolio of plasma products;
|
|
·
|
enhance the yield per unit volume of plasma through new fractionation
techniques;
|
|
·
|
maximize manufacturing efficiency and safety;
|
|
·
|
promote product safety through implementation of new technologies;
and
|
|
·
|
refine production technology for existing products.
|
All the products we currently manufacture have
been developed in-house. The following table outlines our research and development work in progress:
Products Currently in Development
|
|
Treatment/Use
|
|
Status of Product Development
|
|
Stage*
|
Human fibrinogen
|
|
Treatment for lack of fibrinogen and increase human fibrinogen concentration.
|
|
Completed on-site inspection by the CFDA. Commercial production expected in the second half of 2017.
|
|
4
|
|
|
|
|
|
|
|
Immune Globulin Intravenous (Human), Caprylate/Chromatography Purified and 20 nm virus filtration
|
|
Treatment for original immunoglobulin deficiency; secondary immunoglobulin deficiency and auto-immune deficiency diseases.
|
|
Obtained approval for clinical trial by the CFDA.
|
|
3
|
|
|
|
|
|
|
|
Human Antithrombin III (concentration)
|
|
Treatment for (1) hereditary antithrombin III deficiency in connection with surgical or obstetrical procedures and (2) thromboembolism.
|
|
Obtained approval for clinical trial by the CFDA.
|
|
3
|
|
|
|
|
|
|
|
Human coagulation factor IX
|
|
Prevention and control of bleeding in patients who suffer from hemophilia B.
|
|
Obtained approval for clinical trial by the CFDA.
|
|
3
|
|
|
|
|
|
|
|
Human Cytomegalovirus Immunoglobulin
|
|
Prophylaxis and treatment of CMV infection, especially for the prevention of active virus replication for patients in immunosuppression, such as organ transplantation patients.
|
|
Obtained approval for clinical trial by the CFDA
|
|
3
|
|
|
|
|
|
|
|
Human Fibrin Sealant
|
|
Adjunct to hemostasis on patients undergoing surgery in case that traditional surgical techniques (such as suture, ligature or cautery) are ineffective or impractical.
|
|
Completed the official virus inactivation by the PRC National Institutes for Food and Drug Control. Completed the animal experiments for safety and effectiveness.
|
|
1
|
|
*
|
These stages refer to the stages in the regulatory approval process for our products described in “— Regulation.”
|
For 2016, 2015 and 2014, total research and
development expenses amounted to approximately $7.0 million, $6.0 million and $4.2 million, respectively, representing approximately
2.1%, 2.0% and 1.7%, respectively, of our total sales.
Competition
We face intense competition. There are both
local and overseas pharmaceutical enterprises that engage in the manufacture and sale of potential substitutes or similar biopharmaceutical
products as our products in China. These competitors may have more capital, better research and development resources, and stronger
manufacturing and marketing capabilities than we do. In our industry, we compete based upon product quality, production cost, ability
to produce a diverse range of products and logistical capabilities.
Our profitability may be adversely affected
if competition intensifies, competitors reduce prices, regulators promulgate or strengthen regulations that have the effect of
controlling the prices of our products, or competitors develop new products or product substitutes with comparable medicinal applications
or therapeutic effects that are more effective or less costly than ours.
There are approximately 30 approved manufacturers
of plasma products in China of which approximately 28 are currently in operation. Many of these manufacturers are essentially producing
the same type of products that we produce, including human albumin and various types of immunoglobulin. We believe, however, that
it is difficult for new manufacturers to enter into the industry due to current regulatory barrier. We believe that our major competitors
in China include CNBG, Hualan, Shanghai RAAS Blood Products Co., Ltd., Sichuan Yuanda Shuyang Pharmaceutical Co., Ltd., Shanxi
Kangbao Biological Product Co., Ltd., and Jiangxi Boya Bio Pharmaceutical Co., Ltd.
In addition, we also face competition from
imported products where allowed. China became a member of the World Trade Organization in December 2001 and as a result imported
biopharmaceutical products enjoy lower tariffs. Since 2009, China has experienced a substantial increase in volume of imported
human albumin. If the import of human albumin continues to increase, we may face more fierce competition in the domestic human
albumin market.
Based on our industry knowledge, we are among
the top three plasma products manufacturer in China in terms of 2016 sales revenue. To solidify our market position, we have expanded
our product portfolio to include coagulation factor products, such as factor VIII and human prothrombin complex concentrate, or
PCC. For factor VIII, we obtained the manufacturing approval certificate and the GMP certification for production facility from
the CFDA in 2012. For PCC, we obtained the manufacturing approval certificate in July 2013 and the GMP certification for the production
facility in March 2014.
We will continue to meet challenges and secure
our market position by enhancing our existing products, introducing new products to meet customer demand, delivering quality products
to our customers in a timely manner and maintaining our established industry reputation.
Our Intellectual Property
We held 59 issued patents and 10 pending patent
applications in China for certain manufacturing processes and packing designs as of December 31, 2016. We also had eight registered
trademarks in China as of December 31, 2016.
In addition, we had registered three domain
names as of December 31, 2016, namely,
www.chinabiologic.com
,
www.ctbb.com.cn
and
www.taibanggz.com
.
Regulation
Set forth below is a summary of the major PRC
regulations relating to our business.
Due to the nature of our products, we are supervised
by various levels of the NHFPC and/or CFDA. Such supervision includes the safety standards regulating our raw material supplies
(mainly plasma), our manufacturing process and our finished products.
We are also subject to other PRC regulations,
including those relating to taxation, foreign currency exchange and dividend distributions.
Plasma collection
Plasma collection stations are commonly used
to collect plasma in China and substantially all plasma donations for commercialized plasma products are made at plasma collection
stations. Plasma donation means that donors give only plasma but not the other blood components such as platelets, red cells and
infection-fighting white cells. In China, current regulations only allow an individual donor to donate plasma in 14-day intervals,
with a maximum quantity of 580ml (or about 600 gram) per donation.
The following are the general regulatory requirements
to establish a plasma collection station in China:
|
·
|
meet the overall plan in terms of the total number, distribution,
and operational scale of plasma collection stations;
|
|
·
|
have the required professional health care technicians to operate
a station;
|
|
·
|
have the facility and a hygienic environment to operate a station;
|
|
·
|
have an identification system to identify donors;
|
|
·
|
have the equipment to operate a station; and
|
|
·
|
have the equipment and quality control technicians to ensure the
quality of the plasma collected.
|
Plasma collection stations were historically
owned and managed by the PRC health authorities. In March 2006, the NHFPC and other eight central governmental departments of the
PRC State Council promulgated the Measures for the Reform of Blood Collection Stations whereby the ownership and management of
the plasma collection stations are required to be transferred to plasma-based biopharmaceutical companies while the regulatory
supervision and administrative control remain with the government. As a result, all plasma collection stations are now having direct
supply relationship with their parent fractionation facilities.
Set out below are some of the safety features
at China’s plasma collection stations:
|
·
|
Plasma collection stations can only source plasma from donors that
are the local residents within the assigned districts approved by the provincial health authorities.
|
|
·
|
Plasma collection stations must perform a health check on the donor.
Once the donor passes the health check, a “donor permit” is issued to the donor. The standards of the health check
are established by the health authorities at the PRC State Council level.
|
|
·
|
The designing and printing of the “donor permit” is administrated
by the provincial health authorities, autonomous region or municipality government, as the case maybe. The “donor permit”
cannot be altered, copied or assigned.
|
|
·
|
Before donors can donate plasma, the station must verify their identities
and the validity of their “donor permits.” The donors must pass the verification procedures before they are given a
health check and blood test. For those donors who have passed the verification, health check and blood test and whose plasma were
donated according to prescribed procedures, the station will set up a record.
|
|
·
|
Collected plasma which passes quality testing cannot be used to produce
plasma products until its donor donates again after a 90-day quarantine period and the subsequently donated plasma passes quality
testing as well.
|
|
·
|
All plasma collection stations are subject to the regulations on
the prevention of communicable diseases. They must strictly adhere to the sanitary requirements and reporting procedures in the
event of an epidemic situation.
|
The operation of plasma collection stations
is subject to stringent regulations by the PRC government. We estimate that there were approximately 209 plasma collection stations
in operation in China as of December 31, 2016.
Importation of plasma products
According to current PRC regulations, except
for human albumin and recombinant factor VIII products, all the plasma products are banned from importation into China.
Production of plasma products
The manufacture and sale of plasma products
are subject to stringent regulations by the PRC government. Under PRC law, each variation in the packaging, dosage and concentration
of medical products requires separate registration and approval by the CFDA before it may be commercially available for sale. For
example, among our human albumin products, only human albumin 20%/10ml, 20%/25ml, 20%/50ml, 10%/100ml, 10%/20ml, 10%/50ml, 25%/50ml
and 20%/50ml (10g, from factor IV) products have been approved and are commercially available. All references in this report to
our manufacture and sale of human albumin relate to our approved human albumin products.
The table below illustrates the PRC approval
process for the manufacture and sale of new medicines:
Stage
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Activities
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1
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Pre-clinical Research
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The pre-clinical research stage mainly involves the following steps:
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·
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initiate the research project, study the project feasibility and develop a plan for testing and producing the new medicine;
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develop the scope and the techniques for testing the new medicine in the laboratory;
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develop laboratory-scale manufacturing process for the new medicine;
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develop the manufacturing process for the new medicine on an expanded basis in the workshop; and
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·
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develop the virus inactivation process/techniques, engage qualified institution to assess the virus inactivation process/techniques, and report the related documents to the related government authority for re-assessment.
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2
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Clinical trial application
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The clinical trial application stage mainly involves the following steps:
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·
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submit required sample products and documents to The PFDA. The PFDA will perform an on-site examination on the documents and equipment, and then transfer all the required materials to the CFDA, who will further review the documents and test the sample products;
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submit a draft clinical trial program to the CFDA for the application of the clinical trial; and
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obtain approval of the clinical trial.
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3
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Clinical trials
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Clinical trials range from Phase I to IV:
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·
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Phase I: preliminary trial of clinical pharmacology and human safety evaluation studies. The primary objective is to observe the pharmacokinetics and the tolerance level of the human body to the new medicine as a basis for ascertaining the appropriate delivery methods or dosage.
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Phase II: preliminary exploration on the therapeutic efficacy. The purpose is to assess preliminarily the efficacy and safety of the new medicine on patients and to provide the basis for designing dosage tests in phase III.
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·
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Phase III: confirm the therapeutic efficacy. The objective is to further verify the efficacy and safety of the new medicine on patients, to evaluate the benefits and risks and finally to provide sufficient experimental evidence to support the registration application of the new medicine.
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Phase VI: application research conducted after the launch of a new medicine. The objective is to observe the efficacy and adverse reaction of the new medicine under extensive use, to perform an evaluation of the benefits and risks of the application among ordinary or special group of patients, and to ascertain and optimize the appropriate dosage and formula for application.
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4
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Registration
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The registration stage mainly involves the following steps:
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·
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submit documents related to pre-clinical and clinical trials to the PFDA, which will perform on-site inspection on the clinical trials and then transfer the related documents to the CFDA for further review;
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receive on-site inspection by the CFDA on three consecutive sample productions at the production facilities;
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obtain the manufacturing approval certificate following the public notification period; and
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·
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obtain the GMP certificate following the public notification period.
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5
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Production and approval for sale
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The production and approval for sale stage mainly involves the following steps:
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·
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produce the approved products in qualified facilities with requisite GMP certificates;
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submit documentation and samples of mass production products to the CFDA for inspection; and
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obtain qualification certificate to mass production products for sale on a batch-by-batch basis.
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New GMP standard
All of our production facilities are required
to obtain GMP certificates for their pharmaceutical production activities. In February 2011, the CFDA enacted the new GMP standard,
which has significantly increased standards for quality control, documentation, and overall manufacturing processes of blood products,
vaccines, injections and other sterile pharmaceutical products. The new GMP standard requires us to, among others, maintain and
operate a comprehensive and effective product quality control system throughout the production process. In addition, it imposes
higher standards for our production facilities. The new GMP standard became applicable to all of our production facilities at the
end of 2013. Following the upgrades on our production facilities, we obtained the renewed GMP certificate for Shandong Taibang
and Guizhou Taibang in June 2013 and March 2014, respectively. Huitian obtained the GMP certificate from the CFDA for its new plasma
production facility in February 2016 and commenced commercial production thereafter.
Pricing
Prior to June 1, 2015, retail prices of
certain pharmaceutical products were subject to various price-related regulations. According to the “Regulations on
Controlling Blood Products” promulgated by the PRC State Council in 1996, regional offices of the Pricing Bureau and
the NHFPC had the authority to regulate retail prices for controlled plasma products. Effective on June 1, 2015, the NDRC
removed the retail price ceilings for all drug products (except for anesthetics and category I antipsychotics) in China. See
“Risk Factors—Risks Relating to Our Business— We do not have discretion to increase the prices of
certain of our products, which are subject to the regional government tendering mechanism.”
After the pricing ceiling was removed, the
pricing of pharmaceutical products are mainly subject to the provincial tendering mechanism. In 2016, 31 provinces/regions/municipalities
in China initiated a new round of tenders with different tender rules, including the followings trends: 1) a combination of Essential
Drug List (“EDL”) tenders and non-EDL tenders; 2) a dynamic pricing system across different provinces; 3) volume-based
procurement; 4) different tender mechanisms based on product types; 5) various implementation timelines; 6) group purchase organization
(“GPO”) in certain regions. For our plasma products, tetanus immunoglobulin, Factor VIII and PCC are included on the
life-saving EDL in most Chinese provinces, for which drug procurement was prioritized and the hospitals are allowed
to directly purchase drugs from manufacturers through an on-line procurement process. For products like albumin and IVIG, most
provinces adopted regular tendering process that requires manufacturers to compete with other suppliers in both quality and price.
To date, most provinces have not completed the tendering. We expect that most of the provinces, which accounted for the majority
of our product sales, will finish their tenders in the first half of 2017. Even after the official tendering, there might be post-tender
negotiations. Tenders across different provinces with on-line price disclosure will help narrow the differences in tenders among
different provinces and make the practice more uniform across the country, which will increase the price pressure since provinces
intend to benchmark to the lowest nationwide prices.
In addition,
retail prices of pharmaceutical products fully or partially covered under the national insurance system are also affected by the
reimbursement ceilings set out in the National Drug Reimbursement List, or the NDRL, which may be adjusted by the NDRC from time
to time. The new edition of NDRL was launched on February 21, 2017. The hospitals as participants of the national
insurance program are pressured not to sell the products to patients at prices substantially exceeding such reimbursement ceilings.
This in turn puts pressure on the manufacturers’ pricing of the relevant products. Seven of our principal products (namely
human albumin, IVIG, human rabies immunoglobulin, human tetanus immunoglobulin, factor VIII, PCC and
human
immunoglobulin) are included in the NDRL. Two other principal products (namely placenta polypeptide and human hepatitis B immunoglobulin),
although not included in the NDRL, are also subject to tender and drug reimburse list in certain provinces.
Taxation
On March 16, 2007, the National People’s
Congress of China passed the Enterprise Income Tax Law, or the EIT Law, and on November 28, 2007, the PRC State Council passed
its implementation rules, which became effective on January 1, 2008. The EIT Law and its implementation rules impose a unified
EIT of 25.0% on all domestic-invested enterprises and foreign investment enterprises, or FIEs, unless they qualify under certain
limited exceptions.
In addition to the changes to the tax structure,
under the EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered
a resident enterprise and will normally be subject to an EIT of 25.0% on its global income. The implementation rules define the
term “de facto management bodies” as “an establishment that exercises, in substance, overall management and control
over, among others, the production, business, recruitment and accounting aspects of a Chinese enterprise.” If the PRC tax
authorities subsequently determine that we should be classified as a resident enterprise, then our global income will be subject
to PRC income tax of 25%. For detailed discussion of PRC tax issues related to resident enterprise status, see “Risk Factors—Risks
Relating to Doing Business in China—Under the Enterprise Income Tax Law, we may be classified as a “resident enterprise”
of China. Such classification will likely result in unfavorable tax consequences to us and our non-PRC stockholders.”
The EIT Law confirmed that qualified high and
new technology enterprises may enjoy a preferential income tax rate of 15%, instead of the uniform enterprise income tax rate of
25%. The PRC Ministry of Science and Technology, the PRC Ministry of Finance and the State Administration of Taxation, or SAT,
jointly promulgated the Measures for Determination of High and New Technology Enterprise on August 14, 2008 to provide the detailed
rules for the examination of qualifications and approval of certificates for high and new technology enterprises. Each high and
new technology enterprise certificate is valid for three years. Shandong Taibang was recognized by Shandong provincial government
as a high and new technology enterprise in 2008 and renewed the certificate in 2011, as a result of which Shandong Taibang was
entitled to enjoy a preferential income tax rate of 15.0% until the end of 2013. In October 2014, Shandong Taibang renewed the
high and new technology enterprise certificate, which entitled it to enjoy a preferential income tax rate of 15.0% for a period
of three years from 2014 to 2016. Shandong Taibang will apply for a renewal for an additional three years from 2017 to 2019 upon
the expiration of such certificate.
According to Notice on Issues Concerning Relevant
Tax Policies in Deepening the Implementation of the Western Development Strategy jointly promulgated by the PRC Ministry of Finance,
the PRC General Administration of Customs and SAT on July 27, 2011, enterprises located in the western region of China which have
at least 70.0% of their income from the businesses falling within the Category of Encouraged Industries in western region of China
may enjoy a preferential income tax of 15.0% within the period from January 1, 2011 to December 31, 2020. Guizhou Taibang, being
a qualified enterprise located in the western region of China, enjoys a preferential income tax rate of 15.0% effective from January
1, 2011 to December 31, 2020.
Foreign currency exchange
The principal regulation governing foreign
currency exchange in China is the Foreign Currency Administration Rules (1996), as amended (2008). Under these rules, RMB is freely
convertible for current account items, such as trade and service-related foreign exchange transactions, but not for capital account
items, such as direct investment, loan or investment in securities outside China unless the prior approval of, and/or registration
with, the State Administration of Foreign Exchange, or SAFE, or its local counterparts (as the case may be) is obtained.
Pursuant to the Foreign Currency Administration
Rules, FIEs in China may purchase foreign currency without the approval of SAFE for trade and service-related foreign exchange
transactions by providing commercial documents evidencing these transactions. They may also retain foreign exchange (subject to
a cap approved by SAFE) to satisfy foreign exchange liabilities or to pay dividends. In addition, if a foreign company acquires
a company in China, the acquired company will also become an FIE. However, the relevant PRC government authorities may limit or
eliminate the ability of FIEs to purchase and retain foreign currencies in the future. In addition, foreign exchange transactions
for direct investment, loan and investment in securities outside China are still subject to limitations and require approvals from,
and/or registration with, SAFE.
Dividend distributions
Under applicable PRC regulations, FIEs in China
may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations.
In addition, an FIE in China is required to set aside at least 10% of its after-tax profit based on PRC accounting standards each
year to its general reserves until the accumulative amount of such reserves reach 50% of its registered capital. These reserves
are not distributable as cash dividends. The board of directors of an FIE also has the discretion to allocate a portion of its
after-tax profits to staff welfare and bonus funds, which may not be distributed to equity owners except in the event of liquidation.
In addition, under the EIT law, the Notice
of the State Administration of Taxation on Negotiated Reduction of Dividends and Interest Rates, promulgated on January 29, 2008,
the Arrangement between the PRC and the Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention
of Fiscal Evasion, or the Double Taxation Treaty, which became effective on December 8, 2006, and the Notice of the State Administration
of Taxation Regarding Interpretation and Recognition of Beneficial Owners under Tax Treaties, which became effective on October
27, 2009, dividends from our PRC subsidiary, Taibang Biotech (Shandong) Co., Ltd., paid to us through our Hong Kong subsidiary,
Taibang Holdings, may be subject to a withholding tax at a rate of 10%, or at a rate of 5% if Taibang Holdings is considered a
“beneficial owner” that is generally engaged in substantial business activities in Hong Kong and entitled to treaty
benefits under the Double Taxation Treaty.
Our Employees
As of December 31, 2016, we employed 1,799
full-time employees, of which 48 were seconded to us by Shandong Institute of Biological Products, or the Shandong Institute.
We believe we are in material compliance with
all applicable labor and safety laws and regulations in China. We participate in various employee benefit plans that are organized
by municipal and provincial governments, including retirement, medical, unemployment, work injury and maternity benefit plans for
our managerial and key employees. In addition, we provide short term insurance plans for certain employees while on duty to cover
work related accidents. We believe that we maintain a satisfactory working relationship with our employees and we have not experienced
any significant labor disputes or any difficulties in recruiting staff for our operations.
ITEM 1A. RISK FACTORS.
An investment in our common stock involves
a high degree of risk. You should carefully consider the risks described below, together with all of the other information included
in this report, before making an investment decision. If any of the following risks actually occurs, our business, financial condition
or results of operations could suffer. In that case, the trading price of our common stock could decline, and you may lose all
or part of your investment. You should read the section entitled “Special Note Regarding Forward Looking Statements”
above for a discussion of what types of statements are forward-looking statements, as well as the significance of such statements
in the context of this report.
RISKS RELATING TO OUR BUSINESS
The biopharmaceutical industry in China
is strictly regulated and changes in such regulations, including banning or limiting plasma products, may have a material adverse
effect on our operations, revenues and profitability.
The biopharmaceutical industry in China is
strictly regulated by the government. The regulatory regime regulates the process of administrative approval of medicine and its
production, and includes laws and regulations such as the PRC Pharmaceutical Law, the Implementation Rules on the PRC Pharmaceutical
Law and the Regulations on the Administration of Blood Products. These laws and regulations require entities producing plasma products
to comply strictly with certain hygienic standards and specifications promulgated by the government. In the event that a plasma
product is discovered to be not compliant with the government’s hygienic standards and specifications, the health department
may revoke its approval of such plasma product, or otherwise limit the use of such plasma product. Changes in these laws and regulations,
including banning or limiting plasma products, could have a material adverse effect on our operations, revenues and profitability.
If the biopharmaceutical products we
sell are found to be contaminated, our operation, revenues and profitability would be severely and adversely affected and we may
be subject to civil and criminal liabilities.
The principal raw material of our existing
and planned biopharmaceutical products is human source plasma, which, due to its unique nature, is subject to risks of contaminations
and blood-borne diseases. In addition, current technology cannot eliminate entirely the risk of biological hazards inherent in
plasma that are not currently known or for which screens are not currently commercially available, which could result in a widespread
epidemic due to blood infusion. If any of our human donors is infected with diseases, then the plasma from such donor may be infected.
Although we pre-screen all donors in order to ensure that they are not infected with HIV and hepatitis C and have not contracted
liver disease, screening tests may fail to identify and exclude from our supply the plasma from infected donors due to technical
limitation and human errors. In addition, we purchase source plasma and plasma pastes from Xinjiang Deyuan. Although we perform
screening tests on the purchased plasma before putting it into production, we may fail to identify contaminated plasma from Xinjiang
Deyuan due to the technical limitation and/or human errors. If any contaminated plasma is not appropriately screened out, our entire
plasma supply for the relevant plasma collection station may become contaminated. If the plasma from our collection or purchased
from Xinjiang Deyuan is contaminated and we sell biopharmaceutical products made from such plasma, we could be subject to civil
liability from suits brought by consumers. Further, we may lose our registration and have criminal liability if we are found by
the government to have been criminally negligent. If this occurs, our business, prospects, results of operations and financial
condition will be materially and adversely affected.
If our supply of quality plasma is interrupted,
our results of operations and profitability will be adversely affected. In addition, if we experience any shortage of raw materials
in the future, we may be unable to proceed with our long-term business plan and we may be forced to curtail or cease our operations
or further business expansion.
The production of plasma products relies on
the supply of plasma of suitable quality. For 2016, 2015 and 2014, the cost of plasma we used for production accounted for approximately
81.5%, 82.3% and 80.1%, respectively, of total production cost. The supply and market prices of plasma may be adversely affected
by factors such as heightened or new regulatory restrictions, higher living standards or outbreaks of diseases, any of which would
affect our costs of production. We may not be able to pass on any resulting increase in costs to our customers and therefore any
substantial fluctuation in supply or market prices of plasma may adversely affect our results of operations and profitability.
Our production volume, capacity utilization
and future expansion are affected by a contraction in the supply of raw materials, especially plasma. In addition to the plasma
collected from our own plasma collection stations, we also outsource plasma from Xinjiang Deyuan pursuant to a cooperation agreement
entered into in August 2015. Under this cooperation agreement, Xinjiang Deyuan agreed to sell to us no less than 500 tonnes of
source plasma in batches over the next three years. We cannot assure you, however, that Xinjiang Deyuan will always deliver the
source plasma on schedule or such plasma will always pass our quality inspection. If we experience any shortage of plasma supply
or fail to secure sufficient plasma supply for our production, we may not be able to fully utilize our production capacity or proceed
with our expansion plans.
We may not be able to carry on our business
if we lose any of the required permits and licenses.
We and Huitian are required to obtain from
various PRC governmental authorities certain permits and licenses, including permits for pharmaceutical manufacturing and GMP certificates
for each of our plants, as well as pharmaceutical distribution permits.
Each of the production facilities operated
by us and Huitian is required to obtain a GMP certificate for its pharmaceutical production activities. In February 2011, the CFDA
enacted the new GMP standard, which has significantly increased standards for quality control, documentation, and overall manufacturing
processes that applied to each of the production facilities operated by us and Huitian as of December 31, 2013. In order for us
to meet the new GMP standard, we have upgraded the related production facilities of Shandong Taibang and Guizhou Taibang, which
obtained the renewed GMP certificates and resumed commercial production of plasma products in June 2013 and March 2014, respectively.
Huitian suspended its production in late 2013 and obtained the GMP certification for its new plasma production facility in Xi’an
in February 2016 and commenced commercial production thereafter.
We have also obtained permits and licenses
and GMP certificates required for the manufacturing and sales of our products. Our permits and licenses are subject to periodic
renewal and/or reassessment by the relevant PRC governmental authorities, and the compliance standards may be subject to change
from time to time. We intend to apply for the renewal of such permits and licenses when required by applicable laws and regulations.
However, we cannot guarantee that we may renew such permits and licenses in a timely manner, or at all. If we are unable to renew
our permits and licenses or fail an inspection which would impair our permits and licenses, our business, prospects, financial
condition and results of operations may be materially and adversely affected.
In addition, any changes in compliance standards,
or any new laws or regulations that may prohibit or restrict our business activities or increase our compliance costs may adversely
affect our operations and profitability. For example, we expect our on-going compliance cost to increase under the new GMP standard
as compared to the previous standard. As a result, our business and financial condition may be materially and adversely affected.
We may fail to obtain, maintain or renew
required licenses and permits for our plasma collection stations. In addition, if we fail to adequately monitor our plasma collection
stations, follow proper procedures or comply with safety requirements, we may be subject to sanctions by the government, civil
and criminal liability.
We currently operate 12 plasma collection stations
(including one branch collection facility) through Shandong Taibang and two plasma collection stations through Guizhou Taibang.
Huitian, a company in which we hold a minority interest, operates three plasma collection stations in Shaanxi Province. To enable
growth in our sales, we are seeking opportunities to build more plasma collection stations. In October 2014, we received the regulatory
approval to build two new plasma collection stations in Xinglong and Daming Counties, respectively, in Hebei Province. In June
2016, we received the operating permit for and commenced operations at our new plasma collection station in Xinglong County. In
September 2015, we received the regulatory approval to build a new branch collection facility to operate under our Ningyang plasma
collection station in Shandong Province. We obtained the operating permit for this new branch collection facility in October 2015
and commenced plasma collection thereafter. In December 2016, we received the regulatory approvals to build a new plasma collection
station in Ju County in Shandong Province and to build a branch collection facility in Feicheng County to operate under our Ningyang
plasma collection station in Shandong Province. The operation of plasma collection stations, however, is highly regulated and we
cannot assure you that we will be able to obtain, maintain and renew the required licenses and permits for existing and new plasma
collection stations in desirable locations or in a timely manner, if at all. For example, we have experienced difficulties and
delays in obtaining and/or renewing the business licenses and collection permits for a new plasma collection station in Pubei,
Guangxi Province and five existing plasma collection stations we acquired in Guizhou Province. While we monitor our plasma intake
procedures through frequent unscheduled inspections of our stations, there remain risks that our plasma collection stations may
fail to comply with hygiene and procedural requirements for plasma screening, collection, storage and tracking. If we fail to comply
with any of these requirements, we may lose our plasma collection permits or incur criminal liability if we are found by the government
to have been criminally negligent. In the case of plasma contamination, we may also be subject to civil liability from suits brought
by consumers of our biopharmaceutical products. In addition, failure to comply with hygiene and procedural requirements may cause
harm to donors, who may contract diseases from other donors, among other things. Any such incident may subject us to government
sanctions, civil or criminal liabilities. If any of these events were to occur, our business, reputation and prospects would be
materially and adversely affected.
Our operations, sales, profit and cash
flow will be adversely affected if our plasma products fail to pass inspection in a timely manner.
The PRC government inspects each batch of our
plasma products before we can ship it to our customers. The CFDA has quality standards which require the regulators to assess,
among other things, the appearance, packing capacity, thermal stability, pH value, protein content and purity of the product. We
must strictly comply with relevant rules and regulations throughout the lifecycle of each product including plasma collection,
delivery, production and packaging. Government regulators typically take more than a month to inspect one batch of plasma products.
The process begins when the regulator randomly selects samples of our products and delivers them to the PRC National Institute
for the Control of Pharmaceutical and Biological Products, or NICBPB, for testing, and the process ends when the products are given
final approval by NICBPB. In the event that the regulators delay the approval of or reject our products or change the requirements
such that we are unable to comply, our operations, sales, profit and cash flow will be adversely affected.
Current or worsening economic conditions
may adversely affect our business and financial condition.
We currently generate sufficient operating
cash flows which provide us with significant working capital. However, any uncertainty arising out of economic conditions may affect
our ability to manage normal relationships with our customers, suppliers and creditors and adversely affect our results of operations,
cash flows and financial condition, or those of our customers, suppliers and creditors. Current or worsening economic conditions
may adversely affect the ability of our customers to pay for our products, and curtail their spending on healthcare generally.
This could result in a decrease in the demand for our products, declining cash flows, longer sales cycles, slower adoption of new
technologies and increased price competition. These conditions may also adversely affect certain of our suppliers, which could
cause a disruption in our production capacities. Such reductions and disruptions could have a material adverse effect on our business
operations.
Our inability to successfully research
and develop new biopharmaceutical products could have an adverse effect on our future growth.
We believe that the successful development
of biopharmaceutical products can be affected by many factors. Products that appear to be promising in the early phases of research
and development may fail to be commercialized for various reasons, including the failure to obtain the necessary regulatory approvals.
In addition, the research and development cycle for any new medicine is a relatively lengthy process. In our experience, the process
of conducting research and various tests on new products before obtaining a new medicine certificate from the CFDA and subsequent
procedures may take approximately three to five years. We cannot assure you that our future research and development projects will
be successful or that they will be completed within the anticipated time frame or budget. Also, we cannot guarantee that we will
receive the necessary approvals from relevant authorities for the production of our newly developed products. Even if such products
could be successfully commercialized, we cannot assure you that they will be accepted by the market as anticipated.
As mandated by a CFDA notice promulgated on July 22, 2015, all pharmaceutical
enterprises that are in the process of registration application are required to inspect the data from the clinical trials and report
the inspection results to the CFDA and to withdraw the registration application should any deficiency surface from such inspection.
Since July 22, 2015, 1,622 manufacturing certificates
have been included in the self-inspection list, among which
67%
submitted the data, 20% withdrew, and 12% asked to waive the clinical trials.
The three typical reasons for application withdrawals
include:
|
·
|
insufficiency of application documents;
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|
·
|
quality issue uncovered from trial data;
|
|
·
|
voluntary withdrawal to improve the quality of clinical trial data.
|
We withdrew the registration application for
human hepatitis B immunoglobulin (pH4) for intravenous injection as a result of our self-inspection in December 2015 with the aim
to improve the quality of clinical trial data.
Given the uncovered quality issues and rising
costs for clinical trials, certain small drug manufacturers may face increased difficulty in submitting new registration applications,
which could accelerate the CFDA’s overall review process. We cannot assure you, however, that our registration applications
will benefit from this new CFDA practice. Our new product launches might be delayed or aborted due to our withdrawal in December
2015 and any forced or voluntary withdrawal of our other products in the process of registration application in the future should
quality issues be uncovered from the inspection of the relevant clinical trial data. Such delay or abortion could have a material
adverse effect on our results of operations, financial condition and prospects.
We do not have discretion to increase
the prices of certain of our products, which are subject to the regional government tendering mechanism.
Prices of certain pharmaceutical products
were subject to various price-related regulations. Effective on June 1, 2015, the NDRC removed the retail price ceilings for
all drug products (except for anesthetics and category I antipsychotics) in China. Even after the NDRC removed the price
ceiling, our pricing is still subject to provincial and local tendering mechanisms where we compete with other manufacturers
in the price of plasma products. In 2016, 31 provinces/regions/municipalities in China initiated a new round of tenders. For
our plasma products, tetanus immunoglobulin, Factor VIII and PCC are included on the life-saving EDL in most
Chinese provinces, for which drug procurement was prioritized and the hospitals are allowed to directly purchase drugs from
manufacturers through an on-line procurement process. For products like albumin and IVIG, most provinces adopted regular
tendering process that requires manufacturers to compete with other suppliers in both quality and price. To date, most
provinces have not completed the tendering. We expect that most of the provinces, which accounted for the majority of our
product sales, will finish their tenders in the first half of 2017. Even after the official tendering, there might be
post-tender negotiations. Tenders across different provinces with on-line price disclosure will help narrow the differences
in tenders among different provinces and make the practice more uniform across the country, which will increase the price
pressure since provinces intend to benchmark to the lowest nationwide prices.
In addition, retail prices of
pharmaceutical products fully or partially covered under the national insurance system are also affected by the reimbursement
ceilings set out in the NDRL, which may be adjusted by the NDRC from time to time. The new edition of NDRL was launched on
February 21, 2017. The hospitals as participants of the national insurance program are pressured not to sell the products to
patients at prices substantially exceeding such reimbursement ceilings. This in turn puts pressure on the
manufacturers’ pricing of the relevant products. Seven of our principal products (namely human albumin, IVIG,
human rabies immunoglobulin, human tetanus immunoglobulin, factor VIII, PCC and human immunoglobulin) are included in the
NDRL and are affected by the reimbursement ceilings. Two other principal products (namely placenta polypeptide and human
hepatitis B immunoglobulin), although not included in the NDRL, are also subject to tender price ceilings in certain PRC
provinces. See “Business — Regulation” for further details.
Because of the tender process and the
reimbursement ceilings for certain of our products, we do not have discretion to increase
the prices we charge our customers and distributors for such products above certain levels. We may not be able to increase
our prices even if the cost of manufacturing our products increases as a result of increases in the cost of raw materials or
other costs, and, our revenue and profitability would be adversely affected. If the margin of any of these products
becomes prohibitively low, we may stop manufacturing such product, which may further adversely affect our revenue
and profitability.
Our ability to increase the prices of
our products is limited by general market conditions and intense competition.
Our pricing practices may also be affected
by the general market conditions and intense competition. To the extent the demand for our products declines or competition intensifies,
we may decide to respond by reducing our prices in order to capture the declining market demand and maintain the competitiveness
of our products. See also “—We are subject to intense competition and may encounter increased competition from both
local and overseas pharmaceutical enterprises if PRC regulators relax the approval process for plasma products or international
trade restrictions. A change in our competitive environment could adversely affect our profitability and prospects” below.
If the margin of any of our products becomes prohibitively low, we may stop manufacturing such product, which may further adversely
affect our revenue and profitability.
If reimbursement or other payment for
our current or future products is reduced or modified in the PRC, including through the implementation of government-sponsored
healthcare reform or other similar actions, cost containment measures, or changes to policies with respect to pricing, then our
business could suffer.
Sales of our products depend, in part, on the
extent to which the costs of our products are paid by public payers. These public payers mainly consist of local governments which
reimburse the medicines covered by the NIC. The local governments update the NIC on a regularly basis and may remove certain medicines
from the NIC. These public payers may also reduce the reimbursement amounts for certain medicines under the NIC. These measures
by local governments may limit, reduce or eliminate payments for our products and adversely affect both pricing flexibility and
demand for our products.
Legislation and regulations affecting reimbursement
for our products may change at any time and in ways that may be adverse to us. We cannot predict the impact of these pressures
and initiatives, or any negative effects of any additional regulations that may affect our business.
Some of our owned or leased properties
have title defects or non-compliance, which could adversely affect our business operations.
Some of our owned
or leased properties have title defects or non-compliance. For example, we use properties built on collectively owned rural land
for one of our plasma collection stations.
We are also in the process of obtaining the property
ownership certificate for another one of our plasma collection stations. Although such title defects and non-compliance have not
adversely affected our business operations, we cannot assure you that we will be able to rectify such defects and non-compliance
in a timely manner or at reasonable costs, if at all. For example, under PRC laws, collectively owned rural land may not be used
for commercial purposes and we may be required to vacate and seek other space to house our collection facilities. For the collection
station built on collectively owned rural land, under the lease agreement for the collectively owned rural land among us, the local
government and the economic collective which owns the land, the economic collective is required to assist us in securing legal
rights to use such land. If the economic collective fails to perform its obligations under the lease agreement, or the lease agreement
is deemed to be void, voidable or otherwise unenforceable, or if ownership disputes or claims regarding the land otherwise arise,
we may be required to relocate our collection station. Any disputes or claims relating to our owned or leased properties or land
or any efforts in securing alternative sites and properties could divert our resources and management’s attention from our
regular business operations. In addition, we may not be able to secure alternative sites and properties, if required, in a timely
manner or at reasonable costs, which could adversely affect our business operations.
Our financial position and operations
may be materially and adversely affected if our product liability insurance does not sufficiently cover our liabilities.
Under current PRC laws, manufacturers and vendors
of defective products in China may incur liability for loss and injury caused by such products. Pursuant to the General Principles
of the Civil Law of the PRC, or the PRC Civil Law, which became effective in 1987, a defective product that causes property damage
or physical injury to any person may subject the manufacturer or vendor of such product to civil liability.
The Product Quality Law of the PRC, or the
Product Quality Law, was enacted in 1993 and revised in 2000. The Product Quality Law was enacted to protect the rights and interests
of end-users and consumers and to strengthen the supervision and control of the quality of products. Under the Product Quality
Law, manufacturers who produce defective products may be subject to fines and production suspension, and in severe cases, be subject
to criminal liability and may have their business licenses revoked.
The PRC Law on the Protection of the Rights
and Interests of Consumers, or the Consumers’ Rights Law, was enacted in 1993 to further protect the legal rights and interests
of consumers in connection with the purchase or use of goods and services. All businesses, including our business, must observe
and comply with the Consumers’ Rights Law.
The Tort Liability Law of the PRC was enacted
in December 2009, which imposes liability on manufacturers for damages caused by defects in their products. If the defects are
caused by third parties such as transporters or storekeepers, manufactures may be entitled to claim for indemnification or contribution
from such third parties for making compensation to the consumers.
We maintain two product liability insurance
policies for sales in China for Shandong Taibang and Guizhou Taibang’s products in the amount of $2.9 million (RMB20 million)
each. If our products are found to be defective and our insurance coverage is insufficient to cover a successful claim against
us, our financial position and operations may be materially and adversely affected.
Product liability claims or product recalls
involving our products could have a material adverse effect on our business.
Our business exposes us to the risk of product
liability claims that are inherent in the manufacturing, distribution and sale of plasma products. Plasma is a biological substance
that is capable of transmitting viruses and pathogens, whether known or unknown. Therefore, our plasma and plasma products, if
not properly collected, tested, pathogen-inactivated, processed, stored or transported, could cause serious disease and possibly
death to patients. Further, there are viral and other infections of plasma which may escape detection using current testing methods
and which are not susceptible to inactivation methods. Any infection of disease by persons using our products could result in claims
against us. Since our establishment in 2002, we have been subject to four lawsuits filed by patients who were treated with our
products and received blood and/or plasma transfusions. In three of these cases, we were ordered to contribute a portion of the
compensation for the patients even though the courts did not find that our products were defective or caused the patients’
illness. The required contribution by us was immaterial in these three cases. The fourth case is pending in an ongoing litigation,
which we are vigorously defending. We cannot assure you that there will be no future claims against us or that we will always succeed
in defending against such claims. Furthermore, the presence of a defect in a product could require us to carry out a recall of
such product.
A product liability claim, regardless of merit
or eventual outcome, or a product recall could result in substantial financial losses, civil and criminal liabilities, administrative
sanctions, revocation of business and product permits and licenses, negative reputational repercussions and an inability to retain
customers. If our products are found to be defective and our insurance coverage is insufficient to cover a successful claim against
us, our financial position and operations may be materially and adversely affected.
We are subject to intense competition
and may encounter increased competition from both local and overseas pharmaceutical enterprises if PRC regulators relax the approval
process for plasma products or international trade restrictions. A change in our competitive environment could adversely affect
our profitability and prospects.
We face intense competition from local and
foreign entities that manufacture and sell products that compete with ours in China. These competitors may have more capital, better
research and development resources, expanded manufacturing and marketing capabilities and more experience than we do. The plasma-based
biopharmaceutical manufacturing industry in China is highly regulated, and although we believe that compliance with the regulatory
requirements pose a competitive barrier to enter into the Chinese market, over time, however, there may be new entrants. If the
government relaxes these restrictions and allows more competitors to enter into the market, these competitors may have more capital,
better research and development resources, more manufacturing and marketing capability and experience than us. Our operating results
and financial condition may be adversely affected if competition intensifies, competitors reduce prices to gain market share, or
competitors develop new products having comparable medicinal applications or therapeutic effects which are more effective or less
costly than ours.
In addition, we also face competition from
imported products. Since 2009, there has been a substantial increase in volume of imported human albumin in China, which competes
in domestic human albumin market. In addition, we compete with foreign biopharmaceutical manufacturers that set up production facilities
in China and compete directly with us. The increased supply of both domestic and foreign biopharmaceutical products in China may
result in lower sales or lower prices for our products. We cannot assure you that we will remain competitive or that our profitability
and prospects will not be adversely affected.
We depend heavily on key personnel, and
turnover of key employees and senior management could harm our business.
Our success, to a certain extent, is attributable
to the expertise and experience of our senior management and key research and technical personnel who carry out key functions in
our operation. If we lose the service of any of our senior management or key research or technical personnel or fail to attract
additional personnel with suitable experience and qualification, our business operations and research capability may be adversely
affected.
We have a secondment agreement with the
Shandong Institute, which is expected to terminate upon its future privatization, for certain of our employees. If the secondment
agreement is breached or terminated, it could have an adverse effect on our operations and on our financial results.
Shandong Institute provided us with 48 of our
employees, including certain key management personnel, out of our total of approximately 1,799 employees as of December 31, 2016,
pursuant to a secondment agreement dated October 28, 2002, between Shandong Taibang and the Shandong Institute. Pursuant to the
secondment agreement, we are responsible for the salaries of these employees, as well as for their social benefits such as insurance.
Our secondment agreement with the Shandong Institute will expire on the earlier of October 2032 or the privatization of the Shandong
Institute, which was originally scheduled to occur before the end of 2008. However, the privatization of the Shandong Institute
has been delayed indefinitely due to delay by the Shandong Department of Health in implementing the privatization plan. Upon expiration
or termination of the secondment agreement, we plan to hire the seconded employees directly. However, we cannot assure you that
all of the employees will accept our employment offers at that time. Guangli Pang, Shandong Taibang’s chief executive officer
is employed through the secondment agreement. Although none of our seconded employees have indicated that they do not plan to continue
working for us after the privatization, if the secondment agreement is terminated or expires and we are unable to hire those employees
or their replacements on time, our operations, as well as our financial results, may be materially and adversely affected.
Future acquisitions may have an adverse
effect on our ability to manage our business.
Selective acquisitions form part of our strategy
to further expand our business. If we are presented with appropriate opportunities, we may acquire additional companies, products
or technologies. Future acquisitions and the subsequent integration of new companies into ours would require significant attention
from our management. The diversion of our management’s attention and any difficulties encountered in any integration process
could have an adverse effect on our ability to manage our business. Future acquisitions would expose us to potential risks, including
risks associated with the integration of new operations, technologies and personnel, unforeseen or hidden liabilities, the diversion
of resources from our existing businesses and technologies, the inability to generate sufficient revenue to offset the costs and
expenses of acquisitions, and potential loss of, or harm to, relationships with employees, customers and suppliers as a result.
We may lose our competitive advantage
and our operations may suffer if we fail to prevent the loss or misappropriation of, or disputes over, our intellectual property
or proprietary information.
We regard our intellectual property, particularly
our patents and trade secrets, to be of considerable value and importance to our business and our success. We rely on a combination
of patent, trademark and trade secret laws, as well as confidentiality agreements to protect our intellectual property rights.
Failure to protect our intellectual property rights could harm our brands and our reputation, and adversely affect our ability
to compete effectively. Further, enforcing or defending our intellectual property rights, including our patents and trade secrets,
could result in the expenditure of significant financial and managerial resources.
As of December 31, 2016, we held 59 issued
patents and had 10 pending patent applications in China for certain manufacturing processes and packaging designs. We may not be
able to successfully obtain the approval of the PRC authorities for our patent applications. As of December 31, 2016, we also had
eight trademarks registered in China.
While we are not aware of any infringement
on our intellectual property and we have not been notified by any third party that we are infringing on their intellectual property,
our ability to compete successfully and to achieve future revenue growth will depend, in significant part, on our ability to protect
our proprietary technologies and operate without infringing upon the intellectual property rights of others. Policing unauthorized
use of proprietary technologies is difficult and expensive. The steps we have taken may not be adequate to prevent unauthorized
use of our intellectual property rights.
The legal regime in China for the protection
of intellectual property rights is still at its early stage of development. Despite many laws and regulations promulgated and other
efforts made by China over the years to tighten up its regulation and protection of intellectual property rights, private parties
may not enjoy intellectual property rights in China to the same extent as they would in many more developed countries, including
the United States, and the enforcement of such laws and regulations in China has not achieved the levels reached in those countries.
The administrative agencies and the court system in China are not well-equipped to deal with violations or handle the nuances and
complexities between compliant technological innovation and noncompliant infringement.
We also rely on confidentiality agreements
with our management and employees to protect our confidential proprietary information. However, the protection of our intellectual
property may be compromised as a result of:
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departure of any of
our management members or employees in possession of our confidential proprietary information;
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breach by such departing management member or employee of his or
her confidentiality and non-disclosure undertaking to us;
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infringement by others of our proprietary information and intellectual
property rights; or
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refusal by relevant regulatory authorities to approve our patent
or trademark applications.
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Any of these events or occurrences may have
a material adverse effect on our operations.
We cannot assure you that the steps taken by
us to protect our intellectual property rights will be adequate or that third parties will not infringe or misappropriate our patents,
trademarks, confidential proprietary information or similar proprietary rights. Litigation may be necessary to enforce our intellectual
property rights and the outcome of any such litigation may not be in our favor. Given the relative unpredictability of China’s
legal system and potential difficulties enforcing a court judgment in China, we cannot guarantee that we would be able to halt
any unauthorized use of our intellectual property through litigation in a timely manner.
Furthermore, we cannot assure you that other
parties will not assert infringement claims against us, and we may have to pursue litigation against other parties to assert our
rights. Any such claim or litigation could be costly and we may lack the resources required to defend against such claims. If we
are unsuccessful in defending against such infringement claims, we may be required to pay damages, modify our products or suspend
the production and sale of such products. We cannot guarantee that we will be able to modify our products on commercially reasonable
terms.
Finally, any event that would jeopardize our
proprietary rights or any claims of infringement by third parties could have a material adverse effect on our ability to market
or sell our brands, and profitably exploit our products.
A disruption in the supply of utilities,
fire or other calamity at our manufacturing plant would disrupt production of our products and adversely affect our business.
Our products are manufactured at our production
facilities located in Tai’an, Shandong Province and Guiyang, Guizhou Province in China. While we have not in the past experienced
any calamities which disrupted production, any disruption in the supply of utilities, in particular, electricity or power supply,
or any outbreak of fire, flood or other calamity resulting in significant damage at our facilities would severely affect our production
and have a material adverse effect on our business, financial condition and results of operations.
We maintain insurance policies covering losses
with respect to damages to our properties and products. We do not have insurance coverage for inventories of raw materials or business
interruption. We cannot assure you that our insurance would be sufficient to cover all of our potential losses.
If we do not maintain strong financial
controls, investor confidence in us may decline and our stock price may decline as a result.
As required by Section 404 of the Sarbanes-Oxley
Act of 2002, the SEC adopted rules requiring every public company to include a management report on such company’s internal
control over financial reporting in its annual report, which must also contain management’s assessment of the effectiveness
of our company’s internal control over financial reporting. In addition, the independent registered public accounting firm
auditing the financial statements must also attest to the operating effectiveness of our company’s internal controls.
A report of our management and attestation
by our independent registered public accounting firm is included in our annual report on Form 10-K for the year ended December
31, 2016. Our management has concluded that our internal controls over financial reporting as of December 31, 2016 were effective.
We have in the past discovered, and may in the future discover, material weakness in our internal controls. For example, we identified
material weaknesses related to review controls on the accounting for income taxes and derivative instrument valuation as described
under Item 9A of our annual report on Form 10-K for year ended December 31, 2010, which were subsequently remediated in 2011 as
described under Item 9A of our annual report on Form 10-K for the year ended December 31, 2011. However, we cannot guarantee that
these remedies will continue to be effective. Failure to achieve and maintain an effective internal control environment could result
in us not being able to accurately report our financial results, prevent or detect fraud or provide timely and reliable financial
and other information pursuant to the reporting obligations we have as a public company, which could have a material adverse effect
on our business, financial condition and results of operations. This could reduce investors’ confidence in our reported financial
information, which in turn could result in lawsuits being filed against us by our stockholders, otherwise harm our reputation or
negatively affect the trading price of our common stock.
RISKS RELATING TO DOING BUSINESS IN CHINA
Changes in China’s political or
economic situation could harm us and our operating results.
Economic reforms adopted by the PRC government
have had a positive effect on the economic development of the country. The reformed economic infrastructure and legal systems,
however, may be subject to abrupt adjustments by the government. These adjustments, especially in the following areas, could either
benefit or damage our operations and profitability:
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Level of government involvement in the economy;
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Control of foreign exchange;
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Methods of allocating resources;
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International trade restrictions; and
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International conflict.
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The PRC economy differs from the economies
of most member countries of the Organization for Economic Cooperation and Development, or the OECD, in many ways. For example,
state-owned enterprises still constitute a large portion of China’s economy, and weak corporate governance and the lack of
a flexible currency exchange policy still prevail in China. As a result of these differences, we may not develop in the same way
or at the same rate as might be expected if the PRC economy was similar to those of the OECD member countries.
Uncertainties with respect to the PRC
legal system could limit the legal protections available to you and us.
We conduct substantially all of our business
through our operating subsidiaries in China. Our operating subsidiaries are generally subject to laws and regulations applicable
to foreign investments in China and, in particular, laws applicable to foreign-invested enterprises. The PRC legal system is based
on written statutes, and prior court decisions may be cited for reference but have limited precedential value. Since 1979, a series
of new PRC laws and regulations have significantly enhanced the protections afforded to various forms of foreign investments in
China. However, since the PRC legal system continues to evolve rapidly, the interpretations of many laws, regulations, and rules
are not always uniform, and enforcement of these laws, regulations, and rules involve uncertainties, which may limit legal protections
available to you and us. In addition, any litigation in China may be protracted and result in substantial costs and diversion of
resources and management attention.
You may have difficulty enforcing judgments
against us.
Most of our assets are located outside of the
United States and most of our current operations are conducted in China. In addition, most of our directors and officers are nationals
and residents of countries other than the United States and substantially all the assets of these persons are located outside the
United States. As a result, it may be difficult for you to effect service of process within the United States upon our PRC operations
and these persons. It may also be difficult for you to enforce in U.S. courts judgments on the civil liability provisions of the
U.S. federal securities laws against us and our officers and directors.
There is also uncertainty as to whether the
PRC courts would recognize or enforce judgments of U.S. courts. Our counsel as to PRC law has advised us that although recognition
and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law, recognition and enforcement of a foreign
judgment by PRC courts depend on treaties or reciprocity between China and the country where the judgment is made. China does not
have any treaties or other arrangements with the United States that provide for the reciprocal recognition and enforcement of U.S.
judgments. In addition, according to the PRC Civil Procedures Law, PRC courts will not enforce a foreign judgment against us or
our directors and officers if they decide that the judgment violates basic principles of PRC law or national sovereignty, security,
or the public interest. So it is uncertain whether a PRC court would enforce a judgment rendered by a court in the United States.
The PRC government exerts substantial
influence over the manner in which we must conduct our business activities.
The PRC government
has exercised and continues to exercise substantial control over virtually every sector of the PRC economy through regulation and
state ownership. Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating
to taxation, import and export tariffs,
environmental regulations, land use rights, property,
and other matters. We believe that our operations in China are in material compliance with all applicable legal and regulatory
requirements. However, the central or local governments of the jurisdictions in which we operate may impose new, stricter regulations
or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance
with such regulations or interpretations.
Accordingly, government actions in the future,
including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy and
any regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions
in China or particular regions thereof and could require us to divest ourselves of any interest we then hold in Chinese properties
or joint ventures.
Restrictions on currency exchange may
limit our ability to receive and use our sales effectively.
Substantially all of our sales are settled
in RMB, and any future restrictions on currency exchanges may limit our ability to use revenue generated in RMB to fund any future
business activities outside China or other payments in U.S. dollars. Although the PRC government introduced regulations in 1996
to allow greater convertibility of the RMB for current account transactions, significant restrictions still remain, including primarily
the restriction that foreign-invested enterprises may only buy, sell or remit foreign currencies after providing valid commercial
documents at those banks in China authorized to conduct foreign exchange business. In addition, conversion of RMB for capital account
items, including direct investments and loans, is subject to governmental approval and companies are required to open and maintain
separate foreign exchange accounts for capital account items. We cannot be certain that the PRC regulatory authorities will not
impose more stringent restrictions on the convertibility of the RMB.
Fluctuations in exchange rates could
adversely affect our business and the value of our securities.
The value of our common stock will be indirectly
affected by the foreign exchange rate between the U.S. dollar and RMB and between those currencies and other currencies in which
our sales may be denominated. Appreciation or depreciation in the value of the RMB relative to the U.S. dollar would affect our
financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations.
Fluctuations in the exchange rate will also affect the relative value of any dividends we issue that will be exchanged into U.S.
dollars, as well as earnings from, and the value of, any U.S. dollar-denominated investments we make in the future.
Since July 2005, RMB has no longer been pegged
to U.S. dollars. Although the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant
short-term fluctuations in the exchange rate, RMB may appreciate or depreciate significantly in value against U.S. dollars in the
medium to long term. Moreover, it is possible that in the future PRC authorities may lift restrictions on fluctuations in the RMB
exchange rate and lessen intervention in the foreign exchange market.
Very limited hedging transactions are available
in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions. While
we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited,
and we may not be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified
by PRC exchange control regulations that restrict our ability to convert RMB into foreign currencies.
Currently, some of our raw materials and major
equipment are imported. In the event that the U.S. dollars appreciate against RMB, our costs will increase. If we cannot pass the
resulting cost increases on to our customers, our profitability and operating results will suffer. In addition, if our sales to
international customers grow, we will be increasingly subject to the risk of foreign currency depreciation.
Restrictions under PRC law on our PRC
subsidiaries’ ability to make dividends and other distributions could materially and adversely affect our ability to grow,
make investments or acquisitions, pay dividends to you and otherwise fund and conduct our business.
Substantially all of our profits are earned
by our PRC subsidiaries. However, PRC regulations restrict the ability of our PRC subsidiaries to make dividends and other payments
to their offshore parent companies. PRC legal restrictions permit payments of dividends by our PRC subsidiaries only out of their
accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. Our PRC subsidiaries
are also required under PRC laws and regulations to allocate at least 10.0% of their annual after-tax profits determined in accordance
with PRC generally accepted accounting principles to a statutory general reserve fund until the amounts in such fund reaches 50.0%
of their registered capital. Allocations to these statutory reserve funds can only be used for specific purposes and are not transferable
to us in the form of loans, advances or cash dividends. Any limitations on the ability of our PRC subsidiaries to transfer funds
to us could materially limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay
dividends and otherwise fund and conduct our business.
Failure to comply with PRC regulations
relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident stockholders
to personal liability, limit our ability to acquire PRC companies or to inject capital into our PRC subsidiaries, limit the ability
of our PRC subsidiaries to distribute profits to us or otherwise materially adversely affect us.
Pursuant to the Circular on Relevant Issues
concerning Foreign Exchange Administration of Overseas Investment and Financing and Return Investments Conducted by Domestic Residents
through Overseas Special Purpose Vehicle, or Circular 37, which was promulgated by SAFE, and became effective on July 4, 2014,
(1) a PRC resident must register with the local SAFE branch before he or she contributes assets or equity interests in an overseas
special purpose vehicle, or an Overseas SPV, that is directly established or controlled by the PRC resident for the purpose of
conducting investment or financing; and (2) following the initial registration, the PRC resident is also required to register with
the local SAFE branch for any major change, in respect of the Overseas SPV, including, among other things, a change in the Overseas
SPV’s PRC resident shareholder, name of the Overseas SPV, term of operation, or any increase or reduction of the Overseas
SPV’s registered capital, share transfer or swap, and merger or division.
We have requested the beneficial holders of
our stock who are PRC residents to register with the relevant branch of SAFE in connection with their equity interests in us and
our acquisitions of equity interests in our PRC subsidiaries pursuant to Circular 37 or the predecessor regulation of Circular
37, namely the Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents Engaging in Financing and
Roundtrip Investments via Overseas Special Purpose Vehicles, as the case may be. Because of uncertainty over how Circular 37 will
be interpreted and implemented, and how or whether SAFE will apply it to us, we cannot predict how it will affect our business
operations or future strategies. For example, the ability of our present and prospective PRC subsidiaries to conduct foreign exchange
activities, such as the remittance of dividends and foreign currency-denominated borrowings, may be subject to compliance with
Circular 37 by our PRC resident beneficial holders.
In addition, such PRC residents may not always
be able to complete the necessary registration procedures required by Circular 37. We also have little control over either our
present or prospective direct or indirect stockholders or the outcome of such registration procedures. Failure of our present or
future PRC resident beneficial holders to comply with Circular 37 could subject these PRC resident beneficial holders to fines
or legal sanctions, restrict our overseas or cross-border investment activities, limit the ability of our PRC subsidiaries to make
distributions or pay dividends or affect our ownership structure, which could adversely affect our business and prospects.
We may be unable to complete a business
combination transaction efficiently or on favorable terms due to complicated merger and acquisition regulations.
In August 2006, six PRC regulatory agencies,
including the China Securities Regulatory Commission, or CSRC, promulgated the Regulation on Mergers and Acquisitions of Domestic
Companies by Foreign Investors, or Circular 10, which became effective in September 2006 and was amended in June 2009. This regulation,
among other things, governs the approval process by which a PRC company may participate in an acquisition of assets or equity interests.
Depending on the structure of the transaction, Circular 10 requires the PRC parties to make a series of applications and supplemental
applications to the government agencies. In some instances, the application process may require the presentation of economic data
concerning a transaction, including appraisals of the target business and evaluations of the acquirer, which are designed to allow
the government to assess the transaction. Government approvals will have expiration dates by which a transaction must be completed
and reported to the government agencies. Compliance with Circular 10 is likely to be more time-consuming and expensive than in
the past and the government can now exert more control over the combination of two businesses. Accordingly, due to Circular 10,
our ability to engage in business combination transactions has become significantly more complicated, time consuming and expensive,
and we may not be able to negotiate a transaction that is acceptable to our stockholders or sufficiently protect their interests
in a transaction.
Circular 10 allows PRC government agencies
to assess the economic terms of a business combination transaction. Parties to a business combination transaction may have to submit
to the PRC Ministry of Commerce, or MOFCOM, and other relevant government agencies an appraisal report, an evaluation report and
the acquisition agreement, all of which form part of the application for approval, depending on the structure of the transaction.
The regulations also prohibit a transaction at an acquisition price obviously lower than the appraised value of the PRC business
or assets and in certain transaction structures, require that consideration must be paid within defined periods, generally not
in excess of a year. The regulation also limits our ability to negotiate various terms of the acquisition, including aspects of
the initial consideration, contingent consideration, holdback provisions, indemnification provisions and provisions relating to
the assumption and allocation of assets and liabilities. Transaction structures involving trusts, nominees and similar entities
are prohibited. Therefore, such regulation may impede our ability to negotiate and complete a business combination transaction
on financial terms that satisfy our investors and protect our stockholders’ economic interests.
Under the Enterprise Income Tax Law,
we may be classified as a “resident enterprise” of China. Such classification will likely result in unfavorable tax
consequences to us and our non-PRC stockholders.
The Enterprise Income Tax Law, or the EIT Law,
and its implementing rules became effective on January 1, 2008. Under the EIT Law, an enterprise established outside of China with
“de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be
treated in a manner similar to a PRC enterprise for enterprise income tax purposes. The implementing rules of the EIT Law define
de facto management as “substantial and overall management and control over the production and operations, personnel, accounting,
and properties” of the enterprise.
On April 22, 2009, SAT issued the
Notice Concerning Relevant Issues Regarding Cognizance of Chinese Investment Controlled Enterprises Incorporated Offshore
as Resident Enterprises pursuant to Criteria of de facto Management Bodies, or the Notice, further interpreting the
application of the EIT Law and its implementation on non-PRC enterprise or group controlled by a PRC enterprise or a PRC
enterprise group. Pursuant to the Notice, an enterprise incorporated in an offshore jurisdiction and controlled by a PRC
enterprise or group will be classified as a “non-domestically incorporated resident enterprise” if (1) its senior
management in charge of daily operations reside or perform their duties mainly in China; (2) its financial or personnel
decisions are made or approved by bodies or persons in China; (3) its substantial assets and properties, accounting books,
corporate chops, board and shareholder minutes are kept in China; and (4) at least half of its directors with voting rights
or senior management often resident in China. A resident enterprise would be subject to an enterprise income tax rate of
25.0% on its worldwide income and must pay a withholding tax at a rate of 10.0% when paying dividends to its non-PRC
shareholders. However, it remains unclear as to whether the Notice is applicable to an offshore enterprise not controlled by
a PRC enterprise or a PRC enterprise group. Nor are detailed measures on imposition of tax from non-domestically
incorporated resident enterprises are available. Therefore, it is unclear how the PRC tax authorities will determine tax
residency based on the facts of each case.
We may be deemed to be a resident enterprise
by PRC tax authorities. If the PRC tax authorities determine that we are a “resident enterprise” for PRC enterprise
income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we may be subject to the enterprise income
tax at a rate of 25.0% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In our case,
this would mean that income such as interest on financing proceeds and non-PRC source income would be subject to PRC enterprise
income tax at a rate of 25.0%. Second, although under the EIT Law and its implementing rules dividends paid to us from our PRC
subsidiaries would qualify as “tax-exempt income,” we cannot guarantee that such dividends will not be subject to
a 10.0% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued
guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise
income tax purposes. In addition, dividends paid by us to non-PRC shareholders may be subject to PRC withholding tax and gains
on dispositions of our shares by non-PRC shareholders may be subject to PRC tax. In that case, the tax rate would be 10.0% in the
case of non-PRC enterprise shareholder or 20.0% in the case of non-PRC individual shareholder. Finally, if we were treated as
a “resident enterprise” by PRC tax authorities, we would be subject to taxation in both the U.S. and China, and our
PRC tax may not be creditable against our U.S. tax.
We face uncertainties with respect
to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.
SAT released a circular on December 15, 2009
that addresses the transfer of shares by nonresident companies, generally referred to as Circular 698. Circular 698, which is effective
retroactively to January 1, 2008, may have a significant impact on many companies that use offshore holding companies to invest
in China. Circular 698 has the effect of taxing foreign companies on gains derived from the indirect sale of a PRC company. Where
a foreign investor indirectly transfers equity interests in a PRC resident enterprise by selling the shares in an offshore holding
company, and the latter is located in a country or jurisdiction that has an effective tax rate less than 12.5% or does not tax
foreign income of its residents, the foreign investor must report this indirect transfer to the tax authority in charge of that
PRC resident enterprise. Using a “substance over form” principle, the PRC tax authority may disregard the existence
of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of avoiding PRC
tax. As a result, gains derived from such indirect transfer may be subject to PRC withholding tax at a rate of up to 10.0%.
SAT subsequently released public notices
to clarify issues relating to Circular 698, including the Announcement on Several Issues concerning the Enterprise Income Tax
on the Indirect Transfers of Properties by Non-resident Enterprises, or SAT Notice 7, which became effective on February 3,
2015. SAT Notice 7 abolished the compulsive reporting obligations originally set out in Circular 698. Under SAT Notice 7, if
a non-resident enterprise transfers its shares in an overseas holding company, which directly or indirectly owns PRC taxable
properties, including shares in a PRC company, via an arrangement without reasonable commercial purpose, such transfer shall
be deemed as indirect transfer of the underlying PRC taxable properties. Accordingly, the transferee shall be deemed as a
withholding agent with the obligation to withhold and remit the enterprise income tax to the competent PRC tax authorities.
Factors that may be taken into consideration when determining whether there is a “reasonable commercial purpose”
include, among other factors, the economic essence of the transferred shares, the economic essence of the assets held by the
overseas holding company, the taxability of the transaction in offshore jurisdictions, and economic essence and duration of
the offshore structure. SAT Notice 7 also sets out safe harbors for the “reasonable commercial purpose” test. SAT
Notice 7 contains an exemption for transfers of shares of a holding company listed outside the PRC when the shares are
acquired and sold in the public market.
However, uncertainties exist on testing the
reasonable commercial purpose. For example, the relevant authority has not yet promulgated any formal provisions or formally declared
or stated how to calculate the effective tax rates in foreign tax jurisdictions. As a result, we may become at risk of being taxed
under Circular 698 and the related SAT notices and we may be required to expend valuable resources to comply with Circular 698
and the related SAT notices or to establish that we should not be taxed under Circular 698 and the related SAT notices, which could
have a material adverse effect on our financial condition and results of operations.
We may be exposed to liabilities under
the Foreign Corrupt Practices Act and Chinese anti-corruption laws, and any determination that we violated these laws could have
a material adverse effect on our business.
We are subject to the Foreign Corrupt Practice
Act, or FCPA, and other U.S. laws that prohibit improper payments or offers of payments to foreign governments and their officials
and political parties by U.S. persons and issuers as defined by the relevant statute, for the purpose of obtaining or retaining
business. We have operations, agreements with third parties, and make most of our sales in China. PRC anti-corruption laws also
strictly prohibit bribery of government officials. Our activities in China create the risk of unauthorized payments or offers of
payments by the employees, consultants, sales agents, or distributors, even though they may not always be subject to our control.
It is our policy to implement safeguards to discourage these practices by our employees. However, our existing safeguards and any
future improvements may prove to be less than effective, and the employees, consultants, sales agents, or distributors may engage
in conduct for which we might be held responsible. Particularly, most of the hospitals and inoculation centers in China are state-owned
entities, whose employees may be recognized as foreign government officials for the purpose of FCPA. Therefore, any payments, expensive
gifts or other benefits provided to an employee of the state-owned hospital or inoculation center may be deemed violation of FCPA.
Violations of FCPA or PRC anti-corruption laws may result in severe criminal or civil sanctions, and we may be subject to other
liabilities, which could negatively affect our business, prospects, operating results and financial condition. In addition, the
U.S. government may seek to hold us liable for successor liability under FCPA violations committed by companies in which we invest
or that we acquire.
If we become directly subject to the
scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources
to investigate and resolve the matter which could harm our business operations, stock price and reputation and could result in
a loss of your investment in our stock, especially if such matter cannot be addressed and resolved favorably.
In recent years, U.S. public companies that
have substantially all of their operations in China, particularly companies like us which have completed the “reverse merger”
transactions, have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators
and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity has centered around financial
and accounting irregularities and mistakes, a lack of effective internal controls over financial accounting, inadequate corporate
governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny, criticism
and negative publicity, the publicly traded stock of many U.S.-listed PRC-based companies has sharply decreased in value and, in
some cases, has become virtually worthless. Many of these companies are now subject to shareholder lawsuits, SEC enforcement actions
and are conducting internal and external investigations into the allegations. It is not clear what effect this sector-wide scrutiny,
criticism and negative publicity will have on us, our business and our stock price. If we become the subject of any unfavorable
allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate
such allegations and/or defend our company. This situation will be costly and time consuming and distract our management from growing
our company. If such allegations are not proven to be groundless, our company and our business operations will be severely impacted
and your investment in our stock could be rendered worthless.
The disclosures in our reports and other
filings with the SEC and our other public pronouncements are not subject to the scrutiny of any regulatory bodies in China. Accordingly,
our public disclosure should be reviewed in light of the fact that no governmental agency that is located in China where substantially
all of our operations and business are located has conducted any due diligence on our operations or reviewed or cleared any of
our disclosure.
We are regulated by the SEC and our reports
and other filings with the SEC are subject to SEC review in accordance with the rules and regulations promulgated by the SEC under
the Securities Act and the Exchange Act. Unlike public reporting companies whose operations are located primarily in the United
States, however, substantially all of our operations are located in China. Since substantially all of our operations and business
takes place in China, it may be more difficult for the Staff of the SEC to overcome the geographic and cultural obstacles that
are present when reviewing our disclosure. These same obstacles are not present for similar companies whose operations or business
take place entirely or primarily in the United States. Furthermore, our SEC reports and other disclosure and public pronouncements
are not subject to the review or scrutiny of any PRC regulatory authority. For example, the disclosure in our SEC reports and other
filings are not subject to the review of the CSRC, a PRC regulator that is tasked with oversight of the capital markets in China.
Accordingly, you should review our SEC reports, filings and our other public pronouncements with the understanding that no local
regulator has done any due diligence on our company and with the understanding that none of our SEC reports, other filings or any
of our other public pronouncements has been reviewed or otherwise scrutinized by any local regulator.
Our independent registered public accounting
firm may be temporarily suspended from practicing before the SEC if unable to continue to satisfy SEC investigation requests in
the future. If a delay in completion of our audit process occurs as a result, we could be unable to timely file certain reports
with the SEC, which may lead to the delisting of our stock.
The vast majority of our sales are to customers
in China, and we have all of our operations in China. Like many U.S. companies with significant operations in China, our independent
registered public accounting firm is located in China.
On January 22, 2014, Judge Cameron Elliot,
an SEC administrative law judge, issued an initial decision suspending the Chinese member firms of the “Big Four” accounting
firms, including our independent registered public accounting firm, from practicing before the SEC for six months. In February
2014, the initial decision was appealed. While under appeal and in February 2015, the Chinese member firms of “Big Four”
accounting firms reached a settlement with the SEC. As part of the settlement, each of the Chinese member firms of “Big Four”
accounting firms agreed to settlement terms that include a censure, undertakings to make a payment to the SEC, procedures and undertakings
as to future requests for documents by the SEC, and possible additional proceedings and remedies should those undertakings not
be adhered to.
If the settlement terms are not adhered to,
Chinese member firms of “Big four” accounting firms may be suspended from practicing before the SEC which could in
turn delay the timely filing of our financial statements with the SEC. In addition, it could be difficult for us to timely identify
and engage another qualified independent auditor to replace our independent registered public accounting firm. A delinquency in
our filings with the SEC may result in NASDAQ initiating procedures, which could adversely harm our reputation and have other material
adverse effects on our overall growth and prospects.
Our independent registered public accounting
firm’s audit documentation related to their audit reports included in our annual report is located in China. The PCAOB currently
cannot inspect audit documentation located in China and, as such, you may be deprived of the benefits of such inspection.
Our independent registered public accounting
firm issued an audit opinion on the financial statements included in our annual reports filed with the SEC. Our independent registered
public accounting firm’s audit documentation related to their audit reports included in our annual reports is located in
China, and audit procedures take place within China’s borders. As auditors of companies that are traded publicly in the United
States and a firm registered with the Public Company Accounting Oversight Board, or the PCAOB, our auditor is required by the laws
of the United States to undergo regular inspections by the PCAOB. However, work papers located in China are not currently inspected
by the PCAOB because the PCAOB is currently unable to conduct inspections without the approval of the PRC authorities.
Inspections of certain other firms that the
PCAOB has conducted outside of China have identified deficiencies in those firms’ audit procedures and quality control procedures,
which may be addressed as part of the inspection process to improve future audit quality. However, the PCAOB is currently unable
to inspect an auditor’s audit work related to a company’s operations in China and where such documentation of the audit
work is located in China. As a result, our investors may be deprived of the benefits of the PCAOB’s oversight of auditors
that are located in China through such inspections.
The inability of the PCAOB to conduct inspections
of an auditor’s work papers in China makes it more difficult to evaluate the effectiveness of any of our auditor’s
audit procedures or quality control procedures that may be located in China as compared to auditors outside of China that are subject
to PCAOB inspections. Investors may consequently lose confidence in our reported financial information and procedures and the quality
of our financial statements.
RISKS RELATING TO OUR STOCK
The market price of our common stock
is volatile, leading to the possibility of its value being depressed at a time when you want to sell your holdings.
The market price of our common stock is volatile,
and this volatility may continue. Numerous factors, many of which are beyond our control, may cause the market price of our common
stock to fluctuate significantly. These factors include, among others:
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our earnings releases, actual or anticipated changes in our earnings,
fluctuations in our operating results or our failure to meet the expectations of financial market analysts and investors;
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changes in financial estimates by us or by any securities analysts
who might cover our stock;
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speculation about our business in the press or the investment community,
including negative publicity and short seller reports that make allegations against us, even if unfounded;
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significant developments relating to our relationships with our customers
or suppliers;
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stock market price and volume fluctuations of other publicly traded
companies and, in particular, those that are in our industry;
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customer demand for our products;
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investor perceptions of our industry in general and our company in
particular;
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the operating and stock performance of comparable companies;
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general economic conditions and trends;
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major catastrophic events;
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announcements by us or our competitors of new products, significant
acquisitions, strategic partnerships or divestitures;
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changes in accounting standards, policies, guidance, interpretation
or principles;
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loss of external funding sources;
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sales of our common stock, including sales by our directors, officers
or significant stockholders;
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additions or departures of key personnel; and
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investor perception of litigation, investigation or other legal proceedings
involving us or certain of our individual stockholders or their family members.
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Securities class action litigation is often
instituted against companies following periods of volatility in their stock price. This type of litigation could result in substantial
costs to us and divert our management’s attention and resources. Moreover, securities markets may from time to time experience
significant price and volume fluctuations for reasons unrelated to operating performance of particular companies. For example,
in July 2008, the securities markets in the United States, China and other jurisdictions experienced the largest decline in share
prices since September 2001. These market fluctuations may adversely affect the price of our common stock and other interests
in our company at a time when you want to sell your interest in us.
The provisions in our currently effective
certificate of incorporation and bylaws and our preferred shares rights agreement might discourage, delay or prevent a change of
control of our company or changes in our management and, therefore depress the trading price of the common stock.
Upon stockholders’ approval on July 20,
2012, we have adopted amended and restated certificate of incorporation and bylaws, which contained provisions that are intended
to deter coercive takeover practices and inadequate takeover bids by making such practices or bids unacceptably expensive to the
raider and to encourage prospective acquirers to negotiate with our board of directors, rather than to attempt a hostile takeover.
These provisions include, among others:
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the right of our board of directors to issue preferred stock without
stockholder approval;
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division of our board of directors into three classes with staggered
terms;
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elimination of the right of our stockholders to act by written consent;
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prohibiting stockholders from calling a special meeting of the stockholders;
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rules regarding how stockholders may present proposals or nominate
directors for election at stockholder meetings; and
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requiring super majority stockholder vote to amend certain provisions
of the amended and restated certificate of incorporation and bylaws.
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Approved on June 20, 2014, our currently-in-effect
bylaws authorize our stockholders who hold 25.0% of our entire capital stock issued and outstanding and are entitled to vote to
call a special meeting of the stockholders.
On February 22, 2017, our board of directors
adopted a preferred shares rights agreement between us and the Securities Transfer Corporation, as the rights agent. This agreement
provides, among other things, that when specified events occur, our stockholders will be entitled to purchase from us a fraction
of a share of series A participating preferred stock for each share of common stock they own. Such preferred stock purchase rights
are triggered by the earlier to occur of (1) 10 business days (or a later date determined by our board of directors before the
rights are separated from our common stock) after the public announcement that a person or group has become an “acquiring
person” by acquiring beneficial ownership of 15.0% or more of our outstanding common stock or (2) 10 business days (or a
later date determined by our board of directors before the rights are separated from our common stock) after a person or group
begins a tender or exchange offer that, if completed, would result in that person or group becoming an acquiring person. The issuance
of preferred stock pursuant to this preferred shares rights agreement would cause substantial dilution to a person or group that
attempts to acquire us on terms not approved by our board of directors. Our board of directors had previously adopted similar
preferred shares rights agreements on November 19, 2012, which expired on November 20, 2014, and on January 8, 2015, which expired
on January 8, 2017.
We do not intend to pay dividends for
the foreseeable future.
For the foreseeable future, we intend to retain
any earnings to finance the development and expansion of our business, and we do not anticipate paying any cash dividends on our
common stock. Accordingly, investors must be prepared to rely on sales of their common stock after price appreciation to earn an
investment return, which may never occur. Investors seeking cash dividends should not purchase our common stock. Any determination
to pay dividends in the future will be made at the discretion of our board of directors and will depend on our results of operations,
financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our board of directors
deems relevant.
Stock prices of companies with business
operations primarily in China have fluctuated widely in recent years, and the trading prices of our common stock are likely to
be volatile, which could result in substantial losses to investors.
The trading prices of our common stock are
likely to be volatile and could fluctuate widely in response to factors beyond our control. For example, if one or more of the
industry analysts or ratings agencies who cover us downgrades us or our common stock, or publishes unfavorable research about us,
the price of our common stock may decline. If one or more of these analysts or agencies cease to cover our company or fail to regularly
publish reports on us, we could lose visibility in the financial markets, which could cause the price of our common stock or trading
volume to decline. In addition, the performance and fluctuation of the market prices of other China-based, U.S.-listed healthcare
companies may affect the volatility in the price of and trading volume for our common stock. In recent years, a number of PRC-based
companies have listed their securities, or are in the process of preparing for listing their securities, on U.S. stock markets.
Some of these companies have experienced significant volatility, including significant price declines following their initial public
offerings. The trading performances of the securities of these PRC-based companies’ securities at the time of or after their
offerings may affect the overall investor sentiment towards PRC-based companies listed in the United States and consequently may
affect the trading performance of our common stock. These broad market and industry factors may significantly affect the market
price and volatility of our common stock, regardless of our actual operating performance.
In addition to market and industry factors,
the price and trading volume for our common stock may be highly volatile for specific business reasons. Any of these factors may
result in large and sudden changes in the volume and price at which our common stock will trade. We cannot assure you that these
factors will not occur in the future again. In the past, following periods of volatility in the market price of a company’s
securities, stockholders have often instituted securities class action litigation against that company. If we were involved in
a class action lawsuit, it could divert the attention of senior management, and, if adversely determined, could have a material
adverse effect on our business, financial condition and results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
We have no outstanding or unresolved comments
from the SEC staff.
ITEM 2. PROPERTIES.
Our company’s corporate offices are leased
and located at 18th Floor, Jialong International Building, 19 Chaoyang Park Road, Chaoyang District, Beijing 100125, the People’s
Republic of China.
Business
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Location
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Owned/Leased
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Manufacturing Facilities
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Taishan District, Tai’an City, Shandong Province, China
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Owned
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Gaoxin District, Tai’an City, Shandong Province, China
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Owned
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Huaxi District, Guiyang City, Guizhou Province, China
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Owned
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Plasma Collection Stations
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Qihe County, Shandong Province, China
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Leased
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Xiajin County, Shandong Province, China
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Owned
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Zhangqiu County, Shandong Province, China
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Owned
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Yanggu County, Shandong Province, China
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Owned
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Yishui County, Shandong Province, China
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Owned
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Huanjiang Maonan Autonomous County, Guangxi Zhuang Autonomous Region, China
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Owned
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Fangchenggang City, Guangxi Zhuang Autonomous Region, China
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Owned
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Yuncheng County, Shandong Province, China
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Leased
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Ningyang County, Shandong Province, China
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Owned
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Cao County, Shandong Province, China
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Owned
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Xinglong County, Hebei Province, China
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Owned
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Zaozhuang City, Shandong Province, China
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Leased
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Huangping County, Guizhou Province, China
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Owned
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Puding County, Guizhou Province, China
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Owned
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Ziyun Miaozu Buyizu autonomous County, Guizhou Province, China
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Leased
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We believe that all of our properties have
been adequately maintained, are generally in good condition, and are suitable and adequate for our business.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, we may become involved in
various lawsuits and legal proceedings arising in the ordinary course of business. However, litigation is subject to inherent uncertainties,
and an adverse result in these, or other matters, may arise from time to time that may harm our business. Other than the legal
proceedings set forth below, we are currently not aware of any such legal proceedings or claims that we believe will have a material
adverse effect on our business, financial condition or operating results.
Dispute with Jie’an over Certain Capital Injection into
Guizhou Taibang
In May 2007, a 91% majority of Guizhou Taibang’s
shareholders approved a plan to raise additional capital from qualified strategic investors through the issuance of an additional
20,000,000 shares of Guizhou Taibang. The plan required all existing Guizhou Taibang shareholders to waive their rights of first
refusal to subscribe for the additional shares. The remaining 9% minority shareholder of Guizhou Taibang’s shares, Guizhou
Jie’an Company, or Jie’an, did not support the plan and did not waive its right of first refusal. In May 2007, Guizhou
Taibang signed an Equity Purchase Agreement with certain alleged strategic investors (who concealed their background), pursuant
to which such investors agreed to invest an aggregate of RMB51.0 million (approximately $7.3 million) in exchange for 21.4% of
Guizhou Taibang’s equity interests. Such Equity Purchase Agreement was not approved or ratified by over two-thirds supermajority
of Guizhou Taibang’s shareholders, which approval or ratification is required under the PRC Company Law. At the same time,
as an existing shareholder, Jie’an also subscribed for 1,800,000 shares, representing its pro rata share of the 20,000,000
shares being offered. In total, Guizhou Taibang received RMB51.0 million (approximately $7.3 million) from the investors and RMB6.5
million (approximately $0.9 million) from Jie’an.
In June 2007, Jie’an brought a lawsuit
against Guizhou Taibang, alleging that it had a right to acquire the 18,200,000 shares offered to the investors under the Equity
Purchase Agreement. The trial court denied Jie’an’s request, and the PRC Supreme Court ultimately sustained the original
ruling in May 2009 and denied the rights of first refusal of Jie’an over the 18,200,000 shares.
During the second quarter of 2010, Jie’an
requested that Guizhou Taibang register its 1.8 million shares of additional capital injection with the local administration of
industry and commerce, or AIC. Guizhou Taibang’s board of directors withheld its required ratification of Jie’an’s
request, pending the outcome of the ongoing litigation. In March 2012, Jie’an brought another lawsuit against Guizhou Taibang
for refusing to register the shares. In July 2013, the trial court dismissed the lawsuit for lack of jurisdiction. Jie’an
did not appeal the dismissal.
In December 2013, Jie’an brought a third
lawsuit against Guizhou Taibang, requesting Guizhou Taibang to register 1.8 million shares under its name with the local AIC. In
July 2014, the trial court denied Jie’an’s request to register such shares. Despite the denial of Jie’an’s
share registration request, the trial court, however, in its ruling, ordered Guizhou Taibang to pay accumulated dividends of RMB13.8
million (approximately $2.0 million) associated with these shares and the related interest expenses to Jie’an. Guizhou Taibang
and Jie’an subsequently filed a cross-appeal. In December 2014, the appellate court ruled in favor of Jie’an supporting
its request to register 1.8 million shares and ordered Guizhou Taibang to pay Jie’an its share of accumulated dividends of
RMB18.3 million (approximately $2.6 million) associated with these shares plus the related interest expenses to Jie’an. In
the first half of 2015, Guizhou Taibang paid an aggregate of RMB22.6 million (approximately $3.3 million) to the trial court held
in escrow pending further appeal of this case. In June 2015, Guizhou Taibang appealed to the High Court of Guizhou, which overruled
the decision of the appellate court and remanded the case to the trial court for retrial in September 2015. In August 2016, the
trial court granted Jie’an’s petition to withdraw the lawsuit as Jie’an sought to withdraw its capital contribution
in Guizhou Taibang pursuant to an agreement dated July 31, 2016. The funds held in escrow were credited to the consideration payable
to Jie’an for the capital withdrawal as described below.
In November 2013, Guizhou Taibang held a shareholders
meeting and the shareholders passed resolutions, or the November 2013 Resolutions, that, inter alia, (1) determined that it was
no longer necessary for Guizhou Taibang to obtain additional capital from investors; (2) rejected Jie’an’s request
that Jie’an subscribe for additional shares of Guizhou Taibang alone and one or more other shareholders reduce their shareholding
in Guizhou Taibang; and (3) approved the issuance of a total of 20,000,000 new shares to all existing shareholders on a pro rata
basis. Jie’an subsequently filed a fourth lawsuit against Guizhou Taibang in December 2013, requesting that the court declare
the November 2013 Resolutions void. Both the trial court and the appellate court denied Jie’an’s request.
In March 2014, Guizhou Taibang held another
shareholders meeting and the shareholders passed resolutions, or the March 2014 Resolutions, that, inter alia, re-calculated the
ownership percentage in Guizhou Taibang based on the November 2013 Resolutions and the additional capital injections from existing
shareholders. Guizhou Taibang subsequently updated the registration with the local AIC regarding the additional capital injections
in August 2014. In September 2014, Jie’an and Shenzhen Yigong Shengda Technology Co., Ltd., or Yigong Shengda, another minority
shareholder of Guizhou Taibang, filed a lawsuit against Guizhou Taibang, requesting that the court declare both the November 2013
Resolutions and the March 2014 Resolutions void and instruct Guizhou Taibang to withdraw the AIC registration. In November 2014,
the trial court suspended this case pending the final outcome of the third lawsuit filed by Jie’an. In October 2015, the
trial court denied their request. In May 2016, the appellate court vacated the trial court’s decision to uphold Guizhou Taibang’s
shareholders resolution, and remanded the case for retrial. In August 2016, the trial court granted the petitions by Jie’an
and Yigong Shengda to withdraw the lawsuit as Jie’an and Yigong Shengda sought to withdraw their respective capital contributions
in Guizhou Taibang pursuant to an agreement dated July 31, 2016.
On July 31, 2016,
Guiyang Dalin Biologic Technologies Co., Ltd., or Guiyang Dalin, Guizhou Taibang, Jie’an and Yigong Shengda entered into
an agreement, pursuant to which Jie’an and Yigong Shengda agreed to withdraw their respective capital contributions in Guizhou
Taibang for an aggregate consideration of RMB415.0 million (approximately $59.8 million). In August 2016, Guizhou Taibang paid
the first installment of RMB90.0 million (approximately $13.0 million) of the consideration to Jie’an and Yigong Shengda.
Guizhou Taibang completed the AIC registration for the foregoing capital withdrawal in October 2016 and paid the balance of the
consideration to Jie’an and Yigong Shengda in November 2016. As a result of the
capital
withdrawal, Guiyang Dalin has become the sole shareholder of Guizhou Taibang.
Dispute with Certain Individual Investor
over Certain Capital Injection into Guizhou Taibang
In part due to the invalidity of the Equity
Purchase Agreement with certain alleged strategic investors in May 2007, which was never approved or ratified by Guizhou Taibang’s
shareholders, such investors’ equity ownership in Guizhou Taibang and the related increase in registered capital of Guizhou
Taibang have never been registered with the local AIC. In January 2010, one individual among such investors brought a lawsuit against
Guizhou Taibang requesting to register his 14.35% ownership interest in Guizhou Taibang with the local AIC and seeking the distribution
of his share of Guizhou Taibang’s dividends declared since 2007.
In October 2010, the trial court denied such
individual investor’s right as shareholder of Guizhou Taibang and his entitlement to share the dividends, which ruling was
reaffirmed after a re-trial by the same trial court in December 2012. After such ruling, Guizhou Taibang attempted to return the
originally received fund of RMB34.2 million (approximately $4.9 million) to such investor by wiring the fund back to his bank account
but was unable to do so due to the closure of his bank account. Another investor, however, accepted the returned fund of RMB11.2
million (approximately $1.6 million) from Guizhou Taibang in November 2010. In 2013, the same individual investor appealed the
case to the PRC Supreme Court, which also denied his claims for shareholder status in Guizhou Taibang and the related dividend
distribution and accrued interest in September 2013. Such investor subsequently attempted to seek a re-trial by the PRC Supreme
Court, which request was denied by the PRC Supreme Court in January 2014. He then applied to the PRC Supreme Procuratorate to request
for a review of the PRC Supreme Court’s decision and seek an appeal by the PRC Supreme Procuratorate to the PRC Supreme Court
for an ultimate re-trial on his behalf. In July 2015, the PRC Supreme Procuratorate rejected his request for review.
As of December 31, 2016, Guizhou Taibang had maintained, on its
balance sheet, payables to the investors of RMB34.2 million (approximately $4.9 million) as originally received funds from such
individual investor in respect of the shares in dispute, RMB20.6 million (approximately $3.0 million) for the interest expenses,
and RMB0.3 million (approximately $0.1 million) for the 1% penalty imposed by the Equity Purchase Agreement for any breach in the
event that Guizhou Taibang is required to return the original investment amount to such investor.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
Our common stock is traded on the NASDAQ Global
Select Market under the symbol “CBPO.”
The following table sets forth, for the periods
indicated, the high and low closing prices of our common stock. These prices reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not represent actual transactions.
|
|
Closing Prices
(1)
|
|
|
|
High
|
|
|
Low
|
|
|
|
USD
|
|
|
USD
|
|
2016
|
|
|
|
|
|
|
|
|
1
st
Quarter
|
|
|
142.08
|
|
|
|
105.52
|
|
2
nd
Quarter
|
|
|
128.74
|
|
|
|
101.05
|
|
3
rd
Quarter
|
|
|
134.17
|
|
|
|
107.18
|
|
4
th
Quarter
|
|
|
125.43
|
|
|
|
107.52
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
1
st
Quarter
|
|
|
95.51
|
|
|
|
64.98
|
|
2
nd
Quarter
|
|
|
120.85
|
|
|
|
92.69
|
|
3
rd
Quarter
|
|
|
123.83
|
|
|
|
82.62
|
|
4
th
Quarter
|
|
|
142.46
|
|
|
|
89.13
|
|
|
(1)
|
The above table sets forth the range of high and low closing prices per share of our common stock
as reported by www.quotemedia.com for the periods indicated.
|
Approximate Number of Holders of Our Common Stock
As of February 17, 2017, there were 437 holders
of record of our common stock. This number excludes the shares of our common stock owned by stockholders holding stock under nominee
security position listings.
Dividend Policy
We have never declared dividends or paid cash
dividends. Any future decisions regarding dividends will be made by our board of directors. We currently intend to retain and
use any future earnings for the development and expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future. Our board of directors has complete discretion on whether to pay dividends. Even if our board of directors
decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements
and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant.
Recent Sales of Unregistered Securities
We have not sold any equity securities during
the 2016 fiscal year that were not previously disclosed in a quarterly report on Form 10-Q or a current report on Form 8-K that
was filed during the 2016 fiscal year.
ITEM 6. SELECTED FINANCIAL DATA
.
The selected consolidated statement of comprehensive
income data for 2016, 2015 and 2014 and the selected balance sheet data as of December 31, 2016 and 2015 are derived from our audited
consolidated financial statements included elsewhere in this report. The selected consolidated financial data for 2013 and 2012
and the selected balance sheet data as of December 31, 2014, 2013 and 2012 are derived from our audited consolidated financial
statements not included in this report.
The following selected historical financial
information should be read in conjunction with our consolidated financial statements and related notes and the information contained
in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
|
|
For the Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
|
|
(U.S. dollars in thousands, except per share data)
|
|
Revenues
|
|
|
341,169
|
|
|
|
296,458
|
|
|
|
243,252
|
|
|
|
203,357
|
|
|
|
184,813
|
|
Income From Operations
|
|
|
143,915
|
|
|
|
132,586
|
|
|
|
111,159
|
|
|
|
86,933
|
|
|
|
74,489
|
|
Net Income attributable to China Biologic Products, Inc.
|
|
|
104,780
|
|
|
|
89,043
|
|
|
|
70,917
|
|
|
|
54,602
|
|
|
|
45,222
|
|
Total Assets
|
|
|
604,958
|
|
|
|
551,466
|
|
|
|
446,847
|
|
|
|
403,781
|
|
|
|
311,047
|
|
Total Current Liabilities
|
|
|
73,441
|
|
|
|
71,655
|
|
|
|
120,682
|
|
|
|
63,439
|
|
|
|
47,719
|
|
Total Long Term Liabilities
|
|
|
10,380
|
|
|
|
12,849
|
|
|
|
50,904
|
|
|
|
36,373
|
|
|
|
5,909
|
|
Total Stockholders' equity attributable to China Biologic Products, Inc.
|
|
|
462,200
|
|
|
|
382,343
|
|
|
|
212,087
|
|
|
|
237,692
|
|
|
|
195,470
|
|
Total Equity
|
|
|
521,137
|
|
|
|
466,962
|
|
|
|
275,262
|
|
|
|
303,970
|
|
|
|
257,419
|
|
Net Income Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
3.79
|
|
|
|
3.40
|
|
|
|
2.85
|
|
|
|
2.05
|
|
|
|
1.73
|
|
Diluted
|
|
|
3.74
|
|
|
|
3.27
|
|
|
|
2.71
|
|
|
|
1.96
|
|
|
|
1.62
|
|
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The following management’s discussion
and analysis should be read in conjunction with our financial statements and the notes thereto and the other financial information
appearing elsewhere in this report. In addition to historical information, the following discussion contains certain forward-looking
information. See “Special Note Regarding Forward Looking Statements” above for certain information concerning those
forward looking statements. Our financial statements are prepared in U.S. dollars and in accordance with United States generally
accepted accounting principles.
Overview
We are a biopharmaceutical company principally
engaged in the research, development, manufacturing and sales of plasma products in China. We have a strong product portfolio with
over 20 different dosage forms of plasma products and other biopharmaceutical products across nine categories. Our principal products
are human albumin and IVIG. These products use human plasma as their principal raw material. Sales of human albumin products represented
approximately 39.2%, 37.6% and 39.3% of our total sales for 2016, 2015 and 2014, respectively. Sales of IVIG products represented
approximately 34.6%, 42.2% and 40.4% of our total sales for 2016, 2015 and 2014, respectively. All of our products are prescription
medicines administered in the form of injections.
Our sales model focuses on direct sales to
hospitals and inoculation centers and is complemented by distributor sales. In 2016, we generated sales of $341.2 million, an increase
of 15.1% from 2015, and recorded net income attributable to our company of $104.8 million, an increase of 17.8% from 2015.
Recent Developments
We received two approvals from the Shandong
Provincial Health and Family Planning Commission on December 30, 2016 to build a new plasma collection station and a new branch
collection facility, respectively, in Shandong Province. The new plasma collection station will be located in Ju County in Rizhao
City, while the new branch plasma collection facility will be located in Feicheng County in Tai’an City and operated under
the Company’s Ningyang plasma collection station, which was established in Tai’an City in July 2011.
Financial Performance Highlights
The following are some financial highlights for 2016:
|
·
|
Sales
: Sales increased by $44.7 million, or 15.1%,
to $341.2 million for 2016 from $296.5 million for 2015.
|
|
·
|
Gross Profit
: Gross profit increased by $27.2 million,
or 14.3%, to $217.2 million for 2016 from $190.0 million for 2015. As a percentage of sales, gross profit decreased from 64.1%
in 2015 to 63.6% in 2016.
|
|
·
|
Income from operations
: Income from operations increased
by $11.4 million, or 8.6%, to $144.0 million for 2016 from $132.6 million for 2015.
|
|
·
|
Net income attributable to our company
: Net income
attributable to our company increased by $15.8 million, or 17.8%, to $104.8 million for 2016 from $89.0 million for 2015.
|
|
·
|
Fully diluted net income per share
: Fully diluted net
income per share was $3.74 for 2016, as compared to $3.27 for 2015.
|
Principal Factors Affecting Our Financial
Performance
The following are key factors that affect our
financial condition and results of operations and we believe them to be important to the understanding of our business:
Raw material supply and prices
The primary raw material used in the production
of our albumin and immunoglobulin products is human plasma. The collection of human plasma in China is generally influenced by
a number of factors such as government regulations, geographical locations of plasma collection stations, sanitary conditions of
plasma collection stations, living standards of the donors, and cultural and religious beliefs. If we experience any shortage of
plasma supply, we may not be able to fully utilize our production capacity. We currently operate 12 plasma collection stations
(including one branch collection facility) through Shandong Taibang and two plasma collection stations through Guizhou Taibang.
These plasma collection stations provide us with a stable source of plasma supply.
Prices of and demand for our products
The demand for our products is largely affected
by the general economic conditions in China because the prices of our products are still not affordable to many patients. A significant
improvement in the economic environment in China will likely improve consumer income which in turn would make our products more
affordable and consequently increase the demand for our products. We have been able to expand our product range and consumer base
by introducing new products required by customers. We believe that our technical expertise is important in introducing products
that are in demand.
Production capacity
Our sales volume is limited by our annual production
capacity. As we grow our business in the future, our ability to fulfill additional and larger orders will depend on our ability
to increase our production capacity. Our plan to expand our production capacity will depend on the availability of capital to meet
our needs of expansion or upgrading of production lines, and the availability of stable plasma supply. To comply with applicable
PRC laws and regulations, we have maintained permits and licenses necessary for the current operations of our plasma collection
stations and production plants, and are required to apply for such permits and licenses to operate new plasma collection stations
and production plants. As a result, our expansion plan also depends on our ability to renew existing permits and licenses and obtain
new permits and licenses.
Competition
We face intense competition from local and
foreign entities that manufacture and sell products that compete with ours in the PRC. These competitors may have more capital,
better research and development resources, expanded manufacturing and marketing capabilities and more experience than we do. In
our industry, we compete based upon product quality, production cost, ability to produce a diverse range of products and logistical
capabilities.
Our profitability may be adversely affected
if competition intensifies, competitors reduce prices, PRC government requires us to reduce the prices of our products, or competitors
develop new products or product substitutes with comparable medicinal applications or therapeutic effects which are more effective
or less costly than ours. See Item 1, “Business—Competition” for more information.
Taxation
China Biologic is subject to United States
tax at gradual rates of up to 35.0%. No provision for income taxes in the United States has been made as China Biologic has no
U.S. taxable income.
Taibang Biological was incorporated in the
BVI, but is not subject to taxation in that jurisdiction.
Taibang Holdings was incorporated in Hong Kong,
and under the current laws of Hong Kong, is subject to a Profits Tax of 16.5% on profits arising in Hong Kong. However, no provision
for Hong Kong Profits Tax has been made as Taibang Holdings has no taxable income.
According to the PRC government policy, new
or high technology companies may enjoy a preferential income tax rate of 15.0%, instead of 25.0% under the EIT Law. In October
2014, Shandong Taibang renewed its high and new technology enterprise qualification, which entitled it to enjoy a preferential
income tax rate of 15.0% for a period of three years from 2014 to 2016. Shandong Taibang will apply for a renewal for an additional
three years from 2017 to 2019 upon the expiration of its high and new technology enterprise certificate. According to Notice on
Issues Concerning Relevant Tax Policies in Deepening the Implementation of the Western Development Strategy jointly promulgated
by the PRC Ministry of Finance, the PRC General Administration of Customs and SAT dated July 27, 2011, Guizhou Taibang, being a
qualified enterprise located in the western region of China, enjoys a preferential income tax rate of 15.0% effective from January
1, 2011 to December 31, 2020. All of our other PRC subsidiaries are subject to the statutory income tax rate of 25.0%.
Results of Operations
The following table sets forth a summary of
our consolidated statements of comprehensive income for the periods indicated. Our historical results presented below are not necessarily
indicative of the results that may be expected for any other future period.
|
|
For the Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
$
|
|
|
% of
Total
Sales
|
|
|
$
|
|
|
% of
Total
Sales
|
|
|
$
|
|
|
% of
Total
Sales
|
|
|
|
(U.S. dollars in thousands, except percentage and per share data)
|
|
SALES
|
|
|
341,169
|
|
|
|
100.0
|
|
|
|
296,458
|
|
|
|
100.0
|
|
|
|
243,252
|
|
|
|
100.0
|
|
COST OF SALES
|
|
|
124,034
|
|
|
|
36.4
|
|
|
|
106,483
|
|
|
|
35.9
|
|
|
|
80,026
|
|
|
|
32.9
|
|
GROSS MARGIN
|
|
|
217,135
|
|
|
|
63.6
|
|
|
|
189,975
|
|
|
|
64.1
|
|
|
|
163,226
|
|
|
|
67.1
|
|
OPERATING EXPENSES
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
11,679
|
|
|
|
3.4
|
|
|
|
9,973
|
|
|
|
3.4
|
|
|
|
10,707
|
|
|
|
4.4
|
|
General and administrative expenses
|
|
|
54,519
|
|
|
|
16.0
|
|
|
|
41,392
|
|
|
|
14.0
|
|
|
|
32,130
|
|
|
|
13.2
|
|
Research and development expenses
|
|
|
7,022
|
|
|
|
2.1
|
|
|
|
6,024
|
|
|
|
2.0
|
|
|
|
4,162
|
|
|
|
1.7
|
|
Provision for other receivables in respect of an employee housing development project
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,068
|
|
|
|
2.1
|
|
Total operating expenses
|
|
|
73,220
|
|
|
|
21.5
|
|
|
|
57,389
|
|
|
|
19.4
|
|
|
|
52,067
|
|
|
|
21.4
|
|
INCOME FROM OPERATIONS
|
|
|
143,915
|
|
|
|
42.1
|
|
|
|
132,586
|
|
|
|
44.7
|
|
|
|
111,159
|
|
|
|
45.7
|
|
OTHER INCOME (EXPENSES)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income (loss) of equity method investee
|
|
|
2,519
|
|
|
|
0.7
|
|
|
|
(1,311
|
)
|
|
|
(0.4
|
)
|
|
|
8,646
|
|
|
|
3.6
|
|
Interest income
|
|
|
7,816
|
|
|
|
2.3
|
|
|
|
5,551
|
|
|
|
1.9
|
|
|
|
6,645
|
|
|
|
2.7
|
|
Interest expense
|
|
|
(254
|
)
|
|
|
-
|
|
|
|
(1,727
|
)
|
|
|
(0.6
|
)
|
|
|
(3,698
|
)
|
|
|
(1.5
|
)
|
Loss from disposal of a subsidiary
|
|
|
(76
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total other income, net
|
|
|
10,005
|
|
|
|
3.0
|
|
|
|
2,513
|
|
|
|
0.9
|
|
|
|
11,593
|
|
|
|
4.8
|
|
EARNINGS BEFORE INCOME TAX EXPENSE
|
|
|
153,920
|
|
|
|
45.1
|
|
|
|
135,099
|
|
|
|
45.6
|
|
|
|
122,752
|
|
|
|
50.5
|
|
INCOME TAX EXPENSE
|
|
|
25,126
|
|
|
|
7.4
|
|
|
|
20,993
|
|
|
|
7.1
|
|
|
|
26,639
|
|
|
|
11.0
|
|
NET INCOME
|
|
|
128,794
|
|
|
|
37.7
|
|
|
|
114,106
|
|
|
|
38.5
|
|
|
|
96,113
|
|
|
|
39.5
|
|
Less: Net income attributable to non-controlling interest
|
|
|
24,014
|
|
|
|
7.0
|
|
|
|
25,063
|
|
|
|
8.5
|
|
|
|
25,196
|
|
|
|
10.3
|
|
NET INCOME ATTRIBUTABLE TO COMPANY
|
|
|
104,780
|
|
|
|
30.7
|
|
|
|
89,043
|
|
|
|
30.0
|
|
|
|
70,917
|
|
|
|
29.2
|
|
NET INCOME PER SHARE OF COMMON STOCK
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
|
|
|
3.79
|
|
|
|
|
|
|
|
3.40
|
|
|
|
|
|
|
|
2.85
|
|
|
|
|
|
DILUTED
|
|
|
3.74
|
|
|
|
|
|
|
|
3.27
|
|
|
|
|
|
|
|
2.71
|
|
|
|
|
|
Comparison of years ended December 31, 2016 and 2015
Sales
Our total sales increased by 15.1%, or $44.7
million, to $341.2 million for 2016, compared to $296.5 million for 2015. In RMB terms, which is a non-GAAP measure, our total
sales increased by 22.8% for 2016 as compared to 2015. The increase in sales for 2016 was primarily attributable to the increase
in the sales price of human tetanus immunoglobulin products and the increase in the sales volume of human albumin products, placenta
polypeptide and human tetanus immunoglobulin products, partially offset by the decrease in the sales volume of IVIG products.
The following table summarizes the breakdown
of sales by major types of products
:
|
|
For the Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
(U.S. dollars in millions, except percentage)
|
|
Human albumin
|
|
|
133.7
|
|
|
|
39.2
|
|
|
|
111.4
|
|
|
|
37.6
|
|
|
|
22.3
|
|
|
|
20.0
|
|
Immunoglobulin products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IVIG
|
|
|
117.9
|
|
|
|
34.6
|
|
|
|
125.1
|
|
|
|
42.2
|
|
|
|
(7.2
|
)
|
|
|
(5.8
|
)
|
Other immunoglobulin products
|
|
|
40.1
|
|
|
|
11.8
|
|
|
|
22.5
|
|
|
|
7.6
|
|
|
|
17.6
|
|
|
|
78.2
|
|
Placenta polypeptide
|
|
|
32.2
|
|
|
|
9.4
|
|
|
|
27.2
|
|
|
|
9.2
|
|
|
|
5.0
|
|
|
|
18.4
|
|
Others
|
|
|
17.3
|
|
|
|
5.0
|
|
|
|
10.3
|
|
|
|
3.4
|
|
|
|
7.0
|
|
|
|
68.0
|
|
Totals
|
|
|
341.2
|
|
|
|
100.0
|
|
|
|
296.5
|
|
|
|
100.0
|
|
|
|
44.7
|
|
|
|
15.1
|
|
For 2016 as compared
to 2015:
|
·
|
the average price for our approved human albumin products, which
represented 39.2% of our total sales for 2016, increased by 1.5% in RMB terms (which is a non-GAAP measure) and decreased by 4.9%
in USD terms; and
|
|
·
|
the average price for our approved IVIG products, which represented
34.6% of our total sales for 2016, increased by 4.2% in RMB terms (which is a non-GAAP measure) and decreased by 2.3% in USD terms.
|
The average sales price of our human albumin and IVIG products increased
in RMB term for 2016 as compared to 2015, following the removal of the retail price ceiling for drug products effective on June
1, 2015, owing to the increased market demand for human albumin and IVIG products.
The sales volume of our products depends on
market demand and our production volume. The production volume of our human albumin products and IVIG products depends primarily
on the general plasma supply. The production volume of our hyper-immune products, which include human rabies immunoglobulin, human
hepatitis B immunoglobulin and human tetanus immunoglobulin products, is subject to the availability of specific vaccinated plasma
and our production capacity. The supply of specific vaccinated plasma requires several months of lead time. Our production facility
currently can only accommodate the production of one type of hyper-immune products at any given time and we rotate the production
of different types of hyper-immune products from time to time in response to market demand. As such, the sales volume of any given
type of hyper-immune products may vary significantly from period to period.
The sales volume of our human albumin products
increased by 26.2% for 2016 as compared to 2015, which was primarily attributable to the increased production volume at Shandong
Taibang and Guizhou Taibang as a result of increased plasma supply volume. The sales volume of our IVIG products decreased by 3.6%
for 2016 as compared to 2015, primarily due to the depletion of IVIG pastes we reserved from prior years that were processed and
sold in 2015 and the allocation of more production facilities to human tetanus immunoglobulin products with higher margin in 2016.
The sales increase of other immunoglobulin
products for 2016 as compared to 2015 was mainly attributable to the increase in both average sales price and sales volume of human
tetanus immunoglobulin products. The sales volume of our human tetanus immunoglobulin increased by 41.9% for 2016 as compared to
2015. The average sales price of human tetanus immunoglobulin products increased significantly for 2016 as compared to 2015 due
to the significant market supply shortage following the removal of the retail price ceiling for drug products effective on June
1, 2015.
The sales increase of placenta polypeptide
products was generally in line with the sales volume increase for 2016 as compared to 2015. The sales volume of placenta polypeptide
products increased by 22.6% for 2016 as compared to 2015, primarily because we increased our market penetration into more hospitals
through our improved sales capabilities.
The sales increase of other products for 2016
as compared to 2015 was mainly due to the increase in sales volume of both factor VIII and PCC, sales of which we ramped up in
2016.
Cost of sales & gross profit
|
|
For the Year Ended December 31,
|
|
|
Change
|
|
|
|
2016
|
|
|
2015
|
|
|
Amount
|
|
|
%
|
|
|
|
(U.S. dollars in millions, except percentage)
|
|
Cost of sales
|
|
$
|
124.0
|
|
|
$
|
106.5
|
|
|
$
|
17.5
|
|
|
|
16.4
|
|
as a percentage of total sales
|
|
|
36.4
|
%
|
|
|
35.9
|
%
|
|
|
|
|
|
|
0.5
|
|
Gross Profit
|
|
$
|
217.2
|
|
|
$
|
190.0
|
|
|
$
|
27.2
|
|
|
|
14.3
|
|
Gross Margin
|
|
|
63.6
|
%
|
|
|
64.1
|
%
|
|
|
|
|
|
|
(0.5
|
)
|
Our cost of sales was $124.0 million, or 36.4%
of our sales, for 2016, as compared to $106.5 million, or 35.9% of our sales for 2015. Our gross profit was $217.1 million and
$190.0 million for 2016 and 2015, respectively, representing gross margins of 63.6% and 64.1%, respectively.
Our cost of sales and gross margin are affected
by the product pricing, raw material costs, product mix, yields and manufactory efficiency. In an effort to increase plasma collection
volume and expand our donor base, we increased the nutrition fees paid to donors consistent with the industry practice. We expect
the nutrition fees to be paid to donors will continue to increase as a result of improving living standards in China. Consequently,
future improvements on margins will need to be derived from increases in product pricing, yields and manufacturing efficiency,
as well as from optimizing the product mix.
The increase of cost of sales was mainly due
to the increases in the sales volume of human albumin products, placenta polypeptide products and human tetanus immunoglobulin
products, which was partially offset by the decrease in the sales volume of IVIG products. The increase in cost of sales as a percentage
of sales for 2016 as compared to 2015 was mainly due to the higher cost of plasma purchased from Xinjiang Deyuan, which was partially
offset by the increase in the average sales price of certain plasma products and a more profitable product mix.
Operating expenses
|
|
For the Year Ended December 31,
|
|
|
Change
|
|
|
|
2016
|
|
|
2015
|
|
|
Amount
|
|
|
%
|
|
|
|
(U.S. dollars in millions, except percentage)
|
|
Operating expenses
|
|
$
|
73.2
|
|
|
$
|
57.4
|
|
|
$
|
15.8
|
|
|
|
27.5
|
|
as a percentage of total sales
|
|
|
21.5
|
%
|
|
|
19.4
|
%
|
|
|
|
|
|
|
2.1
|
|
Our total operating expenses increased by $15.8
million, or 27.5%, to $73.2 million for 2016 from $57.4 million for 2015. As a percentage of total sales, total expenses increased
by 2.1% to 21.5% for 2016 from 19.4% for 2015. The increase of the total operating expenses was primarily due to the combined effect
of the increase of general and administrative expenses and selling expenses as discussed below.
Selling expenses
|
|
For the Year Ended December 31,
|
|
|
Change
|
|
|
|
2016
|
|
|
2015
|
|
|
Amount
|
|
|
%
|
|
|
|
(U.S. dollars in millions, except percentage)
|
|
Selling expenses
|
|
$
|
11.7
|
|
|
$
|
10.0
|
|
|
$
|
1.7
|
|
|
|
17.0
|
|
as a percentage of total sales
|
|
|
3.4
|
%
|
|
|
3.4
|
%
|
|
|
|
|
|
|
-
|
|
For 2016, our selling expenses increased by
$1.7 million, or 17.0%, to $11.7 million from $10.0 million for 2015. As a percentage of total sales, our selling expenses for
2016 remained stable as compared to 2015. The increase of the selling expenses was in line with the sales growth in 2016 as compared
to 2015.
General and administrative expenses
|
|
For the Year Ended December 31,
|
|
|
Change
|
|
|
|
2016
|
|
|
2015
|
|
|
Amount
|
|
|
%
|
|
|
|
(U.S. dollars in millions, except percentage)
|
|
General and administrative expenses
|
|
$
|
54.5
|
|
|
$
|
41.4
|
|
|
$
|
13.1
|
|
|
|
31.6
|
%
|
as a percentage of total sales
|
|
|
16.0
|
%
|
|
|
14.0
|
%
|
|
|
|
|
|
|
2.0
|
|
For 2016, our general and administrative expenses
increased by $13.1 million, or 31.6%, to $54.5 million from $41.4 million for 2015. As a percentage of total sales, general and
administrative expenses increased by 2.0% to 16.0% for 2016 from 14.0% for 2015. The increase in general and administrative expenses
was mainly due to the increase of share-based compensation expenses of $12.3 million.
Research and development expenses
|
|
For the Year Ended December 31,
|
|
|
Change
|
|
|
|
2016
|
|
|
2015
|
|
|
Amount
|
|
|
%
|
|
|
|
(U.S. dollars in millions, except percentage)
|
|
Research and development expenses
|
|
$
|
7.0
|
|
|
$
|
6.0
|
|
|
$
|
1.0
|
|
|
|
16.7
|
%
|
as a percentage of total sales
|
|
|
2.1
|
%
|
|
|
2.0
|
%
|
|
|
|
|
|
|
0.1
|
|
For 2016, our research and development expenses
increased by $1.0, or 16.7%, to $7.0 million from $6.0 million for 2015. In 2016 and 2015, we received government grants totaling
$0.8 million and $1.2 million, respectively, and recognized them as a reduction of research and development expenses. Excluding
this impact, our non-GAAP research and development expenses increased by $0.6 million for 2016 from 2015. As a percentage of total
sales, our non-GAAP research and development expenses, excluding the impact of these recognized government grants, decreased by
0.1% to 2.3% for 2016 from 2.4% for 2015.
Equity in (loss) income of equity method
investee
Our equity method investment represented our
35.0% equity interest in Huitian, our equity method investee. For 2016, our equity in income (loss) of equity method investee increased
by $3.8 million to a gain of $2.5 million from a loss of $1.3 million for 2015. Huitian suspended its production and began to construct
a new production facility to meet the new GMP standard in late 2013. Huitian incurred operation losses during the suspension period
in 2015 as it did not commence production at its new facility until February 2016.
Income tax expense
|
|
For the Year Ended December 31,
|
|
|
Change
|
|
|
|
2016
|
|
|
2015
|
|
|
Amount
|
|
|
%
|
|
|
|
(U.S. dollars in millions, except percentage)
|
|
Income tax expense
|
|
$
|
25.1
|
|
|
$
|
21.0
|
|
|
$
|
4.1
|
|
|
|
19.5
|
|
Effective income tax rate
|
|
|
16.3
|
%
|
|
|
15.5
|
%
|
|
|
|
|
|
|
0.8
|
|
Our provision for income taxes increased
by $4.1 million, or 19.5%, to $25.1 million for 2016 from $21.0 million for 2015. Our effective income tax rates were 16.3%
and 15.5% for 2016 and 2015, respectively. The increase of effective income tax rate was mainly due to that on a percentage
basis, greater losses were generated by China Biologic in U.S. for 2016 as compared to 2015, most of which were provided
valuation allowance.
Comparison of years ended December 31, 2015 and 2014
Sales
Our total sales increased by 21.9%, or $53.2
million, to $296.5 million for 2015, compared to $243.3 million for 2014, primarily due to increases in the sales volumes of human
albumin and IVIG. In RMB terms, which is a non-GAAP measure, our sales increased by 23.4% for 2015 as compared to 2014. Such increase
of sales was mainly due to the increase in sales volume in major plasma products.
The following table summarizes the breakdown
of sales by major types of products
:
|
|
For the Year Ended December 31,
|
|
|
|
|
|
|
2015
|
|
|
2014
|
|
|
Change
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
(U.S. dollars in millions, except percentage)
|
|
Human albumin
|
|
|
111.4
|
|
|
|
37.6
|
|
|
|
95.6
|
|
|
|
39.3
|
|
|
|
15.8
|
|
|
|
16.5
|
|
Immunoglobulin products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IVIG
|
|
|
125.1
|
|
|
|
42.2
|
|
|
|
98.4
|
|
|
|
40.4
|
|
|
|
26.7
|
|
|
|
27.1
|
|
Other immunoglobulin products
|
|
|
22.5
|
|
|
|
7.6
|
|
|
|
19.7
|
|
|
|
8.1
|
|
|
|
2.8
|
|
|
|
14.2
|
|
Placenta polypeptide
|
|
|
27.2
|
|
|
|
9.2
|
|
|
|
24.0
|
|
|
|
9.9
|
|
|
|
3.2
|
|
|
|
13.3
|
|
Others
|
|
|
10.3
|
|
|
|
3.4
|
|
|
|
5.6
|
|
|
|
2.3
|
|
|
|
4.7
|
|
|
|
83.9
|
|
Totals
|
|
|
296.5
|
|
|
|
100.0
|
|
|
|
243.3
|
|
|
|
100.0
|
|
|
|
53.2
|
|
|
|
21.9
|
|
For 2015 as compared
to 2014:
|
·
|
the average price for our approved human albumin products, which
represented 37.6% of our total sales, remained stable and, excluding the foreign exchange effect, their average price in RMB increased
by approximately 1.3% (which is a non-GAAP measure); and
|
|
·
|
the average price for our approved IVIG products, which represented
42.2% of our total sales, remained stable, and excluding the foreign exchange effect, their average price in RMB increased by approximately
1.2% (which is a non-GAAP measure).
|
The average sales price of our human albumin
and IVIG products increased in RMB term for 2015 as compared to 2014, as a result of the combined effects of the reduced value
added tax, or VAT, rate, strong market demand and our sales effort to increase market shares in tier-one cities and new markets.
The VAT rate on sales of plasma products was reduced from 6.0% to 3.0%, effective on July 1, 2014. The reduction in the VAT rate
had a positive impact on our sales prices as our sales are recognized as the invoiced price of the products sold minus VAT. All
other factors being equal, the reduction in the VAT rate had the effect of increasing our sales price of plasma products by 2.9%.
Excluding this impact, the average sales price of our human albumin and IVIG products in RMB term would have remained stable in
2015 as compared to 2014. The average sales price of our human albumin and IVIG products increased slightly in RMB term in response
to the strong market demand following the removal of the retail price ceilings for drug products, effective on June 1, 2015. This
increase was partially offset by our effort to increase the market share of our human albumin products and IVIG products in tier-one
cities and new markets in 2015, whereby we increased sales to distributors with lower invoiced prices compared to direct sales
to hospitals and inoculation centers.
The sales volume of our products depends on
market demand and our production volume. The production volume of our human albumin products and IVIG products depends primarily
on the general plasma supply. The production volume of our hyper-immune products, which include human rabies immunoglobulin, human
hepatitis B immunoglobulin and human tetanus immunoglobulin products, is subject to the availability of specific vaccinated plasma
and our production capacity. The supply of specific vaccinated plasma requires several months of lead time. Our production facility
currently can only accommodate the production of one type of hyper-immune products at any given time and we rotate the production
of different types of hyper-immune products from time to time in response to market demand. As such, the sales volume of any given
type of hyper-immune products may vary significantly from period to period.
The sales volume of our human albumin products
increased by 16.6% for 2015 as compared to 2014, as a result of the increased production volume at Shandong Taibang and Guizhou
Taibang. The sales volume of our IVIG products increased by 27.0% for 2015 as compared to 2014, mainly due to the increased sales
through distributors in tier-one cities and new markets supported by the increased output following the production resumption at
Guizhou Taibang in March 2014. Further, in anticipation of a favorable market environment and our increased sales capabilities
in 2015, we reserved a large volume of IVIG pastes from previous years to be processed and sold in early 2015, which also contributed
to our increased sales volume in 2015.
The sales increase of other immunoglobulin
products for 2015 as compared to 2014 was mainly attributable to the increase in average sales price of human tetanus immunoglobulin
products. The increase in average sales price of human tetanus immunoglobulin products was primarily due to the strong market demand
coupled by the removal of the retail price ceiling for drug products effective on June 1, 2015.
The sales increase of placenta polypeptide
products was generally in line with the volume increase for 2015 as compared to 2014. The sales volume of placenta polypeptide
products increased by 12.8% for 2015 as compared to 2014, primarily due to the ramp-up of the production capacities for placenta
polypeptide at Guizhou Taibang after receiving the GMP certification for the upgraded production facilities in January 2014.
The sales increase of other products for 2015
as compared to 2014 was mainly due to the increase in sales volume of both factor VIII and PCC.
Cost of sales & gross profit
|
|
For the Year Ended December 31,
|
|
|
Change
|
|
|
|
2015
|
|
|
2014
|
|
|
Amount
|
|
|
%
|
|
|
|
(U.S. dollars in millions, except percentage)
|
|
Cost of sales
|
|
$
|
106.5
|
|
|
$
|
80.0
|
|
|
$
|
26.5
|
|
|
|
33.1
|
|
as a percentage of total sales
|
|
|
35.9
|
%
|
|
|
32.9
|
%
|
|
|
|
|
|
|
3.0
|
|
Gross Profit
|
|
$
|
190.0
|
|
|
$
|
163.2
|
|
|
$
|
26.8
|
|
|
|
16.4
|
|
Gross Margin
|
|
|
64.1
|
%
|
|
|
67.1
|
%
|
|
|
|
|
|
|
(3.0
|
)
|
Our cost of sales was $106.5 million, or 35.9%
of our sales, for 2015, as compared to $80.0 million, or 32.9% of our sales for 2014. Our gross profit was $190.0 million and $163.2
million for 2015 and 2014, respectively, representing gross margins of 64.1% and 67.1%, respectively. Excluding the sales of the
products derived from raw plasma outsourced from Xinjiang Deyuan, whose cost is moderately higher than plasma from our own collection
stations, our gross margin would have been 65.4% for 2015. Our cost of sales and gross margin are affected by the volume and pricing
of our finished products, raw material costs, production mix and yields, inventory impairments, production cycles and routine maintenance
costs.
The increase in cost of sales for 2015 as compared
to 2014 was generally in line with the increases in sales volume and cost of plasma. In an effort to increase plasma collection
volume and expand our donor base, we increased the nutrition fees paid to donors consistent with the industry practice. We expect
the nutrition fees to be paid to donors will continue to increase as a result of improving living standards in China. Consequently,
future improvements on margins will need to be derived from increases in product pricing, yields and manufacturing efficiency,
as well as from optimizing the product mix. The increase in cost of sales as a percentage of sales for 2015 as compared to 2014
was mainly due to the increase in cost of plasma, which was partially offset by the increase in the average sales price of major
plasma products.
Operating expenses
|
|
For the Year Ended December 31,
|
|
|
Change
|
|
|
|
2015
|
|
|
2014
|
|
|
Amount
|
|
|
%
|
|
|
|
(U.S. dollars in millions, except percentage)
|
|
Operating expenses
|
|
$
|
57.4
|
|
|
$
|
52.1
|
|
|
$
|
5.3
|
|
|
|
10.2
|
|
as a percentage of total sales
|
|
|
19.4
|
%
|
|
|
21.4
|
%
|
|
|
|
|
|
|
(2.0
|
)
|
Our total operating expenses increased by $5.3
million, or 10.2%, to $57.4 million for 2015 from $52.1 million for 2014. As a percentage of total sales, total expenses decreased
by 2.0% to 19.4% for 2015 from 21.4% for 2014. The operating expenses for 2014 included a provision of $5.1 million for all the
receivables in respect of an employee housing development project at Shandong Taibang as discussed below. Excluding the effect
of this provision, our operating expenses increased by $10.4 million, or 22.1%, for 2015 as compared to 2014, primarily due to
the combined effect of the increase of the general and administrative expenses and research and development expenses and the decrease
of selling expenses as discussed below.
Selling expenses
|
|
For the Year Ended December 31,
|
|
|
Change
|
|
|
|
2015
|
|
|
2014
|
|
|
Amount
|
|
|
%
|
|
|
|
(U.S. dollars in millions, except percentage)
|
|
Selling expenses
|
|
$
|
10.0
|
|
|
$
|
10.7
|
|
|
$
|
(0.7
|
)
|
|
|
(6.5
|
)
|
as a percentage of total sales
|
|
|
3.4
|
%
|
|
|
4.4
|
%
|
|
|
|
|
|
|
(1.0
|
)
|
For 2015, our selling expenses decreased by
$0.7 million, or 6.5%, to $10.0 million from $10.7 million for 2014. As a percentage of total sales, our selling expenses for 2015
decreased by 1.0% to 3.4% from 4.4% for 2014. The decrease was mainly due to the decreased selling expense of placenta polypeptide
for 2015 as compared to 2014. We began to utilize internal resources instead of third-party service providers to promote sales
of placenta polypeptide products, and did not renew a third-party engagement upon its expiration in May 2014.
General and administrative expenses
|
|
For the Year Ended December 31,
|
|
|
Change
|
|
|
|
2015
|
|
|
2014
|
|
|
Amount
|
|
|
%
|
|
|
|
(U.S. dollars in millions, except percentage)
|
|
General and administrative expenses
|
|
$
|
41.4
|
|
|
$
|
32.1
|
|
|
$
|
9.3
|
|
|
|
29.0
|
|
as a percentage of total sales
|
|
|
14.0
|
%
|
|
|
13.2
|
%
|
|
|
|
|
|
|
0.8
|
|
For 2015, our general and administrative expenses
increased by $9.3 million, or 29.0%, to $41.4 million from $32.1 million for 2014. As a percentage of total sales, general and
administrative expenses increased by 0.8% to 14.0% for 2015 from 13.2% for 2014. The increase in general and administrative expenses
was mainly due to the increase of share-based compensation expenses totaling $6.7 million. In addition, the disposal losses on
assets increased by $2.7 million for 2015 as compared to 2014.
Research and development expenses
|
|
For the Year Ended December 31,
|
|
|
Change
|
|
|
|
2015
|
|
|
2014
|
|
|
Amount
|
|
|
%
|
|
|
|
(U.S. dollars in millions, except percentage)
|
|
Research and development expenses
|
|
$
|
6.0
|
|
|
$
|
4.2
|
|
|
$
|
1.8
|
|
|
|
42.9
|
|
as a percentage of total sales
|
|
|
2.0
|
%
|
|
|
1.7
|
%
|
|
|
|
|
|
|
0.3
|
|
For 2015, our research and development expenses
increased by $1.8, or 42.9%, to $6.0 million from $4.2 million for 2014. In 2015 and 2014, we received government grants totaling
$1.2 million and $2.1 million respectively and recognized them as a reduction of research and development expenses. Excluding this
impact, our non-GAAP research and development expenses increased by $0.9 million for 2015 from 2014. As a percentage of total sales,
our non-GAAP research and development expenses, excluding the impact of the government grants, decreased by 0.2% to 2.4% for 2015
from 2.6% for 2014. The increase of our research and development expenses was mainly due to the expenditures paid for certain clinical
trial programs in 2015.
Provision for other receivables in respect
of an employee housing development project
In 2014, we made a full provision of $5.1 million
for all the receivables in respect of an employee housing development project at Shandong Taibang because it became probable that
these receivables may not be recoverable after all legal means of collection were exhausted.
Equity in (loss) income of equity method
investee
Our equity method investment represented our
35.0% equity interest in Huitian, our equity method investee. For 2015, our equity in (loss) income of equity method investee decreased
by $9.9 million to a loss of $1.3 million from income of $8.6 million for 2014. Huitian suspended its production and began to construct
a new production facility to meet the new GMP standard in late 2013. Huitian incurred operation losses during the suspension period
in 2015 as it did not commence production at its new facility until February 2016. In 2014, Huitian disposed of a subsidiary, recognizing
a gain of RMB116.7 million (approximately $19.0 million).
Income tax expense
|
|
For the Year Ended December 31,
|
|
|
Change
|
|
|
|
2015
|
|
|
2014
|
|
|
Amount
|
|
|
%
|
|
|
|
(U.S. dollars in millions, except percentage)
|
|
Income tax expense
|
|
$
|
21.0
|
|
|
$
|
26.6
|
|
|
$
|
(5.6
|
)
|
|
|
(21.1
|
)
|
Effective income tax rate
|
|
|
15.5
|
%
|
|
|
21.7
|
%
|
|
|
|
|
|
|
(6.2
|
)
|
Our provision for income taxes decreased by
$5.6 million, or 21.1%, to $21.0 million for 2015 from $26.6 million for 2014. For 2014, we incurred the dividend withholding income
tax of $8.9 million in respect of the dividends declared or to be declared by Shandong Taibang. With our plan to reinvest Shandong
Taibang’s earnings in its business operations, we no longer incurred dividend withholding income tax in respect of Shandong
Taibang since 2015 following an internal corporate restructuring.
Excluding the impact of dividend withholding
income tax, our effective income tax rates were 15.5% and 14.4% for 2015 and 2014, respectively. The statutory tax rate applicable
to our major operating subsidiaries in the PRC for 2015 and 2014 was 15.0%.
Foreign Currency Exchange Impact
All of our consolidated revenues and consolidated
costs of sales and majority of expenses, as well as all of our assets (except for certain cash balances) are denominated in RMB,
whereas our reporting currency is U.S. dollars. As a result, we are exposed to foreign exchange risk as our revenues and results
of operations may be affected by fluctuations in the exchange rate between U.S. dollars and RMB. For details, see “Item 7A.
Quantitative and Qualitative Disclosures about Market Risk— Foreign Exchange Risk.”
Given that our operations are primarily in
China, we evaluate certain key items of our financial results on a local currency basis (i.e., in RMB) in addition to the reporting
currency (i.e., in USD). The local currency presentation, which is a non-GAAP measure, excludes the impact of fluctuations in foreign
currency exchange rates. We believe providing local currency information on such key items enhances the understanding of our financial
results and evaluation of performance in comparison to prior periods. We calculate changes in local currency percentages by comparing
financial results denominated in RMB from period to period.
Liquidity and Capital Resources
To date, we have financed our operations primarily
through cash flows from operations, augmented by bank borrowings and equity contributions by our stockholders. As of December 31,
2016, we had $183.8 million in cash and cash equivalents, primarily consisting of cash on hand and demand deposits.
The following table sets forth a summary of our cash flows for the
periods indicated:
Cash Flow
|
|
For the Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
(U.S. dollars in millions)
|
|
Net cash provided by operating activities
|
|
$
|
123.3
|
|
|
$
|
109.4
|
|
|
$
|
93.5
|
|
Net cash used in investing activities
|
|
|
(52.5
|
)
|
|
|
(89.8
|
)
|
|
|
(13.4
|
)
|
Net cash (used in) provided by financing activities
|
|
|
(22.1
|
)
|
|
|
51.6
|
|
|
|
(142.8
|
)
|
Effects of exchange rate change in cash
|
|
|
(9.8
|
)
|
|
|
(7.1
|
)
|
|
|
(0.6
|
)
|
Net increase (decrease) in cash and cash equivalents
|
|
|
38.9
|
|
|
|
64.1
|
|
|
|
(63.3
|
)
|
Cash and cash equivalents at beginning of the year
|
|
|
144.9
|
|
|
|
80.8
|
|
|
|
144.1
|
|
Cash and cash equivalents at end of the year
|
|
$
|
183.8
|
|
|
$
|
144.9
|
|
|
$
|
80.8
|
|
Operating activities
Cash inflows from operating activities totaled
$123.3 million in 2016, $109.4 million in 2015, and $93.5 million in 2014. Cash inflows increased by $13.9 million in 2016 as compared
to 2015 and increased by $15.9 million in 2015 as compared to 2014. Such increases in cash inflows from operations were mainly
in line with the improvements in our results of operations in 2016 and 2015, partially offset by an increase in accounts receivable
and inventories during the relevant years.
Accounts receivable
Our average collection speed of accounts receivable
slowed down slightly in 2016 as compared to 2015. The accounts receivable turnover days for plasma products were 41 days, 34 days,
and 31 days for 2016, 2015, and 2014, respectively. The increase in turnover days for 2016 was primarily due to the extended credit
terms granted to certain qualified hospitals in 2016 for enhancing our business relationship with certain key customers. In 2015,
we adjusted our sales strategy by granting extended credit terms to certain qualified distributors of human rabies immunoglobulin
products to assist in their bidding efforts with provincial centers for disease control and prevention. In prior years, these distributors
were required to make the payments in advance of our product deliveries.
Inventories
Cash outflows for inventories increased in
both 2016 and 2015. The increases in inventory for 2016, 2015 and 2014 were $40.1, $32.1 million and $13.4 million, respectively.
The increase of inventories in 2016 as compared to 2015 was mainly attributable to the increase in source plasma purchased from
Xinjiang Deyuan as well as the increase of finished goods in preparation for Shandong Taibang’s facility transition. The
increase of inventories in 2015 as compared to 2014 was mainly attributable to the source plasma and plasma pastes purchased from
Xinjiang Deyuan.
Investing activities
Cash outflows from investing activities for
2016 was $52.5 million, as compared to $89.8 million and $13.4 million for 2015 and 2014, respectively. In 2016, we paid $51.0
million for the acquisition of property, plant and equipment, intangible assets and land use rights and provided loans of $12.3
million to Xinjiang Deyuan, which was partially offset by a $10.3 million refund of deposits on land use rights from the local
government.
In 2015, we paid $52.3 million for the acquisition
of property, plant and equipment, intangible assets and land use rights and provided a long-term loan of $40.7 million to Xinjiang
Deyuan, which was partially offset by government grants of $2.5 million in connection with our purchase of property, plant and
equipment.
In 2014, we paid $21.9 million for the acquisition
of property, plant and equipment, intangible assets and land use rights, which was partially offset by a $1.6 million refund of
deposits from the local government due to a decrease in the size of a land parcel purchased by Guizhou Taibang and proceeds of
$6.6 million from the maturity of a time deposit made in 2013.
Financing activities
Cash outflows from financing activities for
2016 totaled $22.1 million, as compared to cash inflows from financing activities totaled $51.6 million and cash outflows from
financing activities totaled $142.8 million for 2015 and 2014, respectively.
Cash outflows from financing activities in
2016 mainly consisted of payment of $58.1 million to the former minority shareholders of Guizhou Taibang in connection with their
capital withdrawal from Guizhou Taibang (See Item 3 “Legal Proceedings”) and a dividend payment of $7.9 million by
our subsidiary to noncontrolling interest shareholder, partially offset by the maturity of a $37.8 million time deposit as a security
for a bank loan that was fully repaid in June 2015 and proceeds of $3.6 million from stock option exercised.
Cash inflows from financing activities in 2015
mainly consisted of net proceeds of $80.6 million from a follow-on offering of our company’s common stock in June 2015, proceeds
of $63.2 million from the maturity of deposits used as security for bank loans, proceeds of $15.8 million from a short-term bank
loan and proceeds of $7.7 million from stock options exercised, partially offset by repayments of bank loans totaling $113.5 million
and a dividend of $3.7 million held in escrow by a trial court in connection with disputes with a minority shareholder of Guizhou
Taibang.
Cash outflows from financing activities in
2014 mainly consisted of a payment of $86.8 million for acquisition of noncontrolling interest in Guizhou Taibang, a dividend payment
of $8.8 million by our subsidiaries to noncontrolling interest shareholders and a payment of $70.0 million for repurchase of shares
from an individual stockholder, partially offset by proceeds of $33.2 million from a follow-on offering of our company’s
common stock.
Management believes that our company has sufficient
cash on hand and will continue to have positive cash inflow for its operations from the sale of its products in the PRC market.
Obligations under Material Contracts
The following table sets forth our material
contractual obligations as of December 31, 2016:
|
|
Payments due by period
|
|
Contractual Obligations
|
|
Total
|
|
|
Less than
one year
|
|
|
One to
three years
|
|
|
Three to
five years
|
|
|
More than
five years
|
|
|
|
(U.S. dollars in millions)
|
|
Operating lease commitment
|
|
|
1.1
|
|
|
|
0.4
|
|
|
|
0.6
|
|
|
|
-
|
|
|
|
0.1
|
|
Purchase commitment
|
|
|
44.7
|
|
|
|
25.4
|
|
|
|
19.3
|
|
|
|
-
|
|
|
|
-
|
|
Capital commitment
|
|
|
27.4
|
|
|
|
24.6
|
|
|
|
2.8
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
73.2
|
|
|
|
50.4
|
|
|
|
22.7
|
|
|
|
-
|
|
|
|
0.1
|
|
Seasonality of our Sales
Our operating results and operating cash flows
historically have not been subject to seasonal variations. This pattern may change, however, as a result of new market opportunities
or new product introductions.
Inflation
Inflation does not materially affect our business
or the results of our operations.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements
that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our investors.
Critical Accounting Policies
The preparation of financial statements in
conformity with United States generally accepted accounting principles, or U.S. GAAP, requires our management to make assumptions,
estimates and judgments that affect the amounts reported in the financial statements, including the notes thereto, and related
disclosures of commitments and contingencies, if any. We consider our critical accounting policies to be those that require the
more significant judgments and estimates in the preparation of financial statements, including the following:
Use of estimates
The preparation of consolidated financial statements
in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts
of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject
to such estimates and assumptions include the useful lives of property, plant and equipment and intangibles with definite lives,
the allowances for doubtful accounts, the fair value determinations of equity instruments and stock compensation awards, the realizability
of deferred tax assets and inventories, the recoverability of intangible assets, land use rights, property, plant and equipment,
equity method investment and loan receivable, and accruals for income tax uncertainties and other contingencies. The current economic
environment has increased the degree of uncertainty inherent in those estimates and assumptions.
Allowance for doubtful accounts
We maintain an allowance for doubtful accounts
for estimated losses inherent in its accounts receivable portfolio. In establishing the required allowance, management considers
historical losses, the customers’ financial condition, the amount of accounts receivable in dispute, the accounts receivable
aging and customers’ payment patterns. We review our allowance for doubtful accounts monthly. Past due balances are reviewed
individually for collectability. Account balances are charged off against the allowance after all means of collection have been
exhausted and the potential for recovery is considered remote. We do not have any off-balance-sheet credit exposure related to
our customers.
We generally ask our distributors to pay in
advance before we deliver products, with few exceptions for a credit period of no longer than 60 days. For hospitals and clinics,
depending on the relationship and the creditability, we generally grant a credit period of no longer than 90 days with exceptions
to customers, which we believe are credit worthy, of up to six months. We have provided a bad debt allowance of $123,239, $34,902
and $6,211 respectively for 2016, 2015 and 2014. Due to recovery of bad debt that we previously provided an allowance, the recoveries
of bad debt provision was nil, nil and $30,673 for 2016, 2015 and 2014, respectively.
Inventories
Inventories are stated at the lower of cost
or market. Adjustments are recorded to write down the carrying amount of any obsolete and excess inventory to its estimated net
realizable value based on historical and forecasted demand.
We review the inventory periodically for possible
obsolete goods and cost in excess of net realizable value to determine if any reserves are necessary. Provisions to write-down
the carrying amount of obsolete inventory to its estimated net realizable value amounted to $256,862, $76,587 and $324,584 for
2016, 2015 and 2014, respectively, and were recorded as cost of sales in the consolidated statements of comprehensive income.
Long-lived assets
Long-lived assets, such as property, plant
and equipment, and purchased intangible asset subject to amortization, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset
or asset group be tested for possible impairment, we first compares undiscounted cash flows expected to be generated by that asset
or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted
cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined
through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals,
as considered necessary.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.
Our operations are carried out in the PRC and
we are subject to specific considerations and significant risks not typically associated with companies in North America and Western
Europe. Accordingly, our business, financial condition and results of operations may be influenced by the political, economic and
legal environment in the PRC, and by the general state of the PRC economy. Our results may be adversely affected by changes in
governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad,
and rates and methods of taxation, among other things.
Interest Rate Risk
We are exposed to interest rate risk primarily
with respect to our bank loans. We have not used any derivative financial instruments to manage our interest rate risk exposure.
We have not been exposed nor do we anticipate being exposed to material risks due to changes in interest rates. However, our future
interest expenses may increase due to changes in market interest rates.
Management monitors the banks’ prime
rates in conjunction with our cash requirements to determine the appropriate level of debt balances relative to other sources of
funds. We have not entered into any hedging transactions in an effort to reduce our exposure to interest rate risk.
Foreign Exchange Risk
All of our consolidated revenues and consolidated
costs and majority of expenses are denominated in RMB. All of our assets are denominated in RMB, except certain cash balances.
However, our reporting currency is U.S. dollars. As a result, we are exposed to foreign exchange risk as our revenues and results
of operations may be affected by fluctuations in the exchange rate between U.S. dollars and RMB. If RMB depreciates against the
U.S. dollars, the value of our RMB revenues, earnings and assets as expressed in our U.S. dollar financial statements will decline.
Assets and liabilities are translated at exchange rates at the balance sheet dates and revenue and expenses are translated at the
average exchange rates and shareholders’ equity is translated at historical exchange rates. Any resulting translation adjustments
are not included in determining net income but are included in determining other comprehensive income, a component of stockholders’
equity. We have not entered into any hedging transactions in an effort to reduce our exposure to foreign exchange risk.
RMB is currently freely convertible under the
“current account,” which includes dividends, trade and service-related foreign exchange transactions, but not under
the “capital account,” which includes foreign direct investment. In addition, beginning in July 2005, China reformed
its exchange rate regime by changing to a managed floating exchange rate regime based on market supply and demand with reference
to a basket of major foreign currencies. Under the managed floating exchange rate regime, RMB is no longer pegged to U.S. dollars.
The People’s Bank of China announces the closing prices of foreign currencies such as U.S. dollars traded against RMB in
the inter-bank foreign exchange market after the closing of the market on each business day, and makes such prices the central
parity for trading against RMB on the following business day. On May 19, 2007, the People’s Bank of China announced a policy
to expand the maximum daily floating range of RMB trading prices against U.S. dollars in the inter-bank spot foreign exchange market
from 0.3% to 0.5%. On June 19, 2010, the People’s Bank of China announced that it would proceed further with the reform of
the RMB exchange rate regime to enhance the flexibility of the RMB exchange rate and that emphasis would be placed on reflecting
market supply and demand with reference to a basket of major foreign currencies. On April 16, 2012, the People’s Bank of
China announced a policy to expand the maximum daily floating range of RMB trading prices against U.S. dollars in the inter-bank
spot foreign exchange market from 0.5% to 1.0%. On March 17, 2014, the People’s Bank of China announced a policy to further
expand the maximum daily floating range of RMB trading prices against U.S. dollars in the inter-bank spot foreign exchange market
to 2.0%. In the long term, RMB may appreciate or depreciate more significantly in value against U.S. dollars or other foreign currencies,
depending on the market supply and demand with reference to a basket of major foreign currencies. On August 10, 2015, the People’s
Bank of China announced that it had changed the calculation method for RMB’s daily central parity exchange rate against U.S.
dollars, which resulted in an approximately 2.0% depreciation of RMB on that day. RMB continued to experience an approximately
9.6% depreciation against U.S. dollars throughout the remainder of 2015 and up to the date of this report.
Account Balances
We maintain cash
balances at financial institutions which, from time to time, may exceed Federal Deposit Insurance Corporation insured limits for
the banks located in the United States, Hong Kong Deposit Protection Board insured limits for the banks located in Hong Kong, or
China Deposit Insurance Scheme insured limits for the banks located in the PRC. Total cash at banks, time deposits and restricted
cash deposits as of December 31, 2016 and December 31, 2015 amounted to $183.1 million and $182.3 million respectively, $2.7 million
and $3.0 million of which are covered by insurance, respectively.
We have not experienced
any losses in such accounts and we do not believe that we are exposed to any significant risks on our cash at banks and deposits.
Inflation
Inflationary factors such as increases in the
cost of our sales and overhead costs may adversely affect our operating results. Although we do not believe that inflation has
had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have
an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as
a percentage of net sales if the selling prices of our products do not increase with these increased costs.
Market for Human Albumin and IVIG
Our two major products, human albumin and IVIG,
accounted for 39.2% and 34.6% of the total sales for 2016, respectively. If the market demands for human albumin or IVIG cannot
be sustained in the future or if there is substantial price decrease in either or both products, our operating results could be
materially and adversely affected.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
.
Consolidated Financial Statements
The full text of our audited consolidated financial
statements as of December 31, 2016, 2015 and 2014 begins on page F-1 of this report.
Quarterly Financial Results
The following table sets forth certain unaudited
financial information for each of the eight quarters ended December 31, 2016. The consolidated financial statements for each of
these quarters have been prepared on the same basis as the audited consolidated financial statements included in this annual report
and, in the opinion of management, include all adjustments necessary for the fair presentation of the results of operations for
these periods. This information should be read together with our audited consolidated financial statements and the related notes
included elsewhere in this annual report.
|
|
December
31,
|
|
|
September
30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
December
31,
|
|
|
September
30,
|
|
|
June 30,
|
|
|
March
31,
|
|
|
|
2016
|
|
|
2016
|
|
|
2016
|
|
|
2016
|
|
|
2015
|
|
|
2015
|
|
|
2015
|
|
|
2015
|
|
|
|
(U.S. dollars in thousands, except per share data)
|
|
Sales
|
|
$
|
77,634
|
|
|
$
|
86,526
|
|
|
$
|
91,421
|
|
|
$
|
85,588
|
|
|
$
|
68,285
|
|
|
$
|
78,751
|
|
|
$
|
79,068
|
|
|
$
|
70,354
|
|
Gross profit
|
|
|
46,772
|
|
|
|
58,879
|
|
|
|
59,939
|
|
|
|
51,545
|
|
|
|
41,263
|
|
|
|
50,806
|
|
|
|
52,013
|
|
|
|
45,893
|
|
Earnings before income
tax expense
|
|
|
27,530
|
|
|
|
42,552
|
|
|
|
44,498
|
|
|
|
39,340
|
|
|
|
23,531
|
|
|
|
35,931
|
|
|
|
40,366
|
|
|
|
35,271
|
|
Net income attributable
to Company
|
|
|
19,439
|
|
|
|
28,391
|
|
|
|
30,753
|
|
|
|
26,197
|
|
|
|
16,280
|
|
|
|
22,877
|
|
|
|
26,724
|
|
|
|
23,162
|
|
Basic earnings per share
|
|
|
0.69
|
|
|
|
1.02
|
|
|
|
1.12
|
|
|
|
0.96
|
|
|
|
0.60
|
|
|
|
0.86
|
|
|
|
1.05
|
|
|
|
0.91
|
|
Diluted earnings per share
|
|
|
0.69
|
|
|
|
1.01
|
|
|
|
1.10
|
|
|
|
0.94
|
|
|
|
0.59
|
|
|
|
0.82
|
|
|
|
0.99
|
|
|
|
0.87
|
|
Earnings per share are computed independently
for each of the quarters presented. Therefore, the sum of the quarterly net earnings per share will not necessarily equal the total
for the year.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
.
None.
ITEM 9A. CONTROLS AND PROCEDURES
.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures
(as defined in Rule 13a-15(e) under the Exchange Act) that are designed to ensure that information that would be required to be
disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time period specified in the SEC’s
rules and forms, and that such information is accumulated and communicated to our management, including to our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As required by Rule 13a-15(b) promulgated under
the Securities Exchange Act, our management, with the participation of our Chief Executive Officer and Chief Financial Officer,
evaluated the design and operating effectiveness as of December 31, 2016 of our disclosure controls and procedures, as defined
in Rule 13a-15(e) promulgated under the Securities Exchange Act. Based on this evaluation our Chief Executive Officer and Chief
Financial Officer concluded that, as of December 31, 2016, our disclosure controls and procedures were effective at the reasonable
assurance level to enable our company to record, process, summarize and report information required under the SEC’s rules
in a timely manner.
Management’s Annual Report on Internal
Control over Financial Reporting
Internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) refers to the process designed by, or under the supervision of,
our Chief Executive Officer, and effected by our board of directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. Management is responsible for establishing and maintaining adequate internal control
over financial reporting.
Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Management evaluated the effectiveness of our
internal control over financial reporting as of December 31, 2016. In making this evaluation, management used the framework established
in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission,
or COSO. The COSO framework summarizes each of the components of a company’s internal control system, including the control
environment, risk assessment, control activities, information and communication, and monitoring activities. Based on our evaluation
we determined that our internal control over financial reporting was effective as of December 31, 2016.
Our internal control over financial reporting
as of December 31, 2016 has been audited by our registered public accounting firm as stated in their report which is included in
Part II, Item 9A of this form 10-K.
Report of Independent Registered Public
Accounting Firm
The Board of Directors and Stockholders
China Biologic Products, Inc.:
We have audited China Biologic Products,
Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established in
Internal Control – Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). China Biologic Products, Inc.’s management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included
in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to
express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that
our audit provides a reasonable basis for our opinion.
A company’s internal control over financial
reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, China Biologic Products, Inc.
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on
criteria established in
Internal Control – Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission.
We also have audited, in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of China Biologic Products,
Inc. and subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of comprehensive income, changes
in equity and cash flows for each of the years in the three-year period ended December 31, 2016, and our report dated February
23, 2017 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG Huazhen LLP
Beijing, China
February 23, 2017
Changes in Internal Controls over Financial
Reporting
There were no changes in our internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(d) and 15d-15(f)) during the year ended December 31, 2016 that
have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
Entry into a Material Definitive Agreement
Given the timing of the
event, the following information is included in this Form 10-K pursuant to Item 1.01 “Entry into a Material Definitive Agreement”
of Form 8-K in lieu of filing a Form 8-K.
On February 22, 2017,
our board of directors (the “Board”) authorized and declared a dividend distribution of one right (a “Right”)
for each outstanding share of the common stock, par value $0.0001 per share (the “Common Shares”), of the Company to
stockholders of record at the close of business on March 6, 2017 (the “Record Date”). The complete terms of the Rights
are set forth in a Preferred Shares Rights Agreement (the “Rights Agreement”), dated as of February 22, 2017, between
the Company and Securities Transfer Corporation, as rights agent.
The Board adopted the
Rights Agreement to protect stockholders from coercive or otherwise unfair takeover tactics. In general terms, it works by imposing
a significant penalty upon any person or group that acquires 15% or more of the Common Shares without the approval of the Board
after February 22, 2017. As a result, the overall effect of the Rights Agreement and the issuance of the Rights may be to render
more difficult or discourage a merger, tender or exchange offer or other business combination involving the Company that is not
approved by the Board. However, neither the Rights Agreement nor the Rights should interfere with any merger, tender or exchange
offer or other business combination approved by the Board. The Board had previously adopted similar preferred shares rights agreements
on November 19, 2012, which expired on November 20, 2014, and on January 8, 2015, which expired on January 8, 2017.
Each Right entitles the
registered holder to purchase from the Company one one-thousandth of a share of the Series A Participating Preferred Stock, par
value $0.0001 per share (the “Preferred Shares”), of the Company at an exercise price of $550.00 per one one-thousandth
of a Preferred Share, subject to adjustment (the “Exercise Price”). However, the Rights are not immediately exercisable
and will become exercisable only upon the occurrence of certain events. In particular, after February 22, 2017:
|
·
|
if a person or group acquires 15% or more
of the Company’s Common Shares (including through derivatives), then the Rights will become exercisable and each Right will
entitle its holder (except the acquiring person or group) to purchase, at the Exercise Price, a number of the Company’s Common
Shares having a then-current market value of twice the Exercise Price;
|
|
·
|
if after a person or group acquires 15%
or more of the Company’s Common Shares, the Company merges into another company, an acquiring entity merges into the Company
or the Company sells or transfers more than 50% of its assets, cash flow or earning power, then each Right will entitle its holder
(except the acquiring person or group) to purchase, for the Exercise Price, a number of shares of common stock of the person engaging
in the transaction having a then-current market value of twice the Exercise Price; or
|
|
·
|
after a person or group acquires 15% or
more of the Company’s Common Shares, the Board may, at its option, exchange the Rights (except for Rights held by the acquiring
person or group), in whole or in part, for Common Shares at an exchange ratio of one Common Share per Right (subject to adjustment).
|
The following is a more
detailed summary of the terms of the Rights Agreement. The summary does not purport to be complete and is qualified in its entirety
by reference to the Rights Agreement, a copy of which is attached as Exhibit 4.5 and incorporated herein by reference.
Distribution and Transfer of Rights; Rights
Certificates
The Board has declared
a dividend of one Right for each outstanding Common Share. Prior to the Distribution Date referred to below:
|
·
|
the Rights will be evidenced by and trade
with the certificates for the Common Shares (or, with respect to any uncertificated Common Shares registered in book entry form,
by notation in book entry), together with a copy of this summary of Rights, and no separate rights certificates will be distributed;
|
|
·
|
new Common Shares certificates issued
after the Record Date will contain a legend incorporating the Rights Agreement by reference (for uncertificated Common Shares registered
in book entry form, this legend will be contained in a notation in book entry); and
|
|
·
|
the surrender for transfer of any certificates
for Common Shares (or the surrender for transfer of any uncertificated Common Shares registered in book entry form) will also constitute
the transfer of the Rights associated with such Common Shares.
|
Rights will accompany
any new Common Shares that are issued after the Record Date.
Distribution Date
Subject to certain exceptions
specified in the Rights Agreement, the Rights will separate from the Common Shares and become exercisable following (i) the 10th
business day (or such later date as may be determined by the Board) after the public announcement that an Acquiring Person has
acquired beneficial ownership of 15% or more of the Common Shares or (ii) the 10th business day (or such later date as may be determined
by the Board) after a person or group announces a tender or exchange offer that would result in ownership by a person or group
of 15% or more of the Common Shares. For purposes of the Rights Agreement, beneficial ownership is defined to include the ownership
of derivative securities.
“Acquiring Person”
means a person or group of affiliated or associated persons who has acquired beneficial ownership of 15% or more of the Common
Shares; provided however, no person who, at the time of the adoption of the Rights Agreement, beneficially owns 15% or more of
the Common Shares shall be deemed to be an Acquiring Person (i.e. a stockholder’s existing ownership of the Common Shares
will be grandfathered), unless and until such person acquires beneficial ownership of additional 2% or more of the Common Shares
without the pre-approval of the Board.
The date on which the
Rights separate from the Common Shares and become exercisable is referred to as the “Distribution Date.”
After the Distribution
Date, the Company will mail Rights certificates to the Company’s stockholders as of the close of business on the Distribution
Date and the Rights will become transferable apart from the Common Shares. Thereafter, such Rights certificates alone will represent
the Rights.
Preferred Shares Purchasable
Upon Exercise of Rights
After the Distribution
Date, each Right will entitle the holder to purchase, for the Exercise Price, one one-thousandth of a Preferred Share having economic
and other terms similar to that of one Common Share. This portion of a Preferred Share is intended to give the stockholder approximately
the same dividend, voting and liquidation rights as would one Common Share, and should approximate the value of one Common Share.
More specifically, each
one one-thousandth of a Preferred Share, if issued, will:
|
·
|
entitle holders to quarterly dividend
payments of $0.001 per share, or an amount equal to the dividend paid on one Common Share, whichever is greater;
|
|
·
|
entitle holders upon liquidation either
to receive $1 per share or an amount equal to the payment made on one Common Share, whichever is greater;
|
|
·
|
have the same voting power as one Common
Share; and
|
|
·
|
entitle holders to a per share payment
equal to the payment made on one Common Share, if the Common Shares are exchanged via merger, consolidation or a similar transaction.
|
Flip-In Trigger
If an Acquiring Person
obtains beneficial ownership of 15% or more of the Common Shares, then each Right will entitle the holder thereof to purchase,
for the Exercise Price, a number of Common Shares (or, in certain circumstances, cash, property or other securities of the Company)
having a then-current market value of twice the Exercise Price. However, the Rights are not exercisable following the occurrence
of the foregoing event until such time as the Rights are no longer redeemable by the Company, as further described below.
Following the occurrence
of an event set forth in preceding paragraph, all Rights that are or, under certain circumstances specified in the Rights Agreement,
were beneficially owned by an Acquiring Person or certain of its transferees will be null and void.
Flip-Over Trigger
If, after an Acquiring
Person obtains 15% or more of the Common Shares, (i) the Company merges into another entity, (ii) an acquiring entity merges into
the Company or (iii) the Company sells or transfers more than 50% of its assets, cash flow or earning power, then each Right (except
for Rights that have previously been voided as set forth above) will entitle the holder thereof to purchase, for the Exercise Price,
a number of shares of common stock of the person engaging in the transaction having a then-current market value of twice the Exercise
Price.
Exchange Provision
At any time after the
date on which an Acquiring Person beneficially owns 15% or more of the Common Shares, the Board may, at its option, exchange the
Rights (except for Rights that have previously been voided as set forth above), in whole or in part, for Common Shares at an exchange
ratio of one Common Share per Right (subject to adjustment). In certain circumstances, the Company may elect to exchange the Rights
for cash or other securities of the Company having a value approximately equal to one Common Share.
Redemption of the
Rights
The Rights will be redeemable
at the Company’s option for $0.001 per Right (payable in cash, Common Shares or other consideration deemed appropriate by
the Board) at any time on or prior to the 10th business day (or such later date as may be determined by the Board) after the public
announcement that an Acquiring Person has acquired beneficial ownership of 15% or more of the Common Shares. Immediately upon the
action of the Board ordering redemption, the Rights will terminate and the only right of the holders of the Rights will be to receive
the $0.001 redemption price. The redemption price will be adjusted if the Company undertakes a stock dividend or a stock split.
Expiration of the
Rights
The Rights expire on
the earliest of (i) 5:00 p.m., New York City time, on the two year anniversary date of the date of the Rights Agreement (unless
such date is extended) or (ii) the redemption or exchange of the Rights as described above.
Amendment of Terms
of Rights Agreement and Rights
The terms of the Rights
and the Rights Agreement may be amended in any respect without the consent of the holders of the Rights on or prior to the Distribution
Date. Thereafter, the terms of the Rights and the Rights Agreement may be amended without the consent of the holders of Rights
in order to cure any ambiguities, to shorten or lengthen any time period pursuant to the Rights Agreement or to make changes that
do not adversely affect the interests of holders of the Rights.
Voting Rights; Other
Stockholder Rights
The Rights will not have
any voting rights. Until a Right is exercised, the holder thereof, as such, will have no separate rights as stockholder of the
Company.
Anti-Dilution Provisions
The Board may adjust
the Exercise Price, the number of Preferred Shares issuable and the number of outstanding Rights to prevent dilution that may occur
from a stock dividend, a stock split or a reclassification of the Preferred Shares or Common Shares.
With certain exceptions,
no adjustments to the Exercise Price will be made until the cumulative adjustments amount to at least 1% of the Exercise Price.
No fractional Preferred Shares will be issued and, in lieu thereof, an adjustment in cash will be made based on the current market
price of the Preferred Shares.
Taxes
The distribution of Rights
should not be taxable for federal income tax purposes. However, following an event that renders the Rights exercisable or upon
redemption of the Rights, stockholders may recognize taxable income.
Disclosure pursuant to Section 13(r) of
the Exchange Act
Pursuant to Section 13(r) of the Securities
Exchange Act of 1934, we may be required to disclose in our annual and quarterly reports to the Securities and Exchange Commission
(the “SEC”), whether we or any of our “affiliates” knowingly engaged in certain activities, transactions
or dealings relating to Iran or with certain individuals or entities targeted by US economic sanctions. Disclosure is generally
required even where the activities, transactions or dealings were conducted in compliance with applicable law. Because the SEC
defines the term “affiliate” broadly, it includes any entity under common “control” with us (and the term
“control” is also construed broadly by the SEC).
The description of the activities below has
been provided to us by Warburg Pincus LLC (“WP”), affiliates of which: (i) beneficially own more than 10% of our outstanding
common stock and/or are members of our board of directors, (ii) beneficially own more than 10% of the equity interests of, and
have the right to designate members of the board of directors of Santander Asset Management Investment Holdings Limited (“SAMIH”).
SAMIH may therefore be deemed to be under common “control” with us; however, this statement is not meant to be an admission
that common control exists.
The disclosure below relates solely to activities
conducted by SAMIH and its affiliates. The disclosure does not relate to any activities conducted by us or by WP and does not involve
our or WP’s management. Neither we nor WP has had any involvement in or control over the disclosed activities, and neither
we nor WP has independently verified or participated in the preparation of the disclosure. Neither we nor WP is representing as
to the accuracy or completeness of the disclosure nor do we or WP undertake any obligation to correct or update it.
We understand that one or more SEC-reporting
affiliates of SAMIH intends to disclose in its next annual or quarterly SEC report that:
(a) Santander UK plc (“Santander UK”)
holds two savings accounts and one current account for two customers resident in the United Kingdom (“UK”) who are
currently designated by the United States (“US”) under the Specially Designated Global Terrorist (“SDGT”)
sanctions program. Revenues and profits generated by Santander UK on these accounts in the year ended December 31, 2016 were negligible
relative to the overall revenues and profits of Banco Santander SA.
(b) Santander UK held a savings account for
a customer resident in the UK who is currently designated by the US under the SDGT sanctions program. The savings account was closed
on July 26, 2016. Revenue generated by Santander UK on this account in the year ended December 31, 2016 was negligible relative
to the overall revenues and profits of Banco Santander SA.
(c) Santander UK held a current account for
a customer resident in the UK who is currently designated by the US under the SDGT sanctions program. The current account was closed
on December 22, 2016. Revenue generated by Santander UK on this account in the year ended December 31, 2016 was negligible relative
to the overall revenues and profits of Banco Santander SA.
(d) Santander UK holds two frozen current accounts
for two UK nationals who are designated by the US under the SDGT sanctions program. The accounts held by each customer have been
frozen since their designation and have remained frozen through the year ended December 31, 2016. The accounts are in arrears (£1,844.73
in debit combined) and are currently being managed by Santander UK Collections & Recoveries department. Revenues and profits
generated by Santander UK on these accounts in the year ended December 31, 2016 were negligible relative to the overall revenues
and profits of Banco Santander SA.
(e) During the year ended December 31, 2016,
Santander UK had an OFAC match on a power of attorney account. A party listed on the account is currently designated by the US
under the SDGT sanctions program and the Iranian Financial Sanctions Regulations (“IFSR”). The power of attorney was
removed from the account on July 29, 2016. During the year ended December 31, 2016, related revenues and profits generated by Santander
UK were negligible relative to the overall revenues and profits of Banco Santander SA.
(f) An Iranian national, resident in the UK,
who is currently designated by the US under the IFSR and the Weapons of Mass Destruction Proliferators Sanctions Regulations, held
a mortgage with Santander UK that was issued prior to such designation. The mortgage account was redeemed and closed on April 13,
2016. No further drawdown has been made (or would be allowed) under this mortgage although Santander UK continued to receive repayment
instalments prior to redemption. Revenues generated by Santander UK on this account in the year ended December 31, 2016 were negligible
relative to the overall revenues of Banco Santander SA. The same Iranian national also held two investment accounts with Santander
ISA Managers Limited. The funds within both accounts were invested in the same portfolio fund. The accounts remained frozen until
the investments were closed on May 12, 2016 and bank checks issued to the customer. Revenues generated by Santander UK on these
accounts in the year ended December 31, 2016 were negligible relative to the overall revenues and profits of Banco Santander SA.
(g) In addition, during the year ended December
31, 2016, Santander UK held a basic current account for an Iranian national, resident in the UK, previously designated under the
Iranian Transactions and Sanctions Regulations. The account was closed in September 2016. Revenues generated by Santander UK on
this account in the year ended December 31, 2016 were negligible relative to the overall revenues and profits of Banco Santander
SA.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The information required by Item 10 of Part
III is included in our Proxy Statement for our 2017 Annual Meeting of Stockholders and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 of Part
III is included in our Proxy Statement for our 2017 Annual Meeting of Stockholders and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Securities Authorized for Issuance under
Equity Compensation Plans
The following table includes the information
as of December 31, 2016 for each category of our equity compensation plan:
Plan category
|
|
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
(a)
(1)
|
|
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
|
|
|
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
(c)
|
|
Equity compensation plans approved by security holders
(2)
|
|
|
314,491
|
|
|
$
|
10.32
|
|
|
|
684,245
|
|
Equity compensation plans not approved by security holders
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
314,491
|
|
|
$
|
10.32
|
|
|
|
684,245
|
|
|
(1)
|
Excludes shares of restricted stock granted pursuant to our 2008 Equity Incentive Plan. The 912,650
shares of unvested restricted stock at December 31, 2016 are issuable without the payment of any cash consideration by the grantee.
|
|
(2)
|
Our board of directors adopted the 2008 Plan on May 9, 2008 and shortly thereafter sought and obtained written
consent from the holders of a majority of our then outstanding shares. However, in response to an SEC comment in 2010, the disclosure
in the foregoing table was revised for presently unknown reasons to reflect that the 2008 Plan was not approved by our stockholders.
Our recent review of our records indicates that the written consent signed by the holders of a majority of our then outstanding
shares may not have complied with all requirements for a stockholder consent under the Delaware General Corporation Law (the “DGCL”).
We believe that, even if the written consent did not satisfy all of the requirements applicable to stockholder consents under the
DGCL, this written consent constituted approval of the 2008 Plan by the stockholders pursuant to the terms of the 2008 Plan. In
addition, regardless of whether the stockholders’ written consent complied with all requirements of the DGCL, we believe
that the options granted and restricted stock awarded by our board of directors under the 2008 Plan are valid.
|
The 2008 Plan provides for grants of stock
options, stock appreciation rights, performance units, restricted stock, restricted stock units and performance shares. A total
of five million shares of our common stock may be issued pursuant to the 2008 Plan. The exercise price per share for the shares
to be issued pursuant to an exercise of a stock option will be no less than the fair market value per share on the grant date,
except that, in the case of an incentive stock option granted to a person who holds more than 10.0% of the total combined voting
power of all classes of our stock or any of our subsidiaries, the exercise price will be no less than 110.0% of the fair market
value per share on the grant date. As of December 31, 2016, 912,650 shares of restricted stock and options to purchase 314,491
share of our common stock were outstanding. No awards may be granted under the 2008 Plan after May 9, 2018, except that any award
granted before then may extend beyond that date.
The other information required by Item 12
of Part III is included in our Proxy Statement for our 2017 Annual Meeting of Stockholders and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE.
The information required by Item 13 of Part
III is included in our Proxy Statement for our 2017 Annual Meeting of Stockholders and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by Item 14 of Part
III is included in our Proxy Statement for our 2017 Annual Meeting of Stockholders and is incorporated herein by reference.
PART IV
ITEM
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
Financial
Statements and Schedules
The financial
statements are set forth under Item 8 of this annual report on Form 10-K. Financial statement schedules have been omitted since
they are either not required, not applicable, or the information is otherwise included.
Exhibit List
The list of exhibits in the Exhibit Index to this Report is incorporated herein
by reference.
ITEM 16. FORM 10-K SUMMARY.
None.
SIGNATURES
In accordance with section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant caused this Report on Form 10-K to be signed on its behalf by the undersigned, thereto duly
authorized individual.
Date: February 23, 2017
CHINA BIOLOGIC PRODUCTS, INC.
By:
/s/ David (Xiaoying) Gao
David (Xiaoying) Gao
Chief Executive Officer
By:
/s/ Ming Yang
Ming Yang
Chief Financial Officer
In accordance with the Securities
Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ David (Xiaoying) Gao
|
|
Chairman and Chief Executive Officer
|
|
February 23, 2017
|
David (Xiaoying) Gao
|
|
(Principal Executive Officer)
|
|
|
|
|
|
|
|
/s/ Ming Yang
|
|
Chief Financial Officer
|
|
February 23, 2017
|
Ming Yang
|
|
(Principal Financial and Accounting Officer )
|
|
|
|
|
|
|
|
/s/ Sean Shao
|
|
Director
|
|
February 23, 2017
|
Sean Shao
|
|
|
|
|
|
|
|
|
|
/s/ Zhijun Tong
|
|
Director
|
|
February 23, 2017
|
Zhijun Tong
|
|
|
|
|
|
|
|
|
|
/s/ Yungang Lu
|
|
Director
|
|
February 23, 2017
|
Yungang Lu
|
|
|
|
|
|
|
|
|
|
/s/ Wenfang Liu
|
|
Director
|
|
February 23, 2017
|
Wenfang Liu
|
|
|
|
|
|
|
|
|
|
/s/ Albert (Wai Keung) Yeung
|
|
Director
|
|
February 23, 2017
|
Albert (Wai Keung) Yeung
|
|
|
|
|
|
|
|
|
|
/s/ Joseph Chow
|
|
Director
|
|
February 23, 2017
|
Joseph Chow
|
|
|
|
|
|
|
|
|
|
CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
CONTENTS
Report of Independent Registered Public Accounting
Firm
The Board of Directors and Stockholders
China Biologic Products, Inc.:
We have audited the accompanying consolidated
balance sheets of China Biologic Products, Inc. and subsidiaries (the “Company”) as of December 31, 2016 and 2015,
and the related consolidated statements of comprehensive income, changes in equity and cash flows for each of the years in the
three-year period ended December 31, 2016. These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the financial position of China Biologic Products, Inc.
and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the
standards of the Public Company Accounting Oversight Board (United States), China Biologic Products, Inc.’s internal control
over financial reporting as of December 31, 2016, based on criteria established in Internal Control – Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 23,
2017 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG Huazhen LLP
Beijing, China
February 23, 2017
CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
Note
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
USD
|
|
|
USD
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
183,765,533
|
|
|
|
144,937,893
|
|
Time deposits
|
|
|
|
|
|
|
-
|
|
|
|
38,032,593
|
|
Accounts receivable, net of allowance for doubtful accounts
|
|
|
3
|
|
|
|
33,918,796
|
|
|
|
25,144,969
|
|
Inventories
|
|
|
5
|
|
|
|
156,412,674
|
|
|
|
126,395,312
|
|
Prepayments and other current assets, net of allowance for doubtful accounts
|
|
|
4,12
|
|
|
|
18,275,717
|
|
|
|
24,545,597
|
|
Deposits related to land use rights, current portion
|
|
|
8
|
|
|
|
999,571
|
|
|
|
10,056,200
|
|
Total Current Assets
|
|
|
|
|
|
|
393,372,291
|
|
|
|
369,112,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
7
|
|
|
|
132,091,923
|
|
|
|
105,364,251
|
|
Land use rights, net
|
|
|
|
|
|
|
23,389,384
|
|
|
|
23,576,300
|
|
Equity method investment
|
|
|
9
|
|
|
|
10,614,755
|
|
|
|
8,718,133
|
|
Loan receivable
|
|
|
10
|
|
|
|
43,245,000
|
|
|
|
39,834,173
|
|
Other non-current assets
|
|
|
12
|
|
|
|
2,244,156
|
|
|
|
4,861,075
|
|
Total Assets
|
|
|
|
|
|
|
604,957,509
|
|
|
|
551,466,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
|
|
|
|
6,158,601
|
|
|
|
9,681,835
|
|
Other payables and accrued expenses
|
|
|
11
|
|
|
|
59,798,145
|
|
|
|
57,462,563
|
|
Income tax payable
|
|
|
|
|
|
|
7,484,366
|
|
|
|
4,510,986
|
|
Total Current Liabilities
|
|
|
|
|
|
|
73,441,112
|
|
|
|
71,655,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income
|
|
|
|
|
|
|
3,755,648
|
|
|
|
4,525,867
|
|
Other liabilities
|
|
|
12
|
|
|
|
6,623,926
|
|
|
|
8,323,446
|
|
Total Liabilities
|
|
|
|
|
|
|
83,820,686
|
|
|
|
84,504,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
par value $0.0001;
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
|
|
|
|
29,427,609 and 28,835,053 shares issued at December 31, 2016 and 2015, respectively;
|
|
|
|
|
|
|
|
|
|
|
|
|
27,172,905 and 26,580,349 shares outstanding at December 31, 2016 and 2015, respectively
|
|
|
|
|
|
|
2,943
|
|
|
|
2,884
|
|
Additional paid-in capital
|
|
|
22
|
|
|
|
105,459,610
|
|
|
|
105,079,845
|
|
Treasury stock: 2,254,704 shares at December 31, 2016 and 2015, respectively, at cost
|
|
|
15,21
|
|
|
|
(56,425,094
|
)
|
|
|
(56,425,094
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
|
|
|
|
438,483,401
|
|
|
|
333,704,094
|
|
Accumulated other comprehensive loss
|
|
|
|
|
|
|
(25,320,271
|
)
|
|
|
(18,605
|
)
|
Total equity attributable to China Biologic Products, Inc.
|
|
|
|
|
|
|
462,200,589
|
|
|
|
382,343,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest
|
|
|
22
|
|
|
|
58,936,234
|
|
|
|
84,618,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders’ Equity
|
|
|
|
|
|
|
521,136,823
|
|
|
|
466,961,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
10,18
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
604,957,509
|
|
|
|
551,466,496
|
|
See accompanying notes to Consolidated Financial
Statements.
CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
|
|
|
|
For the Years Ended
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
Note
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
USD
|
|
|
USD
|
|
|
USD
|
|
Sales
|
|
|
17
|
|
|
|
341,169,426
|
|
|
|
296,457,902
|
|
|
|
243,251,658
|
|
Cost of sales
|
|
|
|
|
|
|
124,034,448
|
|
|
|
106,482,626
|
|
|
|
80,025,375
|
|
Gross profit
|
|
|
|
|
|
|
217,134,978
|
|
|
|
189,975,276
|
|
|
|
163,226,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
|
|
|
|
11,679,242
|
|
|
|
9,973,449
|
|
|
|
10,707,409
|
|
General and administrative expenses
|
|
|
|
|
|
|
54,519,122
|
|
|
|
41,391,520
|
|
|
|
32,129,985
|
|
Research and development expenses
|
|
|
|
|
|
|
7,021,992
|
|
|
|
6,024,368
|
|
|
|
4,161,901
|
|
Provision for other receivables in respect of an employee housing development project
|
|
|
6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,068,075
|
|
Income from operations
|
|
|
|
|
|
|
143,914,622
|
|
|
|
132,585,939
|
|
|
|
111,158,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income (loss) of an equity method investee
|
|
|
9
|
|
|
|
2,519,201
|
|
|
|
(1,311,278
|
)
|
|
|
8,646,181
|
|
Interest income
|
|
|
|
|
|
|
7,815,780
|
|
|
|
5,551,105
|
|
|
|
6,644,886
|
|
Interest expense
|
|
|
|
|
|
|
(254,471
|
)
|
|
|
(1,727,335
|
)
|
|
|
(3,697,819
|
)
|
Loss from disposal of a subsidiary
|
|
|
|
|
|
|
(75,891
|
)
|
|
|
-
|
|
|
|
-
|
|
Total other income, net
|
|
|
|
|
|
|
10,004,619
|
|
|
|
2,512,492
|
|
|
|
11,593,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income tax expense
|
|
|
|
|
|
|
153,919,241
|
|
|
|
135,098,431
|
|
|
|
122,752,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
12
|
|
|
|
25,125,820
|
|
|
|
20,992,913
|
|
|
|
26,639,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
128,793,421
|
|
|
|
114,105,518
|
|
|
|
96,112,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net income attributable to noncontrolling interest
|
|
|
|
|
|
|
24,014,114
|
|
|
|
25,062,815
|
|
|
|
25,195,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to China Biologic Products, Inc.
|
|
|
|
|
|
|
104,779,307
|
|
|
|
89,042,703
|
|
|
|
70,916,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share of common stock:
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
3.79
|
|
|
|
3.40
|
|
|
|
2.85
|
|
Diluted
|
|
|
|
|
|
|
3.74
|
|
|
|
3.27
|
|
|
|
2.71
|
|
Weighted average shares used in computation:
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
26,848,445
|
|
|
|
25,599,153
|
|
|
|
24,427,196
|
|
Diluted
|
|
|
|
|
|
|
27,249,144
|
|
|
|
26,567,366
|
|
|
|
25,685,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
128,793,421
|
|
|
|
114,105,518
|
|
|
|
96,112,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment, net of nil income taxes
|
|
|
|
|
|
|
(31,303,262
|
)
|
|
|
(24,368,360
|
)
|
|
|
(1,918,715
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
97,490,159
|
|
|
|
89,737,158
|
|
|
|
94,193,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Comprehensive income attributable to noncontrolling interest
|
|
|
|
|
|
|
19,026,592
|
|
|
|
20,698,249
|
|
|
|
24,798,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to China Biologic Products, Inc.
|
|
|
|
|
|
|
78,463,567
|
|
|
|
69,038,909
|
|
|
|
69,395,535
|
|
See accompanying notes to Consolidated Financial
Statements
CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
Additional
|
|
|
|
|
|
|
|
|
other
|
|
|
attributable
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
paid-in
|
|
|
Treasury
|
|
|
Retained
|
|
|
comprehensive
|
|
|
to China Biologic
|
|
|
Noncontrolling
|
|
|
|
|
|
|
Shares
|
|
|
Par value
|
|
|
capital
|
|
|
stock
|
|
|
earnings
|
|
|
income
(loss)
|
|
|
Products, Inc.
|
|
|
interest
|
|
|
Total equity
|
|
|
|
|
|
|
USD
|
|
|
USD
|
|
|
USD
|
|
|
USD
|
|
|
USD
|
|
|
USD
|
|
|
USD
|
|
|
USD
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2014
|
|
|
27,341,744
|
|
|
|
2,734
|
|
|
|
72,031,864
|
|
|
|
(29,594,080
|
)
|
|
|
173,744,551
|
|
|
|
21,506,494
|
|
|
|
237,691,563
|
|
|
|
66,278,046
|
|
|
|
303,969,609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
70,916,840
|
|
|
|
-
|
|
|
|
70,916,840
|
|
|
|
25,195,794
|
|
|
|
96,112,634
|
|
Other comprehensive loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,521,305
|
)
|
|
|
(1,521,305
|
)
|
|
|
(397,410
|
)
|
|
|
(1,918,715
|
)
|
Dividend declared to noncontrolling interest shareholders
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(13,056,733
|
)
|
|
|
(13,056,733
|
)
|
Acquisition of noncontrolling interests
|
|
|
-
|
|
|
|
-
|
|
|
|
(68,802,855
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(68,802,855
|
)
|
|
|
(15,122,799
|
)
|
|
|
(83,925,654
|
)
|
Share repurchase
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(70,000,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(70,000,000
|
)
|
|
|
-
|
|
|
|
(70,000,000
|
)
|
Share-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
5,396,271
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,396,271
|
|
|
|
-
|
|
|
|
5,396,271
|
|
Excess tax benefits from stock option exercises
|
|
|
-
|
|
|
|
-
|
|
|
|
1,333,594
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,333,594
|
|
|
|
277,805
|
|
|
|
1,611,399
|
|
Reissuance of treasury stock
|
|
|
-
|
|
|
|
-
|
|
|
|
10,189,059
|
|
|
|
23,023,459
|
|
|
|
-
|
|
|
|
-
|
|
|
|
33,212,518
|
|
|
|
-
|
|
|
|
33,212,518
|
|
Common stock issued in connection with:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Exercise of stock options
|
|
|
417,002
|
|
|
|
42
|
|
|
|
3,860,359
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,860,401
|
|
|
|
-
|
|
|
|
3,860,401
|
|
- Vesting of restricted shares
|
|
|
107,125
|
|
|
|
11
|
|
|
|
(11
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance as of December 31, 2014
|
|
|
27,865,871
|
|
|
|
2,787
|
|
|
|
24,008,281
|
|
|
|
(76,570,621
|
)
|
|
|
244,661,391
|
|
|
|
19,985,189
|
|
|
|
212,087,027
|
|
|
|
63,174,703
|
|
|
|
275,261,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
89,042,703
|
|
|
|
-
|
|
|
|
89,042,703
|
|
|
|
25,062,815
|
|
|
|
114,105,518
|
|
Other comprehensive loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(20,003,794
|
)
|
|
|
(20,003,794
|
)
|
|
|
(4,364,566
|
)
|
|
|
(24,368,360
|
)
|
Share-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
12,114,272
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,114,272
|
|
|
|
-
|
|
|
|
12,114,272
|
|
Excess tax benefits from stock option exercises
|
|
|
-
|
|
|
|
-
|
|
|
|
1,225,941
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,225,941
|
|
|
|
292,761
|
|
|
|
1,518,702
|
|
Reissuance of treasury stock
|
|
|
-
|
|
|
|
-
|
|
|
|
60,438,432
|
|
|
|
20,145,527
|
|
|
|
-
|
|
|
|
-
|
|
|
|
80,583,959
|
|
|
|
-
|
|
|
|
80,583,959
|
|
Adjustments in noncontrolling interest resulting from capital injections
|
|
|
-
|
|
|
|
-
|
|
|
|
(452,962
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(452,962
|
)
|
|
|
452,962
|
|
|
|
-
|
|
Common stock issued in connection with:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Exercise of stock options
|
|
|
780,557
|
|
|
|
78
|
|
|
|
7,745,900
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,745,978
|
|
|
|
-
|
|
|
|
7,745,978
|
|
- Vesting of restricted shares
|
|
|
188,625
|
|
|
|
19
|
|
|
|
(19
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance as of December 31, 2015
|
|
|
28,835,053
|
|
|
|
2,884
|
|
|
|
105,079,845
|
|
|
|
(56,425,094
|
)
|
|
|
333,704,094
|
|
|
|
(18,605
|
)
|
|
|
382,343,124
|
|
|
|
84,618,675
|
|
|
|
466,961,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
104,779,307
|
|
|
|
-
|
|
|
|
104,779,307
|
|
|
|
24,014,114
|
|
|
|
128,793,421
|
|
Other comprehensive loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(26,315,740
|
)
|
|
|
(26,315,740
|
)
|
|
|
(4,987,522
|
)
|
|
|
(31,303,262
|
)
|
Dividend declared to noncontrolling interest shareholder
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(10,901,312
|
)
|
|
|
(10,901,312
|
)
|
Share-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
24,405,511
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
24,405,511
|
|
|
|
-
|
|
|
|
24,405,511
|
|
Excess tax benefits from stock option exercises
|
|
|
-
|
|
|
|
-
|
|
|
|
2,299,316
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,299,316
|
|
|
|
314,515
|
|
|
|
2,613,831
|
|
Adjustments in noncontrolling interest resulting from capital injections
|
|
|
-
|
|
|
|
-
|
|
|
|
513,397
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
513,397
|
|
|
|
(513,397
|
)
|
|
|
-
|
|
Capital withdrawal by noncontrolling interest shareholders
|
|
|
-
|
|
|
|
-
|
|
|
|
(30,397,196
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
1,014,074
|
|
|
|
(29,383,122
|
)
|
|
|
(33,608,839
|
)
|
|
|
(62,991,961
|
)
|
Common stock issued in connection with:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Exercise of stock options
|
|
|
337,406
|
|
|
|
34
|
|
|
|
3,558,762
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,558,796
|
|
|
|
-
|
|
|
|
3,558,796
|
|
- Vesting of restricted shares
|
|
|
255,150
|
|
|
|
25
|
|
|
|
(25
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance as of December 31, 2016
|
|
|
29,427,609
|
|
|
|
2,943
|
|
|
|
105,459,610
|
|
|
|
(56,425,094
|
)
|
|
|
438,483,401
|
|
|
|
(25,320,271
|
)
|
|
|
462,200,589
|
|
|
|
58,936,234
|
|
|
|
521,136,823
|
|
See accompanying notes to Consolidated Financial
Statements.
CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
USD
|
|
|
USD
|
|
|
USD
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
128,793,421
|
|
|
|
114,105,518
|
|
|
|
96,112,634
|
|
Adjustments to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
11,962,983
|
|
|
|
8,179,376
|
|
|
|
6,989,222
|
|
Amortization
|
|
|
775,053
|
|
|
|
854,364
|
|
|
|
758,232
|
|
Loss on sale of property, plant and equipment
|
|
|
293,098
|
|
|
|
3,024,830
|
|
|
|
172,032
|
|
Allowance (reversal) for doubtful accounts - accounts receivable, net
|
|
|
123,239
|
|
|
|
34,902
|
|
|
|
(24,462
|
)
|
Allowance for doubtful accounts - other receivables and prepayments
|
|
|
65,341
|
|
|
|
788
|
|
|
|
5,068,075
|
|
Impairment for other non-current assets
|
|
|
1,225,200
|
|
|
|
-
|
|
|
|
-
|
|
Write-down of obsolete inventories
|
|
|
256,862
|
|
|
|
76,587
|
|
|
|
324,584
|
|
Deferred tax (benefit) expense
|
|
|
(3,006,541
|
)
|
|
|
(170,345
|
)
|
|
|
3,483,890
|
|
Share-based compensation
|
|
|
24,405,511
|
|
|
|
12,114,272
|
|
|
|
5,396,271
|
|
Equity in (income) loss of an equity method investee
|
|
|
(2,519,201
|
)
|
|
|
1,311,278
|
|
|
|
(8,646,181
|
)
|
Loss from disposal of a subsidiary
|
|
|
75,891
|
|
|
|
-
|
|
|
|
-
|
|
Excess tax benefits from share-based compensation arrangements
|
|
|
(2,613,831
|
)
|
|
|
(1,518,702
|
)
|
|
|
(1,611,399
|
)
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(10,971,773
|
)
|
|
|
(7,146,311
|
)
|
|
|
(2,191,118
|
)
|
Prepayment and other current assets
|
|
|
1,946,800
|
|
|
|
879,165
|
|
|
|
(9,236,125
|
)
|
Inventories
|
|
|
(40,077,384
|
)
|
|
|
(32,095,328
|
)
|
|
|
(13,418,971
|
)
|
Accounts payable
|
|
|
2,966,885
|
|
|
|
5,348,896
|
|
|
|
405,071
|
|
Other payables and accrued expenses
|
|
|
4,221,669
|
|
|
|
6,734,988
|
|
|
|
4,472,691
|
|
Deferred income
|
|
|
(686,757
|
)
|
|
|
(416,185
|
)
|
|
|
(224,040
|
)
|
Income tax payable
|
|
|
6,022,145
|
|
|
|
(1,926,093
|
)
|
|
|
5,683,912
|
|
Net cash provided by operating activities
|
|
|
123,258,611
|
|
|
|
109,392,000
|
|
|
|
93,514,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment for property, plant and equipment
|
|
|
(49,371,318
|
)
|
|
|
(38,790,998
|
)
|
|
|
(17,194,201
|
)
|
Payment for intangible assets and land use rights
|
|
|
(1,635,891
|
)
|
|
|
(13,500,526
|
)
|
|
|
(4,677,358
|
)
|
Re
fund of payments and deposits
related to land use right
|
|
|
10,297,893
|
|
|
|
-
|
|
|
|
1,635,200
|
|
Proceeds upon maturity of time deposit
|
|
|
-
|
|
|
|
-
|
|
|
|
6,608,612
|
|
Proceeds from sale of property, plant and equipment and land use rights
|
|
|
393,019
|
|
|
|
827,020
|
|
|
|
220,135
|
|
Loans lent to a third party
|
|
|
(12,332,718
|
)
|
|
|
(40,744,167
|
)
|
|
|
-
|
|
Proceeds from disposal of a subsidiary
|
|
|
128,654
|
|
|
|
-
|
|
|
|
-
|
|
Receipt of government grants related to property and equipment
|
|
|
-
|
|
|
|
2,452,864
|
|
|
|
-
|
|
Net cash used in investing activities
|
|
|
(52,520,361
|
)
|
|
|
(89,755,807
|
)
|
|
|
(13,407,612
|
)
|
See accompanying notes to Consolidated Financial
Statements.
CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
USD
|
|
|
USD
|
|
|
USD
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from stock option exercised
|
|
|
3,558,796
|
|
|
|
7,745,978
|
|
|
|
3,860,401
|
|
Payment for share repurchase
|
|
|
-
|
|
|
|
-
|
|
|
|
(70,000,000
|
)
|
Proceeds from short-term bank loans
|
|
|
-
|
|
|
|
15,770,881
|
|
|
|
44,500,340
|
|
Repayment of short-term bank loans
|
|
|
-
|
|
|
|
(47,201,255
|
)
|
|
|
(22,833,400
|
)
|
Proceeds from long-term bank loans
|
|
|
-
|
|
|
|
-
|
|
|
|
70,000,000
|
|
Repayment of long-term bank loans
|
|
|
-
|
|
|
|
(66,300,000
|
)
|
|
|
(33,700,000
|
)
|
Payment for cash deposit as security for bank loans
|
|
|
-
|
|
|
|
-
|
|
|
|
(104,172,005
|
)
|
Maturity of deposit as security for bank loans
|
|
|
37,756,405
|
|
|
|
63,152,258
|
|
|
|
30,370,670
|
|
Net proceeds from reissuance of treasury stock
|
|
|
-
|
|
|
|
80,583,959
|
|
|
|
33,212,518
|
|
Acquisition of noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
(86,830,499
|
)
|
Excess tax benefits from share-based compensation arrangements
|
|
|
2,613,831
|
|
|
|
1,518,702
|
|
|
|
1,611,399
|
|
Dividend paid by subsidiaries to noncontrolling interest shareholders
|
|
|
(7,921,952
|
)
|
|
|
-
|
|
|
|
(8,846,984
|
)
|
Dividend to the trial court to be held in escrow as to dispute with Jie’an
|
|
|
-
|
|
|
|
(3,690,814
|
)
|
|
|
-
|
|
Payment to noncontrolling interest shareholders in connection with their capital withdrawal
|
|
|
(58,091,018
|
)
|
|
|
-
|
|
|
|
-
|
|
Net cash (used in) provided by financing activities
|
|
|
(22,083,938
|
)
|
|
|
51,579,709
|
|
|
|
(142,827,560
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH
|
|
|
(9,826,672
|
)
|
|
|
(7,098,233
|
)
|
|
|
(597,409
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
38,827,640
|
|
|
|
64,117,669
|
|
|
|
(63,318,263
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of year
|
|
|
144,937,893
|
|
|
|
80,820,224
|
|
|
|
144,138,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
|
183,765,533
|
|
|
|
144,937,893
|
|
|
|
80,820,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
|
22,210,476
|
|
|
|
23,348,371
|
|
|
|
17,652,514
|
|
Cash paid for interest expense
|
|
|
84,664
|
|
|
|
1,526,807
|
|
|
|
3,150,381
|
|
Noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of property, plant and equipment included in payables
|
|
|
4,912,937
|
|
|
|
6,363,392
|
|
|
|
3,300,284
|
|
Loan receivable offset by accounts payable
|
|
|
5,848,400
|
|
|
|
-
|
|
|
|
-
|
|
See accompanying notes to Consolidated Financial
Statements.
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016, 2015 AND 2014
NOTE 1 – DESCRIPTION OF BUSINESS AND
SIGNIFICANT CONCENTRATIONS AND RISKS
China Biologic Products, Inc. (“CBP”)
and its subsidiaries (collectively, the “Company”), through its subsidiaries in the People’s Republic of China
(the “PRC”), is a biopharmaceutical company that is principally engaged in the research, development, manufacturing
and sales of plasma-based pharmaceutical products in the PRC. The PRC subsidiaries own and operate plasma collection stations that
purchase and collect plasma from individual donors. The plasma is processed into finished goods after passing through a series
of fractionating processes. All of the Company’s plasma products are prescription medicines that require government approval
before the products are sold to customers. The Company primarily sells its products to hospitals and inoculation centers directly
or through distributors in the PRC.
Cash Concentration
The Company maintains cash balances at financial
institutions which, from time to time, may exceed Federal Deposit Insurance Corporation insured limits for its bank accounts located
in the United States or may exceed Hong Kong Deposit Protection Board insured limits for its bank accounts located in Hong Kong
or may exceed the insured limits for its bank accounts in China established by China Deposit Insurance Fund Management Institution.
Total cash at banks and deposits as of December 31, 2016 and December 31, 2015 amounted to $183,078,440 and $182,291,723, respectively,
of which $2,744,704 and $3,020,569 are insured, respectively. The Company has not experienced any losses in uninsured bank deposits
and does not believe that it is exposed to any significant risks on cash held in bank accounts.
Sales Concentration
The Company’s two major products are
human albumin and human immunoglobulin for intravenous injection (“IVIG”). Human albumin accounted for 39.2%, 37.6%
and 39.3% of the total sales for the years ended December 31, 2016, 2015 and 2014, respectively. IVIG accounted for 34.6%, 42.2%
and 40.4% of the total sales for the years ended December 31, 2016, 2015 and 2014, respectively. If the market demands for human
albumin and IVIG cannot be sustained in the future or the price of human albumin and IVIG decreases, the Company’s operating
results could be adversely affected.
Substantially all of the Company’s customers
are located in the PRC. There were no customers that individually comprised 10% or more of sales during the years ended December
31, 2016, 2015 and 2014. No individual customer represented 10% or more of accounts receivables as at December 31, 2016 and 2015.
The Company performs ongoing credit evaluations of its customers’ financial condition and, generally, requires no collateral
from its customers.
Purchase Concentration
There was one supplier, namely,
Xinjiang
Deyuan Bioengineering Co., Ltd. (“Xinjiang Deyuan”) (see Note 10), that comprised 10% or more of the total purchases
during the year ended December 31, 2016 and 2015. No supplier that comprised 10% or more of the total purchases during the year
ended December 31, 2014. Chongqing Sanda Great Exploit Pharmaceutical Co, Ltd. and Xinjiang Deyuan represented more than 10% of
accounts payables as at December 31, 2016 and December 31, 2015, respectively.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of
Presentation
The accompanying consolidated financial statements
of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”),
and include the financial statements of the Company and its majority owned subsidiaries. All significant intercompany balances
and transactions have been eliminated upon consolidation. The Company has no involvement with variable interest entities. The Company
accounts for investments over which it has significant influence but not a controlling financial interest using the equity method
of accounting.
Use of Estimates
The preparation of consolidated financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts
of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject
to such estimates and assumptions include the useful lives of property, plant and equipment and intangibles with definite lives,
the allowances for doubtful accounts, the fair value determinations of stock compensation awards, the realizability of deferred
tax assets and inventories, the recoverability of intangible assets, land use rights, property, plant and equipment, equity method
investment and loan receivable, and accruals for income tax uncertainties and other contingencies. The current economic environment
has increased the degree of uncertainty inherent in those estimates and assumptions.
Foreign Currency Translation
The accompanying consolidated financial statements of the Company are reported in US dollar. The financial
position and results of operations of the Company’s subsidiaries in the PRC are measured using the Renminbi, which is the
local and functional currency of these entities. Assets and liabilities of the subsidiaries are translated at the prevailing exchange
rate in effect at each period end.
Revenues and expenses
are translated at the average rate of exchange during the period. Translation adjustments are included in other comprehensive income
(loss).
Revenue Recognition
Revenue represents the invoiced value of products sold, net of value
added taxes (VAT).
Revenue is recognized when persuasive evidence of an arrangement
exists, delivery of the product has occurred and the customer takes ownership and assumes risk of loss, the sales price is fixed
or determinable and collection of the relevant receivable is probable. The Company mainly sells human albumin and human immunoglobulin
to hospitals, inoculation centers and pharmaceutical distributors. For all sales, the Company requires a signed contract or purchase
order, which specify pricing, quantity and product specifications. Delivery of the product occurs when the customer receives the
product, which is when the risks and rewards of ownership have been transferred. Delivery is evidenced by signed customer acknowledgement.
The Company’s sales agreements do not provide the customer the right of return, unless the product is defective in which
case the Company allows for an exchange of product or return. For the periods presented, defective product returns were inconsequential.
Fair Value Measurements
The
Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to
the extent possible.
The Company determines fair
value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous
market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes
between observable and unobservable inputs, which are categorized in one of the following levels:
• Level
1 Inputs: Unadjusted quoted prices for identical assets or liabilities in active markets accessible to the entity at the measurement
date.
• Level
2 Inputs: Other than quoted prices included in Level 1, inputs that are observable for the asset or liability, either directly
or indirectly, for substantially the full term of the asset or liability.
• Level
3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not
available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the
measurement date.
The fair value measurement level of an asset
or liability within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
See Note 16 to the Consolidated Financial Statements.
Cash and Cash Equivalents
Cash and cash
equivalents include cash on hand and demand deposits. The Company considers all highly liquid investments with original maturities
of three-month or less at the time of purchase to be cash equivalents. Cash and cash equivalents at December 31, 2016 and
2015 include $98,022,000 and $85,422,000 of certificates of deposit with an initial term of three months or less
.
As of December 31, 2016 and 2015, the Company
maintained cash and cash equivalents at banks in the following locations:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
USD
|
|
|
USD
|
|
PRC, excluding Hong Kong
|
|
|
171,539,309
|
|
|
|
130,319,811
|
|
U.S.
|
|
|
11,539,131
|
|
|
|
13,939,319
|
|
Total
|
|
|
183,078,440
|
|
|
|
144,259,130
|
|
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the
invoiced amount and do not bear interest. Amounts collected on trade accounts receivable are included in net cash provided by operating
activities in the consolidated statements of cash flows. The Company maintains an allowance for doubtful accounts for estimated
losses inherent in its accounts receivable portfolio. In establishing the required allowance, management considers historical losses,
the customers’ financial condition, the amount of accounts receivables in dispute, the accounts receivables aging and the
customers’ payment patterns. The Company reviews its allowance for doubtful accounts monthly. Past due balances are reviewed
individually for collectability. Account balances are charged off against the allowance after all means of collection have been
exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure
related to its customers.
Inventories
Inventories are stated at the lower of
cost or market. Cost is determined using the weighted average method. Cost of work in progress and finished goods comprise direct
materials, direct production costs and an allocation of production overheads based on normal operating capacity. Adjustments are
recorded to write down the carrying amount of any obsolete and excess inventory to its estimated net realizable value based on
historical and forecasted demand.
Property, Plant and Equipment
Property, plant and equipment are stated
at cost.
Depreciation and amortization of property,
plant and equipment attributable to manufacturing activities is capitalized as part of inventories, and recognized as cost of revenues
when the inventory is sold. Cost incurred in the construction of property, plant and equipment, including process payments and
deposits, are initially capitalized as construction-in-progress and transferred into their respective asset categories when the
assets are ready for their intended use, at which time depreciation commences.
Depreciation on property, plant and equipment
is calculated on the straight-line method over the estimated useful lives of the assets. Estimated useful lives of the assets are
as follows:
Buildings
|
30 years
|
Machinery and equipment
|
10 years
|
Furniture, fixtures, office equipment and vehicles
|
5-10 years
|
When items are retired or otherwise disposed
of, income is charged or credited for the difference between net book value and the proceeds received thereon. Ordinary maintenance
and repairs are charged to expense as incurred, and replacements and betterments are capitalized and amortized over the remaining
useful life.
Equity Method Investment
Investment in an investee in which the
Company has the ability to exercise significant influence, but does not have a controlling interest is accounted for using the
equity method. Significant influence is generally presumed to exist when the Company has an ownership interest in the voting stock
between 20% and 50%, and other factors, such as representation on the board of directors and participation in policy-making processes,
are considered in determining whether the equity method of accounting is appropriate. Under the equity method of accounting, the
Company’s share of the investee’s results of operations is included in other income (expenses) in the Company’s
consolidated statements of comprehensive income. Deferred taxes are provided for the difference between the book and tax basis
of the investment. The Company recognizes a loss if it is determined that other than temporary decline in the value of the investment
exists. The process of assessing and determining whether an impairment on a particular equity investment is other than temporary
requires a significant amount of judgment. To determine whether an impairment is other-than-temporary, management considers whether
the Company has the ability and intent to hold the investment until recovery and whether evidence indicating the carrying value
of the investment is recoverable outweighs evidence to the contrary. No impairment loss was recognized by the Company for the years
ended December 31, 2016, 2015 and 2014.
Government Grants
Government grants are recognized when there
is reasonable assurance that the Company will comply with the conditions attaching to them and the grants will be received. Grants
that compensate research and development expenses are recognized as a reduction to the related research and development expenses.
Grants that compensate the Company for the cost of property, plant and equipment and land use rights are recognized as deferred
income and are recognized over the useful life of the asset by way of other income.
For the year ended December 31, 2016, the
Company received government grants of RMB5,056,361 (approximately $728,874), which have been recognized as a reduction of research
and development expenses.
For the year ended December 31, 201
5,
the Company received government grants of RMB15,000,000 (approximately $2,452,864) related to the new manufacturing facilities
for factor products in Shandong Taibang, which was recorded as deferred income. These grants are amortized as the related assets
are depreciated. The grants amortized amounted to $410,369 and $118,751 for the year ended December 31, 2016 and 2015, respectively.
For the year ended December 31, 2015, government grants of RMB7,280,600 (approximately $1,188,907), have been recognized as a reduction
of research and development expenses.
For the year ended December 31, 2014, government
grants of RMB12,963,600 (approximately $2,111,770), have been recognized as a reduction of research and development expenses.
For the year ended December 31, 2012, the
Company received government grants of RMB18,350,000 (approximately $2,989,215) related to the technical upgrade of the manufacturing
facilities in Guizhou Taibang. The grants amortized amounted to $276,388, $297,434 and $224,191 for the years ended December 31,
2016, 2015 and 2014, respectively.
Land Use Rights
Land use rights represent the exclusive
right to occupy and use a piece of land in the PRC for a specified contractual term. Land use rights are carried at cost, less
accumulated amortization. Amortization is calculated using the straight-line method over the contractual period of the rights ranging
from 40 to 50 years.
Research and Development Expenses
Research and development costs are expensed
as incurred. Research and development expenses for the years ended December 31, 2016, 2015 and 2014 were $7,021,992, $6,024,368
and $4,161,901, respectively. These expenses include the costs of the Company’s internal research and development activities.
Product Liability
The Company’s products are covered
by two separate product liability insurances each with coverages of approximately $2,883,000 (or RMB20,000,000) for the products
sold by Shandong Taibang Biological Products Co., Ltd. (“Shandong Taibang”) and Guizhou Taibang Biological Products
Co., Ltd. (“Guizhou Taibang”), respectively. There were no product liability claims as of December 31, 2016.
Income Taxes
Income taxes are accounted for under the
asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases
and tax loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of comprehensive income
in the period that includes the enactment date. A valuation allowance is provided to reduce the amount of deferred tax assets if
it is considered more likely than not that some portion or all of the deferred tax assets will not be realized.
The
Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized
income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition
or measurement are reflected in the period in which the change in judgment occurs.
The
Company records interest related to unrecognized tax benefits in interest expense and penalties in general and administrative expenses.
Share-based Payment
The Company measures the cost of employee
services received in exchange for an award of equity instruments based on the grant-date fair value of the award and recognizes
the cost over the period during which an employee is required to provide service in exchange for the award, which generally is
the vesting period.
Long-lived Assets
Long-lived assets, such as property, plant
and equipment, and purchased intangible asset subject to amortization, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset
or asset group be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by
that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable
on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair
value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party
independent appraisals, as considered necessary.
Net Income per Share
Basic net income per share of common stock
is computed by dividing net income attributable to common stockholders by the weighted average number of common stock outstanding
during the year using the two-class method. Under the two-class method, net income is allocated between common stock and other
participating securities based on their participating rights in undistributed earnings. The Company’s nonvested shares were
considered participating securities since the holders of these securities participate in dividends on the same basis as common
stockholders. Diluted net income per share is calculated by dividing net income attributable to common stockholders as adjusted
for the effect of dilutive common stock equivalent, if any, by the weighted average number of common stock and dilutive common
stock equivalent outstanding during the year. Potential dilutive securities are not included in the calculation of diluted earnings
per share if the impact is anti-dilutive.
Segment Reporting
The Company has one operating segment,
which is the manufacture and sales of human plasma products. Substantially all of the Company’s operations and customers
are located in the PRC, and therefore, no geographic information is presented.
Contingencies
In
the normal course of business, the Company is subject to loss contingencies, such as legal proceedings and claims arising out of
its business, that cover a wide range of matters, including, among others, government investigations and tax matters. An accrual
for a loss contingency is recognized when it is probable that a liability has been incurred and the amount of loss can be reasonably
estimated
.
Legal costs incurred in connection
with loss contingencies are expensed as incurred.
Recently Issued Accounting Standards
In May 2014, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts
with Customers (Topic 606) (“ASU 2014-09”), which amends the existing accounting standards for revenue recognition.
ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when products
are transferred to customers. The original effective date for ASU 2014-09 would have required the Company to adopt beginning in
its first quarter of 2017. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606)
– Deferral of the Effective Date, which defers the effective date of ASU 2014-09 for one year and permits early adoption
as early as the original effective date of ASU 2014-09. Accordingly, the Company may adopt the standard in either its first quarter
of 2017 or 2018. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with
the cumulative effect recognized as of the date of adoption. The Company plans to complete its evaluation by the third quarter
of 2017, including an assessment of the new expanded disclosure requirements and a final determination of the transition method
we will use to adopt the new standard.
In February 2016, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) (“ASU
2016-02”), which modified lease accounting for both lessees and lessors to increase transparency and comparability by recognizing
lease assets and lease liabilities by lessees for those leases classified as operating leases under previous accounting standards
and disclosing key information about leasing arrangements. ASU 2016-02 is effective for public companies for annual reporting periods,
and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. The Company is currently
evaluating the impact of adopting ASU 2016-02 on its consolidated financial statements.
In March 2016, the FASB issued ASU No.
2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU
2016-09”), which simplified certain aspects of the accounting for share-based payment transactions, including income taxes,
classification of awards and classification in the statement of cash flows. This standard will be effective for public companies
for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company is currently
evaluating the impact of adopting ASU 2016-09 on its consolidated financial statements. Adoption of this new standard is not expected
to have a material impact on the Company's consolidated financial statements.
In August 2016, the FASB issued ASU No.
2016-15, Classification of Certain Cash Receipts and Cash Payments, which addressed and provided guidance for each of eight specific
cash flow issues with the objective of reducing the existing diversity in practice. This standard will be effective for public
companies for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently
evaluating the impact of adopting ASU 2016-15 on its consolidated financial statements.
In October 2016, the FASB issued ASU No.
2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. This standard required that companies
recognize the income tax consequences of an intra-entity transfer of an asset (other than inventory) when the transfer occurs.
Current guidance prohibits companies from recognizing current and deferred income taxes for an intra-entity asset transfer until
the asset has been sold to an outside party. This standard will be effective for public companies for annual periods beginning
after December 15, 2017, including interim periods within that reporting period. The Company is currently evaluating the impact
this guidance may have on its consolidated financial statements.
NOTE 3 – ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 2016 and 2015 consisted
of the following:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
USD
|
|
|
USD
|
|
Accounts receivable
|
|
|
34,452,392
|
|
|
|
25,588,593
|
|
Less: Allowance for doubtful accounts
|
|
|
(533,596
|
)
|
|
|
(443,624
|
)
|
Total
|
|
|
33,918,796
|
|
|
|
25,144,969
|
|
The activity in the allowance for doubtful accounts –
accounts receivable for the years ended December 31, 2016, 2015 and 2014 are as follows:
|
|
For the Years Ended
|
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
|
|
USD
|
|
|
USD
|
|
|
USD
|
|
Beginning balance
|
|
|
443,624
|
|
|
|
433,948
|
|
|
|
460,689
|
|
Provisions
|
|
|
123,239
|
|
|
|
34,902
|
|
|
|
6,211
|
|
Recoveries
|
|
|
-
|
|
|
|
-
|
|
|
|
(30,673
|
)
|
Write-offs
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Foreign currency translation adjustment
|
|
|
(33,267
|
)
|
|
|
(25,226
|
)
|
|
|
(2,279
|
)
|
Ending balance
|
|
|
533,596
|
|
|
|
443,624
|
|
|
|
433,948
|
|
NOTE 4 – PREPAYMENTS AND OTHER CURRENT ASSETS
Prepayments and other current assets as
of December 31, 2016 mainly represented other receivables of $10,117,032 and prepayments of $2,921,069. Prepayments and other current
assets as of December 31, 2015 mainly represented other receivables of $17,846,006 and prepayments of $2,206,131.
The activity in the allowance for doubtful
accounts – other receivables and prepayments for the years ended December 31, 2016, 2015 and 2014 are as follows:
|
|
For the Years Ended
|
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
|
|
USD
|
|
|
USD
|
|
|
USD
|
|
Beginning balance
|
|
|
4,924,063
|
|
|
|
5,207,840
|
|
|
|
142,951
|
|
Provisions
|
|
|
65,341
|
|
|
|
788
|
|
|
|
5,068,075
|
|
Recoveries
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Write-offs
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Foreign currency translation adjustment
|
|
|
(317,508
|
)
|
|
|
(284,565
|
)
|
|
|
(3,186
|
)
|
Ending balance
|
|
|
4,671,896
|
|
|
|
4,924,063
|
|
|
|
5,207,840
|
|
NOTE 5 – INVENTORIES
Inventories at December 31, 2016 and 2015 consisted of the following:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
USD
|
|
|
USD
|
|
Raw materials
|
|
|
80,781,903
|
|
|
|
57,418,230
|
|
Work-in-process
|
|
|
24,994,839
|
|
|
|
27,401,062
|
|
Finished goods
|
|
|
50,635,932
|
|
|
|
41,576,020
|
|
Total
|
|
|
156,412,674
|
|
|
|
126,395,312
|
|
Raw materials mainly comprised of the human
plasma collected from the Company’s plasma collection stations. Work-in-process represented the intermediate products in
the process of production. Finished goods mainly comprised plasma products. Provisions to write-down the carrying amount of obsolete
inventory to its estimated net realizable value amounted to $256,862, $76,587 and $324,584 for the years ended December 31,
2016, 2015 and 2014, respectively, and were recorded as cost of sales in the consolidated statements of comprehensive income.
NOTE 6 – OTHER RECEIVABLES IN
RESPECT OF AN EMPLOYEE HOUSING DEVELOPMENT PROJECT
In 2009, 107 employees, or the
Employee-participants, of Shandong Taibang entered into agreements, or the Housing Project Agreements, with a real estate
developer regarding a housing development project, pursuant to which the developer agreed to develop and deliver residential
units to the Employee-participants by the end of 2011 and the Employee-participants paid the developer deposits equal to 80%
of the purchase prices of the residential units. To assist with their deposit payment, Shandong Taibang entered into separate
agreements, or the Financial Assistance Agreements, with the Employee-participants and provided them with advances of up to
50% of the purchase prices of the residential units. These advances were to be repaid by deductions from the
Employee-participants’ salaries. In addition, Shandong Taibang also entered into a purchase agreement with the
developer to purchase additional units in the development project and made a deposit of RMB3,823,200 (approximately
$622,799). However, the developer failed to deliver the residential units and is unlikely to be able to perform the Housing
Project Agreements. In August 2014, the Company entered into agreements, or the Advance Payment Agreements, with
the Employee-participants, pursuant to which the Company made advance payments to the Employee-participants equal to the
deposits that the Employee-participants had paid the developer pursuant to the Housing Project Agreements and refunded them
the deductions previously made from their salaries pursuant to the Financial Assistance Agreements together with accrued
interest totaling RMB27,071,684 (approximately $4,409,977). In November 2014, Shandong Taibang entered into supplemental
agreements to the Advance Payment Agreements, or the Supplemental Agreements, with the Employee-participants, pursuant to
which the Employee-participants transferred and assigned to Shandong Taibang their rights under the Housing Project
Agreements, including their rights to pursue legal actions against and recover damages from the developer, and in return,
Shandong Taibang waived its right to claim the advance payments and the refunds of the deductions under the Advance Payment
Agreements. During the year ended December 31, 2014, the Company made a full provision of $5,068,075 in the consolidated
financial statements for all the receivables in respect of this employee housing development project (see Note 4), including
the deposits paid to the developer, the total advance payments and refunds made under this employee housing development
project, as well as the related fees and expenses, because it became probable that these receivables may not be recoverable
after all legal means of collection were exhausted.
NOTE 7 – PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 2016 and 2015
consisted of the following:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
USD
|
|
|
USD
|
|
Buildings
|
|
|
34,131,032
|
|
|
|
31,505,133
|
|
Machinery and equipment
|
|
|
52,467,764
|
|
|
|
54,640,502
|
|
Furniture, fixtures, office equipment and vehicles
|
|
|
7,843,567
|
|
|
|
7,859,951
|
|
Total property, plant and equipment, gross
|
|
|
94,442,363
|
|
|
|
94,005,586
|
|
Accumulated depreciation
|
|
|
(39,315,011
|
)
|
|
|
(31,521,859
|
)
|
Total property, plant and equipment, net
|
|
|
55,127,352
|
|
|
|
62,483,727
|
|
Construction in progress
|
|
|
61,825,470
|
|
|
|
26,115,927
|
|
Prepayment for property, plant and equipment
|
|
|
15,139,101
|
|
|
|
16,764,597
|
|
Property, plant and equipment, net
|
|
|
132,091,923
|
|
|
|
105,364,251
|
|
Depreciation expense for the years ended
December 31, 2016, 2015 and 2014 was $11,962,983, $8,179,376 and $6,989,222, respectively. No interest expenses were capitalized
into construction in progress for the years ended December 31, 2016, 2015 and 2014.
NOTE 8 – DEPOSITS RELATED TO LAND USE RIGHTS
In 2012, Guizhou Taibang made a refundable
payment of RMB83,400,000 (approximately $12,022,110) to the local government in connection with the public bidding for a land use
right in Guizhou Province. Given the decrease of the land area to be provided by the local government, RMB13,000,000 (approximately
$1,873,950) and RMB 10,000,000 (approximately $1,441,500) was refunded by the local government in December 2013 and January 2014,
respectively. Guizhou Taibang completed the bidding and purchased the land use right in December 2015. For the year ended December
31, 2016, RMB59,665,759 (approximately $8,600,819) was refunded by the local government. The remaining deposit is expected to be
refunded in 2017.
NOTE 9 – EQUITY METHOD INVESTMENT
The Company’s equity method investment
as of December 31, 2016 and 2015 represented 35% equity interest investment in Xi’an Huitian Blood Products Co., Ltd. (“Huitian”).
In October 2008, Shandong Taibang entered
into an equity purchase agreement with one of the equity owners of Huitian (“Seller”) to acquire 35% equity interest
in Huitian. In connection with this transaction, in October 2008, Taibang Biological Limited (“Taibang Biological”)
entered into an entrust agreement (the “Entrust Agreement”) with Shandong Taibang and the noncontrolling interest holder
of Shandong Taibang, pursuant to which, Taibang Biological would pay the cash consideration, including interest, of $6,502,901
(or RMB44,327,887) to the Seller, and would bear the risks and benefits as a 35% equity owner in Huitian. In addition, Taibang
Biological would pay Shandong Taibang RMB120,000 (approximately $19,548) per year as compensation for the administrative costs
of Shandong Taibang’s holding of the 35% equity interest in Huitian on behalf of Taibang Biological. Such amount paid and
received is eliminated upon consolidation. Taibang Biological agreed to indemnify the noncontrolling interest holder of Shandong
Taibang for any loss arising from the Entrust Agreement and has pledged the Company’s equity interest in Shandong Taibang
as collateral against such loss.
The excess of carrying amount over the Company’s share of net assets of equity method investees, which
represented goodwill, is $1,179,637 and $1,260,243 at December 31, 2016 and 2015, respectively
.
The equity method goodwill is not amortized; however, the investment is reviewed for impairment.
NOTE 10 –LOAN RECEIVABLE
In June 2016, the Company entered into
a RMB40,000,000 (approximately $5,766,000) loan agreement with Xinjiang Deyuan. Pursuant to the agreement, Guizhou Taibang agreed
to provide Xinjiang Deyuan with interest-bearing loans at an interest rate of 6% per annum. The loan is unsecured and due on the
earlier of 1) within five days after Xinjiang Deyuan obtaining other loans from financial institutions, or 2) September 20, 2016.
Interest will be paid on the last day of each month. On July 1, 2016, RMB40,000,000 (approximately $5,766,000) was lent to Xinjiang
Deyuan.
On October 18, 2016, the Company entered
into a supplemental agreement to the loan agreement with Xinjiang Deyuan, pursuant to which the principal of the loan was agreed
to offset accounts payable for the purchase of plasma from Xinjiang Deyuan in two installments, with the remaining principal of
the loan, if any, being repaid by Xinjiang Deyuan no later than December 20, 2016. The Company has the right to charge an interest
rate of 9% per annum for any overdue loan since September 21, 2016 according to loan agreement.
In the fourth quarter of 2016, the principal of the loan was completely offset by accounts payable for the
purchase of plasma from Xinjiang Deyuan. Furthermore, as agreed between the Company and Xinjiang Deyuan, interest receivable amounting
to $35,723 and $675,933 for the foregoing loan and the loans as described in Note 10(b), respectively, was also offset by accounts
payable for the purchase of plasma from Xinjiang Deyuan.
Interest income of $160,878 was recognized
by Guizhou Taibang for the year ended December 31, 2016. $125,155 was received by Guizhou Taibang and $35,723 was offset as discussed
above for the year ended December 31, 2016.
In August 2015, the Company entered into
a cooperation agreement with Xinjiang Deyuan and the controlling shareholder of Xinjiang Deyuan. Pursuant to the agreement, Guizhou
Taibang agreed to provide Xinjiang Deyuan with interest-bearing loans at an interest rate of 6% per annum with an aggregate principal
amount of RMB300,000,000 (approximately $43,245,000). The loans are due July 31, 2018 and secured by a pledge of Deyuan Shareholder’s
58.02% equity interest in Xinjiang Deyuan. Interest will be paid on the 20th day of the last month of each quarter. For the year
ended December 31, 2015, RMB258,663,461 (approximately $37,286,338) was lent to Xinjiang Deyuan. The remaining RMB41,336,539 (approximately
$5,958,662) was lent during the three months period ended March 31, 2016.
Interest income of $2,661,700 was recognized
by Guizhou Taibang for the year ended December 31, 2016. $1,985,767 was received by Guizhou Taibang and $675,933 was offset as
described in Note 10(a) for the year ended December 31, 2016.
Interest income of $496,170 was
recognized
by Guizhou Taibang for the year ended December 31, 2015 and received by Guizhou Taibang for the year ended December 31, 2016.
NOTE 11 – OTHER PAYABLES AND ACCRUED EXPENSES
Other payables and accrued expenses at December 31, 2016 and
2015 consisted of the following:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
USD
|
|
|
USD
|
|
Payables to potential investors
(1)
|
|
|
7,941,013
|
|
|
|
9,550,588
|
|
Payable to Guizhou Eakan Investing Corp.
(2)
|
|
|
2,098,824
|
|
|
|
2,242,240
|
|
Payable to Guizhou Jie’an Company
(3)
|
|
|
-
|
|
|
|
1,565,052
|
|
Salaries and bonuses payable
|
|
|
16,740,846
|
|
|
|
13,520,721
|
|
Accruals for selling commission and promotion fee
|
|
|
4,391,160
|
|
|
|
2,360,933
|
|
Dividends payable to noncontrolling interest
|
|
|
7,952,467
|
|
|
|
5,309,920
|
|
Payables for construction work
|
|
|
5,364,441
|
|
|
|
7,257,489
|
|
Other tax payables
|
|
|
1,918,248
|
|
|
|
3,855,405
|
|
Advance from customers
|
|
|
3,976,832
|
|
|
|
1,934,321
|
|
Deposits received
|
|
|
2,541,420
|
|
|
|
3,615,143
|
|
Others
|
|
|
6,872,894
|
|
|
|
6,250,751
|
|
Total
|
|
|
59,798,145
|
|
|
|
57,462,563
|
|
|
(1)
|
The payables to potential investors comprise deposits received from potential investors of $4,924,164
and $6,123,040 as of December 31, 2016 and 2015, respectively, and related interest plus penalty on these deposits totaling $3,016,849
and $3,427,548 as of December 31, 2016 and 2015, respectively.
|
In 2007, Guizhou Taibang received
an aggregate amount of RMB50,960,000 (approximately $7,345,884) from certain potential investors in connection with their subscription
to purchase shares in Guizhou Taibang. In 2010, the Company refunded RMB11,200,000 (approximately $1,614,480) to one of the potential
investors. In 2016, the Company refunded RMB5,600,000 (approximately $807,240) to another potential investor pursuant to a settlement
agreement entered into by Guizhou Taibang and this potential investor in August 2016.
|
(2)
|
Guizhou Taibang has payables to Guizhou Eakan Investing Corp., amounting to approximately $2,098,824
and $2,242,240 as of December 31, 2016 and 2015, respectively. The Company borrowed this interest free advance for working capital
purpose for Guizhou Taibang. The balance is due on demand.
|
|
(3)
|
Guizhou Taibang has payables to Jie’an
,
a former noncontrolling interest shareholder of Guizhou Taibang, amounting to nil and $1,565,052 as of December 31, 2016 and 2015,
respectively. In 2007, Guizhou Taibang received additional contributions from Jie’an of RMB6,480,000 (approximately $997,920)
to subscribe for 1,800,000 shares in Guizhou Taibang. As a result of the capital withdrawal by Jie’an, these additional contributions
were refunded to Jie’an by Guizhou Taibang in 2016. (see Note 18)
|
NOTE 12 – INCOME TAX
The Company and each of its subsidiaries file separate income
tax returns.
The United States of America
The Company is incorporated in the State
of Delaware in the U.S., and is subject to U.S. federal corporate income tax at gradual rates of up to 35%.
British Virgin Islands
Taibang Biological is incorporated in the
British Virgin Islands. Under the current laws of the British Virgin Islands (BVI), Taibang Biological is not subject to tax on
income or capital gains. In addition, upon payments of dividends by Taibang Biological, no British Virgin Islands withholding tax
is imposed.
Hong Kong
Taibang Holdings (Hong Kong) Limited (“Taibang
Holdings”, formerly known as “Logic Holdings (Hong Kong) Limited”) is incorporated in Hong Kong and is subject
to Hong Kong’s profits tax rate of 16.5% for the years ended December 31, 2016, 2015 and 2014. Taibang Holdings did not earn
any income that was derived in Hong Kong for the years ended December 31, 2016, 2015 and 2014. The payments of dividends by Hong
Kong companies are not subject to any Hong Kong withholding tax.
PRC
The PRC’s statutory income tax rate
is 25%. The Company’s PRC subsidiaries are subject to income tax at 25% unless otherwise specified.
On February 12, 2009, Shandong
Taibang received the High and New Technology Enterprise certificate from the Shandong provincial government. This certificate
entitled Shandong Taibang to pay income taxes at a 15% preferential income tax rate for a period of three years from 2008 to
2010. On October 31, 2011, Shandong Taibang obtained a notice from the Shandong provincial government that the High and New
Technology Enterprise qualification has been renewed for an additional three years from 2011 to 2013. In October 2014,
Shandong Taibang obtained a notice from the Shandong provincial government that granted it the High and New Technology
Enterprise certificate. This certificate entitled Shandong Taibang to enjoy a preferential income tax rate of 15% for a
period of three years from 2014 to 2016. Shandong Taibang will apply for a renewal of an additional three years from 2017 to
2019 upon the expiration of such certificate.
According to CaiShui [2011] No. 58 dated
July 27, 2011, Guizhou Taibang, being a qualified enterprise located in the western region of the PRC, enjoys a preferential income
tax rate of 15% effective retroactively from January 1, 2011 to December 31, 2020.
The components of earnings (losses) before income tax expense
by jurisdictions are as follows:
|
|
For the Years Ended
|
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
|
|
USD
|
|
|
USD
|
|
|
USD
|
|
PRC, excluding Hong Kong
|
|
|
170,830,607
|
|
|
|
147,580,488
|
|
|
|
122,116,071
|
|
U.S.
|
|
|
(19,408,283
|
)
|
|
|
(11,711,102
|
)
|
|
|
(8,032,150
|
)
|
BVI
|
|
|
2,498,629
|
|
|
|
(1,336,183
|
)
|
|
|
8,625,859
|
|
Hong Kong
|
|
|
(1,712
|
)
|
|
|
565,228
|
|
|
|
42,381
|
|
Total
|
|
|
153,919,241
|
|
|
|
135,098,431
|
|
|
|
122,752,161
|
|
Income tax expense for the years ended
December 31, 2016, 2015 and 2014 represents current income tax expense and deferred tax (benefit) expense:
|
|
For the Years Ended
|
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
|
|
USD
|
|
|
USD
|
|
|
USD
|
|
Current income tax expense
|
|
|
28,132,361
|
|
|
|
21,163,258
|
|
|
|
23,155,637
|
|
Deferred tax (benefit) expense
|
|
|
(3,006,541
|
)
|
|
|
(170,345
|
)
|
|
|
3,483,890
|
|
Total income tax expense
|
|
|
25,125,820
|
|
|
|
20,992,913
|
|
|
|
26,639,527
|
|
The effective income tax rate based on
income tax expense and earnings before income taxes reported in the consolidated statements of comprehensive income differs from
the PRC statutory income tax rate of 25% due to the following:
|
|
For the Years Ended
|
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
|
|
(in percentage to earnings before income tax expense)
|
|
PRC statutory income tax rate
|
|
|
25.0
|
%
|
|
|
25.0
|
%
|
|
|
25.0
|
%
|
Non-deductible expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
-
|
|
|
|
1.3
|
%
|
|
|
0.5
|
%
|
Others
|
|
|
1.6
|
%
|
|
|
0.1
|
%
|
|
|
0.5
|
%
|
Tax rate differential
|
|
|
(3.6
|
)%
|
|
|
-
|
|
|
|
(2.2
|
)%
|
Effect of PRC preferential tax rate
|
|
|
(10.9
|
)%
|
|
|
(10.5
|
)%
|
|
|
(9.7
|
)%
|
Bonus deduction on research and development expenses
|
|
|
(1.5
|
)%
|
|
|
(1.5
|
)%
|
|
|
(1.4
|
)%
|
Change in valuation allowance
|
|
|
5.3
|
%
|
|
|
1.3
|
%
|
|
|
(0.7
|
)%
|
PRC dividend withholding tax
|
|
|
-
|
|
|
|
-
|
|
|
|
7.3
|
%
|
Tax effect of equity method investment
|
|
|
0.4
|
%
|
|
|
(0.2
|
)%
|
|
|
2.4
|
%
|
Effective income tax rate
|
|
|
16.3
|
%
|
|
|
15.5
|
%
|
|
|
21.7
|
%
|
The PRC tax rate has been used because the majority of the Company’s
consolidated pre-tax earnings arise in the PRC.
As of December 31, 2016 and 2015, significant
temporary differences between the tax basis and financial statement basis of assets and liabilities that gave rise to deferred
taxes were principally related to the following:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
USD
|
|
|
USD
|
|
Deferred tax assets arising from:
|
|
|
|
|
|
|
|
|
-Accrued expenses
|
|
|
3,954,375
|
|
|
|
3,225,045
|
|
-Deferred income
|
|
|
275,687
|
|
|
|
-
|
|
-Property, Plant and Equipment
|
|
|
257,550
|
|
|
|
-
|
|
-Other non-current assets
|
|
|
138,384
|
|
|
|
-
|
|
-Tax loss carryforwards
|
|
|
27,783,051
|
|
|
|
8,669,632
|
|
Gross deferred tax assets
|
|
|
32,409,047
|
|
|
|
11,894,677
|
|
|
|
|
|
|
|
|
|
|
Less: valuation allowance
|
|
|
(26,629,179
|
)
|
|
|
(8,160,611
|
)
|
Net deferred tax assets
|
|
|
5,779,868
|
|
|
|
3,734,066
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities arising from:
|
|
|
|
|
|
|
|
|
- Intangible assets
|
|
|
(235,217
|
)
|
|
|
(314,109
|
)
|
- Equity method investment
|
|
|
(1,153,872
|
)
|
|
|
(509,021
|
)
|
- Dividend withholding tax
|
|
|
(6,085,290
|
)
|
|
|
(7,351,023
|
)
|
Deferred tax liabilities
|
|
|
(7,474,379
|
)
|
|
|
(8,174,153
|
)
|
|
|
|
|
|
|
|
|
|
Classification on consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets – current, net (included in prepayments and other current assets)
|
|
|
3,954,375
|
|
|
|
3,225,045
|
|
Deferred tax assets – non-current, net (included in other non-current assets)
|
|
|
671,621
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities - non-current, net (included in other liabilities)
|
|
|
(6,320,507
|
)
|
|
|
(7,665,132
|
)
|
In assessing the realizability of deferred
tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not
be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible and tax loss carryforwards are utilized. Management considers the
scheduled reversal of deferred tax liabilities (including the impact of available carryforwards periods), projected future taxable
income, and tax planning strategies in making this assessment.
The deferred tax assets of $27,783,051 for
tax loss carry forwards as of December 31, 2016, of which $6,139,906 and $21,643,145 relate to tax loss carryforwards of certain
PRC subsidiaries and CBP, respectively. For PRC income tax purposes, certain of the Company's PRC subsidiaries had tax loss carryforwards
of $24,559,624, of which $6,322,563, $4,727,663, $4,755,017, $4,159,639 and $4,594,742 would expire by 2017, 2018, 2019, 2020 and
2021, respectively, if unused. For United States federal income tax purposes, CBP had tax loss carryforwards of approximately $63,656,308,
of which $162,235, $3,382,154, $978,837, $1,296,319, $384,754, nil and $57,452,009 would expire by 2030, 2031, 2032, 2033, 2034
and 2035, 2036, respectively, if unused. In view of their cumulative losses positions, management determined it is more likely
than not that deferred tax assets of these PRC subsidiaries will not be realized, and therefore full valuation allowances of $6,139,906
and $6,560,170 were provided as of December 31, 2016 and 2015, respectively. For deferred tax assets of CBP, management determined
it is more likely than not that some portion of the deferred tax assets of CBP will not be realized, and therefore valuation allowances
of $20,489,273 and $1,600,441 were provided as of December 31, 2016 and 2015, respectively.
Management believes
it is more likely than not that the Company will realize the benefits of the deferred tax assets, net of the valuation allowances,
as of December 31, 2016 and December 31, 2015.
The following table presents the movement of the valuation allowance
for deferred tax assets for the years ended December 31, 2016, 2015 and 2014:
|
|
For the Years Ended
|
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
|
|
USD
|
|
|
USD
|
|
|
USD
|
|
Beginning balance
|
|
|
8,160,611
|
|
|
|
6,661,139
|
|
|
|
7,558,590
|
|
Addition (deduction) during the year
|
|
|
18,676,456
|
|
|
|
1,703,771
|
|
|
|
(885,253
|
)
|
Foreign currency translation adjustment
|
|
|
(207,888
|
)
|
|
|
(204,299
|
)
|
|
|
(12,198
|
)
|
Ending balance
|
|
|
26,629,179
|
|
|
|
8,160,611
|
|
|
|
6,661,139
|
|
According to the prevailing PRC income
tax law and relevant regulations, dividends relating to earnings accumulated beginning on January 1, 2008 that are received by
non-PRC-resident enterprises from PRC-resident enterprises are subject to withholding tax at 10%, unless reduced by tax treaties
or similar arrangement. Dividends relating to undistributed earnings generated prior to January 1, 2008 are exempt from such withholding
tax. Further, dividends received by the Company from its overseas subsidiaries are subject to the U.S. federal income tax at 34%,
less any qualified foreign tax credits. Based on the dividend policy the Company has provided the deferred tax liabilities of $7,351,023
on undistributed earnings of $74 million, approximately 50% of Shandong Taibang’s total undistributed earnings at December
31, 2014. During the year ended December 31, 2016, the deferred tax liabilities of $1,265,733 was reversed following a sum of RMB82,760,000
(approximately $11,929,854) dividend distribution to Taibang Holdings (Hong Kong) Limited by Taibang Biotech (Shandong) Co., Ltd.
in 2016, which was generated from distributed earnings of Shandong Taibang. Due to the Company’s plan and intention of reinvesting
its earnings in its PRC business, the Company has not provided for the related deferred tax liabilities on the remaining undistributed
earnings of the PRC subsidiaries totaling $388 million as of December 31, 2016.
As of January 1, 2014 and for each of the
years ended December 31, 2014, 2015 and 2016, the Company and its subsidiaries did not have any unrecognized tax benefits, and
therefore no interest or penalties related to unrecognized tax benefits were accrued. The Company does not expect that the amount
of unrecognized tax benefits will change significantly within the next 12 months.
The Company and each of its PRC subsidiaries
file income tax returns in the United States and the PRC, respectively. The Company is subject to U.S. federal income tax examination
by tax authorities for tax years beginning in 2007. According to the PRC Tax Administration and Collection Law, the statute of
limitations is three years if the underpayment of taxes is due to computational errors made by the taxpayer or the withholding
agent. The statute of limitations is extended to five years under special circumstances where the underpayment of taxes is more
than RMB100,000 (approximately $14,415). In the case of transfer pricing issues, the statute of limitations is ten years. There
is no statute of limitations in the case of tax evasion. The PRC tax returns for the Company’s PRC subsidiaries are open
to examination by the PRC tax authorities for the tax years beginning in 2010.
NOTE 13 – OPTIONS AND NONVESTED SHARES
Options
Effective May 9, 2008, the Board of Directors
adopted the China Biologic Products, Inc. 2008 Equity Incentive Plan, (“the 2008 Plan”). The 2008 Plan provides for
grants of stock options, stock appreciation rights, performance units, restricted stock, restricted stock units and performance
shares. A total of five million shares of the Company’s common stock may be issued pursuant to the 2008 Plan. The exercise
price per share for the shares to be issued pursuant to an exercise of a stock option will be no less than the fair market value
per share on the grant date, except that, in the case of an incentive stock option granted to a person who holds more than 10%
of the total combined voting power of all classes of the Company’s stock or any of its subsidiaries, the exercise price will
be no less than 110% of the fair market value per share on the grant date. No awards may be granted under the 2008 Plan after May
9, 2018, except that any award granted before then may extend beyond that date. All the options to be granted will have 10-year
terms.
For the year ended December 31, 2016, 2015
and 2014, no stock options to purchase common stock were granted to any directors or employees.
A summary of stock options activity for
the years ended December 31, 2016, 2015 and 2014 is as follows:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
Average
|
|
|
Average
Remaining
|
|
|
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
|
Options
|
|
|
Price
|
|
|
Term in years
|
|
|
Intrinsic Value
|
|
|
|
|
|
|
USD
|
|
|
|
|
|
USD
|
|
Outstanding as of January 1, 2014
|
|
|
1,882,376
|
|
|
|
9.98
|
|
|
|
7.20
|
|
|
|
35,518,897
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(417,002
|
)
|
|
|
9.26
|
|
|
|
|
|
|
|
(17,529,500
|
)
|
Forfeited and expired
|
|
|
(32,920
|
)
|
|
|
11.44
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2014
|
|
|
1,432,454
|
|
|
|
10.16
|
|
|
|
6.53
|
|
|
|
81,753,119
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(780,557
|
)
|
|
|
9.92
|
|
|
|
|
|
|
|
(68,089,712
|
)
|
Forfeited and expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2015
|
|
|
651,897
|
|
|
|
10.44
|
|
|
|
5.24
|
|
|
|
86,064,461
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(337,406
|
)
|
|
|
10.55
|
|
|
|
|
|
|
|
(35,180,367
|
)
|
Forfeited and expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2016
|
|
|
314,491
|
|
|
|
10.32
|
|
|
|
3.84
|
|
|
|
30,568,083
|
|
Vested as of December 31, 2016
|
|
|
314,491
|
|
|
|
10.32
|
|
|
|
3.84
|
|
|
|
30,568,083
|
|
Exercisable as of December 31, 2016
|
|
|
314,491
|
|
|
|
10.32
|
|
|
|
3.84
|
|
|
|
30,568,083
|
|
For the years ended December 31, 2016,
2015 and 2014, the Company recorded stock compensation expense of $649,203, $1,117,994 and $1,669,573, respectively, in general
and administrative expenses.
Nonvested shares
For the years ended December 31, 2016,
2015 and 2014, nonvested shares were granted to certain directors and employees (collectively, the “Participant”).
Pursuant to the nonvested share grant agreements between the Company and the Participant, the Participant will have all the rights
of a stockholder with respect to the nonvested shares. The nonvested shares granted to directors generally vest in one or two
years. The nonvested shares granted to employees generally vest in four years.
A summary of nonvested shares activity
for the year ended December 31, 2016, 2015 and 2014 is as follow:
|
|
Number of
|
|
|
Grant date weighted
|
|
|
|
nonvested shares
|
|
|
average fair value
|
|
|
|
|
|
|
USD
|
|
Outstanding as of January 1, 2014
|
|
|
362,750
|
|
|
|
20.91
|
|
Granted
|
|
|
299,000
|
|
|
|
51.88
|
|
Vested
|
|
|
(107,125
|
)
|
|
|
20.66
|
|
Forfeited
|
|
|
(2,500
|
)
|
|
|
9.85
|
|
Outstanding as of December 31, 2014
|
|
|
552,125
|
|
|
|
37.78
|
|
Granted
|
|
|
313,100
|
|
|
|
120.62
|
|
Vested
|
|
|
(188,625
|
)
|
|
|
34.78
|
|
Forfeited
|
|
|
(7,500
|
)
|
|
|
28.80
|
|
Outstanding as of December 31, 2015
|
|
|
669,100
|
|
|
|
77.49
|
|
Granted
|
|
|
511,200
|
|
|
|
119.75
|
|
Vested
|
|
|
(255,150
|
)
|
|
|
66.04
|
|
Forfeited
|
|
|
(12,500
|
)
|
|
|
66.74
|
|
Outstanding as of December 31, 2016
|
|
|
912,650
|
|
|
|
104.51
|
|
For the years ended December 31, 2016,
2015 and 2014, the Company recorded stock compensation expense of $23,756,308, $10,996,278 and $3,726,698 in general and administrative
expenses, respectively.
As of December 31, 2016, approximately
$81,666,998 of stock compensation expense with respect to nonvested shares is to be recognized over weighted average period of
approximately 2.79 years.
NOTE 14 – STATUTORY RESERVES
The Company’s PRC subsidiaries are
required to allocate at least 10% of its after tax profits as determined under generally accepted accounting principal in the PRC
to its statutory surplus reserve until the reserve balance reaches 50% of respective registered capital. The accumulated balance
of the statutory reserve as of December 31, 2016 and 2015 was $34,508,737 and $34,160,154, respectively.
NOTE 15 – SHARE REPURCHASE
On January 27, 2014, the Company entered
into a repurchase agreement with an individual shareholder, pursuant to which the Company repurchased 2,500,000 shares of common
stock for a consideration of $70,000,000. The transaction was completed on February 28, 2014.
NOTE 16 – FAIR VALUE MEASUREMENTS
Management used the following methods
and assumptions to estimate the fair value of financial instruments at the relevant balance sheet dates:
·
Short-term financial instruments (including cash and cash equivalents, time deposits, accounts receivable, other receivables, accounts
payable, and other payables and accrued expenses) – The carrying amounts of the short-term financial instruments approximate
their fair values because of the short maturity of these instruments.
·
Loan receivable – The carrying amounts of loan receivable approximate their fair value. The fair value is estimated
using discounted cash flow analysis based on the Company’s incremental borrowing rates for similar borrowing.
NOTE 17 – SALES
The Company’s sales are
primarily derived from the manufacture and sale of Human Albumin and Immunoglobulin products. The Company’s sales by
significant types of product for the years ended December 31, 2016, 2015 and 2014 are as follows:
|
|
For the Years Ended
|
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
|
|
USD
|
|
|
USD
|
|
|
USD
|
|
Human Albumin
|
|
|
133,712,663
|
|
|
|
111,422,258
|
|
|
|
95,547,952
|
|
Immunoglobulin products:
|
|
|
|
|
|
|
|
|
|
|
|
|
Human Immunoglobulin for Intravenous Injection
|
|
|
117,891,410
|
|
|
|
125,136,104
|
|
|
|
98,389,729
|
|
Other Immunoglobulin products
|
|
|
40,105,561
|
|
|
|
22,518,554
|
|
|
|
19,736,027
|
|
Placenta Polypeptide
|
|
|
32,178,681
|
|
|
|
27,194,800
|
|
|
|
24,029,706
|
|
Others
|
|
|
17,281,111
|
|
|
|
10,186,186
|
|
|
|
5,548,244
|
|
Total
|
|
|
341,169,426
|
|
|
|
296,457,902
|
|
|
|
243,251,658
|
|
NOTE 18 – COMMITMENTS AND CONTINGENCIES
Commitments
As of December 31, 2016, commitments outstanding
for the purchase of property, plant and equipment approximated $27.3 million.
As of December 31, 2016, commitments outstanding
for the purchase of plasma from 2017 to 2018 approximated $44.7 million.
Legal proceedings
Dispute with Jie’an over Certain Capital Injection
into Guizhou Taibang
In May 2007, a 91% majority of Guizhou
Taibang’s shareholders approved a plan to raise additional capital from qualified strategic investors through the issuance
of an additional 20,000,000 shares of Guizhou Taibang. The plan required all existing Guizhou Taibang shareholders to waive their
rights of first refusal to subscribe for the additional shares. The remaining 9% minority shareholder of Guizhou Taibang’s
shares, Guizhou Jie’an Company, or Jie’an, did not support the plan and did not waive its right of first refusal. In
May 2007, Guizhou Taibang signed an Equity Purchase Agreement with certain alleged strategic investors (who concealed their background),
pursuant to which such investors agreed to invest an aggregate of RMB50,960,000 (approximately $7,345,884) in exchange for 21.4%
of Guizhou Taibang’s equity interests. Such Equity Purchase Agreement was not approved or ratified by over two-thirds supermajority
of Guizhou Taibang’s shareholders, which approval or ratification is required under the PRC Company Law. At the same time,
as an existing shareholder, Jie’an also subscribed for 1,800,000 shares, representing its pro rata share of the 20,000,000
shares being offered. In total, Guizhou Taibang received RMB50,960,000 (approximately $7,345,884) from the investors and RMB6,480,000
(approximately $934,092) from Jie’an.
In June 2007, Jie’an brought a lawsuit
against Guizhou Taibang, alleging that it had a right to acquire the 18,200,000 shares offered to the investors under the Equity
Purchase Agreement. The trial court denied Jie’an’s request, and the PRC Supreme Court ultimately sustained the original
ruling in May 2009 and denied the rights of first refusal of Jie’an over the 18,200,000 shares.
During the second quarter of 2010, Jie’an
requested that Guizhou Taibang register its 1.8 million shares of additional capital injection with the local administration of
industry and commerce, or AIC. Guizhou Taibang’s board of directors withheld its required ratification of Jie’an’s
request, pending the outcome of the ongoing litigation. In March 2012, Jie’an brought another lawsuit against Guizhou Taibang
for refusing to register the shares. In July 2013, the trial court dismissed the lawsuit for lack of jurisdiction. Jie’an
did not appeal the dismissal.
In December 2013, Jie’an brought
a third lawsuit against Guizhou Taibang, requesting Guizhou Taibang to register 1.8 million shares under its name with the local
AIC. In July 2014, the trial court denied Jie’an’s request to register such shares. Despite the denial of Jie’an’s
share registration request, the trial court, however, in its ruling, ordered Guizhou Taibang to pay accumulated dividends of RMB13,809,197
(approximately $1,990,595) associated with these shares and the related interest expenses to Jie’an. Guizhou Taibang and
Jie’an subsequently filed a cross-appeal. In December 2014, the appellate court ruled in favor of Jie’an supporting
its request to register 1.8 million shares and ordered Guizhou Taibang to pay Jie’an its share of accumulated dividends of
RMB18,339,227 (approximately $2,643,600) associated with these shares plus the related interest expenses to Jie’an. In the
first half of 2015, Guizhou Taibang paid an aggregate of RMB22,639,227 (approximately $3,263,445) to the trial court held in escrow
pending further appeal of this case. Guizhou Taibang appealed to the High Court of Guizhou in June 2015 which overruled the decision
of the appellate court and remanded the case to the trial court for retrial in September 2015. In August 2016, the trial court
granted Jie’an’s petition to withdraw the lawsuit as Jie’an sought to withdraw its capital contribution in Guizhou
Taibang pursuant to an agreement dated July 31, 2016. The funds held in escrow were credited to the consideration payable to Jie’an
for the capital withdrawal as described below.
In November 2013, Guizhou Taibang held
a shareholders meeting and the shareholders passed resolutions, or the November 2013 Resolutions, that, inter alia, (i) determined
that it was no longer necessary for Guizhou Taibang to obtain additional capital from investors; (ii) rejected Jie’an’s
request that Jie’an subscribe for additional shares of Guizhou Taibang alone and one or more other shareholders reduce their
shareholding in Guizhou Taibang; and (iii) approved the issuance of a total of 20,000,000 new shares to all existing shareholders
on a pro rata basis. Jie’an subsequently filed a fourth lawsuit against Guizhou Taibang in December 2013, requesting that
the court declare the November 2013 Resolutions void. Both the trial court and the appellate court denied Jie’an’s
request.
In March 2014, Guizhou Taibang held another
shareholders meeting and the shareholders passed resolutions, or the March 2014 Resolutions, that, inter alia, re-calculated the
ownership percentage in Guizhou Taibang based on the November 2013 Resolutions and the additional capital injections from existing
shareholders. Guizhou Taibang subsequently updated the registration with the local AIC regarding the additional capital injections
in August 2014. In September 2014, Jie’an and Shenzhen Yigong Shengda Technology Co., Ltd., or Yigong Shengda, another minority
shareholder of Guizhou Taibang filed a lawsuit against Guizhou Taibang, requesting that the court declare both the November 2013
Resolutions and the March 2014 Resolutions void and instruct Guizhou Taibang to withdraw the AIC registration. In November 2014,
the trial court suspended this case pending the final outcome of the third lawsuit filed by Jie’an. In October 2015, the
trial court denied their request. In May 2016, the appellate court vacated the trial court’s decision to uphold Guizhou
Taibang’s shareholders resolution, and remanded the case for retrial. In August 2016, the trial court granted the petitions
by Jie’an and Yigong Shengda to withdraw the lawsuit as Jie’an and Yigong Shengda sought to withdraw their respective
capital contributions in Guizhou Taibang pursuant to an agreement dated July 31, 2016.
On July 31, 2016, Guiyang Dalin Biologic
Technologies Co., Ltd., or Guiyang Dalin, Guizhou Taibang, Jie’an and Yigong Shengda entered into an agreement, pursuant
to which Jie’an and Yigong Shengda agreed to withdraw their respective capital contributions in Guizhou Taibang for an aggregate
consideration of RMB415,000,000 (approximately $59,822,250). In August 2016, Guizhou Taibang paid the first installment of RMB90,000,000
(approximately $12,973,500) of the consideration to Jie’an and Yigong Shengda. Guizhou Taibang completed the AIC registration
for the foregoing capital withdrawal in October 2016 and paid the balance of the consideration to Jie’an and Yigong Shengda
in November 2016. As a result of the capital withdrawal, Guiyang Dalin has become the sole shareholder of Guizhou Taibang.
Dispute with Certain Individual Investors
over Certain Capital Injection into Guizhou Taibang
In part due to the invalidity of the Equity
Purchase Agreement with certain alleged strategic investors in May 2007, which was never approved or ratified by Guizhou Taibang’s
shareholders, such investors’ equity ownership in Guizhou Taibang and the related increase in registered capital of Guizhou
Taibang have never been registered with the local AIC. In January 2010, one individual among such investors brought a lawsuit against
Guizhou Taibang requesting to register his 14.35% ownership interest in Guizhou Taibang with the local AIC and seeking the distribution
of his share of Guizhou Taibang’s dividends declared since 2007.
In October 2010, the trial court denied
such individual investor’s right as shareholders of Guizhou Taibang and his entitlement to share the dividends, which ruling
was reaffirmed after a re-trial by the same trial court in December 2012. After such ruling, Guizhou Taibang attempted to return
the originally received fund of RMB34,160,000 (approximately $4,924,164) to such investor by wiring the fund back to his bank account
but was unable to do so due to the closure of his bank account. Another investor, however, accepted the returned fund of RMB11,200,000
(approximately $1,614,480) from Guizhou Taibang in November 2010. In 2013, the same individual investor appealed the case to the
PRC Supreme Court, which also denied his claims for shareholder status in Guizhou Taibang and the related dividend distribution
and accrued interest in September 2013. Such investor subsequently attempted to seek a re-trial by the PRC Supreme Court, which
request was denied by the PRC Supreme Court in January 2014. He then applied to the PRC Supreme Procuratorate to request for a
review of the PRC Supreme Court’s decision and seek an appeal by the PRC Supreme Procuratorate to the PRC Supreme Court for
an ultimate re-trial on his behalf. In July 2015, the PRC Supreme Procuratorate rejected his request for review.
As of December 31, 2016, Guizhou Taibang
had maintained, on its balance sheet, payables to the investors of RMB34,160,000 (approximately $4,924,164) as originally received
funds from such individual investor in respect of the shares in dispute, RMB20,586,941 (approximately $2,967,608) for the interest
expenses, and RMB341,600 (approximately $49,241) for the 1% penalty imposed by the Equity Purchase Agreement for any breach in
the event that Guizhou Taibang is required to return the original investment amount to such investor.
NOTE 19 – NET INCOME PER SHARE
The following table sets forth the computation of basic and
diluted net income per share of common stock for the periods indicated:
|
|
For the Years Ended
|
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
|
|
USD
|
|
|
USD
|
|
|
USD
|
|
Net income attributable to China Biologic Products, Inc.
|
|
|
104,779,307
|
|
|
|
89,042,703
|
|
|
|
70,916,840
|
|
Earnings allocated to participating nonvested shares
|
|
|
(2,987,429
|
)
|
|
|
(2,070,762
|
)
|
|
|
(1,210,895
|
)
|
Net income allocated to common stockholders used in computing basic and diluted net income per common stock
|
|
|
101,791,878
|
|
|
|
86,971,941
|
|
|
|
69,705,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computing basic net income per common stock
|
|
|
26,848,445
|
|
|
|
25,599,153
|
|
|
|
24,427,196
|
|
Diluted effect of stock option
|
|
|
400,699
|
|
|
|
968,213
|
|
|
|
1,257,868
|
|
Weighted average shares used in computing diluted net income per common stock
|
|
|
27,249,144
|
|
|
|
26,567,366
|
|
|
|
25,685,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common stock – basic
|
|
|
3.79
|
|
|
|
3.40
|
|
|
|
2.85
|
|
Net income per common stock – diluted
|
|
|
3.74
|
|
|
|
3.27
|
|
|
|
2.71
|
|
During the year ended December 31, 2016,
2015 and 2014, no option was antidilutive or excluded from the calculation of diluted net income per common stock. Further, rights
issued pursuant to the stockholder rights plan (see Note 23) were excluded from the calculation of diluted net income per common
stock since they were antidilutive.
NOTE 20 – CHINA BIOLOGIC PRODUCTS, INC. (PARENT COMPANY)
The following represents condensed unconsolidated financial
information of the Parent Company only:
Condensed Balance Sheets:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
USD
|
|
|
USD
|
|
Cash
|
|
|
11,539,131
|
|
|
|
13,939,319
|
|
Prepayments and prepaid expenses
|
|
|
85,879
|
|
|
|
86,404
|
|
Property, plant and equipment, net
|
|
|
211
|
|
|
|
211
|
|
Investment in and amounts due from subsidiaries
|
|
|
454,309,702
|
|
|
|
372,035,937
|
|
Total Assets
|
|
|
465,934,923
|
|
|
|
386,061,871
|
|
|
|
|
|
|
|
|
|
|
Other payables and accrued expenses
|
|
|
3,734,334
|
|
|
|
3,718,747
|
|
Total Liabilities
|
|
|
3,734,334
|
|
|
|
3,718,747
|
|
|
|
|
|
|
|
|
|
|
Total Equity
|
|
|
462,200,589
|
|
|
|
382,343,124
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Equity
|
|
|
465,934,923
|
|
|
|
386,061,871
|
|
Condensed Statements of Comprehensive Income:
|
|
For the Years Ended
|
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
|
|
USD
|
|
|
USD
|
|
|
USD
|
|
Equity in income of subsidiaries
|
|
|
124,187,590
|
|
|
|
100,753,805
|
|
|
|
78,948,990
|
|
General and administrative expenses
|
|
|
(19,408,283
|
)
|
|
|
(10,693,991
|
)
|
|
|
(6,008,852
|
)
|
Other expenses, net
|
|
|
-
|
|
|
|
(1,017,111
|
)
|
|
|
(2,023,298
|
)
|
Earnings before income tax expense
|
|
|
104,779,307
|
|
|
|
89,042,703
|
|
|
|
70,916,840
|
|
Income tax expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net Income
|
|
|
104,779,307
|
|
|
|
89,042,703
|
|
|
|
70,916,840
|
|
Condensed Statements of Cash Flows:
|
|
For the Years Ended
|
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
|
|
USD
|
|
|
USD
|
|
|
USD
|
|
Net cash used in operating activities
|
|
|
(2,400,188
|
)
|
|
|
(3,904,038
|
)
|
|
|
(444,755
|
)
|
Net cash used in investing activities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net cash provided by financing activities
|
|
|
-
|
|
|
|
15,192,269
|
|
|
|
2,416,821
|
|
Net (decrease) increase in cash
|
|
|
(2,400,188
|
)
|
|
|
11,288,231
|
|
|
|
1,972,066
|
|
Cash at beginning of year
|
|
|
13,939,319
|
|
|
|
2,651,088
|
|
|
|
679,022
|
|
Cash at end of year
|
|
|
11,539,131
|
|
|
|
13,939,319
|
|
|
|
2,651,088
|
|
NOTE 21 – FOLLOW-ON OFFERING OF COMMON STOCK
On June 15, 2015, the Company completed
a follow-on offering of 3,450,000 shares of common stock at a price of $105.00 per share, less the underwriting discounts and commissions
and offering expenses. In this June 2015 follow-on offering, the Company sold 805,000 shares (including 105,000 shares sold pursuant
to the exercise by the underwriters of their option to purchase additional shares from the Company) and certain selling stockholders
sold 2,645,000 shares (including 345,000 shares sold pursuant to the exercise by the underwriters of their option to purchase additional
shares from such selling stockholders). The Company raised net proceeds of approximately $80.6 million from this offering, after
deducting the underwriting discounts and commissions and offering expenses payable by the Company. The Company did not receive
any proceeds from the sale of the shares by the selling stockholders.
On July 2, 2014, the Company completed
a follow-on offering of 1,782,500 shares of common stock at a price of $38.00 per share, less the underwriting discounts and commissions
and offering expenses. In this July 2014 follow-on offering, the Company sold 920,000 shares (including 120,000 shares sold pursuant
to the exercise by the underwriters of their option to purchase additional shares from the Company) and a selling stockholder sold
862,500 shares (including 112,500 shares sold pursuant to the exercise by the underwriters of their option to purchase additional
shares from such selling stockholder). The Company raised net proceeds of approximately $33.2 million from this offering, after
deducting the underwriting discounts and commissions and offering expenses payable by the Company. The Company did not receive
any proceeds from the sale of the shares by the selling stockholder.
NOTE 22 – CAPITAL WITHDRAWAL BY TWO FORMER NONCONTROLLING
INTEREST SHAREHOLDRERS OF GUIZHOU TAIBANG
On October 26, 2016, Guizhou Taibang completed
the requisite legal and administrative procedures, through which two former minority shareholders, holding a combined 15.3% equity
interest in Guizhou Taibang, withdrew their respective capital contributions in Guizhou Taibang for an aggregate consideration
of RMB415,000,000 (approximately $59,822,250) pursuant to an agreement dated July 31, 2016. (see Note 18)
NOTE 23 – STOCKHOLDER RIGHTS PLAN
On February 22, 2017, the Board of Directors (the “Board”) adopted a stockholder rights plan (the “Rights
Agreement”). Pursuant to the Rights Agreement, the Board of Directors authorized and declared a dividend distribution
of one right (a “Right”) for each outstanding share of the common stock, par value $0.0001 per share (the “Common
Shares”), of the Company to stockholders of record at the close of business on March 6, 2017 (the “Record Date”).
Each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of the Series A Participating
Preferred Stock, par value $0.0001 per share (the “Preferred Shares”), of the Company at an exercise price of
$550.00 per one one-thousandth of a Preferred Share, subject to adjustment (the “Exercise Price”). However, the
Rights are not immediately exercisable and will become exercisable only upon the occurrence of certain events. In particular,
after February 22, 2017:
|
·
|
if
a person or group acquires 15% or more of the Company’s Common Shares (including through derivatives), then the Rights will
become exercisable and each Right will entitle its holder (except the acquiring person or group) to purchase, at the Exercise
Price, a number of the Company’s Common Shares having a then-current market value of twice the Exercise Price;
|
|
·
|
if after a person or group acquires 15%
or more of the Company’s Common Shares, the Company merges into another company, an acquiring entity merges into the Company
or the Company sells or transfers more than 50% of its assets, cash flow or earning power, then each Right will entitle its holder
(except the acquiring person or group) to purchase, for the Exercise Price, a number of shares of common stock of the person engaging
in the transaction having a then-current market value of twice the Exercise Price; or
|
|
·
|
after
a person or group acquires 15% or more of the Company’s Common Shares, the Board
may, at its option, exchange the Rights (except for Rights held by the acquiring person
or group), in whole or in part, for Common Shares at an exchange ratio of one Common
Share per Right (subject to adjustment).
|
The Board adopted the Rights Agreement
to protect stockholders from coercive or otherwise unfair takeover tactics. In general terms, it works by imposing a significant
penalty upon any person or group that acquires 15% or more of the Common Shares without the approval of the Board after February
22, 2017. As a result, the overall effect of the Rights Agreement and the issuance of the Rights may be to render more difficult
or discourage a merger, tender or exchange offer or other business combination involving the Company that is not approved by the
Board. However, neither the Rights Agreement nor the Rights should interfere with any merger, tender or exchange offer or other
business combination approved by the Board. The Board of Directors may redeem the rights for $0.001 per right at any time before
an event that causes the rights to become exercisable. If not redeemed, the right will expire on February 22, 2019. The Board
had previously adopted similar preferred shares rights agreements on November 19, 2012, which expired on November 20, 2014, and
on January 8, 2015, which expired on January 8, 2017.
EXHIBIT INDEX
Exhibit No.
|
|
Description
|
|
|
|
2.1
|
|
Share Exchange Agreement between the registrant, Logic Express Limited and the selling stockholders signatory thereto, dated July 18, 2006 (incorporated by reference to Exhibit 2 of the registration statement on Form SB-2 filed by the registrant on September 5, 2007)
|
|
|
|
3.1
|
|
Second Amended and Restated Certificate of Incorporation of China Biologic Products, Inc. (incorporated by reference to Exhibit 3.1 of the quarterly report on Form 10-Q filed by the registrant on August 5, 2014)
|
|
|
|
3.2
|
|
Third Amended and Restated Bylaws of China Biologic Products,
Inc. as filed with the Secretary of State of the State of Delaware on June 23, 2014 (incorporated by reference to Amendment No.
1 as filed with the SEC on November 2, 2016 to Form 8-K as filed with the SEC on June 20, 2016)
|
|
|
|
3.1.1
|
|
Certificate of Correction to Certificate of Incorporation
of China Biologic Products, Inc. as filed with the Secretary of State of the State of Delaware on October 31, 2016 (incorporated
by reference to Amendment No. 1 as filed with the SEC on November 2, 2016 to Form 8-K as filed with the SEC on June 20, 2016)
|
|
|
|
3.1.2
|
|
Certificate of Change of Registered Office of China Biologic Products, Inc. as filed with the Secretary of State of the State of Delaware on November 1, 2016
|
|
|
|
4.1
|
|
Form of Registration Rights Agreement, dated June 5, 2009 (incorporated by reference to Exhibit 4.1 of the current report on Form 8-K filed by the registrant on June 5, 2009)
|
|
|
|
4.2
|
|
Form of 3.8% Convertible Senior Secured Note due 2011 (incorporated by reference to Exhibit 4.2 of the current report on Form 8-K filed by the registrant on June 5, 2009)
|
|
|
|
4.3
|
|
Form of Warrant (incorporated by reference to Exhibit 4.3 of the current report on Form 8-K filed by the registrant on June 5, 2009)
|
|
|
|
4.4
|
|
Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock of China Biologic Products, Inc. (incorporated by reference to Exhibit 3.1 of the registration form on Form 8-A12B filed by the registrant on November 21, 2012)
|
|
|
|
4.5*
|
|
Preferred Shares Rights Agreement, between the registrant and Securities Transfer Corporation, dated as of February 22, 2017
|
|
|
|
10.1
|
|
China Biologic Products, Inc. 2008 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 of the current report on Form 8-K filed by the registrant on May 13, 2008)
|
|
|
|
10.2
|
|
Form of Stock Option Award Agreement of China Biologic Products, Inc. (incorporated by reference to Exhibit 10.5 of the current report on Form 8-K filed by the registrant on May 13, 2008)
|
|
|
|
10.3
|
|
Form of Restricted Stock Award Agreement of China Biologic Products, Inc. (incorporated by reference to Exhibit 3.3 of the current report on Form 8-K filed by the registrant on August 6, 2011)
|
|
|
|
10.4
|
|
Group Secondment Agreement, dated October 28, 2002, between Shandong Taibang and the Shandong Institute (English Translation) (incorporated by reference to Exhibit 10.1 of the registration statement on Form SB-2/A filed by the registrant on December 3, 2007)
|
|
|
|
10.5
|
|
Amended and Restated Joint Venture Agreement, between Logic Express Limited and the Shandong Institute, dated as of March 12, 2006 (English Translation) (incorporated by reference to Exhibit 10.2 of the registration statement on Form SB-2 filed by the registrant on September 5, 2007)
|
|
|
|
10.6
|
|
Letter of Intent for Equity Transfer, between Logic Express Limited and the Shandong Institute, dated as of June 10, 2006 (English Translation) (incorporated by reference to Exhibit 10.3 of the registration statement on Form SB-2 filed by the registrant on September 5, 2007)
|
|
|
|
10.7
|
|
Joint Venture and Cooperation Agreement between Mr. Fan Qingchun, Shandong Taibang and Shaanxi Power Construction Corporation, dated September 12, 2008 (incorporated by reference to Exhibit 10.2 of the current report on Form 8-K filed by the registrant on October 16, 2008)
|
|
|
|
10.8
|
|
Agreement on Equity Transfer, Acquisition, Joint Venture and Cooperation, among Shandong Taibang, Shaanxi Power Construction Corporation and Mr. Fan Qingchun, dated September 12, 2008 (incorporated by reference to Exhibit 10.3 of the current report on Form 8-K filed by the registrant on October 16, 2008)
|
|
|
|
10.9
|
|
(Shareholder) Agreement among Shandong Taibang, Logic Express Limited and Biological Institute dated September 12, 2008 (incorporated by reference to Exhibit 10.4 of the current report on Form 8-K, filed by the registrant on October 16, 2008)
|
|
|
|
10.10
|
|
Equity Transfer Agreement, dated September 26, 2008, among Logic Express Limited, Chongqing Dalin Biologic Technologies Co., Ltd. and certain shareholders of Chongqing Dalin Biologic Technologies Co., Ltd. (incorporated by reference to Exhibit 10.1 of the current report on Form 8-K filed by the registrant on October 2, 2008)
|
|
|
|
10.11
|
|
Equity Transfer Agreement, between Shandong Taibang and Mr. Fan Qingchun, dated October 10, 2008 (incorporated by reference to Exhibit 10.1 of the current report on Form 8-K filed by the registrant on October 16, 2008)
|
|
|
|
10.12
|
|
Supplemental Agreement, dated November 3, 2008, among Logic Express Limited, Fan Shaowen, as representative of the shareholders of Chongqing Dalin Biologic Technologies Co., Ltd. and Chongqing Dalin Biologic Technologies Co., Ltd. (English Translation) (incorporated by reference to Exhibit 10.2 of the current report on Form 8-K filed by the registrant on November 7, 2008)
|
|
|
|
10.13
|
|
Second Supplemental Agreement, dated November 14, 2008, among Logic Express Limited, Fan Shaowen as representative of the shareholders of Chongqing Dalin Biologic Technologies Co., Ltd. and Chongqing Dalin Biologic Technologies Co., Ltd. (English Translation) (incorporated by reference to exhibit 10.3 of the current report on Form 8-K filed by the registrant on November 20, 2008)
|
|
|
|
10.14
|
|
Amended Equity Transfer Agreement, dated December 12, 2008, among Logic Express Limited, Chongqing Dalin Biologic Technologies Co., Ltd., and certain shareholders of Chongqing Dalin Biologic Technologies Co., Ltd. (English Translation) (incorporated by reference to exhibit 10.4 of the current report on Form 8-K filed by the registrant on December 18, 2008)
|
|
|
|
10.15
|
|
Equity Transfer and Entrustment Agreement, dated April 6, 2009, among Logic Express, Shandong Taibang and the Shandong Institute (English Translation) (incorporated by reference to Exhibit 10.6 of the current report on Form 8-K filed by the registrant on April 13, 2009)
|
|
|
|
10.16
|
|
Asset Purchase Agreement, between Xia Jin An Tai Plasma Collection Co., Ltd. and Xia Jin County Plasma Collection Station, dated as of October 20, 2006 (English Translation) (incorporated by reference to Exhibit 10.15 of the registration statement on Form SB-2/A filed by the registrant on December 3, 2007)
|
|
|
|
10.17
|
|
Asset Purchase Agreement, between Liao Cheng An Tai Plasma Collection Co., Ltd. and Yang Gu County Plasma Collection Station, dated as of November 3, 2006 (English Translation) (incorporated by reference to Exhibit 10.16 of the registration statement on Form SB-2/A filed by the registrant on December 3, 2007)
|
|
|
|
10.18
|
|
Asset Purchase Agreement, between Qi He An Tai Plasma Collection Co., Ltd. and Qi He County Plasma Collection Station, dated as of November 9, 2006 (English Translation) (incorporated by reference to Exhibit 10.14 of the registration statement on Form SB-2/A filed by the registrant on December 3, 2007)
|
|
|
|
10.19
|
|
Asset Purchase Agreement, between He Ze An Tai Plasma Collection Co., Ltd and Yun Cheng County Plasma Collection Station, dated as of December 15, 2006 (English Translation) (incorporated by reference to Exhibit 10.22 of the registration statement on Form SB-2/A filed by the registrant on December 3, 2007)
|
|
|
|
10.20
|
|
Asset Purchase Agreement, between Zhang Qiu An Tai Plasma Collection Co., Ltd. and Zhang Qiu Plasma Collection Station, dated as of December 31, 2006 (English Translation) (incorporated by reference to Exhibit 10.12 of the registration statement on Form SB-2/A filed by the registrant on December 3, 2007)
|
|
|
|
10.21
|
|
Asset Purchase Agreement, between Guang Xi Huan Jiang Missile Plasma Collection Co., Ltd. and Huan Jiang Maonan Autonomous County Plasma Collection Station, dated as of April 24, 2007 (English Translation) (incorporated by reference to Exhibit 10.13 of the registration statement on Form SB-2/A filed by the registrant on December 3, 2007)
|
|
|
|
10.22
|
|
Asset Purchase Agreement, between Fang Cheng Plasma Collection Co., Ltd. and Fang Cheng Plasma Company, dated as of April 30, 2007 (English Translation) (incorporated by reference to Exhibit 10.21 of the registration statement on Form SB-2/A filed by the registrant on December 3, 2007)
|
|
|
|
10.23
|
|
Asset Purchase Agreement, between Guang Xi Huan Jiang Missile Plasma Collection Co., Ltd. and Huan Jiang Maonan Autonomous County Plasma Collection Station, dated as of August 5, 2007 (English Translation) (incorporated by reference to Exhibit 10.13 of the registration statement on Form SB-2/A filed by the registrant on December 3, 2007)
|
|
|
|
10.24
|
|
Trademark Licensing Agreement, dated as of February 27, 2007 (English Translation) (incorporated by reference to Exhibit 10.17 of the registration statement on Form SB-2/A filed by the registrant on December 3, 2007)
|
|
|
|
10.25
|
|
Loan Agreement, dated as of November 30, 2006, among Shandong Taibang and the Shandong Institute and Logic Express (English Translation) (incorporated by reference to Exhibit 10.18 of the registration statement on Form SB-2/A filed by the registrant on December 3, 2007)
|
|
|
|
10.26
|
|
Supplementary Agreement, dated as of September 1, 2007, among Shandong Taibang, the Shandong Institute and Logic Express Limited (English Translation) (incorporated by reference to Exhibit 10.19 of the registration statement on Form SB-2/A filed by the registrant on December 3, 2007)
|
|
|
|
10.27
|
|
Form of Director’s Employment Agreement (incorporated by reference to Exhibit 10.8 of the registration statement on Form SB-2 filed by the registrant on September 5, 2007)
|
|
|
|
10.28
|
|
Form of Independent Director Agreement (incorporated by reference to Exhibit 10.1 of the current report on Form 8-K filed by the registrant on July 30, 2008)
|
|
|
|
10.29
|
|
Form of Indemnity Agreement (incorporated by reference to Exhibit 10.2 of the current report on Form 8-K filed by the registrant on July 30, 2008)
|
|
|
|
10.30
|
|
Form of Guarantee and Pledge Agreement, dated June 10, 2009 (incorporated by reference to Exhibit 10.2 of the current report on Form 8-K filed by the registrant on June 5, 2009).
|
|
|
|
10.31
|
|
Form of Indemnification Agreement, dated June 10, 2009 (incorporated by reference to Exhibit 10.3 of the current report on Form 8-K filed by the registrant on June 5, 2009).
|
|
|
|
10.32
|
|
Cooperation Agreement, among Guizhou Taibang, Xinjiang Deyuan and its controlling shareholder, dated August 28, 2015 (Summary English Translation) (incorporated by reference to Exhibit 10.1 of the current report on Form 8-K filed by the registrant on September 2, 2015)
|
|
|
|
10.33
|
|
Supplemental Agreement, between Guizhou Taibang and Xinjiang Deyuan, dated April 16, 2015 (Summary English Translation) (incorporated by reference to Exhibit 10.2 of the current report on Form 8-K filed by the registrant on April 16, 2015)
|
|
|
|
10.34
|
|
Cooperation Agreement, between Guizhou Taibang and Xinjiang Deyuan, dated September 30, 2014 (Summary English Translation) (incorporated by reference to Exhibit 10.1 of the current report on Form 8-K filed by the registrant on April 16, 2015)
|
|
|
|
10.35
|
|
Registered Equity Purchase Agreement, between Guiyang Dalin
Biotechnology Co., Ltd. and Guizhou Eakan Pharmaceutical Co., Ltd., dated August 21, 2014 (Summary English Translation) (incorporated by reference to Exhibit 10.1 of the current report on Form 8-K filed by the registrant on August 25, 2014)
|
10.36
|
|
Equity Exchange Agreement, between Guiyang Dalin
Biotechnology Co., Ltd. and Guizhou Eakan Pharmaceutical Co., Ltd., dated August 21, 2014 (Summary English Translation) (incorporated by reference to Exhibit 10.2 of the current report on Form 8-K filed by the registrant on August 25, 2014)
|
|
|
|
10.37
|
|
Unregistered Equity Purchase Agreement,
between Guiyang Dalin
Biotechnology Co., Ltd. and Guizhou Eakan Pharmaceutical Co., Ltd.,
dated August 21, 2014 (Summary English Translation) (incorporated by reference to Exhibit 10.3 of the current report on Form 8-K
filed by the registrant on August 25, 2014)
|
10.38
|
|
Summary English translation of Settlement Agreement among Guizhou
Taibang Biological Products Co., Ltd., Guiyang Dalin Biologic Technologies Co., Ltd., Guizhou Jie’an Company and Shenzhen
Yigong Shengda Technology Co., Ltd. dated July 31, 2016 (incorporated by reference to Exhibit 10.1 of the Quarterly Report on Form
10-Q filed by the registrant on August 4, 2016)
|
10.39
|
|
Summary English translation of Guarantee Agreement among Guizhou
Taibang Biological Products Co., Ltd., Guiyang Dalin Biologic Technologies Co., Ltd., Guizhou Jie’an Company and Shenzhen
Yigong Shengda Technology Co., Ltd. dated July 31, 2016 (incorporated by reference to Exhibit 10.2 of the Quarterly Report on Form
10-Q filed by the registrant on August 4, 2016)
|
10.40
|
|
Consulting Agreement by and between Company and Mr. Hui (David)
Li dated July 1, 2016 (incorporated by reference to Exhibit 10.3 of the Quarterly Report on Form 10-Q filed by the registrant on
August 4, 2016)
|
10.41
|
|
Second Amended and Restated Employment Agreement by and between
the Company and Xiaoying (David) Gao dated August 4, 2016 (incorporated by reference to Exhibit 10.4 of the Quarterly Report on
Form 10-Q filed by the registrant on August 4, 2016)
|
10.42
|
|
Second Amended and Restated Employment Agreement between the Company
and Ming Yang dated November 1, 2016 (incorporated by reference to Exhibit 10.5 of the Quarterly Report on Form 10-Q filed by the
registrant on November 2, 2016)
|
10.43
|
|
Second Amended and Restated Employment Agreement between the Company and Ming Yin dated November 1, 2016 (incorporated by reference to Exhibit 10.6 of the Quarterly Report on Form 10-Q filed by the registrant on November 2, 2016)
|
|
|
|
14
|
|
Code of Ethics (incorporated by reference to Exhibit 14 of the annual report on Form 10-KSB filed by the registrant on March 28, 2008)
|
|
|
|
21*
|
|
Subsidiaries of the registrant
|
|
|
|
23.1*
|
|
Consent of KPMG, an independent registered public accounting firm
|
|
|
|
31.1*
|
|
Certifications of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
31.2*
|
|
Certifications of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
32.1*
|
|
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
32.2*
|
|
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
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101*
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Interactive data files pursuant to Rule 405 of Regulation S-T
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*Filed herewith.
China Bioligic Products (NASDAQ:CBPO)
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From Mar 2024 to Apr 2024
China Bioligic Products (NASDAQ:CBPO)
Historical Stock Chart
From Apr 2023 to Apr 2024