ITEM
1.
BUSINESS
Overview
We
are principally engaged in the development, manufacture and marketing of pharmaceutical products for human use in connection with
a variety of high-incidence and high-mortality diseases and medical conditions prevalent in the People’s Republic of China (the
“PRC”). All of our operations are conducted in the PRC, where our manufacturing facilities are located. We manufacture
pharmaceutical products in the form of dry powder injectables, liquid injectables, tablets, capsules, and cephalosporin oral solutions.
The majority of our pharmaceutical products are sold on a prescription basis and all have been approved for at least one or more
therapeutic indications by the China Food and Drug Administration (the “CFDA”) based upon demonstrated safety and efficacy.
As
of December 31, 2017, we manufactured 19 pharmaceutical products for a wide variety of diseases and medical indications, each
of which may be classified into one of three general categories:
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Basic
generic drugs, which are common drugs in the PRC for which there is a very large market demand;
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First-to-market
generic drugs, which are generic Western drugs that are new to the PRC marketplace; or
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Modern
Traditional Chinese Medicines, which are generally comprised of non-synthetic, plant-based medicinal compounds of the type
that have been widely used in the PRC for thousands of years, to which we apply modern production techniques to produce pharmaceutical
products in different formulations, such as tablets, capsules or powders.
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In
selecting generic drugs to develop and manufacture, we consider several factors, including the number of other manufacturers currently
producing a particular drug, the size of the market for that drug, the proposed or required method of distribution, the existing
and expected pricing for that particular drug in the marketplace, the costs of manufacturing that drug, and the costs of acquiring
or developing the formula for that drug. We believe we have historically selected generic drugs for manufacture that have large
addressable markets and higher profit margins relative to other generic drugs manufactured and distributed in the PRC.
We
currently own and operate an approximately 8,000-square-meter manufacturing facility in Haikou, Hainan Province, built in 2002,
that supports eight modern, scalable production lines. We implement quality control procedures in this facility in compliance
with the PRC’s Good Manufacturing Practices, or GMP standards, and applicable CFDA regulations to ensure consistent quality in
our products.
The CFDA promulgated
Good
Manufacturing Practices for Pharmaceutical Products
(2010 revised version) (the “new GMP”) on February 12, 2011
(effective as of March 1, 2011). The new GMP standards outline the basic principles and standards for the manufacturing of pharmaceutical
products and the management of quality controls in the pharmaceutical products manufacturing industry in the PRC. Pursuant to
those mandatory requirements, upgrades to our two injectables production lines were required to be finalized by the end of 2013.
From January 1, 2014 to November 3, 2014, we suspended production at our dry powder injectables and liquid injectables production
lines due to a failure to meet the new GMP upgrade deadline. However, in 2014, we completed construction of a new 20,000 square-meter
factory equipped with four sterilize production lines (two liquid injectables and two dry powder injectables production lines),
in full compliance with the latest GMP standard. In November 2014, the CFDA completed GMP certification of our new facility and
issued us with a GMP certificate, enabling us to commence manufacturing at our two liquid injectables and two dry powder injectables
production lines. In January and December 2015, we completed further upgrades and received new GMP certificates for the tablet
and capsule production lines and the cephalosporin production lines in our old factories.
We
market and sell our products through 16 sales offices covering all major cities and provinces in the PRC. To comply with applicable
Chinese law relating to sales of prescription drugs to certain hospitals and clinics, we also use a distribution system comprised
of over 1,000 independent prefecture-level, city-level, and county-level distributors. Our sales system has further developed
and expanded with the expansion of Chinese healthcare reform, and our 16 provincial offices deliver our products to basic health
care institutions as well as tier two and tier three hospitals through the above mentioned distributors.
Corporate
History
We
are a holding company and conduct substantially all of our production, marketing, finance, development and administrative activities
through our wholly-owned subsidiary located in the PRC. We were incorporated in the State of Delaware under the name “Softstone,
Inc.” on January 28, 1999. From mid-2003 to October 19, 2005, we did not generate any significant revenue and we accumulated
no significant assets while we explored business opportunities as a publicly-held “shell” corporation.
We
entered into our current line of business on October 19, 2005, through the acquisition of Onny Investment Limited, a holding company
formed in the British Virgin Islands (“Onny”), and its operating subsidiary located in the PRC, Hainan Helpson Medical
& Biotechnology Co., Ltd. (“Helpson”). On March 16, 2006, we changed our corporate name to China Pharma Holdings,
Inc. On December 31, 2012, we reincorporated from the State of Delaware to the State of Nevada.
Helpson
was established on February 25, 1993, in Haikou, Hainan Province, PRC as a foreign-invested enterprise. The company was originally
an “equity joint venture,” as defined by China’s laws on foreign invested enterprises, between Haikou Biomedical Engineering
Co., Ltd., a PRC company, and Hong Kong Fudao Development Co., Ltd., a Hong Kong company (“Fudao”).
On
June 16, 2001, Fudao entered into an Equity Interest Transfer Agreement with Hainan Kaidi Science and Technology Co., Ltd., a
PRC company (“Kaidi”), pursuant to which Fudao transferred all of its ownership interest in Helpson to Kaidi. As a result
of this transfer, Helpson became a PRC domestic company, rather than a foreign-invested company.
Onny
was incorporated on January 12, 2005, under the laws of the British Virgin Islands. On May 25, 2005, Helpson’s three then-existing
shareholders entered into an equity interest transfer agreement with Onny, as a result of which, effective as of June 21, 2005,
Helpson became a wholly foreign-owned enterprise (“WFOE”), and Onny became the sole shareholder of Helpson.
On
October 19, 2005, we acquired all of the issued and outstanding shares of Onny in exchange for 27,499,940 shares of our common
stock and became Onny’s sole shareholder. In connection with this share exchange, all of our officers and directors at that time
resigned from their positions as officers and directors of our Company, and new directors and executive officers were appointed.
Also as a result of this share exchange, commonly referred to as a “reverse acquisition,” Helpson became our indirect
wholly-owned subsidiary.
Our
corporate organizational chart is set forth below.
Industry
Background and Market Opportunities
According
to data from the National Bureau of Statistics of China, the pharmaceutical manufacturing industry’s revenue and profit
growth increased by more than 25% from 2009 to 2011, but began to decline year by year; and reached its lowest point in 2015.
In 2016, it slightly recovered due to sustained growth at around 10% and 14%, respectively. From January to November 2017, the
pharmaceutical industry recorded income of RMB2.59 trillion (approximately USD0.40 trillion), or an increase of 12.3% compared
to the same period in 2016, showing a more favorable trend. In general, the pharmaceutical industry was no longer in the rapid
growth phase, but rather a relatively slower and internally differentiated growth phase.
From
the perspective of industrial policy, the pharmaceutical industry has gone through two stages in the recent decade: (1) a golden
period, as the industry developed rapidly before 2011 along with the expansion of China’s medical insurance system; and (2) a
period of decline, in which the growth rate has visibly deteriorated since 2012, partly due to the new rural cooperative medical
system and urban residents’ medical insurance system roughly reaching full coverage, thus, causing the growth rate of funding
of China’s medical insurance system to decline, and pricing pressure to be put into the spotlight.
Various
reform policies have been promulgated and enforced since 2016. With the advancement of public hospital reforms and progression
of the drug regulatory system, the diversity among manufacturers has further intensified. The key takeaways from 2017 include
the implementation of policy: a drug bidding process was approved in various provinces, the two-invoice system was fully launched,
the new medical insurance catalog was launched, the drug supervision system was further promoted, and implementation explanations
around consistency evaluation were issued. It is likely that the environment of the pharmaceutical industry will be refined, and
the development of the industry will enter a new era.
Although
it has been difficult for the chemical drug industry to maintain the same high growth rate it experienced before 2012 due to the
completion of the expansion of health insurance, with the positive impacts of its policies gradual declines, as well as the existence
of Medicare cost-controls and drug pricing pressures resulting from drug bidding. However, in the context of China’s aging
population, the consumption of pharmaceuticals is expected to increase, and although the growth rate of health insurance expenditures
will not remain at the previous high level, the industry will still be able to maintain growth. In addition, personal expenditures
and fiscal expenditures in healthcare are expected to continue to increase. Therefore, we believe that demand for pharmaceuticals
and consumer ability to pay is still enjoying steady growth. Although the growth rate has been declined, our industry is now very
large-scale.
Consistency
Evaluation
The
development of generic drugs is an important measure to reduce medical expenses. By conducting generic drug consistency evaluation,
generic drugs can be advertised as consistent with the original drug in terms of efficacy and quality, and may even replace the
original drug in clinical practice. This work can greatly enhance the overall development of China’s pharmaceutical industry,
and it also provides support for the quality of generic drugs.
On
March 5, 2016, the Chinese State Council issued “Opinions on Carrying out Consistency Evaluations of the Quality and Efficacy
of Generic Drugs” (the “Opinions”). Over 95% of the currently-sold drugs in China are generics which are subject
to the “Opinions”. Per the “Opinions”, any solid oral solution generics listed in the National Essential
Drugs List (2012 edition) that received production approval before October 1, 2007, shall complete a Consistency Evaluation by
the end of 2018,while an applicant which needs to carry out clinical trials and has certain special circumstances shall complete
a Consistency Evaluation by the end of 2021. Overdue applicants may no longer be eligible for re-registration. According to CFDA
statistics, a total of 289 formulas, 17740 production approval numbers, 1817 domestic pharmaceutical manufacturers, and 42 overseas
manufacturers will be affected by the Opinions. Unfortunately, annual sales of most of those 17740 production approval numbers
did not exceed RMB5 million. In which case, manufacturers make wait and extended period of time to recoup the capital investment
for consistency evaluation. The similarities in the pharmaceutical market in China lead to low profit rate. The money invested
in consistency evaluation comes from the manufacturer; therefore in general, manufacturers prefer to take consistency evaluation
of selected existing products with higher profitability.
Oral
Solid Formulation Conformance Assessment 289 catalog has more than 18,000 drug approvals. The annual sales of most varieties do
not exceed 5 million. It takes an extended period of time for companies to recoup the cost of consistency assessment.
In
order to promote consistency evaluation, the P.R.C. State Council and its related agencies have issued corresponding policies.
The result is two core points: first, the medicines that pass the consistency evaluation are given appropriate support in the
payment of medical insurance; and should be given priority during drug purchase and prescription; the second applies when more
than 3 manufacturers have passed the consistency evaluation for a certain drug, then other manufacturers will no longer be eligible
to participate in centralized purchase for this drug.
Consistency
evaluation is a reshuffle of the generic pharmaceutical industry. Generic drugs whose quality levels are not up to standard will
be withdrawn from the market. The revision of the national drug standards can be seen as a continuation of this policy and will
intensify the shuffling of the pharmaceutical industry. According to data from China National Health Information Corporation,
in 2016, the total scale of China’s pharmaceutical end-use market (without medicinal materials) amounted to RMB1.49 trillion (approximately
USD 0.23 trillion). It is said that the consistency assessment and the revision of the national drug standards will involve the
reshuffle of the RMB1 trillion (approximately USD 0.15 trillion) market.
Bioequivalence
testing (BE Testing) is an important component of Consistency Evaluations. Unfortunately, there are a limited number of institutions
that currently carry out BE Testing, which has become for a significant brake on the progress of the Consistency Evaluation program.
The PRC had more than 400 clinical drug trial institutions back in 2016, while, per the “Notice on the Clinical Trial Practice
by Clinical Trial Institutions and Contract Research organizations” issued by CFDA on September 9, 2015, there were only
82 clinical drug trial institutions that had undertaken BE Testing and Phase I clinical trial. Fortunately, the government has
aggressively addressed this problem in recent years. CFDA issued the “Certification of Pharmaceutical Clinical Trial Qualifications
(No. 9) (No. 165 of 2017)” on December 28, 2017. Together with the 618 clinical drug trial institutions previously released,
so far the number of clinical drug trial institutions has reached 625.
BE
Testing costs are considered a major share in the overall costs of Consistency Evaluations, which in turn will increase capital
expenditures for our industry. In addition, if a generic drug under evaluation cannot achieve the same consistency of quality
and efficacy as the originally-developed drug, the generic manufacturer must re-develop and optimize its existing formula and
production process through further analysis of the quality standards and physical and chemical characteristics of the originally-developed
drug, including a study of the crystal form and solubility.
The
Center For Drug Evaluation released the “Technical Requirement for the Consistency Evaluation of Marketed Chemicals (Injectables)
(Draft for Comment)” on December 22, 2017, which launched a prelude to the consistency evaluation of injections.
The
PRC’s medical insurance system
The
PRC started putting basic medical insurance in place for urban workers in 1998, kicked off the “New Rural Cooperative Program”
(new rural cooperative medical care program) in 2003, and implemented basic medical insurance for urban residents in 2007 to cover
unemployed and low-income urban residents. After 20 years of hard work, basic medical insurance has almost covered the entire
population. The universal health insurance, consists mainly of basic medical insurance for employees, basic medical insurance
for urban residents, and new rural cooperative medical care. By the end of 2016, there were more than 1.3 billion people participating
in the basic medical insurance system in China, and the coverage rate of the insurance coverage was more than 95%. In 2016, the
state officially initiated the integration of the two systems of urban residents’ basic medical insurance and new rural cooperative
medical care. From January to November 2017, the number of urban basic medical insurance participants was RMB1.15 billion (approximately
USD0.18 billion), an increase of 63.7% year-on-year, and the amount of funds raised was RMB1.58 trillion (approximately USD0.24
billion), an increase of 40.6% year-on-year, and expenditure was RMB1.23 trillion (approximately USD0.19 billion), an increase
of 35.7% year-on-year. The increase in the number of insured persons, the growth of fundraising and the acceleration of expenditures
were mainly due to the accelerated progress of the integration of the two programs.
The
reimbursement rates for outpatient and inpatient expenses for new rural cooperative medical care remained stable at around 50%
and 70%, respectively in 2017, The Ministry of Human Resources and Social Sciences issued the 2017 edition of Medical Insurance
Drug List (MIDL 2017) on February 23, 2017. The MIDL 2017 included 2,535 drugs, which represented an increase of 339 drugs, or
15.4% compared to 2009 edition; among which included 1297 western drugs, which represented an increase of 133 drugs, or 11.4%;
and 1238 traditional Chinese medicine, which represented an increase of 251 or 25.4%. The MIDL 2017 reflected the government’s
policy on “filling vacancies, selecting the best, supporting innovation, encouraging competition”; and gave special
consideration and support for children’s medicines, innovative medicines, major disease treatment medicines and ethnic medicines.
The
direction of reform of China’s medical insurance payment method has been established. As such, the total amount of medical insurance
expenditures is controlled through the mixed payment methods such as total advance payment and disease-based payment; at the same
time, the drugs with clinically urgent need and high degree of innovation are included in the scope of reimbursement through price
negotiation. The drugs that solve the medical problems of part of the patients with major diseases help reduce or even eliminate
the proportion of reimbursement for supplemental medicines; thus, allowing the remaining medical insurance funds to be used for
innovative drugs and high-quality generic drugs with therapeutic effects.
At
the end of 2017, medical insurance payment reforms were accelerated throughout the country, and multiple compound medical insurance
payment methods based on disease-based payment were gradually introduced. According to a rough estimate, nearly two-thirds of
the country’s provinces have implemented or are piloting the implementation of a disease-based charge.
There
are other factors that may also affect the pharmaceutical industry, such as Medicare cost-controls. In order to control the rapid
increase in medical expenditures, the government of the PRC has, since 2010, introduced a series of policies to strengthen supervision
and control effects of Medicare on healthcare services, to reform the Medicare payment methods, to establish a hierarchical treatment
system, to eliminate pharmaceutical mark-ups, and to reduce the proportion of drug costs to total healthcare costs, etc. In June
2016, the PRC’s National Health Commission called on each province to determine the growth rate of medical expenditures
as soon as possible and further proposed limiting the national medical expenditure growth rate to no higher than 10% by the end
of 2017. The General Office of the State Council issued the “Guiding Opinions on Further Deepening the Reform of Basic Medical
Insurance Payment Methods.” on June 28, 2017. The goal is to further strengthen the budget management of the Medicare fund
from 2017 onwards, and fully implement multiple compound medical insurance payment methods based on disease-based payment. We
believe that Medicare cost-controls have been a consistent theme of our industry. These cost-controls have been a serious challenge
for medical institutions, manufacturing companies, and drug-logistic companies.
The
CFDA promulgated
Good Manufacturing Practices for Pharmaceutical Products (2010 revised version)
(the “new GMP”)
on February 12, 2011 (effective as of March 1, 2011). The new GMP standards outline basic principles and standards for the manufacturing
of pharmaceutical products and the management of quality controls in pharmaceutical manufacturing processes in the PRC. Since
they were first adopted in 1988, GMP have over two decades of history in China, and were revised in 1992 and 1998. As of June
30, 2004, all manufacturing of active pharmaceutical ingredients (“API”) and finished dosages must be in compliance
with the GMP standards. The new GMP standards that became effective on March 1, 2011, include improvements based upon foreign
manufacturing advancements, and have taken into consideration local conditions in China. Based on the principle of “equal
importance between hardware and software”, strictly implementing the idea of risk control during the manufacturing process
of pharmaceutical products, and increased focus on scientific guidance and operability, the new GMP standards are consistent with
the World Health Organization (WHO) standards.
The
four main prongs of the new GMP standards are: (1) strengthening quality control systems during the manufacturing process of pharmaceutical
products by significantly increasing requirements regarding quality control software; (2) improving requirements regarding the
quality of practitioners; (3) refining operational procedures, rules on document management (including manufacturing records),
improving guidance and operability; and (4) further improvements related to measures to ensure the safety of pharmaceutical products.
The
Drug Marketing Authorization Holder (“MAH”) model is a management model that separates marketing authorization from
independent production licensing. License holders may delegate production to manufacturers and are only responsible for the
safety, effectiveness and quality control of drugs manufactured for public consumption. The MAH model is a common worldwide
practice for review and approval of new drugs, and h encourages investment in research and development and the adoption of Contract Manufacturing
Organization.
In
August 2015, the PRC State Council issued “Opinions on the Reform of Drug and Medical Devices Evaluation and Approval of
System Review”, which proposed to implement the MAH system experiments. Because the Company is considered a manufacturer
pursuant to this policy, we believe this policy will benefit our Company in the long run, given our new GMP certified production
facility and because we have the potential to manufacture products for license holders in the future.
Our
Strategy
We
believe we are well positioned in a comparatively steadily growing industry in one of the fastest-growing economies in the world.
We currently manufacture a number of off-patent branded generic drugs that were among the first to market in the PRC. We expect
to continue to gain additional competitive advantages through the growing pipeline of new pharmaceutical products we are developing
for specific target patient groups. Our diverse portfolio of products and our new product pipelines include products for high-incidence
and high-mortality conditions in the PRC, such as cardiovascular, central nervous system (“CNS”), infectious, and
digestive diseases. Furthermore, the Healthcare Reform initiated by the State Council in 2008 in the PRC has significantly expanded
the landscape of the Chinese healthcare industry. According to the
2017 National Economic and Social Development Statistics
Bulletin of the People’s Republic of China
issued by National Bureau of Statistics of the PRC, the total number of Chinese
healthcare institutions has reached 995,000 as of the end of 2017, including 30,000 hospitals, 940,000 grass-root healthcare institutes
(comprised of 37,000 township healthcare centers, 35,000 community health service centers (stations), 230,000 clinics, 638,000
village healthcare centers), and 22,000 professional public health institutions. We believe the increase in demand from these
sources should allow us to grow organically. In addition, the total number of medical personnel in the PRC has reached 8.91
million, including 3.35 million practicing physicians and practicing assistant physicians and 3.79 million registered nurses.
The number of beds in medical and health institutions has reached 7.85 million, including 6.09 million in hospitals and 1.25 million
in township healthcare centers.
Production
approval from the CFDA for Candesartan, an angiotensin II receptor antagonist serving as a first-line treatment for hypertension,
developed in November 2013 and launched towards the end of 2014, and for new products from our pipeline of products under development
(such as a generic version of Crestor and novel anti-drug-resistant combination antibiotics), would offer us significant growth
opportunities. Finally, healthcare reform has started to change the landscape of the Chinese pharmaceutical industry, which we
believe will create many attractive acquisition opportunities. We plan to explore these opportunities in an effort to add synergistic
products that can help us grow our business.
Our
objective is to leverage our expertise in the PRC for the development, manufacture and commercialization of pharmaceutical products.
We intend to achieve this objective by:
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Promoting
Our Existing Brands to Increase Our National Recognition
. We intend to support and grow the existing recognition and reputation
of our brands and to maintain our branded pricing strategy through continued sales and marketing efforts through our new,
upgraded GMP-compliant production lines. To achieve this goal, we plan to promote the efficacy and safety profile of our established
prescription pharmaceutical products to physicians at hospitals and clinics in all provinces of PRC through the efforts of
our sales force, independent distributors and educational physician conferences and seminars.
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Developing
and Introducing Additional Products to Expand or Strengthen Our Existing Product Portfolio
. We plan to focus our development
capabilities towards expanding our existing portfolio of approved products. We have a number of products in various stages
of the CFDA approval process. In addition, we intend to conduct clinical trials for new generic or modernized products to
expand our existing product portfolio. We plan to introduce new generic or modernized products to leverage our branded market
leadership position, particularly in therapeutic areas in which we already have a strong presence.
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Expanding
Our Distribution Network to Increase Market Penetration
. We intend to expand our reach beyond our current 16 offices in
the PRC to drive additional growth of our existing and future products. We currently contract with over 1,000 distributors
in the PRC and plan to expand on these relationships to target new markets. We will continue our conservative sales strategy
of increased cooperation with customers with reliable accounts receivable collection performance. In addition, we plan to
continue to broaden our marketing efforts outside of major cities in the PRC and to increase our market penetration in cities
and rural areas where we already have a presence. Over the long term, we also intend to expand our presence beyond the PRC
to international markets by working with international pharmaceutical companies in cross-selling our products.
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Acquiring
Complementary Products Lines, Technologies, Distribution Networks and Companies
. We intend to selectively pursue strategic
acquisition opportunities that we believe will grow our customer base, expand our product lines and distribution network,
enhance our manufacturing and technical expertise or otherwise complement our business or further our strategic goals. Pursuing
strategic acquisitions is a significant component of our growth strategy. The Company has not identified any strategic acquisition
opportunities as of the date of this report on Form 10-K.
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Products
We
currently have a product portfolio of 19 pharmaceutical products that address a wide variety of diseases and medical indications.
All of our pharmaceutical products have demonstrated safety and efficacy in clinical trials sufficient to obtain approval by the
CFDA and are sold on a prescription basis. The following table summarizes the approved indications for our marketed pharmaceutical
products and the year in which each of such products was first marketed to our customers.
Product
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Indication
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Year of
Commercial
Launch
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Central Nervous System (CNS) and Cerebral-Cardiovascular Diseases
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CerebroproteinHydroloysate Injection
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Memory decline and attention deficit disorder caused by the sequela of craniocerebral trauma and cerebrovascular diseases.
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1996
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Gastrodin Injection
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Tiredness, loss of concentration, poor sleep, and traumatic syndromes of the brain, including vertigo, neuralgia and headaches.
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2005
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Propylgallate for Injection
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Cerebral thrombosis, coronary heart disease and complications after surgery such as thrombus deep phlebitis.
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2006
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Ozagrel Sodium for Injection
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Cerebral thrombosis, coronary heart disease and complications after surgery such as thrombus deep phlebitis.
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2006
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Alginic Sodium Diester Injection
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Ischemic heart disease, cerebrovascular diseases (cerebral thrombosis, cerebral embolism and coronary heart disease) and high lipoprotein blood disease.
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2006
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Bumetanide for Injection
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Various edema diseases (including those associated with heart failure, hepatic cirrhosis, nephropathy, and pulmonary edema), hypertension, acute renal failure, hyperkalemia, hypercalcemia and for the rescue from acute drug poisoning.
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2007
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Candesartan
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Hypertension
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2013
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Anti-infection and Respiratory Diseases
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Roxithromycin Dispersible Tablets
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Pharyngitis and tonsillitis caused by Streptococcus pyogenes; sinusitis, tympanitis, acute and chronic bronchitis caused by acute bacterial infection, Mycoplasma pneumonia and Chlamydia pneumoniae; urethritis and cervical infection caused by chlamydia trachomatis; skin soft tissue infection caused by sensitive bacteria.
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1995
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Cefaclor Dispersible Tablets
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Tympanitis, lower respiratory tract infection, urinary tract infections and skin/skin tissue infection.
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2002
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Cefalexin Capsules
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Acute tonsillitis caused by sensitive fungi, airway infections, such as pharyngitis, otitis media, nasal sinusitis and bronchitis; pneumonia, respiratory tract infection, urinary tract infections and skin soft tissue infections.
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2002
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Anhydroandrographolide
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Ischemic heart disease, cerebrovascular diseases (cerebral thrombosis, cerebral embolism and coronary heart disease) and high lipoprotein blood disease.
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2003
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Clarithromycin Granules and Capsules
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Nasopharynx infection, lower respiratory tract infection, skin tissue infection, acute tympanitis and mycoplasma pneumonia caused by clarithromycin susceptible organisms; urethritis and cervical infection caused by chlamydia trachomatis; and the treatment of legionella infection, mycobacterium avium complex (MAC) infection and helicobacter pylori infection.
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2004
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Naproxen Sodium and PseudophedrineHydrochlorida Sustained Release Tablet
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Relieves cold, sinus and flu symptoms, blocked nose caused by anaphylaxis rhinitis, runny nose, fever, sore throat, symptoms of myalgia in the limbs and pain around the joints.
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2005
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Digestive Diseases
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Hepatocyte Growth-promoting Factor for Injection
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Serious viral hepatitis symptoms caused by various viral hepatitis types (acute, subnormal temperature, chronic serious disease early or middle period of hepatitis).
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2005
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Tiopronin
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Acute and chronic Hepatitis B, and for the relief of drug-induced liver injury.
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2009
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Compound Ammonium Glycyrrhetate S for Injection
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Liver dysfunction caused by acute and chronic hepatitis; supplemental treatment to toxic/trauma hepatitis, liver cancer; also for the indication of food/drug poisoning, and drug allergy.
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2009
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Omeparzole
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Gastroesophageal reflux disease, and other conditions caused by excess acidic formulations in the stomach, including gastric ulcers, recurrent duodenal ulcers and Zollinger-Ellison Syndrome.
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2009
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Others
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Vitamin B6 for Injection
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Vitamin supplement.
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2005
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Granisetron Hydrochloride Injection
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Nausea and vomiting caused by radiotherapy and chemotherapy during the treatment of malignant tumors.
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2006
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The
following table sets forth the aggregate amount and percentage of our revenues attributed to our product portfolio by indication
group for the years ended December 31, 2017 and 2016.
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Year Ended December 31,
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Product Category
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2017
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2016
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Net Change
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% Change
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CNS Cerebral & Cardio Vascular
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2.07
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2.72
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|
-0.65
|
|
|
|
-24
|
%
|
Anti-Viro/ Infection & Respiratory
|
|
|
8.05
|
|
|
|
10.27
|
|
|
|
-2.22
|
|
|
|
-22
|
%
|
Digestive Diseases
|
|
|
0.69
|
|
|
|
0.79
|
|
|
|
-0.10
|
|
|
|
-13
|
%
|
Other
|
|
|
2.40
|
|
|
|
1.78
|
|
|
|
0.62
|
|
|
|
35
|
%
|
Due
to the nature of the pharmaceutical industry, we continually strive to change our product portfolio to respond to changes in market
demand. Based on a foundation established by a number of our widely-recognized prescription products, such as Cefaclor and Roxithromycin,
we have launched and will continue to launch a variety of pharmaceuticals. The core criteria for our selection of potential pipeline
products are strong market demand, proven efficacy, and safety. In an effort to gain an advantage in the marketplace, we often
seek to improve the production process of the new generic products we elect to manufacture or to improve the quality of a proposed
product to increase its efficacy.
We
also adjust the delivery systems and marketing for each of our products based on the product’s target patient group. We believe
that maintaining a variety of delivery systems (e.g. tablet, capsules, injectables and dry powders) for certain of our products
targeted at different groups enhances our competitive position in the marketplace. As a result, our sales and marketing personnel
work closely with management and our research and development personnel to determine which of our products can successfully be
marketed for more than one delivery system and which generic drugs in the marketplace may be good candidates for us to manufacture
and distribute using different delivery systems.
Product
Development
Our
product portfolio includes both branded and generic drugs that we either develop independently, in joint research efforts with
our academic institutional partners, or, to a lesser extent, acquire from third parties. We develop new products in-house as well
as in cooperation with several research institutes, including the Chinese Academy of Sciences, China University of Pharmaceuticals,
Sichuan University, Chongqing Medical Industry Institute and the Military Medical Academy Basic Medical Science Institute. We
only pay these institutes for their research efforts and expenses if our research goals are accomplished as evidenced by the certification
of an applicable drug candidate and the approval of drug production by the CFDA. Following receipt of such certification and approval,
the rights to the applicable drug candidate are transferred to us. Upon any such payment and transfer, we become the sole owner
of the drug certifications and/or the approvals of drug production and any related research, and we have no further payment
or other obligations to the research institute from which we acquired such assets. We obtained certificates and approvals of drug
production for our Naproxen Sodium and Pseudophedrine Hydroclorida sustained-release tablets through our cooperative relationship
with the Chongqing Medical Industry Institute, and we also obtained certificates and approvals of drug production for our Cefalcor
dispersible tablets through our cooperative relationship with the China University of Pharmaceuticals. We are now manufacturing
and selling both drugs. We expect to continue to develop additional new drugs using this method. We also intend to continue purchasing
or obtaining licenses from third parties to produce certain drug products on a limited basis, as we regard this as an important
and effective means for us to develop our business. New products in our pipeline have experienced delays because the CFDA enhanced
its approval criteria and processes, resulting in additional supplemental materials and trials, higher cost, and longer approval
time for certain applications across all pharmaceutical products, including all of our product types. We commenced leading formulation
screening, a new technology exploration and technical criteria improvement activity, in 2013. We expect this new model to accelerate
our development timelines and expand exploration channels for our pipeline products.
Generic
drugs are drugs with the same active ingredient, dosage form, delivery channel and therapeutic effects as the originally-developed
drug. The Consistency Evaluations require currently marketed generic products to prove consistency in terms of quality and therapeutic
effect, and the ability to act as a substitute for the original drug during clinical trials. The Consistency Evaluations could
enhance the development of the pharmaceutical industry, ensure drug safety and effectiveness, promote the improvement and restructuring
of the pharmaceutical industry, and increase international competitiveness.
The
PRC State Council issued the “Opinions on Carrying out Consistency Evaluation on Quality and Efficacy of Generic Drugs”
on March 5, 2016, requiring all manufacturers of generic chemical pipeline products to carry out Consistency Evaluations before
they may obtain final registration approval. In addition, all oral solution generic drugs listed in National Essential Drugs List
(2012 edition) and launched into the market before October 1, 2007, must undergo Consistency Evaluations by the end of 2018, and
Consistency Evaluation should be completed by the end of 2021 for drugs with existing special conditions or those which require
clinical efficacy trials. Drugs failing to meet these requirements may not be re-registered.
Currently,
due to this newly issued policy, as with all other Chinese generic pharmaceutical companies, the CFDA production approved standards
and experimental requirements for almost all of our pipeline products have undergone major adjustments. Management decided to
terminate the development and research of some of the product formulations after it had fully evaluated the technical difficulties,
investment expectations, and expected future market returns of product formulations under the new standard.
Due
to the complex implementation rules of Consistency Evaluations that are still being introduced, we suspended the development of
our pipeline products in 2016. The following list sets forth the current status of our main pipeline products:
Indication
of Product Candidate
|
|
CFDA
Status
|
Anti-infection
|
|
In Phase II Clinical
Study, Supplement Clinical Study Due to Improved Technology Criteria
|
Cholesterol
Control Drug
|
|
we have submitted
an application for production approval, and are supplementing Consistency Evaluation experiments per the New Policy
|
Alzheimer’s
Disease drug
|
|
At the latest stage
of supplementing Consistency Evaluation per the New Policy
|
Coronary
Heart Disease Drug
|
|
Phase III Clinical
Study Completed, and are supplementing clinical trials pursuant to the updated criteria
|
We
have several other pipeline products in various stages of development.
Distribution
and Customers
We
believe we have a well-established sales network. As our current pharmaceutical product portfolio is comprised mainly prescription
drugs, our major sales targets are hospitals. As of December 31, 2017, we also had 16 sales offices covering all major provinces
of China, and over 1,000 sales representatives who assist in managing many of our relationships with hospitals, doctors and local
drug distributors. Overall, our distribution model is rather flat, with relatively few intermediaries compared to many other pharmaceutical
companies in China. Due to this advantage, we believe we are able to keep our selling cost lower than the industry average.
Due
to the nature of our products and current governmental regulations, all of our customers are located in the PRC. We have established
long-standing relationships with most of our key customers as our operating subsidiary, Helpson, formed in 1993.
Production
Facilities
We
manufacture and package our products at our manufacturing facility in the Haikou Free Trade Zone in Haikou, Hainan Province. Our
old manufacturing facility, which was built in 2002, is approximately 8,000 square meters; and our new building, approximately
20,000 square meters, was completed in 2013. We have production lines with new GMP certificates for different forms including:
tablets, capsule, dry power, liquid injectables, solid oral solution Cephalosporins (specifically designated).
The
CFDA promulgated Good Manufacturing Practices for Pharmaceutical Products (2010 revised version) (the “New GMP Standards”)
on February 12, 2011, which became effective on March 1, 2011. The new GMP outlines the basic principles and standards for the
manufacturing of pharmaceutical products and the management of quality controls in the manufacturing process in the PRC. Pursuant
to those mandatory requirements, the upgrading of our two sterilization production lines - liquid injectables and dry powder injectables
production lines were required to be completed by the end of 2013. As of January 1, 2014, we had suspended two such production
lines due to the failure to meet the GMP upgrading deadline. However, construction of our new main building has been completed,
and two new sterilization production lines have been installed. In November 2014 the CFDA completed their process of the GMP certification
for our new facility and issued the GMP certificate to enable us to commence manufacturing our liquid injectables and dry powder
injectable product lines. In January and December 2015, we also completed the upgrading and received new GMP certificates for
the tablet and capsule production lines, and cephalosporin production lines in our old factories respectively.
Raw
Materials
We
require a supply of a wide variety of raw materials to manufacture our products. We employ purchasing staff with extensive knowledge
of our products who work with our product development, and formulations and quality control personnel to source raw materials
for our products. Currently, we rely on numerous suppliers in the PRC and overseas to deliver our required raw materials and believe
we have at least three principal suppliers for each of our most critical raw materials. Historically, we have not had difficulty
obtaining raw materials from suppliers. For the year ended December 31, 2017, our purchases from four suppliers accounted for
19.8%, 17.1%, 15.4% and 11.8% of raw material purchases. For the year ended December 31, 2016, our purchases from one supplier
accounted for approximately 21.1% of raw material purchases.
Competition
We
believe we have established a commercially competitive position in the highly-fragmented pharmaceutical industry in China through
our core competitive advantages, as described below:
We
have a highly-efficient commercialization process for new products, including significant experience with the CFDA registration
process.
We
have over 20 years of product-development experience during which time we have implemented processes to efficiently introduce
and market new and existing products to the Chinese market.
We
have a market-oriented product portfolio and product lines.
Our
product focus is on developing and manufacturing medicines that help large patient groups, such as the infectious disease and
cardio vascular disease patient groups. Our diversified GMP-certified manufacturing facility includes various production lines
targeting a variety of delivery mechanisms, such as tablets, capsules, cephalosprine tablets, cephalosprine capsules, liquid-injectables
and dry powder injectables, which enables us to effectively manufacture a broad range of new drugs.
We
have product diversification to target specific sub-markets.
We
attempt to differentiate our products from those of our competitors by changing, and, in many cases, improving certain physical
aspects of our products to address to different market segments. For example, to make our Cefaclor product more patient friendly
to children and patients with swallowing problems, we added an enteric coating to make our tablets easier to swallow.
We
have a national sales network and a highly-trained marketing team.
Our
experienced sales team has the industry knowledge and know-how to synergistically combine our strong market insight with a successful
commercialization platform.
We
have developed high-quality relationships with leading hospital and clinic administrators and physicians.
While
sales of our pharmaceutical products to hospitals are made through our distributors, we believe our long-term relationships with
leading hospitals and healthcare clinics throughout China resulting from our long-term promotional efforts and periodic physician
seminars improve the perception of our products in the marketplace and help us identify and select high-volume drugs to develop
into new generic products relatively early in the process.
We
cooperate effectively with a number of leading academic research institutions.
Through
our cooperative efforts with leading academic research institutions, which are our research partners, we are able to develop new
product candidates in a cost-effective manner and currently have a number of significant projects in active development in our
pipeline.
Notwithstanding
such favorable positioning, we are subject to intense competition. There are both local and overseas pharmaceutical enterprises
that are engaged in the manufacture and sale of potential substitute or similar pharmaceutical products in the PRC. These competitors
may have more capital, better research and development resources, better manufacturing and marketing capability, and more experience
than we do.
Our
profitability may be adversely affected if:
|
●
|
the
number of our competitors increases;
|
|
●
|
competitors
engage in increased price competition; or
|
|
●
|
competitors
develop new products or product substitutes having comparable medicinal applications or therapeutic effects that are more
effective, less costly and/or have more perceived benefits than those produced by us.
|
In
addition, imported products and China’s admission as a member of the World Trade Organization (“WTO”) creates increased
competition. The PRC became a member of the WTO in December 2001. As a result, competition in the pharmaceutical industry in the
PRC intensified generally in two respects. First, with lower import tariffs, imported pharmaceutical products manufactured overseas
may become increasingly competitive in terms of pricing. Second, we believe that well-established foreign pharmaceutical manufacturers
may set up production facilities in the PRC and compete with domestic manufacturers directly. With the expected increased supply
of competitively-priced pharmaceutical products in the PRC, we may face increased competition from foreign pharmaceutical products,
especially in terms of high-end pharmaceutical products, including certain types of products manufactured by U.S. manufacturers.
Intellectual
Property
We
regard our packaging designs, trademarks, trade secrets, patent and similar intellectual property as part of our core competence
that is critical to our success. We rely on patent, trademark and trade secret law, as well as confidentiality agreements with
certain of our employees, distributors and others to protect our intellectual property rights.
In
November 2008, we purchased the patented medical formula for a cerebral/cardio-vascular indication and the manufacturing processes
for that product from a third party laboratory. In connection with that acquisition, we obtained the title of the patent. This
patent expires in 2025.
In
2012, we acquired another patent related to a medical formula for the treatment of cerebral/cardio-vascular diseases. This patent
expires in 2029.
As
of December 31, 2017, we owned 17 registered trademarks, including marks for nine of the 19 pharmaceutical products we manufacture,
including the tradenames Funalin, Fukexing, Beisha, Shiduotai, Xinuo, Pusenlitai, Pusenouke, Shuchang and Shenkaineng, as well
as marks for our AFGF logo, our HPS logo, our two HELPSON logos and four other logos. The registration numbers of the 17 registered
trademarks are as follows: No.1280259, No.1500459, No.1511770, No.1535416, No.1537828, No.1535420, No.1272792, No.1272759, No.1272760,
No.1330294, No.1327731, No.1330295, No.1476339, No.3993785, No. 4074317, No.4074321 and No. 4315247.
Environmental
Matters
We
comply with the Environmental Protection Law of China as well as applicable local regulations. In addition to statutory and regulatory
compliance, we actively ensure the environmental sustainability of our operations. Penalties may be levied upon us if we fail
to adhere to and maintain certain standards. Such failure has not occurred in the past, and we generally do not anticipate that
it will occur in the future, but no assurance can be given in this regard.
Regulations
Regulations
Relating to Pharmaceutical Industry
. The pharmaceutical industry in China is highly regulated. The primary regulatory authority
is the CFDA, including its provincial and local branches. As a developer and producer of medicinal products, we are subject to
regulation and oversight by the CFDA and its provincial and local branches. The Law of the PRC on the Administration of Pharmaceuticals
provides the basic legal framework for the administration of the production and sale of pharmaceuticals in China and covers the
manufacturing, distribution, packaging, pricing and advertising of pharmaceutical products. These regulations set forth detailed
rules with respect to the administration of pharmaceuticals in China. We are also subject to other PRC laws and regulations that
are applicable to business operators, manufacturers and distributors in general.
Registration
and Approval of Medicine
. Pursuant to the PRC Provisions for Drug Registration, a medicine must be registered and approved
by the CFDA before it can be manufactured and sold. The registration and approval process requires the manufacturer to submit
to the CFDA a registration application containing detailed information concerning the efficacy and quality of the medicine and
the manufacturing process and the production facilities the manufacturer expects to use. This process generally takes two to five
years and could be longer, depending on the nature of the medicine under review, the quality of the data provided and the workload
of the CFDA. If a manufacturer chooses to manufacture a pre-clinical medicine, it is also required to conduct pre-clinical trials,
apply to the CFDA for permission to conduct clinical trials and go through the clinical trials. If a manufacturer chooses to manufacture
a post-clinical medicine, it only needs to go through the clinical trials. In both cases, a manufacturer needs to file clinical
data with the CFDA for approval for manufacturing after clinical trials are completed.
New
Medicine
. If a new medicine is approved by the CFDA, the CFDA will issue a new medicine certificate to the manufacturer and
impose a monitoring period of one to five years. During the monitoring period, the CFDA will monitor the safety of the new medicine,
and will neither accept new medicine certificate applications for an identical medicine by another pharmaceutical company, nor
approve the production or import of an identical medicine by other pharmaceutical companies. As a result of these regulations,
the holder of a new medicine certificate has the exclusive right to manufacture it during the monitoring period. We currently
have new medicine certificates for our Pusenouke, Cefaclor dispersible tablets and Roxithromycin dispersible tablets and Bumetanide
for injection products.
National
Production Standard and Provisional Standard
. In connection with the CFDA’s approval of a new medicine, the CFDA will normally
direct the manufacturer to produce the medicine according to a provisional national production standard, or a provisional standard.
A provisional standard is valid for two years, during which time the CFDA closely monitors the production process and quality
consistency of the medicine to develop a national final production standard for the medicine, or a final standard. Three months
before the expiration of the two-year period, the manufacturer is required to apply to the CFDA to convert the provisional standard
to a final standard. Upon approval, the CFDA will publish the final standard for production. The CFDA has no statutory timeline
to complete its review and grant approval for the conversion. In practice, the approval for conversion to a final standard is
time-consuming and could take a number of years. However, during the CFDA’s review period, the manufacturer may continue to produce
the medicine according to the provisional standard.
Transitional
Period
. Prior to the latter of (1) the expiration of a new medicine’s monitoring period or (2) the date when the CFDA grants
a final standard for a new medicine after the expiration of the provisional standard, the CFDA will not accept applications for
an identical medicine nor will it approve the production of an identical medicine by other pharmaceutical companies. Accordingly,
the manufacturer will continue to have an exclusive production right for the new medicine during this transitional period.
Continuing
CFDA Regulation
Pharmaceutical
manufacturers in China are subject to continuing regulation by the CFDA. If the labeling or its manufacturing process of an approved
medicine is significantly modified, a new pre-market approval or pre-market approval supplement will be required by the CFDA.
A pharmaceutical manufacturer is subject to periodic inspection and safety monitoring by the CFDA to determine compliance with
regulatory requirements.
The
CFDA has a variety of enforcement actions available to enforce its regulations and rules, including fines and injunctions, recall
or seizure of products, the imposition of operating restrictions, partial suspension or complete shutdown of production and criminal
prosecution.
Pharmaceutical
Product Manufacturing
Permits
and Licenses for Pharmaceutical Manufacturers
. A pharmaceutical manufacturer must obtain a pharmaceutical manufacturing permit
from the CFDA’s relevant provincial branch. This permit is valid for five years and is renewable for an additional five-year period
upon its expiration. Our current pharmaceutical manufacturing permit, issued by the CFDA, will expire on December 31, 2020.
Good
Manufacturing Practice.
A pharmaceutical manufacturer must meet the Good Manufacturing Practice standards, or GMP standards,
for each of its production facilities in China in respect of each form of pharmaceutical product it produces. GMP standards include
staff qualifications, production premises and facilities, equipment, raw materials, environmental hygiene, production management,
quality control and customer complaint administration. If a manufacturer meets the GMP standards, the CFDA will issue to the manufacturer
a Good Manufacturing Practice certificate, or a GMP certificate, with a five-year validity period. However, for a newly-established
pharmaceutical manufacturer that meets the GMP standards, the CFDA will issue a GMP certificate with only a one-year validity
period. The New GMP Standards became effective on March 1, 2011 and pharmaceutical manufacturers (except manufacturers of injectables,
blood products or vaccines, which have a three-year grace period) have a five-year grace period to upgrade existing facilities
to comply with the revisions.
We
obtained three GMP certificates for our manufacturing facility in respect of the majority form of pharmaceutical products we produce,
one is valid until October 30, 2019 (lyophilized powder for injection, small volume parenteral solutions), the second is valid
until January 2020 (tablets, capsules), and the third is valid until December 6, 2020 (tables, capsule - cephalosprins). All of
our GMP certificates are valid for five years. While we are required to implement certain upgrades to our manufacturing facilities
to comply with the new GMP standards, we do not currently anticipate any difficulty in renewing these certificates when we finish
the facility upgrading.
Product
Liability and Consumers Protection
Product
liability claims may arise if any pharmaceutical products have a harmful effect on a consumer, and result in an injured party
making a claim for damages or compensation. The General Principles of the Civil Law of the PRC, which became effective in January
1987, state that manufacturers and sellers of defective products causing property damage or injury shall incur civil liabilities
for such damage or injuries.
The
Product Quality Law of the PRC was enacted in 1993 and amended in 2000 to strengthen the quality control of products and protect
consumers’ rights and interests. Under this law, manufacturers and distributors who produce or sell defective products may be
subject to confiscation of earnings from such sales, revocation of business licenses and imposition of fines, and in severe circumstances,
may be subject to criminal liability.
The
Law of the PRC on the Protection of the Rights and Interests of Consumers was promulgated on October 31, 1993 and became effective
on January 1, 1994 to protect consumers when they purchase or use goods or services. All business operators must comply with this
law when they manufacture or sell goods and/or provide services to customers. In extreme situations, pharmaceutical product manufacturers
and distributors may be subject to criminal liability if their goods or services lead to the death or injuries of customers or
other third parties.
Price
Controls
The
State Council of China promulgated the “Notice on Printing and Advocating Opinions on Promoting the Reform of Drug Prices”
in 2015. Not including narcotic drugs and psychotropic drugs of the first category, the prices of drugs originally designed by
the government were abolished beginning in June 1, 2015.
The
Ministry of Human Resources and Social Security announced the results of the Negotiations on the Catalogue of Medicare Drugs on
July 9, 2017: 36 drugs have been successfully added to the Medicare Drug List, among which a variety of tumor-targeting drugs
are listed, as well as drugs for treating major diseases such as cardiovascular diseases and hemophilia. Compared with the average
retail price in 2016, the average price drop in negotiated drugs reached 44%, with the highest drop of 70%. In April this year,
the Ministry of Human Resources and Social Sciences announced a list of 44 drugs to be negotiated. After negotiating with related
companies, 36 drugs were successfully negotiated and were subsequently included in the “National Basic Medical Insurance,
Industrial Injury Insurance and Maternity Insurance Drug Catalog (2017 Edition)” category B drugs.
In
January 2017, the State Council issued the “13th Five-Year Plan for Deepening the Reform of the Medical and Health Care
System”, and called for all levels of public hospitals to implement comprehensive reforms in 2017, and to abolish the practice
of mark-ups on medicine (with the exception of Chinese herbs).
On
February 12, 2018, the State Council Information Office held a press release on deepening medical reform and improving medical
services. Mr. Wang Hesheng, deputy director of the National Health and Family Planning Commission and director of the State Council’s
Medical Reform Office, reiterated the current policy: It is strictly forbidden to link the income of medical personnel with the
income of medicines, consumables, and inspections, and to control the unreasonable growth of medical expenses scientifically.
The increase in the organization’s medical expenses dropped from 21% in 2010 to about 10% in 2017. In respect to drug use, drug
prices are reduced through various measures such as centralized bidding and procurement, national negotiations on drug prices,
and control of irrational use of drugs. The latest round of price reductions for pharmaceuticals in the province as a unit averaged
more than 15%.
Reimbursement
under the National Medical Insurance Program
According
to the “Notice of Doing a Basic Health Insurance Work for Urban Residents in 2017” issued by the Ministry of Social
Affairs of the People’s Republic of China in 2017: to raise the financial subsidy standard. Namely the per capita subsidy standard
for resident medical insurance at all levels of finance will increase by RMB30 (approximately USD 5) on the basis of 2016, with
an average of RMB450 (approximately USD 69) per person per year. Among them, the central government subsidizes the western and
central regions in proportions of 80% and 60% respectively, and grants subsidies to each province in the eastern region according
to a certain percentage. In 2017, the per capita personal payment standards for medical insurance for urban and rural residents
will increase by RMB30 (approximately USD 5) on the basis of 2016, with an average of RMB180 (approximately USD 28) per person
per year.
In
the urban residents’ medical insurance policy in 2017, the proportion of compensation for inpatient medical expenses will be about
75%, and the proportion of basic medical institutions paying for general outpatient visits shall not be less than 50%. The proportion
of reimbursement from different levels of medical institutions has been initiated, and the medical insurance payment policy has
been favors the grass-roots level to facilitate full use of basic medical and health resources and promote the formation of hierarchical
diagnosis and treatment.
Although
it is designated as a national program, the implementation of the NMIP is delegated to various provincial governments, each of
which has established its own medicine catalog. A provincial government must include all Tier 1 medicines listed in the national
medicine catalog in its provincial medicine catalog, but may use its discretion based on its own selection criteria to add other
medicines to, or exclude Tier 2 medicines listed in the national medicine catalog from its provincial medicine catalog, so long
as the combined numbers of the medicines added and excluded do not exceed 15% of the number of the Tier 2 medicines listed in
the national catalog. In addition, provincial governments may use their discretion to upgrade a nationally classified Tier 2 medicine
to Tier 1 in their provincial medicine catalogs, but may not downgrade a nationally classified Tier 1 medicine to Tier 2.
The
total amount of reimbursement for the cost of prescription and OTC medicines, in addition to other medical expenses, for an individual
program participant in a calendar year is capped at the amount in that participant’s individual account. The amount in a participant’s
account varies, depending upon the amount of contributions from the participant and his or her employer. Generally, on average,
program participants who are from relatively wealthier eastern parts of China and relatively wealthier metropolitan centers have
greater amounts in their individual accounts than those from less developed provinces.
Currently,
18 of our pharmaceutical products are listed on the National Insurance Catalogue (NIC), and three of our products - Cefalexin,
Clarithromycin and Omeprazole - are listed on the Essential Drug List (EDL). However, some of our non-EDL drugs have been selected
to enter the provincial EDL, which varies from province to province. We believe these drugs will experience an increase in sales
volume due to the government-initiated promotion of those drugs, while remaining free from the pricing pressures often experienced
by drugs listed on the EDL.
Other
Regulations
In
addition to the regulations relating to pharmaceutical industry in China, we are also subject to the regulations applicable to
a foreign invested enterprise in China.
Foreign
Currency Exchange.
Pursuant to the Foreign Currency Administration Rules promulgated in 1996 and amended in 1997 and various
regulations issued by the State Administration of Foreign Exchange, or the SAFE, and other relevant PRC government authorities,
Renminbi is freely convertible only to the extent of current account items, such as trade-related receipts and payments, interests
and dividends. Capital account items, such as direct equity investments, loans and repatriation of investment, require the prior
approval from the SAFE or its local counterpart for conversion of Renminbi into a foreign currency, such as U.S. dollars, and
remittance of the foreign currency outside the PRC.
Payments
for transactions that take place within the PRC must be made in Renminbi. Unless otherwise approved, PRC companies other than
foreign investment enterprises (FIEs) must convert foreign currency payments they receive from abroad into Renminbi. On the other
hand, FIEs may retain foreign currency in accounts with designated foreign exchange banks, subject to a cap set by the SAFE or
its local counterpart.
Dividend
Distribution.
Under the PRC regulations governing dividend distributions by wholly foreign-owned enterprises and Sino-foreign
equity joint ventures, wholly foreign-owned enterprises and Sino-foreign equity joint ventures in the PRC may pay dividends only
out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. Additionally,
these foreign-invested enterprises are required to set aside certain amounts of their accumulated profits each year, if any, to
fund certain reserve funds. These reserves are not distributable as cash dividends.
Employees
As
of December 31, 2017, we had 296 employees, among which 276 employees were full-time employees and 20 employees were temporary
employees. None of our employees is represented by a labor union and, in general, we consider our relationship with our employees
to be good.
As
required by applicable Chinese law, we have entered into employment contracts with substantially all of our officers, managers
and employees. We are working towards entering into employment contracts with those employees who do not currently have employment
contracts with us. The PRC enacted a new Labor Contract Law, which became effective on January 1, 2008. We have updated our employment
contracts and employee handbook and are in compliance with such law.
ITEM
1A. RISK FACTORS
Risks
Related to our Business and our Industry
The
commercial success of our products depends upon the degree of their market acceptance among the medical community. If our products
do not attain market acceptance among the medical community, our operations and profitability would be adversely affected.
The
commercial success of our products depends upon the degree of market acceptance they achieve among the medical community, particularly
among physicians and hospital administrators. Physicians may not prescribe or recommend our products to patients and procurement
departments of hospitals may not purchase our products if physicians or hospital pharmacists do not find our products attractive.
The acceptance and use of our products among the medical community will depend upon a number of factors, including:
●
|
perceptions
by physicians, patients and others in the medical community about the safety and effectiveness of our products;
|
●
|
the
prevalence and severity of any side effects;
|
●
|
the
pharmacological benefit of our products relative to competing products and products under development;
|
●
|
the
efficacy and potential advantages of our products relative to competing products and products under development;
|
●
|
the
relative convenience and ease of administration of our products;
|
●
|
the
methods by which our pharmaceutical products may be delivered to patients;
|
●
|
the
effectiveness of our education, marketing and distribution efforts and those of our distributors;
|
●
|
publicity
concerning our products or competing products and treatments; and
|
●
|
the
price of our products and competing products.
|
If
we fail to meet the New GMP Standards, the production at certain of our old production lines will be suspended and our operations
and profitability would be adversely affected.
We
are in the process of upgrading our old production facilities to bring them in line with the New GMP Standards which became effective
as of March 1, 2011. In November 2014, the CFDA completed their process of reviewing our new facility and issued GMP certificates
authorizing us to commence manufacturing liquid injectable and dry powder injectable product lines. In January and December 2015,
we completed upgrades and received new GMP certificates for tablet and capsule production lines and cephalosporin production lines
in our old factories.
If
we are not able to satisfy the requirements of the new GMP guidelines and obtain clearance from the CFDA, our existing dry powder
injectable and granule production lines may be suspended and we may be subject to fines or other penalties if we continue to produce
any products from such lines, all of which may have a material and adverse impact on our business, financial condition and results
of operations.
We
may be subject from time to time to product recalls initiated by us or by the CFDA. Product recalls could impose significant costs
on us and adversely affect our ability to generate revenue.
During
our course of business, we must comply with a variety of product safety and product testing regulations. In particular, our products
are subject to, among other statutes and regulations, those issued by the CFDA. If the CFDA issues any notices to cease the production,
sale and use of any of our products, we should comply with such requirements. As a result, we may incur significant costs in complying
with cessation requirements, and our financial results could be materially and adversely affected. Furthermore, concerns about
potential liability or potential future changes in product safety regulations may lead us to voluntarily recall or otherwise discontinue
selling selected products, which could materially and adversely affect our results of operations.
In
March 2013, CFDA issued a nationwide notice (the “CFDA Notice”) for the cessation of the production, sale and use
of Buflomedil effective immediately. The CFDA Notice was a result of the reevaluation done by the CFDA based on the indications
from the recent Chinese and international research materials, which found that the risks of side effects to the nervous system
and the cardiovascular system from Buflomedil have surpassed its clinical treatment benefits. The CFDA Notice was applicable to
all the manufacturers and distributers in China who are in the business of the production and sale of Buflomedil related products.
Recalls
could also harm our reputation, increase our costs and reduce our net sales. Governments and regulatory agencies in the markets
where we manufacture and sell products may enact additional regulations relating to product safety and consumer protection in
the future or take other actions. The CFDA has the authority to revoke drug approvals previously granted and remove from the market
previously approved products for various reasons.
If
we fail to develop new products with high profit margins and our high-profit-margin products are replaced by competitors’
products, then our gross and net profits margins will be adversely affected.
We
had gross profit margins of 18.7% for the year ended December 31, 2017, compared to gross profit margins of 20.7% for the
year ended December 31, 2016. The pharmaceutical market in the PRC remains very competitive, and there may be pressure to
reduce sale prices of products without a corresponding decrease in the cost of sold products. To the extent that we fail to
develop new products with high profit margins and our high-profit-margin products are substituted by competitors’
products, our gross profit margins and net profit margins will be adversely affected. In addition, in the event that our
products are included in the National Essential Drug List (the “EDL”), which is subject to high level of
governmental price control, our gross profit margin and net profit margins could be adversely affected notwithstanding any
increase in our revenues that may result from the listing of such products on EDL.
Our
products face substantial competition. Other companies may discover, develop, acquire or commercialize products earlier or more
successfully than we do.
We
operate in a highly competitive environment. Our products compete with other products or treatments for diseases for which our
products may be indicated. Many of our products may compete against products that have lower prices, superior performance, greater
ease of administration or other advantages compared to our products. We would face enhanced competition if competitive products
are added to the National Medical Insurance Program. Our inability to compete effectively could reduce sales or margins, which
could have a material adverse effect on our results of our operations.
Some
of our competitors are actively engaged in research and development in areas in which we have products or in which we are developing
product candidates or new indications for existing products. In the future, we expect that our products will compete with new
drugs currently in development, drugs approved for other indications that may be approved for the same indications as those of
our products and drugs approved for other indications that are used off-label. If alternatives to our products are dispensed or
prescribed to patients, the volume of our competing products may decline or we may be required to lower the price of our competing
products to remain competitive, either of which could negatively impact our sales. In addition, an increasing number of foreign
pharmaceutical companies have introduced their pharmaceutical products into the Chinese market. Competitive products introduced
by these companies can also negatively impact our sales and results of operations.
Large
Chinese state-owned and privately owned pharmaceutical companies and foreign-invested or foreign pharmaceutical companies may
have greater clinical, research, regulatory, manufacturing, marketing, financial and human resources than we do. In addition,
some of our competitors may have technical or competitive advantages over us with respect to the development of technologies and
processes. These resources may make it difficult for us to compete with them to successfully discover, develop and market new
products and for our current products to compete with new products or new product indications that these competitors may bring
to market. There may also be significant consolidation in the pharmaceutical industry among our competitors. Alliances may develop
among competitors, and these alliances may rapidly acquire significant market share.
Furthermore,
in order to gain market share in China, competitors may significantly increase their advertising expenditures and promotional
activities or engage in irrational or predatory pricing behavior. In addition, our competitors may engage in inappropriate competition
or illegal acts, such as bribery. Third parties may actively engage in activities designed to undermine our brand name and product
quality or to influence customer confidence in our products. Increased competition may result in price reductions, reduced margins
and loss of market share, any of which could materially adversely affect our profit margins. We may not be able to compete effectively
against current and future competitors.
Most
of our products are off-patent branded generics that can be manufactured and sold by other pharmaceutical manufacturers in the
PRC once the relevant protection or monitoring periods, if any, elapse.
Most
of our products are off-patent branded generic pharmaceuticals and are not protected by intellectual property rights. As a result,
other pharmaceutical companies may sell equivalent products at a lower cost, and this might result in a commensurate loss in sales
of our branded generic products or require us to lower our prices to compete. Certain of our generic products are subject to protection
during the CFDA’s monitoring period. During such period, the CFDA will not accept applications for new medicine certificates
for the same product by other pharmaceutical companies or approve the production or import of the same product by other pharmaceutical
companies. Once such monitoring period expires, other manufacturers may obtain relevant production approvals and will be entitled
to sell generic pharmaceutical products with similar formulae or production methods in China. The maximum monitoring period currently
granted by the CFDA is five years from the date the CFDA production approval is issued. As a result, we expect to face increased
competition for our products following the expirations of their respective monitoring periods. If other pharmaceutical companies
sell pharmaceutical products that are similar to our unprotected products or our protected products for which the relevant protection
or monitoring period has expired, we may face additional competition and our business and profitability may be adversely affected.
Our
business depends in part on our well-known Helpson brand name, and if we are not able to maintain and enhance our brand recognition
to maintain our competitive advantage, our reputation, business and operating results may be harmed.
We
believe that market awareness of our Helpson brand has contributed significantly to the success of our business. We also believe
that maintaining and enhancing the Helpson brand is critical to maintaining our competitive advantage. Although our sales and
marketing staff will continue to further promote our brand to remain competitive, we may not be successful. If we are unable to
further enhance our brand recognition and increase awareness of our products, or if we are compelled to incur excessive marketing
and promotion expenses in order to maintain our brand awareness, our business and results of operations may be materially and
adversely affected. Furthermore, our sales and results of operations could be adversely affected if the Helpson brand or our reputation
is impaired by recalls or negative publicity for one of our branded products, and certain actions taken by our distributors, competitors,
third-party marketing firms or relevant regulatory authorities.
Reimbursement
may not be available for our products, which could diminish our sales or affect our ability to sell our products profitably.
Market
acceptance and sales of our products also depend to a large extent on the reimbursement policies of the PRC government. The Ministry
of Labor and Social Security of the PRC or provincial or local labor and social security authorities, together with other government
authorities, review the inclusion or removal of drugs from the national medical insurance catalog or provincial or local medical
insurance catalogs for the National Medical Insurance Program every other year, and catalogs under which a drug will be classified
affects the amounts reimbursable to program participants for their purchases of those medicines. These determinations are made
based on a number of factors, including price and efficacy. Generally, there are two catalogs, the National Insurance Catalogue
(“NIC”) and the EDL on which a product can be included. The products selected for the EDL generally are selected from
the NIC. A consumer can be reimbursed for the full cost of a medicine on the EDL and can be reimbursed for 80% to 90% of the cost
of a medicine listed on the NIC. Our Vitamin B6, Cefalexin, Clarithromycin and Omeprazole products are currently included in the
EDL. If government authorities decide to remove these products from the medicine catalogs, such removal may reduce the affordability
of our products and change the public perception regarding our products, which, in turn, would adversely affect the sales of these
products and reduce our net revenue. Furthermore, if we are unable to obtain approval from the relevant government authorities
to include our new products in the national, provincial or local medicine catalogs, sales of our new products maybe materially
and adversely affected.
The
growth and success of our business depend on our ability to successfully market our principal products to hospitals and their
selection in tender processes used by hospitals for medicine purchases.
Our
future growth and success significantly depend on our ability to successfully market our principal products to hospitals as prescription
medicines. Approximately 90% of the end-customers of our products are hospitals. Hospitals may make bulk purchases of a medicine
included in the national and provincial medicine catalogs only if that medicine is selected under a government-administered tender
process. The interest of a hospital in a medicine is evidenced by:
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the
inclusion of this medicine on the hospital’s formulary, which establishes the scope of medicines physicians at this
hospital may prescribe to their patients, and
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the
willingness of physicians at a hospital to prescribe this medicine to their patients.
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We
believe effective marketing efforts are critical in making and keeping hospitals and physicians interested in purchasing our products.
If our marketing efforts are not effective, hospital administrators may not want to include our products in their formularies
or may remove them from their formularies, or physicians may not be interested in prescribing our products to their patients.
As a result, we may find it difficult to maintain the existing level of sales of our products, and our revenues and profitability
may decline.
Our
future research and development projects may not be successful.
The
successful development of pharmaceutical products can be affected by many factors. Products that appear to be promising at their
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 new products for which we may obtain an approval
certificate is long. The process of conducting basic research and various stages of tests and trials of a new product before obtaining
an approval certificate and commercializing the product may require ten years or longer. A few of our product candidates are in
the early stages of pre-clinical study and clinical trial and we must conduct significant additional clinical trials before we
can seek the regulatory approvals necessary to begin commercial production and sales of these products. There is no assurance
that our future research and development projects will be successful or completed within the anticipated time frame or budget
or that we will receive the necessary approvals from relevant authorities for the production of these newly developed products,
or that these newly-developed products will achieve commercial success.
Others
may obtain approval for a competitive product before the product we are developing is approved. In that case, we may be precluded
from getting approval until the competitor’s monitoring period expires and realize little or no benefit from our research
and development investment.
Even
if such products can be successfully commercialized, they may not achieve the level of market acceptance that we expect. In addition,
the pharmaceutical industry is characterized by rapid changes in technology, constant enhancement of industrial know-how and frequent
emergence of new products. Future technological improvements and continual product developments in the pharmaceutical market may
render our existing products obsolete or affect their viability and competitiveness. Therefore, our future success will largely
depend on our development capability, including our ability to improve our existing products, diversify our product range and
develop new and competitively-priced products that can meet the requirements of the changing market. Should we fail to respond
to these frequent technological advances by improving our existing products or developing new products in a timely manner or these
products do not achieve a desirable level of market acceptance, our business and profitability will be materially and adversely
affected.
We
cooperate with research institutions and universities in the PRC for the research and development of certain new products and
any failure of such research institutions to meet our timing and quality standards or our failure to continue such collaborative
arrangement or enter into such new arrangements could adversely affect our ability to develop new pharmaceuticals and our overall
business prospects
.
Our
business strategy includes collaborating with third parties for research and development of new products. We maintained long-term
cooperative relationships with a number of research institutions and universities in the PRC. These research institutions and
universities have collaborated with us in a number of research projects and certain of our products that have obtained approval
certificates were developed by such research institutions. At present, several research institutions and universities are working
with us on various research and development projects. Any failure of such research institutions to meet the required quality standards
and timetables set forth in their research agreements with us, or our inability to enter into additional research agreements with
these research institutions on terms acceptable to us in the future, may have an adverse effect on our ability to develop new
medicines and on our business prospects. In addition, the growth of our business and development of new products may require that
we seek additional research institutions. We cannot assure you that we will be able to enter into agreements with new parties
on terms acceptable to us. Our inability to enter into such agreements or our failure to maintain such arrangements could limit
the number of new products that we develop and ultimately decrease our sources of future revenue.
We
may not be able to obtain regulatory approval for any of the new products and failure to obtain these approvals could materially
harm our business.
All
new medicines must be approved by the CFDA before they can be marketed and sold in the PRC. The CFDA requires successful completion
of clinical trials and demonstrated manufacturing capability before it grants approval. It often takes a number of years before
a medicine can be ultimately approved by the CFDA. In addition, the CFDA and other regulatory authorities may apply new standards
for safety, manufacturing, packaging, and distribution of future product candidates.
Complying
with such standards may be time-consuming and expensive and could result in delays in obtaining CFDA approval for our future product
candidates, or possibly preclude us from obtaining CFDA approval altogether. For example, due to the enhanced criteria introduced
during the implementation process of the trial of one of our products in the dried powder injectable and granule production lines
in our old plant, the clinical trials lasted longer than originally expected. Furthermore, our future products may not be effective
or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may preclude us from obtaining
regulatory approval or prevent or limit commercial use. The CFDA and other regulatory authorities may not approve the products
that we develop and even if we do obtain regulatory approvals, such regulatory approvals may be subject to limitations on the
indicated uses for which we may market a product, which may limit the size of the market for such product.
New
product development in the pharmaceutical industry is time-consuming and costly and has a low rate of successful commercialization
.
Our
success will depend in part on our ability to enhance our existing products and to develop new products. The development process
for pharmaceutical products is complex and uncertain, as well as time-consuming and costly. Relatively few research and development
programs produce a commercial product. A product candidate that appears promising in the early phases of development may fail
to reach the market for a number of reasons, such as:
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the
failure to demonstrate safety and efficacy in preclinical and clinical trials;
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the
failure to obtain approvals for intended use from relevant regulatory bodies, such as the CFDA;
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our
inability to manufacture and commercialize sufficient quantities of the product economically; and
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proprietary
rights, such as patent rights, held by others to our product candidates and their refusal to sell or license such rights to
us on reasonable terms, or at all.
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Delays
in any part of the development process or our inability to obtain regulatory approval of our products could adversely affect our
operating results by restricting or delaying our introduction of new products. Even if we successfully commercialize new products,
these products may address markets that are currently being served by our mature products and may result in a reduction in the
sales volume of our mature product or vice versa. Failure to develop, obtain necessary regulatory clearances or approvals for
or successfully commercialize or market potential new products or technologies could have a material adverse effect on our financial
condition and results of operations.
We
may not be able to successfully identify and acquire new products or businesses
.
In
addition to our own product development efforts, our growth strategy also relies on our acquisitions of new product candidates,
products or businesses from third parties. Any future growth through acquisitions will be dependent upon the continued availability
of suitable acquisition candidates at favorable prices and upon advantageous terms and conditions. Even if such opportunities
are present, we may not be able to successfully identify them. Moreover, other companies, many of which may have substantially
greater financial, marketing and sales resources, are competing with us for the right to acquire such product candidates, products
or businesses.
We
depend on distributors for all of our revenues and failure to maintain relationships with our distributors or to otherwise expand
our distribution network would materially and adversely affect our business
.
We
sell our products exclusively to pharmaceutical distributors in the PRC and depend on distributors for all of our revenues. We
have business relationships with over 1,000 distributors in the PRC. For the year ended December 31, 2017, no customer accounted
for more than 10.0% of sales, and one customer accounted for 47.4% of accounts receivable. In line with industry practices in
the PRC, we enter into written sales agreements with our distributors. However, such sales agreements are not in substance equivalent
to a typical distribution agreement in the United States. Each sales agreement is more in the form of a sales order and specifies
one or several purchases of one or more products without any continuing obligation to purchase any additional amount of products.
In the event certain distributors choose not to continue their relationship with us after completing their existing sales agreements,
they can do so without breaching any contract or agreement and our financial results could be adversely affected if we cannot
find the equivalent distributors in time under such circumstances. In addition, some of our distributors may sell products that
compete with our products. We compete for desired distributors with other pharmaceutical manufacturers, many of which may have
higher visibility, greater name recognition and financial resources, and broader product selection than we do. Consequently, maintaining
relationships with existing distributors and replacing distributors may be difficult and time consuming. Any disruption of our
distribution network, including our failure to renew our existing distribution agreements with our desired distributors, could
negatively affect our ability to effectively sell our products and would materially and adversely affect our business, financial
condition and results of operations.
We
rely on a limited number of distributors for the majority of sales of our products
.
We
rely on a limited number of distributors for most of our net revenue. Our top five distributors in the aggregate accounted for
14% and 21% of our net revenues in 2017 and 2016, respectively. We expect that a relatively small number of our distributors will
continue to account for a major portion of our net revenue in the near future. Our dependence on a few distributors could expose
us to the risk of substantial losses if a single large distributor stops purchasing our products, purchases fewer of our products
or goes out of business and we cannot find substitute distributors on equivalent terms. If any of our significant distributors
reduces the quantity of the products they purchase from us or stops purchasing from us, our net revenue would be materially and
adversely affected.
Our operations may be affected if
we could not pass the Consistency Evaluation requirement issued by the State Council for any of our current existing products.
Generic drugs refer
to the drugs with the same active ingredient, dosage form, delivery channel and therapeutic effects compared to the original drugs.
“Consistency Evaluation” requires currently marketed generic products to prove consistency in term of quality and therapeutic
effect, and substitutable during clinical trials with original drug. The Consistency Evaluation could enhance the development of
pharmaceutical industry, ensure drug safety and effectiveness, promote the upgrading and restructuring the pharmaceutical industry,
and improve international competitiveness.
The PRC State Council
issued the “Opinions on Carrying out Consistency Evaluations on Quality and Efficacy of Generic Drugs” (“Opinions”)
on March 5, 2016, requiring all chemical generic pipeline products to carry out Consistency Evaluations before final registration
approval. In addition, all oral solution generic drugs listed in National Essential Drugs List (2012 edition) and launched into
market before October 1, 2007, must complete Consistency Evaluations by the end of 2018. Consistency Evaluations must be completed
by the end of 2021 for drugs with existing special condition or those require clinical efficacy trials. Drugs fail to meet requirements
shall not be re-registered. As of today, all of our products in pipe lines were postponed in receiving its CFDA approval due to
this additional new requirement and the Company strives to accelerate the process.
The “Opinions” stress that the drug manufacturers
are subject to Consistency Evaluations. Therefore, if we fail to complete Consistency Evaluations for our generic drugs per the
government?s requirement, our business and operation will be negatively impacted.
Our operations may be affected if
we could not obtain raw materials from our current key suppliers on acceptable terms.
We require a supply of a wide variety of
raw materials to manufacture our products. Currently, we rely on numerous suppliers in the PRC and overseas to deliver our required
raw materials and believe we have at least three principal suppliers for each of our most critical raw materials. For the year
ended December 31, 2017, four suppliers accounted for 19.8%, 17.1%, 15.4% and 11.8% of raw material purchases and the year ended
December 31, 2016, purchases from one supplier accounted for 21.0% of our raw material purchases.
Historically, we have
not had difficulty obtaining raw materials from suppliers. However, we cannot predict the impact on our suppliers of the current
economic environment and other developments in their respective businesses. Insolvency, financial difficulties or other factors
may result in our suppliers not being able to fulfill the terms of their agreements with us. Furthermore, such factors may render
suppliers unwilling to extend contracts that provide favorable terms to us or may force them to seek to renegotiate existing contracts.
Although we believe we have alternative sources of supply for the raw materials used in our business, termination of our relationship
with any of our key suppliers could have a material adverse effect on our business, financial condition or results of operations
in the unlikely event that we are unable to obtain adequate raw materials from other sources in a timely manner or at all.
We may not be able to effectively
manage our employees and distribution network, and our reputation, business, prospects and brand may be materially and adversely
affected by actions taken by our distributors and third party marketing firms.
We have limited ability
to manage the activities of our distributors and third-party marketing firms that we contract to promote our products and brand
name, both of which are independent from us. Our distributors and third-party marketing firms could take one or more of the following
actions, any of which could have a material adverse effect on our business, prospects and brand:
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sell our products outside their designated territory, possibly in violation of the exclusive distribution rights of other distributors;
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fail to adequately promote our products;
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promote competing products in lieu of our products; or
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violate the anti-corruption laws of China, the United States or other countries.
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In addition, although
our company policies prohibit our employees from making improper payments to hospitals or otherwise engaging in improper activities
to influence the procurement decisions of hospitals, we may not be able to effectively manage our employees, as the compensation
of our sales and marketing personnel is partially linked to their sales performance. As a result, we cannot assure you that our
employees will not violate the anticorruption laws of the PRC, the United States and other countries. Such violations could have
a material adverse effect on our reputation, business, prospects and brand.
Failure to adequately
manage our employees, distribution network or third-party marketing firms, or their non-compliance with employment, distribution
or marketing agreements could harm our corporate image among hospitals and end users of our products and disrupt our sales, resulting
in a failure to meet our sales goals. Furthermore, we could be liable for actions taken by our employees, distributors or third-party
marketing firms, including any violations of applicable law in connection with the marketing or sale of our products, including
China’s anticorruption laws and the Foreign Corrupt Practices Act of the United States, or the FCPA. In particular, if our
employees, distributors or third-party marketing firms make any payments that are forbidden under the FCPA, we could be subject
to civil and criminal penalties imposed by the U.S. government.
Recently, the PRC government
has increased its anti-corruption measures. In the pharmaceutical industry, corrupt practices include, among others, acceptance
of kickbacks, bribes or other illegal gains or benefits by the hospitals and medical practitioners from pharmaceutical manufacturers
and distributors in connection with the prescription of certain pharmaceuticals. Our employees, affiliates, distributors or third-party
marketing firms may violate these laws or otherwise engage in illegal practices with respect to their sales or marking of our products
or other activities involving our products. If our employees, affiliates, distributors or third-party marketing firms violate these
laws, we could be required to pay damages or fines, which could materially and adversely affect our financial condition and results
of operations. In addition, PRC laws regarding what types of payments to promote or sell our products are impermissible are not
always clear. As a result, we, our employees, affiliates, our distributors or third-party marketing firms could make certain payments
in connection with the promotion or sale of our products or other activities involving our products which at the time are considered
by us or them to be legal but are later deemed impermissible by the PRC government. Furthermore, our brand and reputation, our
sales activities or the price of our common stock could be adversely affected if we become the target of any negative publicity
as a result of actions taken by our employees, affiliates, distributors or third-party marketing firms.
We have limited insurance coverage
and may incur losses resulting from product liability claims, business interruptions or claims that could be covered by D&O
Insurance.
The nature of our business
exposes us to the risk of product liability claims that is inherent in the research and development, manufacturing and marketing
of pharmaceutical products. Using product candidates in clinical trials also exposes us to product liability claims. These risks
are greater for our products that receive regulatory approval for commercial sale. Even if a product is approved for commercial
use by an appropriate governmental agency, there can be no assurance that users will not claim effects other than those intended
resulted from the use of our products. While to date no material claim for personal injury resulting from allegedly defective products
has been brought against us, a substantial claim or a substantial number of claims, if successful, could have a material adverse
impact on our business, financial condition and results of operations. Such lawsuits may divert the attention of our management
from our business strategies, may be costly to defend and may negatively impact our reputation and our Helpson brand’s reputation,
and harm the sales of our other branded products. In addition, product liability insurance for pharmaceutical products is not available
in the PRC. In the event of allegations that any of our products are harmful, we may experience reduced consumer demand for our
products or our products may be recalled from the market. We may also be forced to defend lawsuits and, if unsuccessful, to pay
a substantial amount in damages. In addition, business interruption insurance available in the PRC offers limited coverage compared
to that offered in many other countries. We do not have any business interruption insurance. Any business disruption or natural
disaster could result in substantial costs and diversion of resources. Lastly, we currently do not have directors and officers
insurance. In the event we or any of our directors or officers are sued under any proceedings or actions that could be covered
by a standard D&O insurance, we may incur substantial costs and expenses to defend such case.
Our future liquidity needs are uncertain
and we may need to raise additional funds in the future.
Based on our current
operating plans, we expect our existing resources to be sufficient to fund our existing operations for at least 12 months. However,
we may be required to raise additional funds to expand our operations. In addition, we may, need to raise additional funds if our
expenditures exceed our current expectations. This could occur for a number of reasons, including:
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we determine to devote significant amount of financial resources to the development of products that we believe to have significant commercialization potential;
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we determine to acquire or license rights to additional product candidates or new technologies;
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some or all of our product candidates fail in clinical trials or pre-clinical studies or prove to be not as commercially promising as we expect and we are forced to develop or acquire additional product candidates;
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our product candidates require more extensive clinical or pre-clinical testing or clinical trials of these product candidates take longer to complete than we currently expect; or
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we determine or are required to conduct more high-throughput screening than expected against current or additional disease targets to develop additional product candidates.
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Our ability to raise
additional funds in the future is subject to a variety of uncertainties, including:
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our future financial condition, results of operations and cash flows;
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general market conditions for capital-raising activities by pharmaceutical companies; and
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economic, political and other conditions in China and elsewhere.
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We cannot assure you
that our revenues will be sufficient to meet our operational needs and capital requirements. If we need to obtain external financing,
we cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all. Our future liquidity
needs and other business reasons could require us to sell additional equity or debt securities or obtain a credit facility. The
sale of additional equity or equity-linked securities could result in additional dilution to our stockholders. The incurrence of
additional indebtedness would result in increased debt service obligations and could result in operating and financing covenants
that would restrict our operations.
We may undertake acquisitions in
the future, and any difficulties in integrating these acquisitions may damage our profitability.
In the future, we may
acquire additional businesses or products that complement our existing business and expand our business scale. The integration
of new businesses and products may prove to be an expensive and time consuming procedure. We can offer no assurance that we will
be able to successfully integrate the newly acquired businesses and products or operate the acquired business in a profitable manner.
Failure to locate an appropriate acquisition target, failure to successfully integrate and operate acquired businesses and products,
and failure to identify substantial liabilities associated with acquired businesses, may materially adversely impact our operations
and profits.
The failure to manage growth effectively
could have an adverse effect on our business, financial condition and results of our operations.
The rapid market growth
of our pharmaceutical products may require us to expand our employee base for managerial, operational, financial and other purposes.
As of December 31, 2017, we had 296 employees. Our future development will impose significant responsibilities upon the members
of management to identify, recruit, maintain, integrate and motivate new employees. Aside from the increased difficulties in the
management of human resources, we may also encounter working capital issues, as we need increased liquidity to finance the purchases
of raw materials and supplies, research and development and purchase of drug formulas for new products, acquisition of new businesses
and technologies, and the hiring of additional employees. For effective growth management, we will be required to continue improving
our operations, management, and financial systems and control. Our failure to manage growth effectively may lead to operational
and financial inefficiencies that will have a negative effect on our profitability.
We depend upon key employees and
consultants in a competitive market for skilled personnel. If we are unable to attract and retain key personnel, it could adversely
affect our ability to develop and market our products.
We are highly dependent
upon the principal members of our management team, especially Ms. Zhilin Li, our Chairman, President and Chief Executive Officer.
The loss of the services of Ms. Li would adversely affect our ability to develop and market our products. We also depend in part
on the continued services of our key scientific personnel and our ability to identify, hire and retain additional personnel, including
marketing and sales staff. We face intense competition for qualified personnel, and the existence of noncompetition agreements
between prospective employees and their former employers may prevent us from hiring those individuals or subject us to suit from
their former employers. While we attempt to provide competitive compensation packages to attract and retain key personnel, many
of our competitors are likely to have greater resources and more experience than we have, making it difficult for us to compete
successfully for key personnel.
Certain of our employees
and consultants were previously employed at other biotechnology or pharmaceutical companies, including our competitors or potential
competitors, or at universities or other research institutions. Although no claims against us are currently pending, we may be
subject to claims that these employees or consultants have, inadvertently or otherwise, used or disclosed trade secrets or other
proprietary information of their former employers. Litigation may be necessary to defend against these claims. Even if we are successful
in defending against these claims, litigation could result in substantial costs and be a distraction to our management. If we fail
in defending such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel.
We are subject to environmental regulations
and may be exposed to liability and potential costs for environmental compliance.
We are subject to PRC
laws and regulations concerning the discharge of waste water, gaseous waste and solid waste during our manufacturing processes.
We are required to establish and maintain facilities to dispose of waste and report the volume of waste to the relevant government
authorities, which conduct scheduled or unscheduled inspections of our facilities and treatment of such discharge. We may not at
all times comply fully with environmental regulations. Any violation of these regulations may result in substantial fines, criminal
sanctions, revocations of operating permits, shutdown of our facilities and obligation to take corrective measures. Our cost of
complying with current and future environmental protection laws and regulations and our liabilities which may potentially arise
from the discharge of effluent water and solid waste may materially adversely affect our business, financial condition and results
of operations. The government may take steps towards the adoption of more stringent environmental regulations. Due to the possibility
of unanticipated regulatory or other developments, the amount and timing of future environmental expenditures may vary substantially
from those currently anticipated. If there is any unanticipated change in the environmental regulations, we may need to incur substantial
capital expenditures to install, replace, upgrade or supplement our pollution control equipment or make operational changes to
limit any adverse impact or potential adverse impact on the environment in order to comply with new environmental protection laws
and regulations. If such costs become prohibitively expensive, we may be forced to cease certain aspects of our business operations.
Power shortages, natural disasters,
terrorist acts or other calamities could disrupt our production and have a material adverse effect on our business, financial position
and results of operations.
All of our products
are produced at our manufacturing facility in Hainan, China. A significant disruption at that facility, even on a short-term basis,
could impair our ability to timely produce and ship products, which could have a material adverse effect on our business, financial
position and results of operations. Our manufacturing operations are vulnerable to interruption and damage from natural and other
types of disasters, including earthquake, fire, floods, environmental accidents, power loss, communications failures and similar
events. If any disaster were to occur, our ability to operate our business at our facilities would be seriously impaired. For example,
a once-in-forty-year 16 grade super typhoon Rammasun hit Haikou on July 18, 2014, which caused us approximately $2.3 million (RMB14.2
million) in losses. Part of a warehouse was flooded, some damage was caused to our new facility, and the water and electricity
supply was suspended for several days, causing a brief halt to our production activities and a delay in our obtaining GMP certification.
In addition, we do
not maintain any insurance other than property insurance for some of our buildings and equipment. Accordingly, unexpected business
interruptions resulting from disasters could disrupt our operations and thereby result in substantial costs and diversion of resources.
Our production process requires a continuous supply of electricity. We have encountered power shortages historically due to restricted
power supply to industrial users during summers when the usage of electricity is high and supply is limited or as a result of damage
to the electricity supply network. Because the duration of those power shortages was brief, they had no material impact on our
operations. Interruptions of electricity supply could result in lengthy production shutdowns, increased costs associated with restarting
production and the loss of production in progress. Any major suspension or termination of electricity or other unexpected business
interruptions could have a material adverse impact on our business, financial condition and results of operations.
The discontinuation of any preferential
tax treatments or other incentives currently available to us in the PRC could materially and adversely affect our business, financial
condition and results of operations.
Prior to January 1,
2008, pursuant to the original Income Tax Law of the PRC for Enterprises with Foreign Investment and Foreign Enterprises and its
implementation rules, a foreign invested enterprise as defined under PRC laws was required to pay a 30% corporate income tax and
a 3% local income tax; an enterprise with foreign investment of a production nature scheduled to operate for a period of not less
than ten years was, from the year of making profits, exempt from enterprise income tax in the first and second years and allowed
a fifty percent reduction in the third to fifth years. Pursuant to the State Council’s Regulations on Encouraging Investment
in and Development of Hainan Island promulgated in May 1988, the corporate income tax for all companies incorporated in Hainan
Province was reduced to 15%. Pursuant to the Regulations on Foreign Investment in Hainan Special Economic Zone promulgated by Hainan
Province in March 1991 (the “Regulation on Foreign Investment”), all foreign-invested enterprises incorporated in Hainan
Province are exempt from the local income tax.
However, on March 16,
2007, China’s national congress approved the Enterprise Income Tax Law of the PRC (“New Income Tax Law”), which
took effect on January 1, 2008. The New Income Tax Law unified the enterprise income tax rate, cost deduction and tax incentive
policies for both domestic and foreign invested enterprises. Under the New Income Tax Law, enterprises that were established and
already enjoyed preferential tax rates or tax holidays before March 16, 2007 will (i) in the case of preferential tax rates, gradually
increase to a 25% rate over a period of five years, (ii) in the case of tax holidays, continue to receive the benefit of such holidays
until the expiration of such term.
As a result, we enjoyed
a preferential tax rate of 9%, 10% and 11% in the years of 2008, 2009 and 2010. We obtained the High Tech Enterprise status from
the PRC government in 2010 and we enjoyed a 15% income tax rate for a three-year period from 2011 to 2013. We applied for continued
High Tech Enterprise status in 2013, with its associated favorable tax rate, and we received an extension of the 15% income tax
rate for a second three-year period from 2014 to 2016. However, our recent net loss results have put the Company in an unfavorable
position for the potential renewal of “National High-Tech Enterprise” status in 2017, and after evaluating the feasibility
of such a renewal, the Company has decided not to renew this status. As a result, our tax rate for 2017 and the foreseeable future
will be 25%. The discontinuation of any of our existing special or preferential tax treatment as mentioned above or other incentives
could have an adverse effect on our business, financial condition and results of operations.
The recently enacted U.S. tax reform bill could adversely
affect our business and financial condition.
On December 22, 2017,
U.S. President Donald Trump signed into law the “Tax Cuts and Jobs Act,” which significantly amended the Internal Revenue
Code. The Tax Cuts and Jobs Act, among other things, reduces the U.S. corporate tax rate from a top marginal rate of 35% to a flat
rate of 21%, limits the tax deduction for interest expense to 30% of adjusted earnings, eliminates net operating loss carrybacks,
imposes a one-time tax on offshore earnings at reduced rates regardless of whether they are repatriated, allows immediate deductions
for certain new investments instead of deductions for depreciation expense over time, and modifies or repeals many business deductions
and credits. We continue to examine the impact these changes may have on our business. Notwithstanding the reduction in the corporate
income tax rate, the overall impact of the Tax Cuts and Jobs Act is uncertain and our business and financial condition could be
adversely affected. The impact of the Tax Cuts and Jobs Act on holders of our shares is also uncertain and could be adverse. We
urge our shareholders to consult with their legal and tax advisers with respect to the Tax Cuts and Jobs Act and the potential
tax consequences of investing in our shares.
We cannot guarantee the protection
of our intellectual property rights, and if infringement or counterfeiting of our intellectual property rights occurs, then our
reputation and business may be adversely affected.
To protect the brand
names of our products, we have registered and applied for registration of certain of our trademarks in the PRC. Currently eight
of the 20 pharmaceutical products we manufacture are marketed under a brand registered as a trademark in China. We also purchased
from a third party for a pharmaceutical compound that we are seeking to develop into a further product. To date, we have not experienced
any infringements of our trademarks for sales of pharmaceutical products or our exclusive patent license, and we are not aware
of any infringement of our intellectual property rights. However, there is no assurance that there will not be any infringement
of our brand name or other registered trademarks or counterfeiting of our products in the future. There is no assurance that there
will not be any third-party infringement of our patent. Should any such infringement or counterfeiting occur, our reputation and
business may be adversely affected. We may also incur significant expenses and substantial amounts of time and effort to protect
our intellectual property rights in the future. Such diversion of our resources may adversely affect our existing business and
future expansion plans.
Litigation may be necessary
in the future to enforce our intellectual property rights or to determine the validity and scope of the intellectual property rights
of others. However, because the validity, enforceability and scope of protection of intellectual property rights in the PRC are
uncertain and still evolving, we may not be successful in prosecuting these cases. In addition, any litigation or proceeding or
other efforts to protect our intellectual property rights could result in substantial costs and diversion of our resources and
could seriously harm our business and operating results. Furthermore, the degree of future protection of our proprietary rights
is uncertain and may not adequately protect our rights or permit us to gain or keep our competitive advantage. If we are unable
to protect our trade names, trade secrets and other propriety information from infringement, our business, financial condition
and results of operations may be materially and adversely affected.
Risks Related to Doing Business in China
Adverse changes in political and
economic policies of the PRC government could have a material and adverse effect on the overall economic growth of China, which
could reduce the demand for our services and materially and adversely affect our competitive position.
We conduct substantially
all of our business and have historically derived all of our revenues in China. Accordingly, our business, financial condition,
results of operations and prospects are affected significantly by economic, political and legal developments in China. The Chinese
economy differs from the economies of most developed countries in many respects, including:
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the degree of government involvement;
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the level of development;
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the control of foreign exchange;
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access to financing; and
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the allocation of resources.
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While the Chinese economy
has experienced significant growth in the past 30 years, growth has been uneven, both geographically and among various sectors
of the economy. The Chinese economy has also experienced certain adverse effects due to the recent global financial crisis. The
Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of
these measures benefit the overall Chinese economy, but may also have a negative effect on us. For example, our operating results
and financial condition may be adversely affected by government control over capital investments or changes in tax regulations
that are applicable to us, and by government policies or guidance aimed at curtailing the perceived over-capacity of certain industry
sectors, such as pharmaceutical companies. The Chinese government has implemented certain measures, including interest rate increases,
to control the pace of economic growth. These measures may cause decreased economic activity in China, which could in turn reduce
the demand for our products and materially and adversely affect our operating results and financial condition.
The Chinese economy
has been transitioning from a planned economy to a more market-oriented economy. Although in recent years the Chinese government
has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of
productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of the productive
assets in China is still owned by the Chinese government. The continued control of these assets and other aspects of the national
economy by the Chinese government could materially and adversely affect our business.
The Chinese government
also exercises significant control over Chinese economic growth through the allocation of resources, controlling payment of foreign
currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies.
Any adverse change
in the economic conditions or government policies in China could have a material and adverse effect on overall economic growth
and the level of investments in health industries in China, which in turn could lead to a reduction in demand for our products
and consequently have a material and adverse effect on our business.
The PRC legal system has inherent
uncertainties that could limit the legal protections available to us.
The PRC legal system
is a civil law system based on written statutes. Unlike common law systems, it is a system in which decided legal cases have little
precedential value. In the late 1970s, the PRC government began to promulgate a comprehensive system of laws and regulations governing
commercial matters. The overall effect of legislation enacted over the past 20 years has significantly enhanced the protections
afforded to foreign-invested enterprises in China. However, these laws, regulations and legal requirements are relatively recent
and are evolving rapidly, and their interpretation and enforcement involve uncertainties. These uncertainties could limit the legal
protections available to foreign investors.
The practical effect
of the PRC legal system on our business operations in China can be viewed from two separate but intertwined considerations. First,
as a matter of substantive law, the Foreign Invested Enterprise laws provide significant protection from government interference.
In addition, these laws guarantee the full benefit of corporate articles and contracts to Foreign Invested Enterprise participants.
These laws, however, do impose standards concerning corporate formation and governance that are not qualitatively different from
the corporation laws found in the United States. Similarly, PRC accounting laws mandate accounting practices that may not be consistent
with the U.S. generally accepted accounting principles. PRC accounting laws require that an annual “statutory audit”
be performed in accordance with PRC accounting standards and that the account books of a foreign invested enterprise be maintained
in accordance with PRC accounting laws. Article 14 of the PRC Wholly Foreign-Owned Enterprise Law requires a wholly foreign-owned
enterprise to submit certain periodic fiscal reports and statements to designated financial and tax authorities. If a foreign-invested
enterprise refuses to keep account books in China, the financial and tax authorities may impose a fine on it, and the industry
and commerce administration authority may order it to suspend operations or may revoke its business license.
Second, while the enforcement
of substantive rights may be less clear than United States procedures, foreign invested enterprises and wholly foreign-owned enterprises
are PRC registered companies that enjoy the same status as other PRC registered companies in business-to-business dispute resolutions.
The PRC legal infrastructure, however, is significantly different in operation from its United States counterpart, and may present
a significant impediment to the operation of a foreign invested enterprise.
PRC economic reform policies or nationalization
could result in a total investment loss in our common stock.
Since 1979, the PRC
government has been in the process of reforming its economic policies. Because many reforms are unprecedented or experimental,
they are expected to be refined and improved over time. Other political, economic and social factors, such as political changes,
changes in the economic growth rates, unemployment or inflation, or in the disparities in per capita wealth between regions within
China, could lead to further readjustment of the reform measures. This refinement and readjustment process may negatively affect
our operations.
Although the PRC government
owns the majority of productive assets in China, in the past several years the government has implemented economic reform measures
that emphasize decentralization and encourage private economic activity. Because these economic reform measures may be inconsistent
or ineffectual, there are no assurances that:
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We will be able to capitalize on economic reforms;
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The PRC government will continue its pursuit of economic reform policies;
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The economic policies, even if pursued, will be successful;
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Economic policies will not be significantly altered from time to time; or
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Business operations in China will not become subject to the risk of nationalization.
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Over the last few years,
China’s economy has registered high growth rates. Recently, there have been indications that rates of inflation have increased.
In response, the Chinese government recently has taken measures to curb this excessively expansive economy. These measures have
included restrictions on the availability of domestic credit, reducing the purchasing capability of some of its customers, and
limited recentralization of the approval process for purchases of certain foreign products. These austere measures alone may not
succeed in slowing down the economy’s excessive expansion or control inflation, and may result in severe dislocations in
the Chinese economy. The PRC government may adopt additional measures to further combat inflation, including the establishment
of freezes or restraints on certain projects or markets. These measures may adversely affect our operations.
There can be no assurance
that the reforms to China’s economic system will continue or that we will not be adversely affected by changes in China’s
political, economic, and social conditions and by changes in policies of the PRC government, such as changes in laws and regulations,
measures which may be introduced to control inflation, changes in the rate or method of taxation, imposition of additional restrictions
on currency conversion and remittance abroad, and reduction in tariff protection and other import restrictions.
You may experience difficulties in
effecting service of legal process, enforcing foreign judgments or bringing original actions in the PRC against our company or
our management based on U.S. or other foreign laws.
Our operating subsidiary,
Helpson, is incorporated under the laws of the PRC and substantially all of our assets are located in the PRC. In addition, substantially
all of our directors, executive officers and managers reside within the PRC, and substantially all of the assets of these persons
are located within the PRC. As a result, it may not be possible to effect service of process within the United States or elsewhere
outside the PRC upon certain of our directors, executive officers or managers, including with respect to matters arising under
U.S. federal securities laws or applicable state securities laws. Moreover, the PRC does not have treaties providing for the reciprocal
recognition and enforcement of judgments of courts with the United States, the United Kingdom, Japan or many other countries. As
a result, recognition and enforcement in the PRC of judgments of a court in the United States and any of the other jurisdictions
mentioned above in relation to any matter may be difficult or impossible. Furthermore, an original action may be brought in the
PRC against us, our directors, executive officers or managers only if the actions are not required to be arbitrated by PRC law
and Helpson’s articles of association, and only if the facts alleged in the complaint give rise to a cause of action under
PRC law. In connection with any such original action, a PRC court may impose civil liability, including monetary damages.
Because we receive substantially
all of our revenue in Renminbi, which currently is not a freely convertible currency, and the PRC government controls the currency
conversion and the fluctuation of the Renminbi, we are subject to changes in the PRC’s political and economic decisions.
We receive substantially
all of our revenues in Renminbi, which currently is not a freely-convertible currency. The PRC government may, at its discretion,
restrict access in the future to foreign currencies for current account transactions. Any future restrictions on currency exchanges
may limit our ability to use revenue generated in Renminbi to fund any future business activities outside China or to make dividend
or other payments in U.S. dollars. Although the Chinese government introduced regulations in 1996 to allow greater convertibility
of the Renminbi 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 authorized to conduct foreign exchange business. In addition, conversion of Renminbi for capital account items, including
direct investment and loans, is subject to governmental approval in China, and companies are required to open and maintain separate
foreign exchange accounts for capital account items.
We cannot be certain that the Chinese
regulatory authorities will not impose more stringent restrictions on the convertibility of the Renminbi, especially with respect
to foreign exchange transactions.
Fluctuation in the
value of the Renminbi may have a material and adverse effect on your investment. The change in value of the Renminbi against the
U.S. dollar is affected by, among other things, changes in PRC’s political and economic conditions. From 1995 until July
2005, the People’s Bank of China intervened in the foreign exchange market to maintain an exchange rate of approximately
Renminbi 8.3 per U.S. dollar. On July 21, 2005, the PRC government changed this policy and began allowing modest appreciation of
the Renminbi versus the U.S. dollar. Under the new policy, the Renminbi was permitted to fluctuate within a narrow and managed
band against a basket of certain foreign currencies. This change in policy caused the Renminbi to appreciate approximately 21.5%
against the U.S. dollar over the following three years. As a consequence, the Renminbi has fluctuated sharply since July 2008 against
other freely traded currencies, in tandem with the U.S. dollar. It is difficult to predict how long the current situation may last
and when and how it may change again. There remains significant international pressure on the PRC government to adopt a substantial
liberalization of its currency policy, which could result in a further and more significant appreciation in the value of the Renminbi
against the U.S. dollar. Significant revaluation of the Renminbi may have a material and adverse effect on your investment. For
example, to the extent that we need to convert U.S. dollars we receive from securities offering into Renminbi for our operations,
appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive from
the conversion. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends
on our common stock or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative
effect on the U.S. dollar amount available to us. In August 2015, the PRC Government devalued its currency by approximately 3%,
represented the largest yuan depreciation for 20 years. Concerns remain that China’s slowing economy, and in particular its
exports, will need a stimulus that can only come from further cuts in the exchange rate.
In addition, appreciation
or depreciation in the value of the Renminbi 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. The income statements of our operations
are translated into U.S. dollars at the average exchange rates in each applicable period. To the extent the U.S. dollar strengthens
against foreign currencies, the translation of these foreign currencies denominated transactions results in reduced revenue, operating
expenses and net income for our international operations. Similarly, to the extent the U.S. dollar weakens against foreign currencies,
the translation of these foreign currency denominated transactions results in increased revenue, operating expenses and net income
for our international operations. We are also exposed to foreign exchange rate fluctuations as we convert the financial statements
of our foreign subsidiaries into U.S. dollars in consolidation. If there is a change in foreign currency exchange rates, the conversion
of the foreign subsidiaries’ financial statements into U.S. dollars will lead to a translation gain or loss, which is recorded
as a component of other comprehensive income. 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.
We are subject to the environmental
protection laws of the PRC that may be costly to comply with and may adversely affect our manufacturing operations.
Our manufacturing process
may produce by-products, such as effluent, gases and noise, which are harmful to the environment. We are subject to multiple laws
governing environmental protection, such as “The Law on Environmental Protection in the PRC” and “The Law on
Prevention of Effluent Pollution in the PRC,” as well as standards set by the relevant governmental bodies determining the
classification of different wastes and proper disposal. We have properly attained a waste disposal permit for our manufacturing
facility, which details the types and concentration of effluents and gases allowed for disposal. We are responsible for the renewal
of the waste disposal permit. There is no assurance that we will obtain the renewal of the waste disposal permit when the current
permit expires.
China is experiencing
substantial problems with environmental pollution. Accordingly, it is likely that the national, provincial and local governmental
agencies will adopt stricter pollution controls. There can be no assurance that future changes in environmental laws and regulations
will not impose costly compliance requirements on us or otherwise subject us to future liabilities. Our business’s profitability
may be adversely affected if additional or modified environmental control regulations are imposed upon us.
Failure to comply with PRC regulations
regarding the registration requirements for employee equity incentive plans may subject our PRC citizen employees or us to fines
and other legal or administrative sanctions.
On March 28, 2007,
the SAFE promulgated the Application Procedure of Foreign Exchange Administration for Domestic Individuals Participating in Employee
Stock Holding Plan or Share Option Plan of Overseas-Listed Company, which were superseded by Notice from SAFE regarding Issues
related to Domestic Individual Participating Offshore Public Company Equity Incentive Plan promulgated on February 15, 2012 (“SAFE
#7”) or the Share Option Rule. Under the Share Option Rule, PRC citizens who are granted share options or other employee
equity incentive awards by an overseas publicly-listed company are required, through a PRC agent who may be a PRC subsidiary of
such overseas publicly-listed company, to register with the SAFE and complete certain other procedures related to the share options
or other employee equity incentive plans. We and our PRC citizen employees who are granted share options or other equity incentive
awards under our 2010 Long-Term Incentive Plan, or PRC optionees, are subject to the Share Option Rule. If we or our PRC optionees
fail to comply with these regulations, we or our PRC optionees may be subject to fines and legal sanctions.
The enforcement of new labor contract
law and its implementation rules and increase in labor costs in the PRC may adversely affect our business and our profitability.
China adopted the PRC
Employment Contract Law, or the new Labor Contract Law, effective January 1, 2008 and the implementation rules effective September
18, 2008. The new Labor Contract Law and its implementation rules impose more stringent obligations on employers for, among others,
entering into written employment contracts, hiring temporary employees, dismissing employees, setting compensations for dismissal
and protecting certain sick or disabled employees from dismissal and setting forth detailed requirements relating to the contents
of the employment contracts. The implementation of the new Labor Contract Law may increase our operating expenses, in particular
our personnel expenses, as the continued success of our business depends significantly on our ability to attract and retain qualified
personnel. In the event that we decide to terminate some of our employees or otherwise change our employment or labor practices,
the new Labor Contract Law may also limit our ability to effect those changes in a manner that we believe to be cost-effective
or desirable, which could adversely affect our business and results of operations.
PRC regulation of loans and direct
investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds we receive from a securities
offering to make loans or additional capital contributions to our PRC operating subsidiary.
In utilizing the proceeds
we receive from a securities offering, as an offshore holding company with a PRC subsidiary, we may make loans to our PRC subsidiary,
or we may make additional capital contributions to our PRC subsidiary. Any loans to our PRC subsidiary are subject to PRC regulations
and approvals. For example, loans to our PRC subsidiary Helpson, which is a foreign-invested enterprise, to finance its activities
cannot exceed statutory limits and must be registered with the State Administration of Foreign Exchange in China, or SAFE, or its
local counterpart. Loans by us to domestic PRC enterprises must be approved by the relevant government authorities and must also
be registered with the SAFE or its local counterpart. Any capital contributions to our PRC subsidiary must be approved by the Ministry
of Commerce in China or its local counterpart. On August 29, 2008, SAFE promulgated Circular 142, a notice regulating the conversion
by a foreign-invested company of foreign currency into Renminbi by restricting how the converted Renminbi may be used. The notice
requires that Renminbi converted from the foreign currency denominated capital of a foreign-invested company may only be used for
purposes within the business scope approved by the applicable governmental authority and may not be used for equity investments
within the PRC unless specifically provided for otherwise.
In addition, SAFE strengthened
its oversight over the flow and use of Renminbi funds converted from the foreign currency-denominated capital of a foreign-invested
company. The use of such Renminbi may not be changed without approval from SAFE, and may not be used to repay Renminbi loans if
the proceeds of such loans have not yet been used. Violations of Circular 142 may result in severe penalties, including substantial
fines as set forth in the Foreign Exchange Administration Rules. We cannot assure you that we will be able to obtain these government
registrations or approvals on a timely basis, if at all, with respect to our future loans or capital contributions to our direct
or indirect subsidiaries. If we fail to receive such registrations or approvals, our ability to use the proceeds from a securities
offering and to capitalize our PRC operations may be negatively affected, which could materially and adversely affect our liquidity
and ability to fund and expand our business.
The 2006 M&A Rule establishes
more complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for
us to pursue growth through acquisitions in China.
On August 8, 2006,
six PRC regulatory agencies, namely, the Ministry of Commerce, the State Assets Supervision and Administration Commission, or SASAC,
the State Administration for Taxation, the State Administration for Industry and Commerce, the CSRC and SAFE, jointly adopted the
Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the 2006 M&A Rule, which became effective
on September 8, 2006. The 2006 M&A Rule establishes additional procedures and requirements that could make some acquisitions
of PRC companies by foreign entities, such as our company, more time-consuming and complex, including requirements in some instances
that the approval of the Ministry of Commerce shall be required for transactions involving the shares of an offshore listed company
being used as the acquisition consideration by foreign entities, including Sino-foreign joint ventures. In the future, we may grow
our business in part by acquiring complementary businesses. Complying with the requirements of the 2006 M&A Rule to complete
such transactions could be time-consuming, and any required approval processes, including obtaining approval from the Ministry
of Commerce, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business
or maintain our market share.
Our China-sourced income is subject
to PRC withholding tax under the new Enterprise Income Tax Law of the PRC, and we may be subject to PRC enterprise income tax at
the rate of 25% when more detailed rules or precedents are promulgated.
We are a Nevada holding
company with substantially all of our operations conducted through our operating subsidiary in China. Under the new PRC Enterprise
Income Tax Law, or the new EIT Law, and its implementation rules, both of which became effective on January 1, 2008, China-sourced
income of foreign enterprises, such as dividends paid by a PRC subsidiary to its overseas parent, is generally subject to a 10%
withholding tax. The new EIT Law, however, also provides that enterprises established outside China whose “de facto management
bodies” are located in China are considered “tax resident enterprises” and will generally be subject to the uniform
25% enterprise income tax rate as to their global income. Under the implementation rules, “de facto management bodies”
are defined as the bodies that have, in substance, overall management control over such aspects as the production and business,
personnel, accounts and properties of an enterprise. In April 2009, the PRC tax authority promulgated the Notice on Determination
of Tax Resident Enterprises of Chinese-controlled Offshore Incorporated Enterprises in accordance with Their De Facto Management
Bodies, or Circular 82, to clarify the criteria for determining whether the “de facto management bodies” are located
within the PRC for enterprises incorporated overseas with controlling shareholders being PRC enterprises. As all of the our operational
management is currently based in the PRC, and we expect them to continue to be located in China, our company may be deemed a PRC
resident enterprise and therefore subject to the PRC enterprise income tax at a rate of 25% on our worldwide income, which excludes
the dividends received directly from another PRC resident enterprise. Due to the lack of clear guidance on the criteria pursuant
to which the PRC tax authorities will determine our tax residency under the new EIT Law, it remains unclear whether the PRC tax
authorities will treat us as a PRC resident enterprise. Therefore, we are unable to confirm whether we are subject to the tax applicable
to resident enterprises or non-resident enterprises under the new EIT Law. Furthermore, in connection with the new EIT Law and
Tax Implementation Regulations, the Ministry of Finance and State Administration of Taxation jointly issued, on April 30, 2009,
the Notice on Issues Concerning Process of Enterprise Income Tax in Enterprise Restructuring Business, or Circular 59, which became
effective retrospectively on January 1, 2008. It is uncertain to us as to how it will be implemented and the respective tax base
and the tax exposure cannot be determined reliably at this stage. In case we are required to pay the income tax on capital gains
by the relevant PRC tax authorities, our financial conditions and results of operations could be adversely affected.
Dividends payable by us to our foreign
investors and gain on the sale of our shares may become subject to taxes under PRC tax laws.
Under the new EIT law
and its implementation rules, to the extent that we are considered a “resident enterprise” which is “domiciled”
in China, PRC income tax at the rate of 10% is applicable to dividends payable by us to investors that are “non-resident
enterprises” so long as such “non-resident enterprise” investors do not have an establishment or place of business
in China or, despite the existence of such establishment or place of business in China, the relevant income is not effectively
connected with such establishment or place of business in China. Similarly, any gain realized on the transfer of our shares by
such investors is also subject to a 10% PRC income tax if such gain is regarded as income derived from sources within China and
we are considered a “resident enterprise” which is domiciled in China for tax purposes. Additionally, there is a possibility
that the relevant PRC tax authorities may take the view that our purpose is that of a holding company, and the capital gain derived
by our overseas stockholders would be deemed China-sourced income, in which case such capital gain may be subject to PRC withholding
tax at the rate of up to 10%. If we are required under the new EIT law to withhold PRC income tax on our dividends payable to our
foreign stockholders who are “non-resident enterprises”, or if you are required to pay PRC income tax on the transfer
of our shares under the circumstances mentioned above, the value of your investment in our shares may be materially and adversely
affected. It is unclear whether, if we are considered a PRC “resident enterprise,” holders of our shares would be able
to claim the benefit of income tax treaties or agreements entered into between China and other countries or areas.
The strengthened scrutiny over acquisition
transactions by the PRC tax authorities may have a negative impact on our acquisition strategy.
In connection with
the new EIT Law, the Ministry of Finance and State Administration of Taxation jointly issued, on April 30, 2009, the Notice on
Issues Concerning Process of Enterprise Income Tax in Enterprise Restructuring Business, or Circular 59. On December 10, 2009,
the State Administration of Taxation issued the Notice on Strengthening the Management on Enterprise Income Tax for Non-resident
Enterprises Equity Transfer, or Circular 698. Both Circular 59 and Circular 698 became effective retrospectively on January 1,
2008. By promulgating and implementing these circulars, the PRC tax authorities have strengthened their scrutiny over the direct
or indirect transfer of equity interest in a PRC resident enterprise by a non-resident enterprise. For example, Circular 698 specifies
that the PRC State Administration of Taxation is entitled to redefine the nature of an equity transfer where offshore vehicles
are interposed by abusing corporate structures for tax-avoidance purposes and without reasonable commercial intention. We may pursue
acquisitions as one of our growth strategies, and may conduct acquisitions involving complex corporate structures. We cannot be
assured that the PRC tax authorities will not, at their discretion, adjust the capital gains thus causing us to incur additional
acquisition costs.
Risks Related to our Common Stock
The market price for our common stock
may be volatile which could result in a complete loss of your investment.
The market price for
our common stock is likely to be highly volatile and subject to wide fluctuations in response to factors including the following:
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actual or anticipated fluctuations in our quarterly operating results;
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announcements of new products by us or our competitors;
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changes in financial estimates by securities analysts;
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conditions in the pharmaceutical market;
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changes in the economic performance or market valuations of other companies involved in pharmaceutical production;
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announcements by our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
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economic, regulatory and political developments;
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additions or departures of key personnel, or
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In addition, the securities
markets have from time to time experienced significant price and volume fluctuations that are not related to the operating performance
of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock.
We may issue additional shares of
our capital stock to raise additional cash for working capital; if we issue additional shares of our capital stock, our stockholders
will experience dilution in their respective percentage ownership in the company.
We may issue additional
shares of our capital stock to raise additional cash for working capital. There is no anti-dilution protection or preemptive rights
in connection with our common stock. Thus, the percentage ownership of existing holders of common stock may be diluted in their
respective percentage ownership in us if we issue additional shares of our capital stock.
A large portion of our common stock
is controlled by a small number of stockholders and as a result, these stockholders are able to influence and ultimately control
the outcome of stockholder votes on various matters.
A large portion of
our common stock is held by a small number of stockholders. For instance, Heung Mei Tsui, a member of our Board of Directors, holds
21.4% and Zhilin Li, our Chief Executive Officer, holds 23.1% of our common stock, respectively, as of the date hereof. As a result,
these two stockholders are able to significantly influence the outcome of stockholder votes on various matters, including the election
of directors and other corporate transactions including business combinations. In addition, the occurrence of sales of a large
number of shares of our common stock, or the perception that these sales could occur, may affect our stock price and could impair
our ability to obtain capital through an offering of equity securities. Furthermore, the current ratios of ownership of our common
stock reduce the public float and liquidity of our common stock which can in turn affect the market price of our common stock.
We are likely to remain subject to
“penny stock” regulations and as a consequence there are additional sales practice requirements and additional warnings
issued by the SEC.
If at any time we have
net tangible assets of $5,000,000 or less and the trading price of our common stock is below $5.00 per share, the open-market trading
of our common stock will be subject to the “penny stock” rules of the SEC. The “penny stock” rules impose
additional sales practice requirements on broker-dealers who sell securities to persons other than established customers and accredited
investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their
spouse). For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase
of securities and have received the purchaser’s written consent to the transaction before the purchase. Additionally, for
any transaction involving a penny stock, unless exempt, the broker-dealer must deliver, before the transaction, a disclosure schedule
prescribed by the SEC relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both
the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements must
be sent disclosing recent price information on the limited market in penny stocks. These additional burdens imposed on broker-dealers
may restrict the ability of broker-dealers to sell the common stock and may affect a stockholder’s ability to resell the
common stock.
There can be no assurance
that our common stock will qualify for exemption from the “penny stock” rules. In any event, even if our common stock
is exempt from such rules, we would remain subject to Section 15(b)(6) of the Exchange Act, which gives the SEC the authority to
restrict any person from participating in a distribution of a “penny stock” if the SEC finds that such a restriction
would be in the public interest.
Stockholders should
be aware that, according to SEC Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns of
fraud and abuse. Such patterns include (i) control of the market for the security by one or a few broker-dealers that are often
related to the promoter or issuer; (ii) manipulation of prices through prearranged matching of purchases and sales and false and
misleading press releases; (iii) boiler room practices involving high-pressure sales tactics and unrealistic price projections
by inexperienced sales persons; (iv) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and
(v) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired
level, along with the resulting inevitable collapse of those prices and with consequent investor losses. Our management is aware
of the abuses that have occurred historically in the penny stock market.
We are responsible for the indemnification
of our officers and directors under certain circumstances which could result in substantial expenditures, which we may be unable
to recoup.
Our bylaws provide
for the indemnification of our directors, officers, employees, and agents, under certain circumstances, against attorney’s
fees and other expenses incurred by them in any litigation to which they become a party arising from their association with or
activities on behalf of us. This indemnification policy could result in substantial expenditures, which we may be unable to recoup.
We have identified material weaknesses
in our internal control over financial reporting, which could affect our ability to ensure timely and reliable financial reports,
affect the ability of our auditors to attest to the effectiveness of our internal controls should we become an accelerated filer
in the future, and weaken investor confidence in our financial reporting.
As directed by Section
404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring public companies in their annual reports to include a report
of management on the reporting company’s disclosure controls and procedures and internal controls over financial reporting. We
became subject to this requirement commencing with our fiscal year ended December 31, 2007 and a report of our management is included
under Item 9A. “Controls and Procedures” of this Annual Report on Form 10-K. As set forth in such report, our management
has concluded that our internal controls over financial reporting were not effective as of December 31, 2017, and there existed
a material weakness in our internal control over financial reporting as of December 31, 2017.
We believe we are taking
appropriate actions to remediate such material weakness; however, such measures may not be sufficient to address the material weaknesses
identified or ensure that our controls and procedures are effective. We may also discover other material weaknesses in the future.
Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in the implementation
of such controls, could cause us to fail to meet our periodic reporting obligations or result in material misstatements in our
financial statements and affect the ability of our auditors to attest to the effectiveness of our internal control over financing
reporting to the extent we become an accelerated filer in the future. In addition, substantial costs and resources may be required
to rectify any internal control deficiencies. If we cannot produce reliable financial reports, investors could lose confidence
in our reported financial information, the market price of our common stock could decline significantly, and our business and financial
condition could be adversely affected.
We do not anticipate paying cash
dividends on our common stock.
You should not rely
on an investment our common stock to provide dividend income, as we have not paid any cash dividends on our common stock and do
not plan to pay any in the foreseeable future. Accordingly, investors must rely on sales of their common stock after price appreciation,
which may never occur, as the only way to realize any return on their investment.
Restrictions on the Use of Rule 144
by Shell Companies or Former Shell Companies.
Historically, the SEC
has taken the position that Rule 144 under the Securities Act, as amended, is not available for the resale of securities initially
issued by companies that are, or previously were, blank check companies like us, to their promoters or affiliates despite technical
compliance with the requirements of Rule 144. The SEC has codified and expanded this position in its amendments effective on February
15, 2008 and applies it to securities acquired both before and after that date by prohibiting the use of Rule 144 for resale of
securities issued by shell companies (other than business transaction related shell companies) or issuers that have been at any
time previously a shell company. The SEC has provided an important exception to this prohibition, however, if the following conditions
are met: the issuer of the securities that was formerly a shell company has ceased to be a shell company; the issuer of the securities
is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act; the issuer of the securities has filed all
Exchange Act reports and material required to be filed, as applicable, during the preceding 12 months (or such shorter period that
the issuer was required to file such reports and materials), other than Form 8-K reports; and at least one year has elapsed from
the time that the issuer filed current Form 10 type information with the SEC reflecting its status as an entity that is not a shell
company. As such, due to the fact that we had been a shell company prior to October 2005, holders of “restricted securities”
within the meaning of Rule 144, when reselling their shares pursuant to Rule 144, shall be subject to the conditions set forth
herein.