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,
2018, 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 sterilized 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 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
provided by the National Bureau of Statistics of China, business income of pharmaceutical manufacturers above the designated size
(i.e., manufacturers with annual production of a minimum of RMB20 million, or approximately $2.98 million) reached CNY2426.47 billion
in 2018, which represented an increase of 12.4% over the same period of last year. Among these manufacturers, the main business
income was CNY2,398.63 billion (approximately USD357.40 billion), which represented an increase of 12.6% over the same period last
year, an increase of 0.1 percentage points over the previous year, which was 4.1% higher than the overall level of industrial enterprises
above designated size in the same period. Total profit reached CNY309.42 billion (approximately USD46.10 billion), an increase
of 9.5% over the same period last year. Profit margin of the main business of pharmaceutical manufacturing industry is 12.90%,
which is 1.14% higher than the same period last year, and 6.41% higher than the overall level of Industrial Enterprises above designated
size in the same period.
In 2018, Comprehensive
institutional reforms were implemented, and major changes have taken place in the medical and health functional departments, including
the establishment of the National Health and Health Commission, the discontinuation of the National Health and Family Planning
Commission, the establishment of the National Medical Security Bureau, and the establishment of the National Drug Administration.
These reforms focus on the optimization and adjustment of institutional functions in the fields of medical care, medical insurance,
medicine and key links, which is conducive to improving the efficiency and effectiveness of administration and supervision and
deepening the medical reform.
In terms of changes
to medical policy in 2018, the Chinese Health and Health Commission adjusted the national Essential Drug List with an increased
number of enrolled drugs, improved the structure of included drugs, and added emphasis on the basic drugs demand for common and
chronic diseases on one hand; and carried out many regulations and reforms in order to promote the construction of the graded diagnosis
and treatment system, established and improved the modern hospital management system, and strengthened the management of supplemental
drugs and clinical pathways on the other hand. In terms of health insurance policy, the State Medical Insurance Bureau has incorporated
17 anticancer drugs into the national health insurance through negotiations; organized a pilot scheme for centralized drug purchases,
and explored the improvement of centralized drug procurement and market-led drug pricing mechanisms. In terms of pharmaceutical
policy, the Chinese State Administration of Pharmaceutical Supervision has optimized the process of drug registration, examination
and approval, accelerated the speed of import drug registration, encouraged Chinese enterprises to go out and carry out global
synchronous clinical research and development, continued to promote the evaluation of the consistency evaluation to guarantee the
safety and effectiveness of generics, and promoted the upgrading and structural adjustment of the pharmaceutical industry.
We have observed that the prices of pharmaceutical
finished products have been declining while the prices of raw and auxiliary materials have generally increased. Due to strengthened
environmental protection, many raw material enterprises have been forced out of business. In addition, some enterprises monopolize
the production and sale of certain raw materials, which leads to soaring prices.
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 public finance
expenditures in healthcare are expected to continue to increase. Therefore, we believe that demand for pharmaceuticals and the
consumer’s ability to pay is still enjoying steady growth. Although the growth rate has been declined, the scale of pharmaceutical
industry in China is still huge.
Consistency Evaluation
The development of
generic drugs is an important measure to reduce medical expenses. By conducting generic drug consistency evaluations, 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.
The Chinese State
Drug Administration issued a Notice on Consistency Assessment of Quality and Efficacy of Generic Drugs (hereinafter referred to
as the Notice) on December 28, 2018. The Notice points out that the National Essential Medicines Catalogue (2018 edition) (hereinafter
referred to as the New Edition Catalogue) has been put into effect as of November 1, 2018. The New Edition Catalogue has established
a dynamic adjustment mechanism, giving priority to the formulas that pass the consistency evaluation, gradually transferring formulas
that fail to pass the consistency evaluation out of the Catalogue. Due to the importance of ensuring the clinical needs of essential
drugs, the time limit for evaluating essential drugs is no longer set uniformly for the drugs included in the national Essential
Drugs Catalogue.
This does not mean
that the time limit requirement for the evaluation of essential drugs has been eliminated. The Notice also pointed out that generic
drugs, including essential drugs, which were approved for market before the implementation of the new registered classification
of chemicals, should, in principle, complete the consistency evaluation of the same formula of other pharmaceutical manufacturers
within three years after the first applicant passed the consistency evaluation. If an enterprise fails to complete the evaluation,
it may apply to the local provincial drug regulatory authorities for postponement of the evaluation if it considers that the drug
in question is both clinically necessary and in short supply in the market. After being confirmed by the provincial drug regulatory
authorities in conjunction with the health administrative departments, the applicant may appropriately postpone the evaluation.
Our company has actively promoted the consistency evaluation process of several key current existing oral
products in 2018.
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,
17,740 production approval numbers, 1,817 domestic pharmaceutical manufacturers, and 42 overseas manufacturers will be affected
by the Opinions. Unfortunately, annual sales of most of those 17,740 production approval numbers did not exceed RMB5 million, in
which case, manufacturers may wait an extended period of time to recoup their capital investment for consistency evaluations. The
similarities in the pharmaceutical market in China lead to low profit rate. The money invested in consistency evaluations comes
from the manufacturer; therefore in general, manufacturers prefer to take consistency evaluations of selected existing products
with higher profitability.
The 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 evaluations, 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 coverage by health 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 evaluations
have resulted in 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.
There were 149 consistency evaluation tasks
(according to acceptance number) published by Center for Drug Evaluation (CDE), involving 74 formulas and 75 enterprises as of
May 15, 2018. And 35 of these 149 acceptance numbers have been approved (29 of them have been published by CFDA), 38 have been
required for supplements, 3 have been rejected, and 73 have been under review.
Bioequivalent 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 injectables. According to the
statistics of Pharmaceutical Intelligence Drug Registration and Acceptance Database, as of January 15, 2019, CDE has accepted 155
applications of consistency acceptance numbers for injectables from 66 pharmaceutical companies with regards to 43 formulas.
The PRC’s medical insurance
system
The Chinese National Medical Insurance
Bureau was officially established on May 31, 2018. The reform has given the Medical Insurance Bureau great functions and powers.
After the establishment of the Medical Insurance Bureau, it will become a centralized department with the power of overall decision
and a decision-maker with the greatest voice in drug procurement, medical service evaluations, and the medical insurance payment
system. The newly established Medical Insurance Bureau has reorganized the functions previously dispersed in four ministries: basic
medical insurance and maternity insurance for urban workers and residents of the Ministry of Human Resources and Social Affairs,
the New Agricultural Cooperation of the State Health and Planning Commission, the price management of drugs and medical services
of the National Development and Reform Commission, and the medical assistance responsibilities of the Ministry of Civil Affairs.
This reorganization has broken down the restrictions on the functions of the original ministries and commissions, thoroughly restructured
the previous operations of the pharmaceutical products, medical insurance and medical treatment division, and reshaped the functions
of medical procurement and medical service supervision within the scope of medical insurance, so that the follow-up medical reform
has a clearer direction and stronger execution. As a “super buyer” integrating purchasing power, pricing power and payment
power, the newly established National Medical Insurance Bureau will be more prominent in the implementation process of subsequent
collection and payment of medical insurance.
The cumulative income of the basic medical
insurance fund was RMB18.63 billion during January to November 2018, an increase of 14.9% compared with the same period last year.
And the cumulative expenditure was RMB1.475 billion, an increase of 19.9% compared with the same period last year. This showed
that the expenditure side has not declined obviously due to drug-fees-control, but reflected the government orientation of “the
goal of the medical insurance bureau is not only to control fees, but also to expand coverage”. The number of basic medical
insurance coverage has reached 1.21 billion by the end of November 2018 in China, which represented an increase of 5.3% over the
same period last year. The number of insured persons is continuously increasing driven by the implementation of the policy of “two-in-one
insurance”.
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 needs and high degrees 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.
Our Strategy
We believe that in
the pursuit of innovative research and development is imperative for providing the basic medical solutions needed by the majority
of patients. We are passionate about protecting human health, and always adhere to the highest standards of ethics and integrity,
fulfilling our firm commitment to our customers and patients.
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.
Based on our experience
in R&D, production and marketing of specialized pharmaceutical products in China for more than 20 years, and our market insights,
we have decided to gradually adjust our strategy to produce generic and innovative drugs with high value in pharmacoeconomics,
good clinical efficacy and market differentiation. These include drugs for the treatment of chronic diseases prevalent in China,
geriatric diseases, cancers, and nutritional products.
Overall, the development
of China’s pharmaceutical industry has been good in 2018. The main indicators are showing improvement in varying degrees. The “One
Belt One Road” initiative has been heavily promoted, the 2030 Healthy China plan has been fully implemented, international
demand has been growing, and the rate of domestic health consumption has been accelerated. However, the pharmaceutical industry
is still in need of strengthened policy and financial supports through multiple channels to improve the drug supply mechanism,
enhance industry concentration and internationalization levels.
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:
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.
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.
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.
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.
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.
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Year of
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Commercial
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Product
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Indication
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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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Acute thrombotic cerebral infarction and dyskinesia associated with cerebral infarction
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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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Year of
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Commercial
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Product
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Indication
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Launch
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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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Andrographolide
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Detoxification, antibacterial and anti-inflammatory. For sore throat caused by upper respiratory tract infection
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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 our revenues attributed to our product portfolio by indication group for the years ended December
31, 2018 and 2017.
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Year Ended December 31,
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Product Category
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2018
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2017
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Net Change
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% Change
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CNS Cerebral & Cardio Vascular
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2.41
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2.07
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0.34
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16
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%
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Anti-Viral/ Infection & Respiratory
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6.76
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8.05
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-1.29
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-16
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%
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Digestive Diseases
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0.72
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0.69
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0.03
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5
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%
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Other
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2.44
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2.40
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0.04
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2
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%
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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
Research & development
and innovation represent the core competitive advantage for a company’s sustainable growth. For pharmaceutical companies,
products with proprietary intellectual property are not only strategic resources for comprehensive strength, but also important
tools to engage in social responsibility. We have been focusing on the research and development of both first generic drugs and
innovative drugs. Additionally, we also have actively worked to meet unsatisfied medical needs by sticking to a market-oriented
approach and continuously improving the effectiveness and ease of use of our drugs, supported by a well-designed system for intellectual
property management.
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. 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 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.
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 their 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 “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. 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 some of our pipeline
products in 2018. The following list sets forth the current status of our main pipeline products:
Indication of Product Candidate
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CFDA Status
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Anti-infection
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In Phase II clinical study, supplement clinical study due to improved technology criteria
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Cholesterol Control Drug
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we have submitted an application for production approval, and are supplementing Consistency Evaluation experiments per the newly issued policies
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Alzheimer’s Disease drug
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We have completed consistency evaluation experiments. We are in the stage of pilot scale tests and trial productions.
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Coronary Heart Disease Drug
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Phase III clinical study completed, and are supplementing clinical trials pursuant to the updated criteria
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Distribution and Customers
We believe we have
a well-established sales network. As our current pharmaceutical product portfolio is comprised mainly of prescription drugs, our
major sales targets are hospitals. As of December 31, 2018, 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 through our operating subsidiary, Helpson, which was 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 version of 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, 2018, our purchases from four suppliers accounted for 26.2%, 17.0% and 11.2% of
raw material purchases. 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.
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 market 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:
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the number of our competitors increases;
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competitors engage in increased price competition; or
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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.
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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,
2018, 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. A series of policies on consistency evaluation and drug review process have been issued in recent
years, and potentially more reforms and adjustments are underway in order to promote the pharmaceutical industry in China in line
with international standards. In this context, we believe that the uncertainties in the timetables for obtaining CFDA production
approvals for products under research are increasing. f 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. We are confident the permit could be renewed before
its expiration.
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. At the same time, it encourages to improve the drug procurement mechanism, optimize medicine-fees-control effect
of medical insurance, and allow the actual transaction prices of drugs being formed per market competition.
The authority calls for strengthening the
role of medical insurance in medicine-fees-control. It promotes the reform of payment systems such as the compound payment system
and the medical insurance monitoring system; and urges to further improve the “bargaining negotiation mechanism” between
medical insurance departments and designated medical institutions. At the same time, taking into account the affordability of medical
insurance funds and insured patients, the clinical efficacy of medical insurance drugs and other factors, to formulate medical
insurance drug payment standards, and effectively play the guiding role of medical insurance payment standards on market prices.
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. With 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%.
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,
2018, we had 252 employees, among which 240 employees were full-time employees and 12 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.
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 within 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:
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perception
of physicians, patients and others in the medical community as to the safety and effectiveness of our products;
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the
prevalence and severity of any side effects;
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the
pharmacological benefit of our products relative to competing products and products under development;
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the
efficacy and potential advantages of our products relative to competing products and products under development;
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the
relative convenience and ease of administration of our products;
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the
methods by which our pharmaceutical products may be delivered to patients;
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the
effectiveness of our education, marketing and distribution efforts and those of our distributors;
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publicity
concerning our products or competing products and treatments; and
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the
price of our products and competing products.
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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.
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.
In our 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 must 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 distributors
in China who are in the business of the production and sale of Buflomedil related products. As a result, we no longer produce Buflomedil
after 2013.
Recalls may 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 that may adversely impact our business. 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 16.0% for the year ended December 31, 2018, compared to gross profit margins of 18.7% for the year ended December 31,
2017. 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 replaced by our 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 strict governmental price controls, 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 the
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 that treat similar medical conditions.
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 sold may decline or we may be required to lower the prices 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 even 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 periods expire, 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.
A hospital’s interest in a particular 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 ensuring that hospitals and physicians are 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 influenced by many factors. Products that appear to be promising in their early phases of research
and development may fail to be commercially viable for various reasons, such as failing to obtain the necessary regulatory approvals.
Additionally, the research and development process 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 trials and we must conduct a significant number of additional clinical trials before we can seek the regulatory
approvals necessary to begin commercial production and sales of these products. We cannot guarantee that our future research and
development projects will be successful or completed within their anticipated time frames or budgets or that we will receive the
necessary approvals from the relevant authorities for the production of these newly developed products, or that these newly-developed
products will achieve commercial success.
Our competitors may
obtain approval for a competitive product before the product we are developing is approved. If this occurs, we may be precluded
from getting approval until the competitor’s monitoring period expires and realize little to 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. Additionally, the pharmaceutical
industry is characterized by rapid changes in technology, constant enhancements of industry know-how and the 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 failing to improve our existing products, develop new products in a timely manner, or have these products
reach 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 the research and development of new products. We have 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. Additionally, 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 and prevent or limit their 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 favorable 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, 2018, no customer accounted for more than 10.0% of sales,
and two customers accounted for 49.1%, 10.6% 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, our financial results could be adversely affected if we cannot find the substantially similar 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,
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 12% and 14% of our
net revenues in 2018 and 2017, 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 may expose us to the risk of substantial
losses if a single large distributor stops purchasing our products, purchases lower quantities 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 drugs with the same active ingredient, dosage form, delivery channel and therapeutic effects compared to the original drugs.
The “Consistency Evaluation” requires currently marketed generic products to prove their consistency in term of quality
and therapeutic effect, and substitutability 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 their 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 their
CFDA approvals due to this additional new requirement and the Company is working 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 requirements, 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, 2018, three suppliers accounted for 26.2%, 17.0%, 11.2% of raw material purchases and
the year ended December 31, 2017, purchases from four suppliers accounted for 19.8%, 17.1%, 15.4% and 11.8% 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 relationships
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, 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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Additionally, 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 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 the types of payments to promote or sell our products that 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
could be reasonably determined 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 no material claim for personal injury resulting from allegedly defective products
has been brought against us to date, 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, legal fees, and other related expenses. 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
decide 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
decide 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 not to be 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
decide 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, 2018, we had 242 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 Ms. Li’s services 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. There may be
situations where we may not be in full compliance with environmental regulations. Any violation of these regulations could 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. Longer 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 deductions 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 2018 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
a pharmaceutical compound from a third party 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 guarantee that there will not be any infringements
of our brand name or other registered trademarks or counterfeiting of our products in the future. There is no guarantee that there
will not be any third-party infringement of our patents. 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 as 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 foreign wholly-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 guarantees 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 is no guarantee
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. Additionally, 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 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 periodically
renewing this waste disposal permit. There is no assurance that we will obtain a 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 is no guarantee 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 stock 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 securities
offerings 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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addition
or departure 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, 2018, and
there existed a material weakness in our internal control over financial reporting as of December 31, 2018.
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 in 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 our 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.