Creating Miracles in Life
2013 Annual Report
A leading fully integrated plasma-based biopharmaceutical company in China
China Biologic Products, Inc.
China Biologic Products, Inc. (Nasdaq: CBPO), is a leading fully integrated plasma-
based biopharmaceutical company in China. The Company’s products are used as
critical therapies during medical emergencies and for the prevention and treatment
of life-threatening diseases and immune-deficiency related diseases. Headquartered
in Beijing, China Biologic manufactures over 20 different dosages of plasma-based
products through its majority-owned subsidiaries, Shandong Taibang and Guizhou
Taibang. The company also has an equity investment in Xi’an Huitian Blood Products
Co., Ltd. The Company sells its products to hospitals and other healthcare facilities
in China.
One of the largest suppliers in China’s $1.6B market* for plasma-based
pharmaceutical products, the second largest market in the world
Two majority-owned subsidiaries, Shandong Taibang and Guizhou Taibang, and
equity investment in Xi’an Huitian
15 plasma collection centers: 10 operated by Shandong, 2 by Guizhou, 3 by Xi’an
Manufacturer of over 20 different dosages of plasma-based products of seven
types in three major classes, sold directly to over 1,000 hospitals in China
Ranked as Asia’s “200 Best Under a Billion” in Forbes Magazine’s annual list in
2009, 2011 and 2013
Founded in 2002, headquartered in Beijing; Listd on NASDAQ in 2009
*Source: The Marketing Research Bureau, Inc. (MRB)
Our Mission
Grow as a world-class
biopharmaceutical company
focused on saving lives.
Core Values
Quality / Growth / Innovation /
Promise / Focus / Passion /
Responsibility
Table of Contents
4 Financial Highlights
6 Business Highlights
8 Chairman’s Letter
10 Operational Review
Plasma Collection
Manufacturing
Products
Research & Development
18 Chinese Plasma Protein Market
20 Board of Directors
27 Form 10-K
153 Appendix: reconciliation of Non-GAAP
financial measures
154 Stockholder Information
5
Total Sales
($ In Millions)
Non-GAAP Net Income*
($ In Millions)
Non-GAAP EPS*
($)
CAGR = 14.3%
CAGR = 17.0%
59.0
203.4
184.8
153.1
139.7
119.0
48.0
39.0
36.5
31.5
2.13
1.79
1.61
1.43
1.37
2009
2010
2011
2012
2013
2009
2010
2011
2012
2013
2009
2010
2011
2012
2013
Sales Breakdown By Products 2013
44%
38%
Human albumin
IVIG
18%
Others
Gross Profit & Gross Margin
($ In Millions)
73.5%
72.6%
69.9%
67.8%
68.2%
137.9
126.0
107.1
86.4
102.7
Operating Costs as of Revenue
Operating Cash Flow
($ In Millions)
74.3
71.1
5.3%
3.0%
9.5%
20.6%
7.8%
5.2%
50.3
38.8
38.5
16.6% 16.8%
18.4%
17.7%
Financial Highlights
2009
2010
Gross Profit
2011
2013
2012
Gross Margin
1.4%
2009
1.7%
2010
Selling
1.6%
2012
2.6%
2011
G&A
R&D
2.1%
2013
2009
2010
2011
2012
2013
* Please see appendix for reconciliation of Non-GAAP financial measures.
Annual Report 2013 6
7
In January 2013, Shandong Taibang established Cao Xian Plasma Company. Cao Xian
Plasma Company obtained the operating permits on April 1, 2013 and commenced full
scale plasma collection in July 2013.
On June 28, 2013, Shandong Taibang obtained the renewed Good Manufacturing Practice
(“GMP”) certification from the China Food and Drug Administration (“CFDA”) in respect of its
plasma production facility.
In June 2013, we suspended the plasma products production and commenced a
comprehensive upgrade to our Guizhou Taibang’s plasma production facility. The upgrade
was completed in January 2014. In January 2014, the CFDA conducted an on-site inspection
on the upgraded plasma production facility. Guizhou Taibang obtained the GMP certification
and resumed commercial production in March 2014.
In July 2013, Guizhou Taibang obtained the manufacturing approval certificate from CFDA for
human prothrombin complex concentrate (“PCC”).
In July 2013, Shandong Taibang obtained the manufacturing approval certificate from CFDA for
human coagulation factor VIII (300IU) and commenced the commercial production in late 2013.
In August 2013, we entered into a repurchase agreement with Ms. Lin Ling Li, an individual
shareholder of our Company, and her spouse, pursuant to which we repurchased 1,479,704
shares of common stock held by Ms. Li for a consideration of US$29,594,080. The transaction
was completed on August 8, 2013.
In November 2013, Guizhou Taibang completed the GMP upgrade of its placenta polypeptide
production facility. In December 2013, the CFDA conducted an on-site inspection on the
placenta polypeptide production facility. In January 2014, Guizhou Taibang obtained the GMP
certification for the placenta polypeptide production facility.
Business Highlights for 2013
Annual Report 2013Annual Report 2013
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9
Dear Valued
Shareholders
As the Chinese economy continues to expand and Chinese household
income levels continue to grow, demand for quality healthcare products
and services is rising. The growth of China’s aging population, urbanization
trends, and higher occurance rates for hepatitis B infections, liver disease,
and immunodeficiencies are contributing to higher demand for plasma-
based biophamarceutical products such as human albumin. With over
twenty different dosages of plasma-based products sold directly to over one
thousand hospitals in China and increasing plasma collection capabilities,
we believe CBPO is well positioned to expand its market share as a leading
fully integrated plasma-based biopharmaceutical company.
2013 was an eventful year for China Biologic Products. We achieved revenue
of $203.4 million and non-GAAP net income of $59 million, representing
year-over-year increases of approximately 10% and 23%, respectively. We
achieved such results in spite of a challenging anniversary over 2012 strong
growth, as well as a production suspension at our Guizhou facility since
June as we began the upgrade process to meet new “Good Manufacturing
Practice” (“GMP”) standards. The revenue growth in 2013 was attributable
to sales of our plasma products and placenta polypeptide products. The
breakdown between human albumin and IVIG fluctuated, primarily because
of the production suspension in Guizhou. At the beginning of 2013, our
sales team began to increase its penetration of IVIG products into high-end
markets, primarily consisting of Beijing, Shanghai and Guangdong. The initial
market response was encouraging and we believe there is significant growth
potential that we can cultivate from these products over the next several years.
Similar to 2012, we benefitted from focusing our sales efforts on direct sales
to hospitals and inoculation centers which helped maintain pricing power.
With continuous efforts of transitioning to a more profitable product mix and
implementing stringent cost control measures, we increased our operating
margin to 42.7% from 40.3% and net margin to 26.9% from 24.5% in 2012.
During 2013, we generated $74.3 million in net cash from operating activities
and ended the year with a strong balance sheet, including 144.1 million in
cash and cash equivalents and approximately $200.9 million in working capital.
A major goal for our business in 2013 was to ensure full compliance with
GMP standards. Through our efforts during the year, our Shandong Taibang
facility obtained the renewal of its GMP certification for plasma production in
June 2013, while Guizhou Taibang completed its GMP upgrade in January
2014. We received GMP certification for a placenta polypeptide production
Mr. David (Xiaoying) Gao
Chairman, CEO & President
facility at Guizhou Taibang in January 2014 and GMP certification
for plasma production in March 2014. With these upgrades, we are
confident we can increase our capacity and sales opportunity at
Guizhou Taibang and Shandong Taibang to meet growing market
demand.
During the summer of 2013, we announced a number of
encouraging business initiatives. First, we commenced commercial
operation at our new plasma collection center in Cao County located
in Shandong Province. The plasma market in China is a highly
regulated and underserved market. With an expanding number of
plasma collection centers in three provinces, China Biologic is well
positioned to increase its output. In 2013, we experienced a 16%
increase in our plasma collection volume, mostly through organic
growth. We are encouraged with the growing collection volumes at
Cao County and expect it to reach its designed capacity over the
next three years, potentially expanding our collection volume in the
Shandong region by approxmately ten to fifteen percent. Second,
we obtained the required governmental approval to manufacture
human prothrombin complex concentrate (“PCC”) at our Guizhou
Taibang facility. We will commence commercial production of this
new product after obtaining the GMP certification in March 2014.
We are also pleased with our improved plasma utilization efficiency
as commercial production and sales of human coagulation factor
FVIII (“FVIII”) ramped up in 2013. In July, our Shandong Taibang
facility received the manufacturing approval certificate for a new
dosage of FVIII (300IU), which further solidifies our leadership in
the industry.
At the non-operational level, we continued our efforts to strengthen
our corporate governance and increase shareholder value. In an
effort to optimize our shareholding structure, we repurchased
approximately 1.48 million shares of common stock from Ms. Lin
Ling Li, an individual shareholder, for $29.6 million in August 2013
and further repurchased 2.5 million shares of common stock from
Ms. Siu Ling Chan, an individual shareholder, for $70 million in
February 2014. The repurchased shares represent approximately
14.76% of the total common stock outstanding in early August prior
to the first share repurchase.
As we head into 2014, we believe we can
further capitalize on the growth trends of the
plasma product
industry. We have new
products in the pipeline, most notably our
Shandong subsidiary’s PCC product and
human hepatitis B immunoglobulin (pH 4) for
intravenous injection product. The latter is
in Phase III clinical trials and its commercial
production is expected to commence in 2015.
We also see great opportunity to further
penetrate sales of IVIG and higher-margin
hyper-immune products in certain markets
and increase our production and sales of
Placenta Polypeptide products. We anticipate
growth in 2014 to be driven by our increased
plasma supply, expansion of our product
portfolio, and ongoing efforts to improve our
market share.
Finally, I would like to express my deepest
respect and appreciation
to all of our
employees for their efforts and contributions
to our Company. We always endeavor to serve
the interests of our shareholders, employees
and customers, while simultaneously pursuing
a long-term sustainable growth plan for China
Biologic Products. We intend to implement
CBPO’s short and long-term growth plans
to ensure that China Biologic solidifies and
enhances its leadership position in China’s
growing plasma-based biopharmaceuticals
market.
Sincerely,
David (Xiaoying) Gao
Chairman, CEO & President
China Biologic Products, Inc.
Annual Report 2013Annual Report 2013 10
11
Plasma Collection
Plasma is a key item among China’s national strategic reserves for emergency
response and disease treatment.
China’s plasma fractionation throughput in 2013 was 4.5 million liters*, barely
meeting half of the demand for plasma protein products.
Former Minister of Health Zhu Chen has since indicated that China’s domestic
plasma industry needs to double blood product supply and to establish more
plasma collection stations.
China now has some of the world’s strictest policies on raw material collection
for blood products.
2000
“Primary Standards for Plasma Stations”
2006
“Plasma Station Quality Management Practices,”
“Reforming Plasma Collection Stations”
2008
“Management of Plasma Stations”
2009
“National Test for Mixed Blood”
2011
“Standardized Procedures for Plasma Collection”
China’s plasma-based products industry is strictly supervised by the Chinese
government. From 1986, imports of all plasma-based products were banned
except for human albumin.
Source: Company estimate
Operational Review
Puding Plasma Collection Center, Guizhou
Cao Xian Plasma Collection Center, Shandong
Annual Report 2013Annual Report 2013
12
13
Manufacturing
Shandong Taibang
Guizhou Taibang
Xi’an Huitian
State-of-the-art Fractionation Facilities
Three manufacturing bases, 1,300 metric tons of annual capacity.
Plasma Donor Management: five steps to assure safe plasma from healthy donors
Pipelined Equipment
Closed Reaction Tanks
I. Facial identification
II. Five times
fingerprint identification
III. ID card identification
system
IV. Physical
examination before
donating plasma.
Assures up to standards
for HBsAg, HCV, HIV,
ALT, and syphilis.
V. Fully-automatic
plasma collection
machine. Fully
enclosed and one-off
medical instruments.
S/D Inactivated Heat Preservation Tank
Automatic Sub-Packing System
Annual Report 2013Annual Report 2013 14
15
Products
Human Albumin
Human Hepatitis B Immunoglobulin
Emergency blood loss, burns,
post-surgery volume replacement,
albumin-depleting kidney diseases,
and malignant tumors.
Prevention and treatment for hepatitis B
infections for infants whose mothers are
hepatitis B surface antigen positive, patients
who are accidentally infected, and patients
who come into close contact with hepatitis
B patients and hepatitis B carriers.
Human Immunoglobulin
for Intravenous Injection
Treatment of primary and
secondary immune deficiencies,
autoimmune deficiencies,
and acute infections.
Human Tetanus Immunoglobulin
Human Rabies Immunoglobulin
Human Immunoglobulin
Prevention and treatment for tetanus,
particularly for patients who have allergic
reactions or hypersensitivity to TAT.
Mainly for passive immunity from bites or claws
by animals infected with rabies. All human
patients suspected of being exposed to rabies
are recommended to be given both a rabies
vaccine and the human rabies immunoglobulin.
Used to treat severe bacterial or
viral infections, such as the
prevention of measles and
infectious hepatitis.
Human Coagulation Factor VIII
Thymopolypeptides Injection
Placenta Polypeptide
Prevention and treatment for
hemophilia A, a bleeding disorder,
with supplies additional amount of
blood coagulation factor VIII.
Treatment for various T-cell deficiency
syndromes, auto-immune deficiency
diseases, cell immunity deficiency
diseases, and in treating tumors.
Treatment for cell immunity
deficiency diseases, viral infection
and leucopenia caused by various
reasons, and assist in postoperative
healing
Plasma-derived products are used for treating various health conditions.
for emergency care during disaster relief (earthquakes, floods);
in the prevention or treatment of epidemic diseases (SARS, influenza, A H3N2, foot and mouth disease);
used for treating patients with immune deficiencies / disorders;
with other urgent treatments involving blood loss;
for the treatment of hereditary genetic disorders (hemophilia).
Annual Report 2013Annual Report 2013
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17
New Product Pipeline
Products
Preclinical Phase l Phase ll Phase lll
Human Prothrombin
Complex Concentrate
Human Hepatitis B
Immunoglobulin (pH 4)
for Intravenous Injection
Human Fibrinogen
IVIG Next Generation
Human Antithrombin III
(concentration)
Varicella Hyper-immune
Globulins
Registration, Filing
Commercialization
Commercial production
expected in 2014
In Phase III clinical trial &
Commercial production
expected in 2015
Approved to commence clinical trial &
commercial production expected in 2016
Application made to the National Institutes
for Food and Drug Control (“NIFDC”)
for official virus inactivation. Approval
of clinical trials expected in 2015.
Approval of clinical trials
expected in 2015.
Research & Development
Innovation focuses on:
Expanding portfolio of plasma-based biopharmaceutical products
Maximizing manufacturing efficiency
Enhancing product quality through new technologies
Continual improvement in production methods
Annual Report 2013Annual Report 2013 18
19
•
In 2012, the Chinese plasma protein market size was estimated to be RMB 10.46 billion ($1.66
billion). Among Chinese plasma fractionation companies, CBPO ranked second in terms of
revenue and had a fractionation volume market share of 10.7%, according to MRB.
• China is now the second largest plasma product market in the world behind the US.
•
In 2012, albumin represented 57% of the plasma-derived market; with the remaining portion
being comprised of the following: IVIG, 28.3%; IMIG, 12.6%; coagulation factors and other
products, 2.0%. In 2012, 205 tons of albumin were sold in China (the equivalent of 16.4
million 12.5 gram vials), up 40% from 2009.
•
In 2012, the Chinese albumin market was approximately 40% larger than the U.S. market.
• By 2015, the Chinese plasma protein products market is forecasted to reach approximately
RMB 16 billion ($2.5 billion), representing an over 50% increase from 2012. Albumin will
remain the largest product with an increase of at least 15% per year between 2012 and 2015.
Source: The Marketing Research Bureau
Market Size of Plasma Protein Products in China
($ in Billions)
Biologic Products Market in China
($ in Billions)
21.0
CAGR = 16%
2.5
1.6
CAGR = 20%
5.9
2012
2015E
Source: The Marketing Research Bureau
2013
2020E
Source: Morgan Stanley
Chinese Plasma Protein Market
Annual Report 2013Annual Report 2013 Board of Directors
and Master of Engineering Management from the Kellogg Graduate School
of Management, a Ph.D. in Cell and Molecular Biology from the University of
Rochester, and a Bachelor of Science in Biophysics from Fudan University.
Mr. David (Xiaoying) Gao
Chairman, CEO & President
Mr. Gao has been a member of our Board since October 6, 2011, our Chairman
Mr. Zhang has been a member of our Board since October 01, 2012. He has
since March 30, 2012 and our Chief Executive Officer since May 10, 2012.
served as a Partner of DT Capital Partners since 2008, in which capacity
From February 2004 until the company’s acquisition by Sanofi in February
Mr. Zhang is responsible for identifying and evaluating potential investment
2011, Mr. Gao served as the Chief Executive Officer and director of BMP
opportunities. Prior to joining DT Capital Partners, Mr. Zhang was an investment
Sunstone Corporation (Nasdaq: BJGP). Following the acquisition, he served
banker at Goldman Sachs Gao Hua Securities from 2006 to 2008, he also
as a senior integration advisor for Sanofi from February to August 2011. From
worked as a senior manager at Huwei Technologies from 2000 to 2004 and a
February 2002 through February 2004, Mr. Gao served as Chairman of BMP
product manager at Alcatel from 1998 to 2000. Mr. Zhang currently serves as
China’s board of directors. Mr. Gao served as President and director of Abacus
Director of Chongqing Chuanyi Automation Co. Ltd, Zhongtian Environmental
Investments Ltd, a private wealth management company, from August 2003
Protection Co. Ltd, Shanghai Liangjiang Communications, Chongqing
until June 2004, and as Chief Executive Officer of Abacus from July 2003 to
Zhongshe Engineering Design Co. Ltd and Haizhou Chemicals. Mr. Zhang
June 2004. From 1989 to 2002, Mr. Gao held various executive positions at
also serves as supervisor of Porton Fine Chemicals Co. Ltd (ticker“300363”,
Motorola, Inc., including: Vice President and Director, Integrated Electronic
China). Zhang holds a M.B.A. from Sloan School of Management, the
System Sector, Asia-Pacific operation, from 1998 to 2002; Member, Motorola
Massachusetts Institute of Technology, and a M.S. and a B.S. in electrical
Asia Pacific Management Board, Management Board of Motorola Japan Ltd.,
engineering from Harbin Institute of Technology.
from 2000 to 2002; and Motorola China Management Board from 1996 to 2002.
Mr. Gao holds a B.S. in Mechanical Engineering from the Beijing Institute of
Technology, a M.S. in Mechanical Engineering from Hanover University,
Mr. Shao has been a member of our Board since July 24, 2008. Mr. Shao
Germany, and an M.B.A. from The Massachusetts Institute of Technology.
currently serves as (i) independent director and chairman of the audit committee
of: LightInTheBox Holdings Co. Ltd., a global e-commerce company listed on
NYSE since June 2013; UTStarcom Holdings Corp., a provider of broadband
Mr. Charles (Le) Zhang
Director
Dr. Li has been a member of our Board since February 27, 2011. He has
equipment and solutions listed on NASDAQ since October 2012; Xueda
served as an advisor of Warburg Pincus Asia LLC since June 2010 and has
Education Group, a Chinese personalized tutoring services company listed
served as an Executive Director in Warburg Pincus Asia LLC since June
on NYSE since March 2010; Yongye International, Inc., a Chinese agricultural
2011, in which capacity Dr. Li evaluates potential investment opportunities
company listed on NASDAQ since April 2009, and (ii) independent director
and manages portfolio in the healthcare space. Prior to joining Warburg
and chairman of the nominating committee of Agria Corporation, a Chinese
Pincus Asia LLC, Dr. Li served from November 2007 to June 2010 as the
agricultural company listed on NYSE since November 2008. He served as
General Manager of Enterprise Business and Business Development at
the chief financial officer of Trina Solar Limited from 2006 to 2008. In addition,
GlaxoSmithKline China/Hong Kong, and from August 2006 to October 2007,
Mr. Shao served from 2004 to 2006 as the chief financial officer of ChinaEdu
as the Commercial Development Director of GlaxoSmithKline China/Hong
Corporation, an educational service provider, and of Watchdata Technologies
Mr. Sean Shao
Independent Director
Chairman of Audit Committee
& Compensation Committee
Dr. Bing Li
Director
Kong. Dr. Li led efforts in creating the brand generics business and several
Ltd., a Chinese security software company. Prior to that, Mr. Shao worked at
M&A/JV deals While at GlaxoSmithKline. Prior to that, Dr. Li served from April
Deloitte Touche Tohmatsu CPA Ltd. for approximately a decade. Mr. Shao
1999 to August 2006 in various positions with Eli Lilly and Company in the
received his master’s degree in health care administration from the University
United States, including functions of strategy, business development, new
of California at Los Angeles in 1988 and his bachelor’s degree in art from
product planning and sourcing. Dr. Li currently serves as Director of Zhejiang
East China Normal University in 1982. Mr. Shao is a member of the American
Weixin BioPharmaceutical. Dr. Li holds a Master of Business Administration
Institute of Certified Public Accountants.
Dr. Yungang Lu
Independent Director
Chairman of Governance
& Nominating Committee
Dr. Lu has been a member of our Board since March 19, 2012 and currently
Mr. Tong has been a member of our Board since April 20, 2012. He has
serves as chairman of our Governance and Nominating Committee. Dr. Lu has
served as the chairman of the board of directors of several corporations,
served as a Managing Director of Seres Asset Management Limited, an invest-
including Spain Qifa Corporation Ltd. since 1996, Hong Kong Tong’s
ment manager based in Hong Kong, since August 2009. Dr. Lu also serves
Group since 2007, Sunstone (Qingdao) Plant Oil Co., Ltd. since 2008,
as a board director of the following listed companies: AsiaInfo-Linkage, Inc.,
Sunstone (Qingdao) Food Co., Ltd. since 2009, Shengda (Zhangjiakou)
a provider of software solutions and IT services in China’s telecommunica-
Pharmaceutical Co., Ltd. since 2011 and Shengda (Qianxi) Chinese
tions industry, China Techfaith Wireless Communication Technology Ltd., a
Medicine Cultivation Co., Ltd. since 2012. Mr. Tong has also served as
handheld device company in China, and China Cord Blood Corporation, a
a director and a vice president of Spain International Haisitan Group
provider of cord blood storage services in China. From 2004 to July 2009, Dr. Lu
since 1993. From 2007 to 2011, He also served as the president and a
was a Managing Director of APAC Capital Advisors Limited, a Hong Kong-
director of BMP Sunstone Corporation, a NASDAQ-listed pharmaceutical
based investment manager specializing in Greater China equities. Dr. Lu was
corporation.
Mr. Zhijun Tong
Independent Director
a research analyst with Credit Suisse First Boston (Hong Kong), a financial
services company, from 1998 to 2004, where his last position was the head of
China Research. Before moving to Credit Suisse, he worked as an equity analyst
focused on regional infrastructure at JP Morgan Securities Asia, a financial
services company, in Hong Kong. Dr. Lu received a B.S. in Biology from Peking
University, an M.S. in Biochemistry from Brigham Young University and a Ph.D.
in Finance from the University of California, Los Angeles.
Mr. Yeung has been a member of our Board since July 29, 2012. Mr.
Yeung has been since 2005 a partner of Albert Yeung & Associate
Consulting Company, a consulting company providing M&A, leadership
and executive coaching services to senior managers and chief executive
officers. From August 2006 to February 2011, Mr. Yeung also served as
a director of BMP Sunstone Corporation, a company listed on NASDAQ
until the company’s acquisition by Sanofi. Prior to that, Mr. Yeung had
Prof. Liu has been a member of our Board since February 27, 2011. From
spent more than 30 years in China’s pharmaceutical industry, holding
2007 to 2011, Prof. Liu served as the Chief Consultant for Sichuan Yuanda
various senior sales, marketing and general management positions with
Shuyang Pharmaceuticals. Prior to that, he served from 2000 to 2007, in
major pharmaceutical corporations in Hong Kong and mainland China,
various managerial positions including as Chief Engineer and Director of
including Johnson & Johnson, Xian-Janssen, Burroughs Wellcome, Bristol
Hualan Biological Engineering, and as Director of Blood Separating, from
Myers-Squibb and GlaxoSmithKline.
Mr. Albert (Wai Keung) Yeung
Independent Director
Prof. Wenfang Liu
Independent Director
2005 to 2006, at Chengdu Jiaying Medical Product Co Ltd. Prior to that,
Prof. Liu served, from 1998 to 1999, as Chief Engineer of Guiyang Qianfeng
Biological Products Co. Ltd., and from 1988 to 1998 as Vice Chairman of the
Institute of Blood Transfusion of Chinese Academy of Medical Sciences. Prof.
Liu is currently a Member of the Sichuan CPPCC Standing Committee, and
previously served as a member of the Chinese Society of Blood Transfusion
and the China Medical Biotech Association. He holds a Bachelors Degree
in Bio-Chemistry from the Chinese Academy of Sciences, Forest and Soil
College and was a Ph.D. advisor from 1997 to 1998.
Mr. Li has been a member of our Board since November 4, 2013. Mr.
David Li has served as a Managing Director of Warburg Pincus Asia LLC
(“Warburg Pincus”) since 2002. Mr. David Li is responsible for Warburg
Pincus’ investment activities in China. Prior to joining Warburg Pincus,
Mr. Li served as an executive director in the investment banking division
of Goldman Sachs from 2001 to 2002 and that of Morgan Stanley from
1994 to 2001. He is also a director of China Auto Rental Holdings, China
Kidswant Investment Holdings Co., Ltd, Cubic City (China) Service
Apartment Group, D. Tong Insurance Sales & Service and Synutra
International. Mr. Li received a B.S. in economics from Renmin University
of China and an M.B.A. from Yale University School of Management.
Mr. David Hui Li
Director
24
25
As a leading plasma-based biopharmaceutical company in China, China Biologic Products, Inc.
is committed to fulfilling its role as a caring and responsible corporate citizen focused on ensuring
that patients have access to life-saving drugs. Our efforts align with and support our mission of
saving and enhancing the quality of our patients’ lives.
Key CSR initiatives in 2013 include:
In April 2013, Shandong Taibang donated 500 bottles of human albumin and 1000 bottles of
Tetanus immunoglobulin for those injured in the devastating earthquake that struck Lushan
County, Ya’an City in China’s Sichuan province.
In July 2013, 110 employees at Guizhou Taibang participated in the voluntary whole-blood
donation event, as part of the community effort to address the local blood shortage.
In November 2013, Shandong Taibang and Guizhou Taibang each donated RMB 500,000
to the Beijing Medical Award Foundation, which is dedicated to awarding excellence in
heathcare practice and research.
In 2013, Shandong Taibang donated 2,220 bottles of Human Coagulation Factor VIII with
market value of approximately RMB 0.8 million to the Hemophilia Home of China (HHC) to
support low-income hemophilia patients.
Corporate
Social Responsibility
Annual Report 2013Annual Report 2013
26
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2013
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission File No. 001-34566
CHINA BIOLOGIC PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
Delaware
75-2308816
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
18th Floor, Jialong International Building, 19 Chaoyang Park Road
Chaoyang District, Beijing 100125
People’s Republic of China
(Address of principal executive offices)
(+86) 10-6598-3111
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, par value $0.0001 per share
Preferred Share Purchase Rights
NASDAQ Global Select Market
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [_] No [X]
In 2014, we remain committed to pursuing activites that will benefit individuals with coagulation deficiency,
or other rare and serious medical conditions that can be treated by our products. We will work with local
governments and third-party philanthrophic organizations on a range of issues that affect coagulation
deficiency patients, providing a wide scope of services from education to advocacy, and intend to make
ongoing financial and product donations to raise awareness and ensure adequate access to our plasma-
based products.
Form 10-KAnnual Report 2013
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
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DOCUMENTS INCORPORATED BY REFERENCE
Annual Report on Form 10-K
Year Ended December 31, 2013
Table of Contents
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PART I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3.
Legal Proceedings
Item 4. Mine Safety Disclosures
PART II
51
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
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of Equity Securities
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting fees and Services
Portions of the Registrant’s Proxy Statement for its 2014 Annual Meeting of Stockholders to be filed with the
Commission within 120 days after the close of the Registrant’s fiscal year are incorporated by reference into Part III
of this Annual Report on Form 10-K.
PART IV
82
Item 15. Exhibits, Financial Statement Schedules
Form 10-KForm 10-K
Special Note Regarding Forward Looking Statements
Use of Terms
In addition to historical information, this report contains forward-looking statements within the meaning of Section
Except as otherwise indicated by the context and for the purposes of this report only, references in this report to:
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. We use words such as “believe,” “expect,” “anticipate,” “project,” “target,” “plan,” “optimistic,” “intend,”
“aim,” “will” or similar expressions which are intended to identify forward-looking statements. Such statements
include, among others, those concerning market and industry segment growth and demand and acceptance of
new and existing products; expectations regarding governmental approvals of our new products; any projections of
sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of
management for future operations; any statements regarding future economic conditions or performance; as well as
all assumptions, expectations, predictions, intentions or beliefs about future events. You are cautioned that any such
forward-looking statements are not guarantees of future performance and involve risks and uncertainties, as well
as assumptions, which, if they were to ever materialize or prove incorrect, could cause the results of the Company
to differ materially from those expressed or implied by such forward-looking statements. Risks and uncertainties
that could cause actual results to differ materially from those anticipated include risks related to, among others: our
ability to overcome competition from local and overseas pharmaceutical enterprises; decrease in the availability,
or increase in the cost, of plasma; failure to renew plasma collection permits for plasma stations; failure to meet
the GMP standard or other mandatory requirements for any of our facilities; failure to obtain PRC governmental
approval to increase retail prices of certain of our biopharmaceutical products; loss of key members of our senior
management; and unexpected changes in the PRC government’s regulation of the biopharmaceutical industry in
China, or changes in China’s economic situation and legal environment. Additional disclosures regarding factors
that could cause our results and performance to differ from results or performance anticipated by this report are
discussed in Item 1A “Risk Factors.”
Readers are urged to carefully review and consider the various disclosures made by us in this report and our other
filings with the SEC. These reports attempt to advise interested parties of the risks and factors that may affect
our business, prospects, financial condition and results of operations. The forward-looking statements made in
this report speak only as of the date hereof and we disclaim any obligation, except as required by law, to provide
updates, revisions or amendments to any forward-looking statements to reflect changes in our expectations or future
events.
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“China Biologic,” the “Company,” “we,” “us,” or “our,” are to the combined business of China Biologic Products, Inc.,
a Delaware corporation, and its direct and indirect subsidiaries;
“Taibang Biological” are to Taibang Biological Limited (formerly Logic Express Limited), our wholly owned
subsidiary and a BVI company;
“Taibang Holdings” are to Taibang Holdings (Hong Kong) Limited (formerly Logic Holdings (Hong Kong)
Limited), our wholly-owned subsidiary and a Hong Kong company;
“Taibang Biotech” are to Taibang Biotech (Shandong) Co., Ltd. (formerly Logic Management and Consulting
(China) Co., Ltd.), our wholly owned subsidiary and a PRC company;
“Taibang Beijing” are to Taibang (Beijing) Pharmaceutical Research Institute Co., Ltd. (formerly Logic Taibang
Biotech Institute (Beijing)), our wholly owned subsidiary and a PRC company;
“Dalin” are to Guiyang Dalin Biologic Technologies Co., Ltd., our wholly owned subsidiary and a PRC company;
“Shandong Taibang” are to Shandong Taibang Biological Products Co. Ltd., our majority owned subsidiary and
a sino-foreign joint venture incorporated in China;
“Taibang Medical” are to Shandong Taibang Medical Company, our wholly owned subsidiary and a PRC
company;
“Guizhou Taibang” are to Guizhou Taibang Biological Products Co., Ltd. (formerly Guiyang Qianfeng Biological
Products Co., Ltd.), our majority owned subsidiary and a PRC company;
“Huitian” are to Xi’an Huitian Blood Products Co., Ltd., our minority owned investee and a PRC company;
“Board” are to our board of directors;
“BVI” are to the British Virgin Islands;
“Hong Kong” are to the Hong Kong Special Administrative Region of the People’s Republic of China;
“PRC” and “China” are to the People’s Republic of China and for the purpose of this report only, excluding
Hong Kong, the Macau Special Administrative Region of the People’s Republic of China and Taiwan;
“SEC” are to the Securities and Exchange Commission;
“Securities Act” are to the Securities Act of 1933, as amended;
“Exchange Act” are to the Securities Exchange Act of 1934, as amended;
“Renminbi” and “RMB” are to the legal currency of China;
“U.S. dollars,” “dollars” “USD” and “$”are to the legal currency of the United States; and
“New GMP Standard” are to the Drug Good Manufacturing Practice Regulations enacted by China’s Ministry
of Health on February 12, 2001 and the Good Manufacturing Practice Implementation Guidelines published by
China Food and Drug Administration (“CFDA”) on February 24, 2011.
Form 10-KForm 10-K ITEM 1. BUSINESS.
Overview of Our Business
We are a biopharmaceutical company principally engaged in the research, development, manufacturing and sales
of human plasma-based pharmaceutical products in China. We have two majority owned subsidiaries, Shandong
Taibang, a company based in Tai’an, Shandong Province and Guizhou Taibang, a company based in Guiyang, Guizhou
Province. We also hold a minority equity interest in Huitian, a company based in Xi’an, Shaanxi Province. The human
plasma-based biopharmaceutical manufacturing industry in China is highly regulated by both provincial and central
governments. Accordingly, the manufacturing process of our products is strictly monitored from the initial collection of
plasma from human donors to finished products.
Our principal products are human albumin and immunoglobulin products. Albumin has been used for almost 50 years to
treat critically ill patients by replacing lost fluid and maintaining adequate blood volume and pressure. Immunoglobulin is
used for certain disease prevention and treatment by enhancing specific immunity. These products use human plasma
as the principal raw material. Human albumin and human immunoglobulin for intravenous injection, or IVIG products,
are our top-selling products. Sales of human albumin products represented approximately 44.1%, 44.6% and 54.5%
of our total sales for each of the years ended December 31, 2013, 2012 and 2011, respectively. Sales of IVIG products
represented approximately 38.0%, 39.0% and 32.3% of our total sales for each of the years ended December 31, 2013,
2012 and 2011, respectively. All of our products are prescription medicines administered in the form of injections.
We sell our products primarily to hospitals and inoculation centers in the PRC directly or through approved distributors.
We usually sign short-term contracts with customers and therefore our largest customers have changed over the years.
For the years ended December 31, 2013, 2012 and 2011, our top 5 customers accounted for approximately 11.0%,
10.8% and 13.2%, respectively, of our total sales. As we continue to diversify our geographic presence, customer base
and product mix, we expect that our largest customers will continue to change from year to year.
We operate and manage our business as a single segment. We do not account for the results of our operations on a
geographic or other basis.
Our principal executive offices are located at 18th Floor, Jialong International Building, 19 Chaoyang Park Road,
Chaoyang District, Beijing 100125, the People’s Republic of China. Our corporate telephone number is (86)10-6598-
3111 and our fax number is (86)10-6598-3222. We maintain a website at http://www.chinabiologic.com that contains
information about our company, but that information is not part of this report.
Our History and Background
China Biologic Products, Inc. was originally incorporated on December 20, 1989 under the laws of the State of Texas as
Shepherd Food Equipment, Inc. On November 20, 2000, Shepherd Food Equipment, Inc. changed its corporate name
to Shepherd Food Equipment, Inc. Acquisition Corp., which is the survivor of a merger with GRC Holdings, Inc. on May
28, 2003. On January 10, 2007, the Company was converted into a Delaware corporation and changed its name to
China Biologic Products, Inc.
Taibang Biological and Shandong Taibang
On July 19, 2006, we completed a reverse merger with Taibang Biological, whereby we issued to the shareholders
of Taibang Biological 18,484,715 shares of our common stock in exchange for 100% of the issued and outstanding
shares of capital stock of Taibang Biological and its majority-owned Chinese operating subsidiary, Shandong Taibang.
As a result of the merger, Taibang Biological became our wholly owned subsidiary, the former shareholders of Taibang
Biological became our controlling stockholders holding 96.1% of our common stock and Shandong Taibang became
our 82.76% majority-owned indirect subsidiary. Shandong Taibang is a sino-foreign joint venture company.
The remaining 17.24% equity interest of Shandong Taibang is held by the Shandong Institute of Biological Products
(“Shandong Institute”), a stated-owned entity established in 1971. Directly administrated by the Shandong Provincial
health department as its research arm, Shandong Institute specializes in the research, development and production
of biological and plasma-based biopharmaceutical products. In 2002, as the consideration for its equity interest in
Shandong Taibang, the Shandong Institute transferred all of its business and the licenses necessary to carry on its
business to Shandong Taibang and seconded certain of its employees to Shandong Taibang.
Plasma Collection Stations of Shandong Taibang
Shandong Taibang has eight plasma collection stations in Shandong Province and two in Guangxi Province. The
assets of these plasma stations are held through separate subsidiaries of Shandong Taibang, specially formed for this
purpose. The subsidiaries holding the ten plasma stations are Xia Jin Plasma Company, Qi He Plasma Company, He
Ze Plasma Company, Huan Jiang Plasma Company, Liao Cheng Plasma Company, Zhang Qiu Plasma Company, Fang
Cheng Plasma Company, Ning Yang Plasma Company, Yishui Plasma Company and Cao Xian Plasma Company. Among
these ten plasma stations, the one operated by Cao Xian Plasma Company was the latest addition. It was established in
January 2013, obtained the operating permits on April 1, 2013, and commenced plasma collection shortly thereafter.
In June 2008, we received approval from the Guangxi Province Bureau of Health to set up an additional plasma station
in Pu Bei County, Guangxi Province. We plan to locate this plasma station in the Centralized Industry Zone of Pu Bei
County and when it commences operation, it could replace our existing Fang Cheng Plasma Collection Station with
a more strategic location to increase collection volumes. However, due to disagreement among local government
branches on the approval of the plasma station, the management is uncertain whether this station will be approved
or when it will be approved. The management is still working with the local government for the approval of the Pu Bei
Plasma Station.
6
7
Form 10-KForm 10-KPART IPART I
Dalin and Guizhou Taibang
Corporate Structure
We hold our equity interest in Guizhou Taibang through Dalin, our indirect wholly-owned subsidiary.
The following chart reflects our current corporate organizational structure as of December 31, 2013:
According to the records of the local Administration for Industry and Commerce, or AIC, Dalin is a 54% shareholder of
Guizhou Taibang (formerly Guiyang Qianfeng Biological Products Co., Ltd.).
Guizhou Taibang initially owned 85% equity interest in seven plasma collection stations at the time of our acquisition, of
which two plasma stations remain in operation as of the date of this report. The remaining 15% equity interest in these
plasma stations was owned by certain non-controlling shareholders through their holdings in an intermediate company,
Guiyang Qianfeng Renyuan Bio Material Co., Ltd. (“Renyuan”). In January 2013, Guizhou Taibang purchased from these
non-controlling shareholders their equity interest in Renyuan. In May 2013, Guizhou Taibang further restructured its
equity interest in these two plasma stations, making them its direct wholly-owned subsidiaries.
In June 2013, Guizhou Taibang suspended the production of plasma-based products and commenced a
comprehensive upgrade to its plasma production facility. In January 2014, the upgrade was completed and the CFDA
conducted an on-site inspection on the upgraded plasma production facility. Guizhou Taibang expects to obtain the
GMP certification for such upgraded facilities in April 2014 and will resume commercial production at such production
facility thereafter.
Guizhou Taibang completed the GMP upgrade of its placenta polypeptide production facility in November 2013 and
received the GMP certification for such upgraded facilities from CFDA in January 2014.
Minority Equity Interest in Huitian
We hold a 35% interest in Huitian, a manufacturer of plasma-based biopharmaceutical products in Xi’an, Shaanxi
Province. Huitian produces about 80 tons of plasma-based products per year and has 200 tons of annual production
capacity. Huitian has been approved by the CFDA for the production of human albumin, human immunoglobulin, IVIG,
and human hepatitis B immunoglobulin products.
To meet the New GMP Standard, Huitian started to construct a new production facility and suspended the production at
its current facility at the end of 2013. Huitian expects to complete the construction of the new facility in 2015 and obtain
the GMP certificate for such new facility from CFDA thereafter.
China Biologic Products, Inc.
(Delaware)
100%
Taibang Biological Ltd.
(BVI)
100%
100%
Taibang Holdings (Hong Kong)
Limited
Taibang Biotech (Shandong)
Co., Ltd.
Off Shore
On Shore
100%
100%
100%
Shandong Taibang
Medical Company
Guiyang Dalin Biologic
Technologies Co., Ltd.
Taibang (Beijing)
Pharmaceutical Research
Institute Co., Ltd.
82.76%
54%
35%
Shandong Taibang Biological
Products Co., Ltd.
Guizhou Taibang Biological Products
Co., Ltd.
Xi’an Huitian Blood
Products Co., Ltd.
100%
100%
100%
Xia Jin
Plasma Company
Qi He
Plasma Company
Guiyang Qianfeng
Biological Science
Company
Guiyang Qianfeng
Renyuan Bio
Material Co., Ltd.
100%
80%
20%
Pu Ding
Plasma Company
Zhen Yuan
Plasma Company
San Sui
Plasma Company
Huang Ping
Plasma Company
Wei Ning
Plasma Company
Na Yong
Plasma Company
Dan Zhai
Plasma Company
He Ze
Plasma Company
Huan Jiang
Plasma Company
Liao Cheng
Plasma Company
Ning Yang
Plasma Company
Zhang Qiu
Plasma Company
Fang Cheng
Plasma Company
Yi Shui
Plasma Company
Pu Bei
Plasma Company
Yuncheng
Ziguang
Biological
Science Company
Cao Xian
Plasma Company
100%
Fu Ping
Plasma Company
100%
Bai Shui
Plasma Company
80%
An Kang
Plasma Company
8
9
Form 10-KForm 10-KPART IPART I Our Industry
Plasma Collection in China
Plasma-Based Products Industry in China
We produce approved human albumin and immunoglobulin products, with human plasma as the primary raw material.
Compared to the more developed countries, China has a lower usage level of plasma products and the make-up and
The collection of human plasma in China is generally influenced by a number of factors such as government
range of the plasma-based pharmaceutical products is significantly different. Based on our analysis, in most developed
regulations, geographical locations of plasma collection stations, sanitary conditions of plasma stations, living
countries, immunoglobulin products account for the majority of the plasma-based biopharmaceutical products, while in
standards of the donors, and cultural and religious beliefs. Until 2006, only licensed plasma stations owned and
operated by the government could collect human plasma. Furthermore, each plasma station was only allowed to supply
plasma to the one manufacturer that had signed the “Quality Responsibility” statement with them. However, in March
2006, the Ministry of Health promulgated certain “Measures on Reforming Plasma Collection Stations,” or the Blood
Collection Measures, whereby the ownership and management of PRC plasma stations are required to be transferred
to plasma-based biopharmaceutical companies and the local government is charged with regulatory supervision
and administrative control in accordance with the policies of the central government. These measures also tightened
operational standard for plasma stations. As a result, all plasma stations are now having direct supply relationship with
their parent fractionation facilities. In 2011, on the 11th National People’s Congress which contemplated the China’s 12th
Five-Year Plan, Mr. Zhu Chen, China’s Minister of Health, encouraged China’s plasma industry to double plasma supply
from 2011 to 2015 to meet China’s needs. As a result, more plasma stations are expected to be built throughout China
in the foreseeable future.
We believe that these regulatory changes, including measures which limit illegal selling of blood, have improved the
quality of blood and plasma by increasing hygiene standards at plasma stations. As the operation of the plasma
China, human albumin products account for the vast majority of such products. We estimated that total immunoglobulin
products and human albumin products accounted for approximately 42% and 12%, respectively, of the total annual
plasma-derived products in developed countries in 2013, and accounted for approximately 31% and 67%, respectively,
of China’s during the same period.
Our Growth Strategy
Our mission is to become a first-class biopharmaceutical enterprise in China. To achieve this objective, we have
implemented the following strategies:
• Securing the supply of plasma. Due to the shortage of plasma, we plan to build new plasma collection stations
throughout China as well as to expand collection territories of existing plasma stations in order to secure our
plasma supply. By the end of 2013, we have a total of twelve plasma stations in operation, of which eight in
Shandong Province, two in Guangxi Province, and two in Guizhou Province. In addition, we are working with the
local government to obtain the plasma collection permit of our subsidiary located in Pu Bei, Guangxi Province. In
stations become more regulated and the donor population expands, we believe that the overall quality of plasma supply
the meanwhile, we carried out various promotion activities to stabilize and expand our donor base for the existing
will continue to improve, leading to a safer, more reliable finished product.
plasma stations. All of our plasma stations recorded increases in plasma collection volume in 2013 as compared to
The supply of plasma for plasma-based products in the PRC has been on the decline since 2003 from the historical
high of annual supply of approximately 7,000 metric tons to approximately 3,130 metric tons in 2008 and gradually
recovering to approximately 4,180 metric tons in 2010. We believe that the decline prior to 2008 was a direct result of
the government’s industry reforms of the country’s collection practices which led to the closure of many stations that did
not meet the new industry standards. In July 2011, the Guizhou Provincial Health Department issued and implemented
the revised “Plan for Guizhou Provincial Blood Collection Institutional Setting (2011-2014)” which limited the territories
permitted to set up plasma stations in Guizhou Province to four counties only. As a result, 16 plasma stations, including
four plasma stations of Guizhou Taibang, were closed down in July 2011. As a result, the supply of plasma in 2011
declined to approximately 3,540 metric tons. Based on reports promulgated by the PRC Ministry of Health and taking
into consideration both the growth of the collection volume of existing plasma stations and the establishment of new
plasma stations during 2012 and 2013, we estimate that the annual supply of plasma in China amounts to approximately
4,200 metric tons, as compared to 38,000 metric tons in the global market in 2013. The five largest manufacturers of
plasma products in China are estimated to account for more than 50% of the annual plasma collection. We estimate
revenues from the sale of plasma products in China amounted to approximately $2.2 billion in 2013, of which revenues
from the sale of human albumin and IVIG products accounted for about 89% in 2013.
2012.
• Acquisition of competitors and/or other biologic related companies. In addition to organic growth,
acquisition is an important part of our expansion strategy. Although there are about 33 approved plasma-based
biopharmaceutical manufacturers in the market, we believe that there are only 25 manufacturers in operation, and
only about half of them are competitive. The top five manufacturers in China are estimated to account for more
than 50% market share (excluding imports) as of December 31, 2013. Furthermore, we believe that the regulatory
authorities are considering further industry reform and those smaller, less competitive manufacturers will face
possible revocation of their manufacturing permits by the regulators, making them potential targets for acquisition.
If we are presented with appropriate opportunities, we may acquire additional companies, products or technologies
in the biologic related sectors (including but not limited to medical, pharmaceutical and biopharmaceutical) to
complement our current business operations.
•
Further strengthening of research and development capability. We believe that, unlike other more developed
countries such as the U.S., China’s plasma-based biopharmaceutical products are at the initial stage of
development. There are many other plasma-based products that are being used in the U.S. which are not
currently being manufactured in China. We intend to strengthen our research and development capability so as to
expand our product line to include plasma-based biopharmaceutical products that have higher margins and are
technologically more advanced. We believe that our increased focus on research and development will give us a
competitive advantage in China over our competitors.
10
11
Form 10-KForm 10-KPART IPART I • Market development and network expansion. Leveraging on the high quality and excellent safety record of
our products, we intend to (i) enhance our product penetration with our existing customers by introducing new
products and (ii) expand our geographic market to include other provinces where we envision significant market
potential.
Our Products
Our principal products are our approved human albumin and immunoglobulin products. Human albumin is principally
used to treat critically ill patients by replacing lost fluid and maintaining adequate blood volume and pressure. Human
immunoglobulin products are primarily used to enhance specific immunity, a defense mechanism by which the human
body generates certain immunoglobulin, or antibodies, against invasion by potentially dangerous substances. In a
situation where the human body cannot effectively react with these foreign substances, injection of our products will
provide sufficient antibodies to neutralize such substances. We are currently approved to produce 26 biopharmaceutical
products in nine major categories as follows:
Approved Products (1) (2)
Treatment / Use
Human albumin: - 20%/10ml,
20%/25ml, 20%/50ml,10%/100ml,
10%/20ml, 10%/50ml, 25%/50ml
and 20%/50ml(10g, from factor IV)
Shock caused by blood loss trauma or burn; raised intracranial
pressure caused by hydrocephalus or trauma; oedema or ascites
caused by hepatocirrhosis and nephropathy; prevention and treatment
of low-density-lipoproteinemia; and Neonatal hyperbilirubinemia.
Human hepatitis B immunoglobulin
– 100 International Units,
or IU, 200IU, 400IU
Prevention of measles and contagious hepatitis. When
applied together with antibiotics, its curative effect on certain
severe bacteria or virus infection may be improved.
Human immunoglobulin –
10%/3ml and 10%/1.5ml
Original immunoglobulin deficiency, such as X chain low immunoglobulin,
familiar variable immune deficiency, immunoglobulin G secondary
deficiency; secondary immunoglobulin deficiency, such as severe
infection, newborn sepsis; and auto-immune deficiency diseases,
such as original thrombocytopenia purpura or kawasaki disease.
IVIG – 5%/25ml, 5%/50ml,
5%/100ml and 5%/200ml
Same as above
Thymopolypeptides injection
– 20mg/2ml,5mg/2ml
Treatment for various original and secondary T-cell deficiency syndromes,
some auto-immune deficiency diseases and various cell immunity
deficiency diseases, and assists in the treatment for tumors.
Human rabies immunoglobulin
– 100IU, 200IU and 500IU
Mainly for passive immunity from bites or claws by rabies or other infected
animals. All patients suspected of being exposed to rabies will be treated with
a combined dose of rabies vaccine and human rabies immunoglobulin.
Human tetanus
immunoglobulin – 250IU
Mainly used for the prevention and therapy of tetanus. Particularly applied
to patients who have allergic reactions to tetanus antitoxin. (3)
Placenta polypeptide – 4ml/vial
Treatment for cell immunity deficiency diseases, viral infection and leucopenia
caused by various reasons, and assist in postoperative healing
Human coagulation factor VIII
(“FVIII”)– 200IU and 300IU
Treatment for coagulopathie such as hemophilia A and
increase concentration of coagulation factor VIII
Notes:
(1)
“%” represents the degree of dosage concentration for the product and each product has its own dosage requirement.
For example, human albumin 20%/10ml means 2g of human albumin is contained in each 10ml packaging and human
immunoglobulin 10%/3ml means 300mg of human immunoglobulin is contained in each 3ml packaging. Under PRC law, each
variation in the packaging, dosage and concentration of medical products requires separate registration and approval by the
CFDA before it may be commercially available for sale. For example, among our human albumin products, only human albumin
20%/10ml, 20%/25ml, 20%/50ml, 10%/100ml, 10%/20ml, 10%/50ml, 25%/50ml and 20%/50ml (10g, from factor IV) products are
currently approved and are commercially available.
(2)
“IU” means International Units, or IU. IU is a unit used to measure the activity of many vitamins, hormones, enzymes, and drugs.
An IU is the amount of a substance that has a certain biological effect. For each substance there is an international agreement
on the biological effect that is expected for 1 IU. In the case of immunoglobulin, it means the number of effective units of
antibodies in each package.
(3)
Tetanus antitoxin is a cheaper injection treatment for tetanus. However it is not widely used because most people are allergic to it.
We received the manufacturing approval certificate from CFDA for FVIII (200IU) in June 2012, obtained the GMP
certification for our production facility of such product in October 2012 and commenced the commercial production
shortly thereafter. We also received the manufacturing approval certificate from CFDA for FVIII (300IU) in July 2013
and commenced the commercial production in second half 2013. FVIII is widely used in the treatment of hemophilia
A. In China, there is a large hemophilia patient population whose treatment requires lifelong medication. Currently, only
three domestic companies produce plasma-based FVIII products. We plan to further expand our production for FVIII to
capitalize on the market demand of coagulation products in China.
Our approved human albumin, immunoglobulin, and FVIII products all use human plasma as the primary raw material.
All of our approved products are prescription medicines administered in the form of injections.
We have two product liability insurances covering Shandong Taibang’s and Guizhou Taibang’s products in the amount
of RMB20 million (approximately $3,231,000) each. Since our establishment in 2002, there has not been any product
liability claims nor has any legal action been filed against us by patients related to our products.
Raw Materials
Plasma
Plasma is the principal raw material for our biopharmaceutical products. As of December 31, 2013, we operate ten
plasma stations through Shandong Taibang and two plasma stations through Guizhou Taibang. We believe that our
plasma stations give us a stable source of plasma supply and control over product quality. Also, we believe that we have
enjoyed benefits of economies of scale, including sharing certain administration and management expenses across our
several plasma stations. We currently maintain sufficient plasma supply for approximately six months of production.
12
13
Form 10-KForm 10-KPART IPART I Other Raw Materials and Packaging Materials
in which the products may be sold. We provide our distributors with training in relation to our products and on sales
techniques. We generally ask our distributors to pay in advance before we deliver products, with few exceptions for a
Other raw materials used in the production of our biopharmaceutical products include reagents and consumables such
credit period of no longer than 30 days. For hospitals and clinics, we generally grant a credit period of no longer than
as filters and alcohol. The principal packaging materials we use include glass bottles for our injection products as well
90 days, with exceptions to certain high credit-worthy customers of up to 6 months. During 2013, we have not incurred
as external packaging and printed instructions for our biopharmaceutical products. We acquire our raw materials and
any significant bad debts from our customers.
packaging materials from our approved suppliers in China and overseas. We select our suppliers based on quality,
consistency, price and delivery of the raw materials which they supply.
As of December 31, 2013, our largest geographic market is Shandong province, representing approximately 27.3%,
24.1% and 23.0% of our total sales for the years ended December 31, 2013, 2012 and 2011, respectively. Jiangsu is our
Our five largest suppliers in the aggregate accounted for approximately 39.3%, 38.0% and 52.7% of our total
second largest geographic market, representing 8.4%, 7.6% and 6.7% of our total sales for the years ended December
procurement for the years ended December 31, 2013, 2012 and 2011, respectively. We have not experienced any
31, 2013, 2012 and 2011, respectively. In addition to Shandong and Guizhou provinces, we also have sales presence in
shortage of supply or significant quality issue with respect to any raw materials and packaging materials.
24 other provinces and four municipal cities.
Plasma Collection
Our marketing and after-sales services department currently employs 132 employees.
We believe that due to the nature of our products, the key factors of our competitiveness centers on product safety,
All of our plasma was collected through plasma stations of Shandong Taibang and Guizhou Taibang. These stations
brand recognition, timely availability and pricing. As all of our products are prescription medicines, we are not allowed
purchase, collect, examine and deepfreeze plasma on behalf of Shandong Taibang and Guizhou Taibang and are
to advertise our products in the mass media. For the years ended December 31, 2013, 2012 and 2011, total sales and
subject to provincial health bureau’s rules, regulations and specifications for quality, packaging and storage. Each
marketing expenses amounted to approximately $10.6 million, $14.4 million and $14.6 million, respectively, representing
station is only allowed to collect plasma from healthy donors within its respective districts and in accordance with a time
approximately 5.2%, 7.8% and 9.5%, respectively, of our total sales.
table set by its respective parent company, Shandong Taibang or Guizhou Taibang. The plasma must be tested negative
for HBsAb, HCV and HIV antibodies and the RPR test, contain ALT ≤25 units (ALT) and plasma protein ≥55g/l, and
contain no virus pollution or visible erythrolysis, lipemia, macroscopic red blood cell or any other irregular finding. The
Our Research and Development Efforts
plasma is packaged in 25 separate 600g bags in each box and then stored at -20°C within limited time after collection
to ensure that it will congeal within 6 hours. Each bag is labeled with a computer-generated tracking code. Shandong
Shandong Taibang and Guizhou Taibang each has its own research and development department (together, our “R&D
Taibang and Guizhou Taibang are responsible for the overall technical and quality supervision of the plasma collection,
Departments”). Our R&D Departments are equipped with specialized equipment including advanced testing and
packaging and storage at each plasma station.
Sales, Marketing and Distribution
analytical equipment, such as atomic absorptimeter, fully automated blood coagulation analyzer, high performance
liquid chromatograph, gas chromatograph, radioimmunoassay analyzer, ultraviolet-visible spectrophotometer, and
protein chromatograph, most of which were imported from the U.S., Japan, Italy, Germany and Australia. All of our R&D
researchers hold degrees in medicine, pharmacy, biology, biochemistry or other relevant field. Our R&D Departments
are responsible for the development and registration of our products. We also cooperate with third-party biological
Because all of our products are prescription drugs, we can only sell to hospitals and inoculation centers directly or
research institutes in China to strengthen our R&D capacity.
through approved distributors. For the years ended December 31, 2013, 2012 and 2011, direct sales to hospitals and
inoculation centers represented approximately 66.8%, 66.4% and 62.8%, respectively, of our total sales. Our five largest
We employ a market driven approach to initiate research and development projects, including both product and
customers in the aggregate accounted for approximately 11.0%, 10.8% and 13.2% of our total sales for the years
production technique development. We believe that the key to the industry developments revolves around (i) safety of
ended December 31, 2013, 2012 and 2011, respectively. Our largest customer accounted for approximately 2.7%, 3.6%
products and (ii) maximizing the yield per unit volume of plasma. Our research and development efforts are focused
and 6.2% of our total sales for the years ended December 31, 2013, 2012 and 2011, respectively.
around the following areas:
As part of our effort to ensure the quality of our distributors, we conduct due diligence to verify whether potential
distributors have obtained necessary permits and licenses and facilities (such as cold storage) for the distribution of
•
•
broaden the breadth and depth of our portfolio of plasma-based biopharmaceutical products;
enhance the yield per unit volume of plasma through new collection techniques;
our biopharmaceutical products. We also assess a distributor’s financial condition before appointing it as our distributor.
• maximize manufacturing efficiency and safety;
Certain of our regional distributors are appointed on an exclusive basis within a specified geographic territory. Our
supply contracts set out the quantity and price of products to be supplied by us. For distributors, our contracts also
contain guidelines for the sale and distribution of our products, including restrictions on the geographical territory
•
•
promote product safety through implementation of new technologies; and
refine production technology for existing products.
14
15
Form 10-KForm 10-KPART IPART I All the products we currently manufacture have been developed in-house. The following table outlines our research and
Our profitability may be adversely affected if (i) competition intensifies; (ii) competitors drastically reduce prices;
development work in progress:
Products Currently
in Development
Treatment / Use
Status of Product
Development
Stage*
Human prothrombin
complex concentrate
Used for the prophylaxis and treatment of
bleeding in patients with single or multiple
congenital deficiencies of factor II or X and
in patients with single or multiple acquired
prothrombin complex factor deficiency
requiring partial or complete reversal.
Application made to the CFDA
for official production permit and
product certification. Commercial
production expected in late 2014.
Human hepatitis B
immunoglobulin (pH4) for
intravenous injection
Prevention of measles and contagious
hepatitis. When applied together with
antibiotics, its curative effect on certain severe
bacteria or virus infection may be improved.
Application made to the CFDA
for official production permit and
product certification. Commercial
production expected in 2015.
Human fibrinogen
Treatment for lack of fibrinogen and
increase human fibrinogen concentration.
Clinical trial program under
CFDA review. Commercial
production expected in 2016.
Varicella hyperimmune
globulins
Used for treatment of eczema vaccinatum,
vaccinia necrosum, and ocular vaccinia
Develop scope and technique
for testing the new medicine.
Immune Globulin
Intravenous (Human),
Caprylate / Chromatography
Purified & 20 virus
filtration
Treatment for original immunoglobulin
deficiency; secondary immunoglobulin
deficiency and auto-immune
deficiency diseases
Application made to the National
Institutes for Food and Drug
Control (“NIFDC”) for official
virus inactivation. Approval of
clinical trials expected in 2015.
Human Antithrombin
III (concentration)
Treatment for (i) hereditary antithrombin
III deficiency in connection with
surgical or obstetrical procedures
and (ii) thromboembolism
Pre-validation of viral inactivation
and removal. Approval of
clinical trials expected in 2015.
4
4
3
1
1
1
* These stages refer to the stages in the regulatory approval process for our products disclosed under the heading “Regulation” in
(iii) PRC government’s interference on prices of our products; or (iv) competitors develop new products or product
substitutes having comparable medicinal applications or therapeutic effects which are more effective and /or less costly
than those produced by us.
There are currently about 33 approved manufacturers of plasma-based pharmaceutical products in China. Many
of these manufacturers are essentially producing the same type of products that we produce: human albumin and
various types of immunoglobulin. However, due to Ministry of Health regulations, we believe that it is difficult for
new manufacturers to enter into the industry. We believe that our major competitors in China are Hua Lan Biological
Engineering, China National Biotec Group, Shanghai RAAS Blood Products Co., Ltd., Shanxi Kangbao Biological
Product Co., Ltd., Sichuan Yuanda Shuyang Pharmaceutical Co and Jiangxi Boya Bio pharmaceutical Co., Ltd.
In addition, we also face competition from imported products. The PRC became a member of the WTO in December
2001 and as a result imported biopharmaceutical products enjoy lower tariffs. Since 2009, we have seen a substantial
increase in volume of imported human albumin in China. If the trend of importation of human albumin continues, we
may face more fierce competition in domestic human albumin market.
We believe that we continued to be one of the top ranked plasma-based biopharmaceutical companies in China in
2013 based on our analysis of plasma product approval announcement published by China National Institute for the
Control of Pharmaceutical and Biological Products throughout the year. To solidify our market position, we have also
expanded our product portfolio to include FVIII in 2012. We received the manufacturing approval certificate and the
GMP certification for production facility from CFDA for FVIII in 2012. We also have obtained the manufacturing approval
certificate for human prothrombin complex concentrate (“PCC”) in July 2013, and expect to obtain the GMP certification
for the production facility of PCC in 2014.
We will continue to meet challenges and secure our market position by enhancing our existing products, introducing
new products to meet customer demand, delivering quality products to our customers in a timely manner and
this report.
maintaining our established industry reputation.
For the years ended December 31, 2013, 2012 and 2011, total research and development expenses amounted to
approximately $4.2 million, $3.0 million and $4.0 million, respectively, representing approximately 2.1%, 1.6% and 2.6%,
Seasonality of our business
respectively, of our total sales.
Competition
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 biopharmaceutical products as our products in the PRC.
These competitors may have more capital, better research and development resources, more manufacturing and
marketing capability and experience than we do. In our industry, we compete based upon product quality, product cost,
ability to produce a diverse range of products and logistical capabilities.
Our business, operating results and operating cash flows historically have not been subject to significant seasonal
variations. This pattern may change, however, as a result of new market opportunities or new product introductions.
Our Intellectual Property
We have 42 registered patents and four pending patent applications in the PRC for certain manufacturing processes
and packing designs as of December 31, 2013. We also have one registered Trademark “CTBB” in the PRC.
In addition, we have registered the following domain names: www.chinabiologic.com, www.ctbb.com.cn and
We believe that we have a strong competitive position in the marketplace with our 82.76% majority-owned operating
subsidiary, Shandong Taibang, 54% majority-owned operating subsidiary, Guizhou Taibang and 35% equity interest in Huitian.
www.taibanggz.com.
16
17
Form 10-KForm 10-KPART IPART I Regulation
Set out below are some of the safety features at China’s plasma stations:
This section summarizes the major PRC regulations relating to our business.
•
Plasma stations can only source plasma from donors within the assigned district approved by the provincial health
authorities.
Due to the nature of our products, we are supervised by various levels of the PRC Ministry of Health and/or CFDA.
•
Plasma stations must perform a health check on the donor. Once the donor passes the health check, a “donor
Such supervision includes the safety standards regulating our raw material supplies (mainly plasma), our manufacturing
permit” is issued to the donor. The standards of the health check are established by the health authorities at the
process and our finished products.
State Council level.
We are also subject to other PRC regulations, including those relating to taxation, foreign currency exchange and
dividend distributions.
Plasma Collection
Substantially all plasma donations for commercialized plasma-based biopharmaceutical products are done through
plasma stations. Plasma donation means donors give only selected blood components — platelets, plasma, red cells,
infection-fighting white cells called granulocytes, or a combination of these, depending on donors blood type and the
needs of the community. Plasma stations in China are commonly used to collect plasma. In China, current regulations
only allow an individual donor to donate blood in 14-day intervals, with a maximum quantity of 580ml (or about 600
gram) per donation.
•
The designing and printing of the “donor permit” is administrated by the provincial health authorities, autonomous
region or municipality government, as the case maybe. The “donor permit” cannot be altered, copied or assigned.
• Before donors can donate plasma, the station must verify their identities and the validity of their “donor permits.”
The donors must pass the verification procedures before they are given a health check and blood test. For those
donors who have passed the verification, health check and blood test and whose plasma were donated according
to prescribed procedures, the station will set up a record.
• All plasma stations are subject to the regulations on the prevention of communicable diseases. They must strictly
adhere to the sanitary requirements and reporting procedures in the event of an epidemic situation.
The operation of plasma collection stations is subject to stringent regulations by the PRC government. We estimated
that there are approximately 150 plasma stations in operation in China as of December 31, 2013.
The following are the regulatory requirements to establish a plasma station in China:
• meet the overall plan in terms of the total number, distribution, and operational scale of plasma stations;
Importation of Blood Products
•
•
•
•
•
have the required professional health care technicians to operate a station;
have the facility and a hygienic environment to operate a station;
have an identification system to identify donors;
have the equipment to operate a station; and
have the equipment and quality control technicians to ensure the quality of the plasma collected.
According to current Chinese regulations, the following blood products are banned from importation into China:
•
•
Plasma – frozen, liquid and freeze-dried human plasma;
Immunoglobulin – human normal immunoglobulin, specific immunoglobulin, human anti-tetanus immunoglobulin,
human anti-hemophilia globulin, human anti-HBs immunoglobulin, human anti-D(Rho) immunoglobulin and
immunoglobulin for intravenous administration;
Plasma stations were historically owned and managed by the PRC health authorities. In March 2006, the Ministry of
•
Factor VIII – cryoprecipitated Factor VIII and Factor VIII concentrate (only Bayer is allowed, under a special
Health promulgated the Blood Collection Measures whereby the ownership and management of the plasma stations
arrangement with PRC government, to import this product into PRC, commencing November 2007);
are required to be transferred to plasma-based biopharmaceutical companies while the regulatory supervision
and administrative control remain with the government. As a result, all plasma stations are now having direct supply
relationship with their parent fractionation facilities.
•
Factor IX concentrate;
• Human fibrinogen;
•
Platelet concentrate;
• Human prothrombin complex; and
• Whole blood or blood components.
18
19
Form 10-KForm 10-KPART IPART I Production of Plasma-based Products
The manufacture and sale of plasma-based biopharmaceutical products are subject to stringent regulations by the PRC
government. Under PRC law, each variation in the packaging, dosage and concentration of medical products requires
separate registration and approval by the CFDA before it may be commercially available for sale. For example, among
our human albumin products, only human albumin 20%/10ml, 20%/25ml, 20%/50ml, 10%/100ml, 10%/20ml, 10%/50ml,
25%/50ml and 20%/50ml (10g, from factor IV) products are currently approved and are commercially available. All
references, in this report, to our manufacture and sale of human albumin relate to our approved human albumin
products.
The table below shows the PRC approval process for the manufacture and sale of new medicines:
Stage
Activities
The pre-clinical research stage mainly involves the following steps:
• Initiate the research project, study the project feasibility and develop a plan for testing and
producing the new medicine;
1
Pre-clinical
Research
• Develop the scope and the techniques for testing the new medicine in the laboratory;
• Develop laboratory-scale manufacturing process for the new medicine;
• Develop the manufacturing process for the new medicine on an expanded basis in the workshop;
• Develop the virus inactivation process/techniques, engage qualified institution to assess the virus
inactivation process/techniques, and report the related documents to the related government
authority for re-assessment.
The clinical trial application stage mainly involves the following steps:
2
Clinical trial
application
• Submit required sample products and documents to the Provincial Food and Drug Administration
(“PFDA”). PFDA will perform an on-site examination on the documents and equipment, and then
transfer all the required materials to the China Food and Drug Administration (“CFDA”), who will
further review the documents and test the sample products;
• Submit a draft clinical trial program to CFDA for the application of the clinical trial;
• Approval of the clinical trial.
Clinical trials range from Phase I to IV:
• Phase I: preliminary trial of clinical pharmacology and human safety evaluation studies. The
primary objective is to observe the pharmacokinetics and the tolerance level of the human body to
the new medicine as a basis for ascertaining the appropriate delivery methods or dosage.
• Phase II: preliminary exploration on the therapeutic efficacy. The purpose is to assess preliminarily
the efficacy and safety of the new medicine on patients and to provide the basis for designing
dosage tests in phase III.
• Phase III: confirm the therapeutic efficacy. The objective is to further verify the efficacy and safety
of the new medicine on patients, to evaluate the benefits and risks and finally to provide sufficient
experimental evidence to support the registration application of the new medicine.
• Phase VI: application research conducted after the launch of a new medicine. The objective is to
observe the efficacy and adverse reaction of the new medicine under extensive use, to perform an
evaluation of the benefits and risks of the application among ordinary or special group of patients,
and to ascertain and optimize the appropriate dosage and formula for application.
3 Clinical trials
Stage
Activities
The registration stage mainly involves the following steps:
4
Registration
• Submit documents related to pre-clinical and clinical trials to PFDA, which will perform on-site
inspection on the clinical trials and then transfer the related documents to CFDA for further review;
• On-site inspection by CFDA on three consecutive sample productions at the production facilities;
• Grant of the manufacturing approval certificate following the public notification period;
• Grant of GMP certificate following the public notification period.
New GMP Standard
All of our production facilities are required to obtain GMP certificates for their pharmaceutical production activities.
In February 2011, CFDA enacted the New GMP Standard, which has significantly increased standards for quality
control, documentation, and overall manufacturing processes of blood products, vaccines, injections and other sterile
pharmaceutical products. The New GMP Standard, among others, requires us to maintain and operate a comprehensive
and effective product quality control system throughout the production process. In addition, it imposes higher standards
for our production facility. The New GMP Standard has become applicable to all of our production facilities at the end of
2013. After respective upgrades on this production facilities, Shandong Taibang obtained the renewed GMP certificate
in June 2013, and Guizhou Taibang expects to obtain the renewed GMP certificate in April 2014 following the on-site
inspection conducted by CFDA in January 2014. See Item 1A “Risk Factors – Risk related to our business – One of
our production facilities has suspended production for technical upgrade and is awaiting the renewed GMP
certificate. We may not be able to carry on our business if we lose any of the permits and licenses required by
the PRC government in order to carry on our business.”
Pricing
Retail prices of certain pharmaceutical products are subject to various regulations. According to the “Regulations on
controlling blood products” promulgated by the State Council in 1996, regional offices of the Pricing Bureau and the
Ministry of Health have the authority to regulate retail prices for controlled plasma products. In addition, retail prices
of pharmaceutical products fully or partially covered under the national insurance system are also subject to the price
ceilings set out in the National (Medical) Insurance Catalog (the “NIC”), which may be adjusted by Chinese National
Development and Reform Commission (“NDRC”) from time to time. The hospitals as participants of the national
insurance program cannot sell the products to patients at prices exceeding such retail price ceilings. The provincial
governments in turn often establish a tender price ceiling for product tender offer made to hospitals based on, amongst
other things, the regional living standards, cost of production of the manufacturers and the corresponding retail price
ceiling. The ex-factory prices and the distributor’s wholesale prices cannot exceed the tender price ceiling. Five of our
principal products, human albumin, IVIG, human rabies immunoglobulin, human tetanus immunoglobulin and FVIII, are
included in the NIC and are subject to tender price ceilings. Two of our principal products, placenta polypeptide and
human hepatitis B immunoglobulin, although not included in the NIC, are also subject to tender price ceilings in certain
provinces. Our profit margin for any price-controlled product is effectively controlled by the tender price ceiling. When
a tender price ceiling puts significant pressure on the profit margin of a given product, we may appeal to the provincial
governments for lifting of such tender price ceiling.
20
21
Form 10-KForm 10-KPART IPART I In an announcement published in September 2012 (the “2012 Adjustment”), NDRC adjusted retail price ceilings for
related foreign exchange transactions, but not for capital account items, such as direct investment, loan or investment in
95 oncology, immunology and hematology drug products, which came into effect on October 8, 2012. Two of our
securities outside China unless the prior approval of, and/or registration with, the State Administration of Foreign Exchange
approved products, IVIG and FVIII are affected by the 2012 Adjustment. The new retail price ceilings for IVIG products
of the People’s Republic of China, or SAFE, or its local counterparts (as the case may be) is obtained.
are lower than the current prevailing market retail prices in some of our regional markets while those for FVIII are close
to the current prevailing market retail prices. As a result, some local governments revised tender price ceilings for
Pursuant to the Foreign Currency Administration Rules, FIEs in China may purchase foreign currency without the approval
IVIG products. In January 2013, NDRC further adjusted retail price ceilings for certain drug products, which came into
of SAFE for trade and service-related foreign exchange transactions by providing commercial documents evidencing
effect on February 1, 2013 (the “2013 Adjustment”). Three of our approved products, human albumin, human rabies
these transactions. They may also retain foreign exchange (subject to a cap approved by SAFE) to satisfy foreign exchange
immunoglobulin and human tetanus immunoglobulin are affected by the 2013 Adjustments. The 2013 Adjustment
liabilities or to pay dividends. In addition, if a foreign company acquires a company in China, the acquired company
slightly increased retail price ceilings for both human albumin and human tetanus immunoglobulin products and subject
will also become an FIE. However, the relevant PRC government authorities may limit or eliminate the ability of FIEs to
human rabies immunoglobulin products to a retail price ceiling for the first time. The retail price ceiling imposed on
purchase and retain foreign currencies in the future. In addition, foreign exchange transactions for direct investment, loan
human rabies immunoglobulin products by the 2013 Adjustment is close to the prevailing market retail price.
and investment in securities outside China are still subject to limitations and require approvals from, and/or registration
Taxation
with, SAFE.
Dividend Distributions
On March 16, 2007, the National People’s Congress of China passed the Enterprise Income Tax Law, or the EIT Law,
and on November 28, 2007, the State Council of China passed its implementing rules, which took effect on January 1,
Under applicable PRC regulations, FIEs in China may pay dividends only out of their accumulated profits, if any,
2008. Before the implementation of the EIT Law, foreign invested enterprises, or FIEs, established in the PRC, unless
determined in accordance with PRC accounting standards and regulations. In addition, a FIE in China is required to set
granted preferential tax treatments by the PRC government, were generally subject to an earned income tax, or EIT, rate
aside at least 10% of its after-tax profit based on PRC accounting standards each year to its general reserves until the
of 33.0%, which included a 30.0% state income tax and a 3.0% local income tax. The EIT Law and its implementing
accumulative amount of such reserves reach 50% of its registered capital. These reserves are not distributable as cash
rules impose a unified EIT of 25.0% on all domestic-invested enterprises and FIEs, unless they qualify under certain
dividends. The board of directors of a FIE also has the discretion to allocate a portion of its after-tax profits to staff
limited exceptions. However, the EIT Law gives FIEs established before March 16, 2007, or Old FIEs, a five-year
welfare and bonus funds, which may not be distributed to equity owners except in the event of liquidation.
grandfather period during which they can continue to enjoy their existing preferential tax treatments. During this five-year
grandfather period, Old FIEs that enjoyed tax rates lower than 25% under the original EIT Law can gradually increase
In addition, under the EIT law, the Notice of the State Administration of Taxation on Negotiated Reduction of Dividends
their EIT rate by 2% per year until their tax rate reaches 25%. In addition, the Old FIEs that are eligible for the “two-year
and Interest Rates, which was issued on January 29, 2008, the Arrangement between the PRC and the Hong Kong
exemption and three-year half reduction” or “five-year exemption and five-year half-reduction” under the original EIT law,
Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion, or the Double
are allowed to continue enjoying their preference until these holidays expire.
Taxation Treaty, which became effective on December 8, 2006, and the Notice of the State Administration of Taxation
Regarding Interpretation and Recognition of Beneficial Owners under Tax Treaties, which became effective on October
In addition to the changes to the tax structure, under the EIT Law, an enterprise established outside of China with “de
27, 2009, dividends from our PRC subsidiary, Taibang Biotech, paid to us through our Hong Kong subsidiary, Taibang
facto management bodies” within China is considered a resident enterprise and will normally be subject to an EIT of
Holdings, may be subject to a withholding tax at a rate of 10%, or at a rate of 5% if Taibang Holdings is considered
25% on its global income. The implementing rules define the term “de facto management bodies” as “an establishment
a “beneficial owner” that is generally engaged in substantial business activities in Hong Kong and entitled to treaty
that exercises, in substance, overall management and control over the production, business, personnel, accounting, etc.,
benefits under the Double Taxation Treaty.
of a Chinese enterprise.” If the PRC tax authorities subsequently determine that we should be classified as a resident
enterprise, then our organization’s global income will be subject to PRC income tax of 25%. For detailed discussion
of PRC tax issues related to resident enterprise status, see Item 1A “Risk Factors – Risks Related to Doing Business
Our Employees
in China – Under the Enterprise Income Tax Law, we may be classified as a ‘resident enterprise’ of China. Such
classification will likely result in unfavorable tax consequences to us and our non-PRC stockholders.”
Foreign Currency Exchange
As of December 31, 2013, we employed 1,533 full-time employees, of which approximately 66 were seconded to us by
the Shandong Institute.
We believe we are in material compliance with all applicable labor and safety laws and regulations in the PRC. We
participate in various employee benefit plans that are organized by municipal and provincial governments, including
The principal regulation governing foreign currency exchange in China is the Foreign Currency Administration Rules (1996),
retirement, medical, unemployment, work injury and maternity benefit plans for our managerial and key employees. In
as amended (2008). Under these Rules, RMB is freely convertible for current account items, such as trade and service-
addition, we provide short term insurance plans for all our employees while on duty to cover work related accidents.
22
23
Form 10-KForm 10-KPART IPART I We believe that we maintain a satisfactory working relationship with our employees and we have not experienced any
If the plasma we source is found to be contaminated, our operation, revenues and profitability would
significant labor disputes or any difficulties in recruiting staff for our operations.
be severely and adversely affected and we may be subject to civil and criminal liabilities.
Available Information
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments
to these reports, are available free of charge through our web site as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the Securities and Exchange Commission, at the following address:
www.chinabiologic.com. The information within, or that can be accessed through, the web site is not part of this report.
ITEM 1A. RISK FACTORS.
An investment in our common stock involves a high degree of risk. You should carefully consider the risks described
below, together with all of the other information included in this report, before making an investment decision. If any of
the following risks actually occurs, our business, financial condition or results of operations could suffer. In that case,
the trading price of our common stock could decline, and you may lose all or part of your investment. You should read
the section entitled “Special Note Regarding Forward Looking Statements” above for a discussion of what types of
statements are forward-looking statements, as well as the significance of such statements in the context of this report.
RISKS RELATED TO OUR BUSINESS
If the PRC government bans or limits plasma-based biopharmaceutical products, our operations,
revenues and profitability would be adversely affected.
The principal raw materials of our existing and planned biopharmaceutical products is human source plasma, which,
due to its unique nature, is subject to various quality and safety control risks which include, but are not limited to,
contaminations and blood-borne diseases. In addition, current technology cannot eliminate entirely the risk of biological
hazards inherent in plasma that have yet to be discovered, which could result in a wide spread epidemic due to blood
infusion. The primary law that regulates plasma products in China is the PRC Pharmaceutical Law, the Implementation
Rules on the PRC Pharmaceutical Law and the Regulations on the Administration of Blood Products. These rules
and regulations require entities producing blood products to comply strictly with certain hygienic standards and
specifications promulgated by the government. In the event that human plasma is discovered to be not compliant with
the government’s hygienic standards and specifications, the health department may revoke its approval of the blood
product in general, or otherwise limit the use of such blood product. If the PRC government bans or limits plasma-
based biopharmaceutical products, our operations, revenues and profitability would be adversely affected.
We currently source plasma from human donations to our plasma stations in Shandong, Guangxi and Guizhou
Provinces. If any of our human donors is infected with diseases, then the plasma from such donor may be infected.
Although we pre-screen all donors in order to ensure that they are not infected with HIV and Hepatitis C and have not
contracted liver disease, technical limitation and human errors in the screening test may fail to identify and exclude
from our supply the plasma from infected donors. If such contaminated plasma is not appropriately screened out, our
entire plasma source for the relevant plasma station may become contaminated. If the plasma from our collection is
found to be contaminated, we could be subject to civil liability from suits brought by consumers. Further, we may lose
our registration and incur criminal liability if we are found by the government to have been criminally negligent. If this
occurs, our business, prospects, results of operations and financial condition will be materially and adversely affected.
If our supply of quality plasma is interrupted, our results of operations and profitability will be
adversely affected.
The production of plasma-based biopharmaceutical products relies on the supply of plasma of suitable quality. For
the years ended December 31, 2013, 2012 and 2011, the cost of plasma used by us for production accounted for
approximately 74%, 74% and 67%, respectively, of total production cost. The supply and market prices of plasma may
be adversely affected by factors such as regulatory restrictions, living standard or outbreak of diseases which would
impact our costs of production. We may not be able to pass on any resulting increase in costs to our customers and
therefore any substantial fluctuation in supply or market prices of plasma may adversely affect our results of operations
and profitability.
The biopharmaceutical industry in the PRC is strictly regulated and changes in such regulations
may have an adverse effect on our business.
The biopharmaceutical industry in the PRC is strictly regulated by the government. The regulatory regime, such as
administrative approval of medicines and production approvals, establishes regulations and administrative rules.
The PRC regulatory authorities may amend these regulations and rules and promulgate new ones from time to time.
Changes in these regulations and administrative rules could have a material and adverse impact on our business,
prospects, financial conditions and results of operation.
One of our production facilities has suspended production for technical upgrade and is awaiting the
renewed GMP certificate. We may not be able to carry on our business if we lose any of the permits
and licenses required by the PRC government in order to carry on our business.
All pharmaceutical manufacturing and distribution enterprises in the PRC are required to obtain from various
PRC governmental authorities certain permits and licenses, including, in the case of manufacturing enterprises,
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Form 10-KForm 10-KPART IPART I pharmaceutical manufacturing permit and GMP certificate and, in the case of distribution enterprises, pharmaceutical
insurance program cannot sell the products to patients at prices exceeding such retail price ceilings. The provincial
distribution permit.
governments in turn often establish a tender price ceiling for product tender offer made to hospitals based on, amongst
other things, the regional living standards, cost of production of the manufacturers and the corresponding retail price
All of our production facilities are required to obtain GMP certificates for their pharmaceutical production activities.
ceiling. The ex-factory prices and the distributor’s wholesale prices cannot exceed the tender price ceiling. Five of our
In February 2011, CFDA enacted the New GMP Standard, which has significantly increased standards for quality
principal products, including human albumin, IVIG, human rabies immunoglobulin, human tetanus immunoglobulin
control, documentation, and overall manufacturing processes. The New GMP Standard has become applicable to all
and FVIII, are included in the NIC and are also subject to tender price ceilings. Two of our principal products, placenta
of our production facilities at the end of 2013. In order for us to meet the New GMP Standard, we have upgraded the
polypeptide and human hepatitis B immunoglobulin, although not included in the NIC, are also subject to tender price
related production facilities in Shandong Taibang and Guizhou Taibang. Shandong Taibang obtained the renewed GMP
ceilings in certain provinces.
certificate in June 2013. Guizhou Taibang suspended production since June 2013 to upgrade its plasma production
facility. In January 2014, the upgrade was completed and the CFDA conducted on-site inspection on the upgraded
In an announcement published in September 2012 (the “2012 Adjustment”), NDRC adjusted retail price ceilings for
plasma production facility. Guizhou Taibang expects to obtain the renewed GMP certificate and resume production of
95 oncology, immunology and hematology drug products, which came into effect on October 8, 2012. Two of our
plasma-based products in April 2014. We cannot assure you, however, that Guizhou Taibang will not experience any
approved products, IVIG and FVIII are affected by the 2012 Adjustment. The new retail price ceilings for IVIG products
delay in obtaining renewed GMP certificate. If this occurs, our business, financial conditions and results of operation
are lower than the current prevailing market retail prices in some of our regional markets while those for FVIII are close
may be materially and adversely affected.
to the current prevailing market retail prices. As a result, some local governments revised tender price ceilings for IVIG
Moreover, Huitian has suspended its production since the end of 2013 and is constructing a new production facility
products.
to meet the New GMP Standard. The suspension of Huitian’s production may have a negative effect on its business
In January 2013, NDRC further adjusted retail price ceilings for certain drug products, which came into effect
operation and profitability, which may in turn affect our income derived from our minority investment in Huitian and
on February 1, 2013 (the “2013 Adjustment”). Three of our approved products, human albumin, human rabies
materially and adversely affect our business, financial condition and results of operations.
immunoglobulin and human tetanus immunoglobulin are affected by the 2013 Adjustments. The 2013 Adjustment
slightly increased retail price ceilings for both human albumin and human tetanus immunoglobulin products and subject
Other than discussed above, we have obtained permits and licenses and the GMP certificates, required for the
human rabies immunoglobulin products to a retail price ceiling for the first time. The retail price ceiling imposed on
manufacturing and sales of our pharmaceutical products. Our permits and licenses are subject to periodic renewal and/
human rabies immunoglobulin products by the 2013 Adjustment is close to the prevailing market retail price.
or reassessment by the relevant PRC governmental authorities, and the standards of compliance required in relation
thereto may from time to time be subject to changes. We intend to apply for the renewal of such permits and licenses
We do not have discretion to increase our ex-factory price of the price-controlled products above the relevant controlled
when required by applicable laws and regulations. However, there is no guarantee that we may renew such permits
tender price ceiling. Although we may appeal to the local governments for favorable pricing policy support in lifting
and licenses in a timely manner, or at all. If this happens, our business, prospects, financial conditions and results of
the tender price ceiling, such support is only granted on a case-by-case basis and there is no guarantee that we may
operation may be materially and adversely affected.
be able to obtain any such support in the future when needed. Since the tender price ceiling may prevent us from
absorbing or offsetting the effect resulting from any increase in the cost of raw materials or other costs, our revenue
In addition, any changes in compliance standards, or any new laws or regulations that may prohibit or render it more
and profitability could be adversely affected. If the margin of any of these products becomes prohibitively low, we may
restrictive for us to conduct our business or increase our compliance costs may adversely affect our operations or
be forced to stop manufacturing such product, in which case our revenue and profitability would be further adversely
profitability. For example, we expect our on-going compliance cost to increase under the New GMP Standard as
affected.
compared to the former GMP standard. As a result, our business and financial condition may be materially and
adversely affected.
We do not have discretion to increase our ex-factory price of our price-controlled products.
If we are unable to adequately monitor our plasma collection stations, failure to follow proper
procedure or comply with safety requirements may subject us to sanctions by the government, civil
and criminal liability, any of which would have a material adverse effect on our business.
Retail prices of certain pharmaceutical products are subject to various regulations. According to the “Regulations
We currently operate ten plasma collection stations through Shandong Taibang and two plasma stations through
on controlling blood products” promulgated by the State Council in 1996, regional offices of the Pricing Bureau and
Guizhou Taibang. Huitian, our minority owned subsidiary, operates three plasma stations in Shaanxi province. To
the Ministry of Health have the authority to regulate retail prices for controlled plasma products. In addition, retail
ensure our development, we are seeking opportunities to build more plasma stations and expect to start operating
prices of pharmaceutical products fully or partially covered under the national insurance system are also subject to
one additional plasma station through Shandong Taibang by the end of 2014. While we monitor our plasma
the price ceilings set out in the National (Medical) Insurance Catalog (the “NIC”), which may be adjusted by Chinese
intake procedures through frequent unscheduled inspections of our stations, there remain risks that our plasma
National Development and Reform Commission ("NDRC") from time to time. The hospitals as participants of the national
stations may fail to comply with hygiene and procedure requirements in plasma screening, collection, storage
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Form 10-KForm 10-KPART IPART I
and tracking. If we fail to comply with any of these requirements, we may lose our plasma collection permits
In addition, the demand for our products is largely affected by the general economic conditions in China as our
or even incur criminal liability if we are found by the government to have been criminally negligent. In the case
products are still not affordable to many patients. As China’s economy grows, we expect more Chinese people will
of plasma contamination, we may also be subject to civil liability from suits brought by consumers. In addition,
become consumers of medical treatments and procedures, including procedures requiring human plasma. However,
failure to comply with hygiene and procedure requirements may cause harm to donors, including contracting
any potential global economic slowdown may result in slower economic growth in China and an unfavorable economic
disease from other donors. Any such incident may subject us to government sanctions, civil or criminal liabilities.
environment which in turn may make our products less affordable to more patients and result in an overall decreased
If this occurs, our business operation, reputation and prospects may be materially and adversely affected.
demand for our products. Such reductions and disruptions could have a material adverse effect on our business
operations.
Our operations, sales, profit and cash flow will be adversely affected if our plasma-based
biopharmaceutical products fail to pass inspection in a timely manner.
Each batch of our plasma-based biopharmaceutical products requires inspection by Chinese government regulators
before we can ship it to our customers. The CFDA has a quality standard which considers, among other things, the
appearance, packing capacity, thermal stability, pH value, protein content and percentage of purity of the product. We
must strictly comply with relevant rules and regulations in our whole production procedures including plasma collection,
delivery, production and packaging. For example, in order to pass inspection, our plasma must be tested negative for
any blood irregularities, including Hepatitis C, HIV and liver disease. The plasma must be packaged in 25 to 30 separate
600g bags in each box and each bag must be labeled with a computer-generated tracking code. The plasma must be
stored at -20°C as soon as possible after collection to ensure that it will congeal within 6 hours. Government regulators
usually take more than one month to inspect a batch of plasma products. The process begins when the regulator
randomly selects samples of our products and delivers them to the National Institute for the Control of Pharmaceutical
and Biological Products, or the NICBPB, for testing, and the process ends when the products are given final approval
by the NICBPB. In the event that the regulators delay the approval of or reject our products, change the requirements
in such a way that we are unable to comply with those requirements, our operations, sales, profit and cash flow will be
adversely affected.
We face risks related to general domestic and global economic conditions. Disruptions in the
capital and credit markets could adversely affect our results of operations, cash flows and financial
condition, or those of our customers, suppliers and creditors.
We currently generate sufficient operating cash flows, which combined with access to the credit markets, provide us
with significant discretionary funding capacity. However, any uncertainty arising out of domestic and global economic
conditions, including any disruption in credit markets, may impact our ability to manage normal relationships with our
customers, suppliers and creditors and adversely impact our results of operations, cash flows and financial condition,
or those of our customers, suppliers and creditors. Disruptions in the capital and credit markets as a result of
uncertainty, changing or increased regulation, reduced alternatives or failures of significant financial institutions could
adversely affect our access to liquidity needed to conduct or expand our businesses or conduct acquisitions or make
other discretionary investments. Such disruptions may also adversely impact the capital needs of our customers and
suppliers, which, in turn, could adversely affect our results of operations, cash flows and financial condition.
If we are unable to obtain additional capital or if we experience any shortage of raw materials in
future years, we may be unable to proceed with our long-term business plan and we may be forced
to curtail or cease our operations or further business expansion.
We will require additional working capital to support our long-term business plan, which includes identifying suitable
targets for horizontal or vertical mergers or acquisitions, so as to enhance the overall productivity and benefit from
economies of scale. Our working capital requirements and the cash flow provided by future operating activities, if any,
will vary greatly from quarter to quarter, depending on the volume of business during the period and payment terms
with our customers. We may not be able to obtain adequate levels of additional financing, whether through equity
financing, debt financing or other sources, especially during time of market downturn. To raise funds, we may need
to issue new equities or bonds which could result in additional dilution to our shareholders and investors. Additional
financings could result in significant dilution to our earnings per share or the issuance of securities with rights superior
to our current outstanding securities or contain covenants that would restrict our operations and strategy. In addition, we
have granted and may in the future grant further registration rights to investors purchasing our equity or debt securities.
If we are unable to raise additional financing, we may be unable to implement our long-term business plan, develop or
enhance our products and services, take advantage of future opportunities or respond to competitive pressures on a
timely basis. In addition, a lack of additional financing could force us to substantially curtail or cease operations.
In addition, our production volume, capacity utilization and future expansion are affected by the supply of raw materials,
especially plasma. If we experience any shortage of plasma supply or fail to secure sufficient plasma supply for our
production, we may not be able to fully utilize our production capacity or proceed with our plan for expansion.
Our cash flow could be negatively affected as a result of our extension of relatively long payment
terms to customers that we believe are credit worthy.
As is customary in our industry, we extend relatively long payment terms (up to six months) to customers that we believe
are credit worthy. Our accounts receivable, net of our allowance for doubtful accounts as of December 31, 2013, 2012
and 2011 was $17,270,132, $11,206,244 and $16,757,368, respectively. Almost all of our accounts receivables are due
from hospitals and clinics. Although we attempt to establish appropriate reserves for our receivables, those reserves
may not prove to be adequate in view of actual levels of bad debts. The failure of our customers to pay us timely would
negatively affect our working capital, which could in turn adversely affect our cash flow.
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Form 10-KForm 10-KPART IPART I We rely on a Secondment Agreement with the Shandong Institute, which is expected to terminate
various tests on new products before obtaining a Certificate of New Medicine from the PRC Ministry of Health and
upon the future privatization of the Shandong Institute, for certain of our employees. If the
Secondment Agreement is breached or terminated, it could have an adverse effect on our operations
and on our financial results.
The Shandong Institute has provided us with approximately 66 of our employees, including certain key management
personnel, out of our total of approximately 1,533 employees, pursuant to a secondment agreement, or Secondment
Agreement, dated October 28, 2002, between Shandong Taibang and the Shandong Institute. Pursuant to the
Secondment Agreement, we are responsible for the salaries of these employees, as well as for their social benefits such
as insurance. Our Secondment Agreement with the Shandong Institute will expire on the sooner to occur of October
2032 or upon the privatization of the Shandong Institute, which was originally expected to occur before the end of
2008. However, the completion of privatization of Shandong Institute has been delayed indefinitely due to delay by the
Shandong Ministry of Health in implementing the privatization plan. Upon expiration or termination of the Secondment
Agreement, we plan to hire the seconded employees directly. However, we cannot be sure that all of the employees
will accept our employment offers at that time. Guangli Pang, Shandong Taibang’s Chief Executive Officer is employed
through the Secondment Agreement. Although none of our seconded employees have indicated that they do not plan to
continue working for our Company after the privatization, if the Secondment Agreement is terminated or expires and we
are unable to hire those employees or replacement employees on time, our operations, as well as our financial results,
may be materially and adversely affected.
If the distributors on whom we rely do not purchase our products, our business and results of
operations will be adversely affected.
We sell a third of our products in China through our network of about 208 distributors located in about 25 provinces and
four municipal cities throughout China. While we have established working relationships with many of our distributors
and strictly regulate their sales and marketing activities by annual distribution agreements, there are no restrictions in
these distribution agreements preventing our distributors from also sourcing products produced by our competitors.
Our own marketing and sales staff work to develop and maintain relationships with our distributors, but there can be
no assurance that we will be able to maintain such relationships. For the years ended December 31, 2013, 2012 and
2011, sales to distributors represented approximately 33.2%, 33.6% and 37.2%, respectively, of our total revenues.
If a number of our distributors cease to purchase our products and we are unable to find suitable replacements, our
business and results of operations will be materially and adversely affected.
Our inability to successfully research and develop new biopharmaceutical products could have an
adverse effect on our future growth.
We believe that the successful development of biopharmaceutical products can be affected by many factors. Products
that appear to be promising in the early phases of research and development may fail to be commercialized for various
reasons, including the failure to obtain the necessary regulatory approvals. In addition, the research and development
cycle for any new medicine is a relatively lengthy process. In our experience, the process of conducting research and
subsequent procedures may take approximately three to five years. There is no assurance that our future research and
development projects will be successful or that they will be completed within the anticipated time frame or budget. Also,
there is no guarantee that we will receive the necessary approvals from relevant authorities for the production of our
newly developed products. Even if such products could be successfully commercialized, there is no assurance that
they will be accepted by the market as anticipated.
Our financial position and operations may be materially and adversely affected if our product liability
insurance does not sufficiently cover our liabilities.
Under current PRC laws, manufacturers and vendors of defective products in the PRC may incur liability for loss and
injury caused by such products. Pursuant to the General Principles of the Civil Law of the PRC, or the PRC Civil Law,
which became effective in 1987, a defective product which causes property damage or physical injury to any person
may subject the manufacturer or vendor of such product to civil liability.
The Product Quality Law of the PRC, or the Product Quality Law, was enacted in 1993 and revised in 2000. The
Product Quality Law was enacted to protect the rights and interests of end-users and consumers and to strengthen
the supervision and control of the quality of products. Under the Product Quality Law, manufacturers who produce
defective products may be subject to fines and production suspension, and in severe cases, be subject to criminal
liability and may have their business licenses revoked.
The PRC Law on the Protection of the Rights and Interests of Consumers, or the Consumers’ Rights Law, was enacted
in 1993 to further protect the legal rights and interests of consumers in connection with the purchase or use of goods
and services. All businesses, including our business, must observe and comply with the Consumers’ Rights Law.
The Tort Liability Law of the PRC was enacted in December 2009, which states that manufacturers are liable for
damages caused by defects in their products. If the defects are caused by third parties such as transporters or
storekeepers, manufactures may be entitled to claim for compensation from such third parties after paying the
compensation amount to the consumer.
We maintain two product liability insurances for sales in the PRC for Shandong Taibang and Guizhou Taibang’s products
in the amount of RMB20 million (approximately $3.2 million) each. If our products are found to be defective and our
insurance coverage is insufficient to cover a successful claim against us, our financial position and operations may be
materially and adversely affected.
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Form 10-KForm 10-KPART IPART I We are subject to intense competition and may encounter increased competition from both local and
Future acquisitions may have an adverse effect on our ability to manage our business.
overseas pharmaceutical enterprises if the PRC regulatory relaxes the approval process for plasma-
based biopharmaceutical products or international trade restrictions. A change in our competitive
environment could adversely affect our profitability and prospects.
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 biopharmaceutical products as our products in the
PRC. These competitors may have more capital, better research and development resources, more manufacturing
and marketing capability and experience than we do. In addition, our continued ability to compete depends on
the development of the plasma-based biopharmaceutical manufacturing industry in China. The plasma-based
biopharmaceutical manufacturing industry in China is highly regulated by both provincial and central governments.
Prior to engaging in the collection and production of plasma products, companies such as ours are required to obtain
collection permits from the central health department and production permits and certificates for each new product
formulation from the various provincial food and drug authorities. Although we believe that the regulatory requirements
pose a competitive barrier to entry into the biopharmaceutical industry, over time, however, there may be new entrants.
Selective acquisitions form part of our strategy to further expand our business. If we are presented with appropriate
opportunities, we may acquire additional companies, products or technologies. Future acquisitions and the subsequent
integration of new companies into ours would require significant attention from our management. Potential problems
encountered by each organization during mergers and acquisitions would be unique, posing additional risks to the
company. The diversion of our management’s attention and any difficulties encountered in any integration process could
have an adverse effect on our ability to manage our business. Future acquisitions would expose us to potential risks,
including risks associated with the assimilation of new operations, technologies and personnel, unforeseen or hidden
liabilities, the diversion of resources from our existing businesses and technologies, the inability to generate sufficient
revenue to offset the costs and expenses of acquisitions, and potential loss of, or harm to, relationships with employees,
customers and suppliers as a result of integration of new businesses.
We may lose our competitive advantage and our operations may suffer if we fail to prevent the loss
If the government relaxes these restrictions and allows more competitors to enter into the market, these competitors
or misappropriation of, or disputes over, our intellectual property or proprietary information.
may have more capital, better research and development resources, more manufacturing and marketing capability and
experience than us. Our profitability may be adversely affected if (i) competition intensifies; (ii) competitors drastically
We regard our intellectual property, particularly our patents and trade secrets, to be of considerable value and
reduce prices; or (iii) competitors develop new products having comparable medicinal applications or therapeutic
importance to our business and our success. We rely on a combination of patent, trademark and trade secret laws, as
effects which are more effective or less costly than those produced by us.
well as confidentiality agreements to protect our intellectual property rights. Failure to protect our intellectual property
could harm our brands and our reputation, and adversely affect our ability to compete effectively. Further, enforcing or
In addition, we also face competition from imported products. China became a member of the WTO in December
defending our intellectual property rights, including our patents and trade secrets, could result in the expenditure of
2001 and as a result imported biopharmaceutical products enjoy lower tariffs. Since 2009, we have seen a substantial
significant financial and managerial resources.
increase in volume of imported human albumin in China. If the trend of importation of human albumin continues, we
may face more fierce competition in domestic human albumin market. In addition, China becomes more accessible
As of December 31, 2013, we own 42 registered patents and have four pending patent applications in the PRC for
to foreign biopharmaceutical manufacturers who may wish to set up production facilities in the PRC and compete
certain manufacturing processes and packaging designs. The patent application will be subject to approval from the
directly with domestic manufacturers. The increased supply of both domestic and foreign competitively priced
relevant PRC authorities. We may not be able to successfully obtain the approval of the PRC authorities for our patent
biopharmaceutical products in the PRC will result in increased competition. There is no assurance that our strategies
applications. We also have one trademark “CTBB” registered in the PRC.
to remain competitive can be implemented successfully as scheduled or at all. Our inability to remain competitive may
have an adverse effect on our profitability and prospects.
We depend heavily on key personnel, and turnover of key employees and senior management could
harm our business.
Our success, to a certain extent, is attributable to the expertise and experience of our senior management and key
research and technical personnel who carry out key functions in our operation. If we lose the service of any of our
senior management or key research or technical personnel or fail to attract additional personnel with suitable experience
and qualification, our business operations and research capability may be adversely affected.
While we are not aware of any infringement on our intellectual property and we have not been notified by any third party
that we are infringing on their intellectual property, our ability to compete successfully and to achieve future revenue
growth will depend, in significant part, on our ability to protect our proprietary technology and operate without infringing
upon the intellectual property rights of others. Policing unauthorized use of proprietary technology is difficult and
expensive. The steps we have taken may not be adequate to prevent unauthorized use of our intellectual property rights.
The legal regime in China for the protection of intellectual property rights is still at its early stage of development.
Despite many laws and regulations promulgated and other efforts made by China over the years with a view to
tightening up its regulation and protection of intellectual property rights, private parties may not enjoy intellectual
property rights in China to the same extent as they would in many Western countries, including the United States,
and enforcement of such laws and regulations in China have not achieved the levels reached in those countries. Both
the administrative agencies and the court system in China are not well-equipped to deal with violations or handle the
nuances and complexities between compliant technological innovation and noncompliant infringement.
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Form 10-KForm 10-KPART IPART I
We also rely on confidentiality agreements with our management and employees to protect our confidential proprietary
If we do not maintain strong financial controls, investor confidence in us may decline and our stock
information. However, the protection of our intellectual properties may be compromised as a result of:
price may decline as a result.
• departure of any of our management members or employees in possession of our confidential proprietary information;
• breach by such departing management member or employee of his or her confidentiality and non-disclosure
undertaking to us;
•
•
infringement by others of our proprietary information and intellectual property rights; or
refusal by relevant regulatory authorities to approve our patent or trademark applications.
Any of these events or occurrences may have a material adverse effect on our operations.
There can be no assurance that the steps taken by us to protect our intellectual property rights will be adequate or that
third parties will not infringe or misappropriate our patents, trademarks, confidential proprietary information or similar
proprietary rights. Litigation may be necessary to enforce our intellectual property rights and the outcome of any such
litigation may not be in our favor. Given the relative unpredictability of China’s legal system and potential difficulties
enforcing a court judgment in China, there is no guarantee that we would be able to halt the unauthorized use of our
intellectual property through litigation in a timely manner.
Furthermore, there can be no assurance that other parties will not assert infringement claims against us, and we may
have to pursue litigation against other parties to assert our rights. Any such claim or litigation could be costly and we
may lack the resources required to defend against such claims. If we are unsuccessful in defending against such
infringement claims, we may be required to pay damages, modify our products or suspend the production and sale of
such products. We cannot guarantee that we will be able to modify our products on commercially reasonable terms.
The SEC as required by Section 404 of the Sarbanes-Oxley Act of 2002, or SOX 404, adopted rules requiring every
public company to include a management report on such company’s internal control over financial reporting in its
annual report, which must also contain management’s assessment of the effectiveness of the company’s internal
control over financial reporting. In addition, the independent registered public accounting firm auditing the financial
statements must also attest to the operating effectiveness of the company’s internal controls.
A report of our management and attestation by our independent registered public accounting firm is included under
Item 9A of this report. Our management has concluded that our internal controls over financial reporting as of
December 31, 2013 were effective. We have in the past and may in the future discover material weakness in our internal
controls. For example, we identified material weaknesses related to review controls on the accounting for income taxes
and derivative instrument valuation as described under Item 9A of our annual report in form 10-K for fiscal year ended
December 31, 2010, which were subsequently remediated in fiscal year 2011 as described under Item 9A of our
annual report in form 10-K for the year ended December 31, 2011. However, there is no guarantee that these remedies
will continue to be effective. Failure to achieve and maintain an effective internal control environment could result in us
not being able to accurately report our financial results, prevent or detect fraud or provide timely and reliable financial
and other information pursuant to the reporting obligations we have as a public company, which could have a material
adverse effect on our business, financial condition and results of operations. This could reduce investors’ confidence
in our reported financial information, which in turn could result in lawsuits being filed against us by our stockholders,
otherwise harm our reputation or negatively impact the trading price of our common stock.
Finally, any event that would jeopardize our proprietary rights or any claims of infringement by third parties could have a
material adverse effect on our ability to market or sell our brands, and profitably exploit our products.
RISKS RELATED TO DOING BUSINESS IN CHINA
A disruption in the supply of utilities, fire or other calamity at our manufacturing plant would disrupt
production of our products and adversely affect our sales.
Changes in China’s political or economic situation could harm us and our operating results.
Economic reforms adopted by the Chinese government have had a positive effect on the economic development of the
country. The reformed economic infrastructure and legal systems, however, may be subject to abrupt adjustments by
the government. These adjustments, especially that in the following areas, could either benefit or damage our operations
Our products are manufactured at our production facilities located in Tai’an, Shandong Province and Guiyang,
and profitability:
Guizhou Province in the PRC. While we have not in the past experienced any calamities which disrupted production,
any disruption in the supply of utilities, in particular, electricity or power supply, or any outbreak of fire, flood or other
calamity resulting in significant damage at our facilities would severely affect our production and have a material
adverse effect on our business, financial condition and results of operations.
We maintain insurance policies covering losses with respect to damages to our properties and products. We do not
have insurance coverage for inventories of raw materials or business interruption. There is no assurance that our
insurance would be sufficient to cover all of our potential losses.
•
•
•
•
•
Level of government involvement in the economy;
Control of foreign exchange;
Methods of allocating resources;
International trade restrictions; and
International conflict.
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Form 10-KForm 10-KPART IPART I
The Chinese economy differs from the economies of most member countries of the Organization for Economic
The PRC government exerts substantial influence over the manner in which we must conduct our
Cooperation and Development (the “OECD”) in many ways. For example, state-owned enterprises still constitute a large
portion of the Chinese economy, and weak corporate governance and the lack of a flexible currency exchange policy
still prevail in China. As a result of these differences, we may not develop in the same way or at the same rate as might
be expected if the Chinese economy was similar to those of the OECD member countries.
business activities.
The PRC government has exercised and continues to exercise substantial control over virtually every sector of the
Chinese economy through regulation and state ownership. Our ability to operate in China may be harmed by changes
in its laws and regulations, including those relating to taxation, import and export tariffs, environmental regulations,
land use rights, property, and other matters. We believe that our operations in China are in material compliance with all
Uncertainties with respect to the PRC legal system could limit the legal protections available to you
applicable legal and regulatory requirements. However, the central or local governments of the jurisdictions in which
and us.
we operate may impose new, stricter regulations or interpretations of existing regulations that would require additional
expenditures and efforts on our part to ensure our compliance with such regulations or interpretations.
We conduct substantially all of our business through our operating subsidiaries in the PRC. Our operating subsidiaries
are generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws
Accordingly, government actions in the future, including any decision not to continue to support recent economic
applicable to FIEs. The PRC legal system is based on written statutes, and prior court decisions may be cited for
reforms and to return to a more centrally planned economy and any regional or local variations in the implementation
reference but have limited precedential value. Since 1979, a series of new PRC laws and regulations have significantly
of economic policies, could have a significant effect on economic conditions in China or particular regions thereof and
enhanced the protections afforded to various forms of foreign investments in China. However, since the PRC legal
could require us to divest ourselves of any interest we then hold in Chinese properties or joint ventures.
system continues to evolve rapidly, the interpretations of many laws, regulations, and rules are not always uniform, and
enforcement of these laws, regulations, and rules involve uncertainties, which may limit legal protections available to you
and us. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources
Future inflation in China may inhibit our ability to conduct business in China.
and management attention. In addition, most of our executive officers and directors are residents of China and not of
the United States, and substantially all the assets of these persons are located outside the United States. As a result, it
In recent years, the Chinese economy experienced rapid expansion but also highly fluctuating rates of inflation. During
could be difficult for investors to affect service of process in the United States or to enforce a judgment obtained in the
the past ten years, the rate of inflation in China has been as high as 5.9% and as low as -0.8%. The fluctuating rates
United States against our Chinese operations and subsidiary.
You may have difficulty enforcing judgments against us.
of inflation have led to the adoption by the Chinese government, from time to time, of various corrective measures
designed to restrict the availability of credit or to regulate growth and contain inflation. High inflation may in the future
cause the Chinese government to impose controls on credit and/or prices, or to take other actions, which could inhibit
economic activity in China, and thereby adversely affect the market for our products and consequently our profitability
and operating results.
Most of our assets are located outside of the United States and most of our current operations are conducted in the
PRC. In addition, most of our directors and officers are nationals and residents of countries other than the United States
and substantially all the assets of these persons is located outside the United States. As a result, it may be difficult for
Restrictions on currency exchange may limit our ability to receive and use our sales effectively.
you to effect service of process within the United States upon these persons. It may also be difficult for you to enforce
in U.S. courts judgments on the civil liability provisions of the U.S. federal securities laws against us and our officers and
The majority of our sales will be settled in RMB, and any future restrictions on currency exchanges may limit our ability
directors.
to use revenue generated in RMB to fund any future business activities outside China or other payments in U.S. dollars.
Although the Chinese government introduced regulations in 1996 to allow greater convertibility of the RMB for current
There is also uncertainty as to whether the courts of the PRC would recognize or enforce judgments of U.S. courts. Our
account transactions, significant restrictions still remain, including primarily the restriction that FIEs may only buy, sell
counsel as to PRC law has advised us that although recognition and enforcement of foreign judgments are provided for
or remit foreign currencies after providing valid commercial documents at those banks in China authorized to conduct
under the PRC Civil Procedures Law, reorganization and enforcement of a foreign judgment by PRC courts depend on
foreign exchange business. In addition, conversion of RMB for capital account items, including direct investments
treaties or reciprocity between China and the country where the judgment is made. China does not have any treaties or
and loans, is subject to governmental approval and companies are required to open and maintain separate foreign
other arrangements with U.S. that provide for the reciprocal recognition and enforcement of U.S. judgments. In addition,
exchange accounts for capital account items. We cannot be certain that the Chinese regulatory authorities will not
according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our
impose more stringent restrictions on the convertibility of the RMB.
directors and officers if they decide that the judgment violates basic principles of PRC law or national sovereignty,
security, or the public interest. So it is uncertain whether a PRC court would enforce a judgment rendered by a court in
the United States.
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Form 10-KForm 10-KPART IPART I Fluctuations in exchange rates could adversely affect our business and the value of our securities.
Failure to comply with PRC regulations relating to the establishment of offshore special purpose
The value of our common stock will be indirectly affected by the foreign exchange rate between the U.S. dollar and
RMB and between those currencies and other currencies in which our sales may be denominated. Appreciation or
depreciation in the value of the RMB relative to the U.S. dollar would affect our financial results reported in U.S. dollar
terms without giving effect to any underlying change in our business or results of operations. Fluctuations in the
exchange rate will also affect the relative value of any dividend we issue that will be exchanged into U.S. dollars, as well
as earnings from, and the value of, any U.S. dollar-denominated investments we make in the future.
Since July 2005, the RMB has no longer been pegged to the U.S. dollar. Although the People’s Bank of China regularly
intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB
may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is
possible that in the future PRC authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen
intervention in the foreign exchange market.
Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To
date, we have not entered into any hedging transactions. While we may enter into hedging transactions in the future,
the availability and effectiveness of these transactions may be limited, and we may not be able to successfully hedge
our exposure at all. In addition, our foreign currency exchange losses may be magnified by PRC exchange control
regulations that restrict our ability to convert RMB into foreign currencies.
Currently, some of our raw materials and major equipment are imported. In addition, we have interest expenses for
our U.S. dollar denominated loans. In the event that the U.S. dollars appreciate against RMB, our costs will increase.
If we cannot pass the resulting cost increases on to our customers, our profitability and operating results will suffer.
In addition, if our sales to international customers grow, we will be increasingly subject to the risk of foreign currency
depreciation.
Restrictions under PRC law on our PRC subsidiaries’ ability to make dividends and other
companies by PRC residents may subject our PRC resident stockholders to personal liability, limit
our ability to acquire PRC companies or to inject capital into our PRC subsidiaries, limit our PRC
subsidiaries’ ability to distribute profits to us or otherwise materially adversely affect us.
In October 2005, SAFE issued the Notice on Relevant Issues in the Foreign Exchange Control over Financing and Return
Investment Through Special Purpose Companies by Residents Inside China (the “Circular 75”) which required PRC
residents to register with the competent local SAFE branch before establishing or acquiring control over an offshore
special purpose company, or SPV, for the purpose of engaging in an equity financing outside of China on the strength
of domestic PRC assets originally held by those residents. Amendments to registrations made under Circular 75 are
required in connection with any increase or decrease of capital, transfer of shares, mergers and acquisitions, equity
investment or creation of any security interest in any assets located in China to guarantee offshore obligations. Failure
to comply with the requirements of Circular 75 may result in fines and other penalties under PRC laws for evasion of
applicable foreign exchange restrictions. Any such failure could also result in the SPV’s affiliates being impeded or
prevented from distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation to
the SPV, or from engaging in other transfers of funds into or out of China.
We have asked the beneficial holders of our stock who are PRC residents as defined in Circular 75 to register with the
relevant branch of SAFE, as currently required, in connection with their equity interests in us and our acquisitions of
equity interests in our PRC subsidiaries. However, we cannot provide any assurances that they can obtain the above
SAFE registrations required by Circular 75. Moreover, because of uncertainty over how Circular 75 will be interpreted
and implemented, and how or whether SAFE will apply it to us, we cannot predict how it will affect our business
operations or future strategies. For example, our present and prospective PRC subsidiaries’ ability to conduct foreign
exchange activities, such as the remittance of dividends and foreign currency-denominated borrowings, may be
subject to compliance with Circular 75 by our PRC resident beneficial holders.
In addition, such PRC residents may not always be able to complete the necessary registration procedures required
by Circular 75. We also have little control over either our present or prospective direct or indirect stockholders or the
outcome of such registration procedures. A failure by our PRC resident beneficial holders or future PRC resident
distributions could materially and adversely affect our ability to grow, make investments or
stockholders to comply with Circular 75 could subject these PRC resident beneficial holders to fines or legal sanctions,
acquisitions that could benefit our business, pay dividends to you and otherwise fund and conduct
restrict our overseas or cross-border investment activities, limit our subsidiaries’ ability to make distributions or pay
our business.
dividends or affect our ownership structure, which could adversely affect our business and prospects.
Substantially all of our sales are earned by our PRC subsidiaries. However, PRC regulations restrict the ability of our
We may be unable to complete a business combination transaction efficiently or on favorable terms
PRC subsidiaries to make dividends and other payments to their offshore parent companies. PRC legal restrictions
due to complicated merger and acquisition regulations.
permit payments of dividends by our PRC subsidiaries only out of their accumulated after-tax profits, if any, determined
in accordance with PRC accounting standards and regulations. Our PRC subsidiaries are also required under PRC
In August 2006, six PRC regulatory agencies, including the China Securities Regulatory Commission, or CSRC,
laws and regulations to allocate at least 10% of their annual after-tax profits determined in accordance with PRC GAAP
promulgated the Regulation on Mergers and Acquisitions of Domestic Companies by Foreign Investors (“Circular 10”),
to a statutory general reserve fund until the amounts in said fund reaches 50% of their registered capital. Allocations
which became effective in September 2006. This regulation, among other things, governs the approval process by
to these statutory reserve funds can only be used for specific purposes and are not transferable to us in the form
which a PRC company may participate in an acquisition of assets or equity interests. Depending on the structure of
of loans, advances, or cash dividends. Any limitations on the ability of our PRC subsidiaries to transfer funds to us
the transaction, Circular 10 will require the PRC parties to make a series of applications and supplemental applications
could materially limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay
to the government agencies. In some instances, the application process may require the presentation of economic
dividends and otherwise fund and conduct our business.
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Form 10-KForm 10-KPART IPART I data concerning a transaction, including appraisals of the target business and evaluations of the acquirer, which
to whether the Notice is applicable to an offshore enterprise incorporated by a Chinese natural person. Nor are detailed
are designed to allow the government to assess the transaction. Government approvals will have expiration dates by
measures on imposition of tax from non-domestically incorporated resident enterprises are available. Therefore, it is
which a transaction must be completed and reported to the government agencies. Compliance with Circular 10 is
unclear how tax authorities will determine tax residency based on the facts of each case.
likely to be more time consuming and expensive than in the past and the government can now exert more control over
the combination of two businesses. Accordingly, due to Circular 10, our ability to engage in business combination
We may be deemed to be a resident enterprise by Chinese tax authorities. If the PRC tax authorities determine that we
transactions has become significantly more complicated, time consuming and expensive, and we may not be able to
are a “resident enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences
negotiate a transaction that is acceptable to our stockholders or sufficiently protect their interests in a transaction.
could follow. First, we may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income
Circular 10 allows PRC government agencies to assess the economic terms of a business combination transaction.
on financing proceeds and non-China source income would be subject to PRC enterprise income tax at a rate of 25%.
Parties to a business combination transaction may have to submit to the PRC Ministry of Commerce, or MOFCOM,
Second, although under the EIT Law and its implementing rules dividends paid to us from our PRC subsidiaries would
and other relevant government agencies an appraisal report, an evaluation report and the acquisition agreement, all
qualify as “tax-exempt income,” we cannot guarantee that such dividends will not be subject to a 10% withholding tax,
of which form part of the application for approval, depending on the structure of the transaction. The regulations also
as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with
prohibit a transaction at an acquisition price obviously lower than the appraised value of the PRC business or assets
respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise
and in certain transaction structures, require that consideration must be paid within defined periods, generally not in
income tax purposes. Finally, it is possible that future guidance issued with respect to the “resident enterprise”
excess of a year. The regulation also limits our ability to negotiate various terms of the acquisition, including aspects
classification could result in a situation in which a 10% withholding tax is imposed on dividends we pay to our non-
of the initial consideration, contingent consideration, holdback provisions, indemnification provisions and provisions
PRC stockholders and with respect to gains derived by our non-PRC stockholders from transferring our shares. Finally,
relating to the assumption and allocation of assets and liabilities. Transaction structures involving trusts, nominees and
if we were treated as a “resident enterprise” by PRC tax authorities, we would be subject to taxation in both the U.S.
similar entities are prohibited. Therefore, such regulation may impede our ability to negotiate and complete a business
and China, and our PRC tax may not be creditable against our U.S. tax. We are actively monitoring the possibility of
combination transaction on financial terms that satisfy our investors and protect our stockholders’ economic interests.
“resident enterprise” treatment for the 2013 tax year and are evaluating appropriate organizational changes to avoid this
as well as PRC enterprise income tax reporting obligations. In our case, this would mean that income such as interest
treatment, to the extent possible.
Under the Enterprise Income Tax Law, we may be classified as a “resident enterprise” of China.
Such classification will likely result in unfavorable tax consequences to us and our non-PRC
We face uncertainty from China’s Circular on Strengthening the Administration of Enterprise
stockholders.
Income Tax on Non-Resident Enterprises’ Share Transfer that was released in December 2009 with
retroactive effect from January 1, 2008.
The EIT Law and its implementing rules became effective on January 1, 2008. Under the EIT Law, an enterprise
established outside of China with “de facto management bodies” within China is considered a “resident enterprise,”
The Chinese State Administration of Taxation, or SAT, released a circular on December 15, 2009 that addresses the
meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The
transfer of shares by nonresident companies, generally referred to as Circular 698. Circular 698, which is effective
implementing rules of the EIT Law define de facto management as “substantial and overall management and control
retroactively to January 1, 2008, may have a significant impact on many companies that use offshore holding companies
over the production and operations, personnel, accounting, and properties” of the enterprise.
to invest in China. Circular 698, which provides parties with a short period of time to comply with its requirements,
On April 22, 2009, the State Administration of Taxation issued the Notice Concerning Relevant Issues Regarding
investor indirectly transfers equity interests in a Chinese resident enterprise by selling the shares in an offshore holding
Cognizance of Chinese Investment Controlled Enterprises Incorporated Offshore as Resident Enterprises pursuant
company, and the latter is located in a country or jurisdiction where the effective tax burden is less than 12.5% or
to Criteria of de facto Management Bodies (the “Notice”) further interpreting the application of the EIT Law and its
where the offshore income of his, her, or its residents is not taxable, the foreign investor is required to provide the tax
implementation on non-Chinese enterprise or group controlled offshore entities. Pursuant to the Notice, an enterprise
authority in charge of that Chinese resident enterprise with the relevant information within 30 days of the transfers.
incorporated in an offshore jurisdiction and controlled by a Chinese enterprise or group will be classified as a “non-
Moreover, where a foreign investor indirectly transfers equity interests in a Chinese resident enterprise through an abuse
domestically incorporated resident enterprise” if (i) its senior management in charge of daily operations reside or
of form of organization and there are no reasonable commercial purposes such that the corporate income tax liability
perform their duties mainly in China; (ii) its financial or personnel decisions are made or approved by bodies or persons
is avoided, the PRC tax authority will have the power to re-assess the nature of the equity transfer in accordance with
in China; (iii) its substantial assets and properties, accounting books, corporate chops, board and shareholder minutes
PRC’s “substance-over-form” principle and deny the existence of the offshore holding company that is used for tax
indirectly taxes foreign companies on gains derived from the indirect sale of a Chinese company. Where a foreign
are kept in China; and (iv) at least half of its directors with voting rights or senior management often resident in China.
planning purposes.
A resident enterprise would be subject to an enterprise income tax rate of 25% on its worldwide income and must pay
a withholding tax at a rate of 10% when paying dividends to its non-PRC shareholders. However, it remains unclear as
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Form 10-KForm 10-KPART IPART I The SAT released the Announcement on Several Issues concerning the Administration of Income Tax of Non-tax-
If we become directly subject to the scrutiny, criticism and negative publicity involving U.S.-listed
resident Enterprises (“Public Notice 24”), which went into effect on April 1, 2011, to clarify several issues related to
Circular 698. Under Public Notice 24, the term “effective tax” refers to the effective tax on the gain derived from the
disposition of equity interests of an overseas holding company; and the term “does not impose income tax” refers to
cases where the gain derived from disposition of the equity interests of an overseas holding company is not subject to
income tax in the country or region where the overseas holding company is a resident.
There is uncertainty as to the application of Circular 698. For example, while the term “indirectly transfer” is not defined,
it is understood that the relevant PRC tax authorities have jurisdiction regarding requests for information over a wide
range of foreign entities having no direct link with China. Moreover, the relevant authority has not yet promulgated any
formal provisions or formally declared or stated how to calculate the effective tax in the country or jurisdiction and
to what extent and the process of the disclosure to the tax authority in charge of that Chinese resident enterprise.
In addition, there are not any formal declarations with regard to how to decide “abuse of form of organization” and
“reasonable commercial purpose,” which can be utilized by us to balance if our Company complies with the Circular
698.
As a result, we may become at risk of being taxed under Circular 698 and we may be required to expend valuable
resources to comply with Circular 698 or to establish that we should not be taxed under Circular 698, which could have
a material adverse effect on our financial condition and results of operations.
We may be exposed to liabilities under the Foreign Corrupt Practices Act and Chinese anti-
corruption laws, and any determination that we violated these laws could have a material adverse
effect on our business.
We are subject to the Foreign Corrupt Practice Act (the “FCPA”) and other U.S. laws that prohibit improper payments
or offers of payments to foreign governments and their officials and political parties by U.S. persons and issuers as
defined by the relevant statute, for the purpose of obtaining or retaining business. We have operations, agreements with
third parties, and make most of our sales in China. PRC anti-corruption laws also strictly prohibit bribery of government
officials. Our activities in China create the risk of unauthorized payments or offers of payments by the employees,
consultants, sales agents, or distributors of our Company, even though they may not always be subject to our control.
It is our policy to implement safeguards to discourage these practices by our employees. However, our existing
safeguards and any future improvements may prove to be less than effective, and the employees, consultants, sales
agents, or distributors of our Company may engage in conduct for which we might be held responsible. Particularly,
most of the hospitals and inoculation centers in China are state-owned entities, which employees may be recognized
as foreign government officials for the purpose of FCPA. Therefore, any payments, expensive gifts or other benefits
provided to an employee of the state-owned hospital or inoculation center may be deemed violation of FCPA. Violations
of the FCPA or PRC anti-corruption laws may result in severe criminal or civil sanctions, and we may be subject to
other liabilities, which could negatively affect our business, prospects, operating results and financial condition. In
addition, the U.S. government may seek to hold our Company liable for successor liability FCPA violations committed by
companies in which we invest or that we acquire.
Chinese companies, we may have to expend significant resources to investigate and resolve the
matter which could harm our business operations, stock price and reputation and could result in a
loss of your investment in our stock, especially if such matter cannot be addressed and resolved
favorably.
In recent years, U.S. public companies that have substantially all of their operations in China, particularly companies like
us which have completed the so-called reverse merger transactions, have been the subject of intense scrutiny, criticism
and negative publicity by investors, financial commentators and regulatory agencies, such as the SEC. Much of the
scrutiny, criticism and negative publicity has centered around financial and accounting irregularities and mistakes,
a lack of effective internal controls over financial accounting, inadequate corporate governance policies or a lack of
adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny, criticism and negative publicity,
the publicly traded stock of many U.S. listed Chinese companies has sharply decreased in value and, in some cases,
has become virtually worthless. Many of these companies are now subject to shareholder lawsuits, SEC enforcement
actions and are conducting internal and external investigations into the allegations. It is not clear what effect this sector-
wide scrutiny, criticism and negative publicity will have on our Company, our business and our stock price. If we become
the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to
expend significant resources to investigate such allegations and/or defend our company. This situation will be costly
and time consuming and distract our management from growing our company. If such allegations are not proven to be
groundless, our company and business operations will be severely impacted and your investment in our stock could be
rendered worthless.
The disclosures in our reports and other filings with the SEC and our other public pronouncements
are not subject to the scrutiny of any regulatory bodies in the PRC. Accordingly, our public
disclosure should be reviewed in light of the fact that no governmental agency that is located in
China where substantially all of our operations and business are located have conducted any due
diligence on our operations or reviewed or cleared any of our disclosure.
We are regulated by the SEC and our reports and other filings with the SEC are subject to SEC review in accordance
with the rules and regulations promulgated by the SEC under the Securities Act and the Exchange Act. Unlike public
reporting companies whose operations are located primarily in the United States, however, substantially all of our
operations are located in China. Since substantially all of our operations and business takes place in China, it may
be more difficult for the Staff of the SEC to overcome the geographic and cultural obstacles that are present when
reviewing our disclosure. These same obstacles are not present for similar companies whose operations or business
take place entirely or primarily in the United States. Furthermore, our SEC reports and other disclosure and public
pronouncements are not subject to the review or scrutiny of any PRC regulatory authority. For example, the disclosure
in our SEC reports and other filings are not subject to the review of the CSRC, a PRC regulator that is tasked with
oversight of the capital markets in China. Accordingly, you should review our SEC reports, filings and our other public
pronouncements with the understanding that no local regulator has done any due diligence on our company and with
the understanding that none of our SEC reports, other filings or any of our other public pronouncements has been
reviewed or otherwise been scrutinized by any local regulator.
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Form 10-KForm 10-KPART IPART I The Chinese member firm of the KPMG network, of which our independent registered public
The inability of the PCAOB to conduct inspections of our auditors’ work papers in China makes it more difficult to
accounting firm is also a member, may be temporarily suspended from practicing before the SEC.
If a delay in completion of our audit process occurs as a result, we could be unable to timely file
certain reports with the SEC, which may lead to the delisting of our stock.
evaluate the effectiveness of our auditor’s audit procedures or quality control procedures as compared to auditors
outside of China that are subject to PCAOB inspections. Investors may consequently lose confidence in our reported
financial information and procedures and the quality of our financial statements.
In the year ended December 31, 2013, the majority of our sales were to customers in China, and we have all of our
operations in China. Certain of our independent registered public accounting firm’s audit documentation related to
their audit reports included in this Report are located in China, and certain audit procedures take place within China’s
borders. The Public Company Accounting Oversight Board (“PCAOB”) is currently unable to conduct inspections
in China or review audit documentation located within China without the approval of Chinese authorities. Like many
U.S. companies with significant operations in China, our independent registered public accounting firm may rely on a
Chinese member firm for assistance in completing the audit work associated with our operations in China.
On January 22, 2014, Judge Cameron Elliot, an SEC administrative law judge, issued an initial decision suspending
the Chinese member firms of the “Big Four” accounting firms, among others, from practicing before the SEC for six
months as a result of their failure to provide certain including KPMG documents to the SEC because to do so would
violate Chinese law. The decision is not yet effective and will only become effective when and if the SEC endorses it. If
the decision goes into effect, the work of our auditors could be delayed and it will be difficult for us to engage qualified
independent auditors.
RISKS RELATED TO THE MARKET FOR OUR STOCK
Although publicly traded, the trading market in our common stock has been substantially less liquid
than the average trading market for a stock quoted on the NASDAQ Stock Market and this low
trading volume may adversely affect the price of our common stock.
Our common stock is traded on the NASDAQ Global Select Market under the symbol “CBPO.” The trading market in
our common stock has been substantially less liquid than the average trading market for companies trading on the
NASDAQ Stock Market. Reported average daily trading volume in our common stock for the three months immediately
prior to March 1, 2014, was approximately 23,211 shares. Limited trading volume will subject our shares of common
stock to greater price volatility and may make it difficult for you to sell your shares of common stock at a price that
is attractive to you.
A delay in completion of the audit process could delay the timely filing of our quarterly or annual reports with the SEC. A
The market price of our common stock is volatile, leading to the possibility of its value being
delinquency in our filings with the SEC may result in Nasdaq initiating delisting procedures, which could have a material
depressed at a time when you want to sell your holdings.
adverse effect on our results of operation and financial condition.
The market price of our common stock is volatile, and this volatility may continue. Numerous factors, many of which are
beyond our control, may cause the market price of our common stock to fluctuate significantly. These factors include,
Our independent registered public accounting firm’s audit documentation related to their audit
among others:
reports included in our annual report may include audit documentation located in the Peoples’
Republic of China. PCAOB currently cannot inspect audit documentation located in China and, as
such, you may be deprived of the benefits of such inspection.
Our independent registered public accounting firm issued an audit opinion on the financial statements included in
our annual report filed with SEC. As auditors of companies that are traded publicly in the United States and a firm
registered with the PCAOB, our auditor is required by the laws of the United States to undergo regular inspections by
the PCAOB. However, the significant portion of the audit conducted in China and the relevant work papers located in
China are not currently inspected by the PCAOB because the PCAOB is currently unable to conduct inspections without
the approval of the Chinese authorities.
Inspections of certain other firms that the PCAOB has conducted outside of China have identified deficiencies in those
firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process
to improve future audit quality. However, the PCAOB is currently unable to inspect an auditor’s audit work related to a
company’s operations in China and where such documentation of the audit work is located in China. As a result, our
investors may be deprived of the benefits of PCAOB’s oversight of our auditors through such inspections.
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our earnings releases, actual or anticipated changes in our earnings, fluctuations in our operating results or our
failure to meet the expectations of financial market analysts and investors;
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changes in financial estimates by us or by any securities analysts who might cover our stock;
speculation about our business in the press or the investment community;
significant developments relating to our relationships with our customers or suppliers;
stock market price and volume fluctuations of other publicly traded companies and, in particular, those that are in
the our industry;
customer demand for our products;
investor perceptions of the our industry in general and our company in particular;
the operating and stock performance of comparable companies;
general economic conditions and trends;
major catastrophic events;
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Form 10-KForm 10-KPART IPART I •
announcements by us or our competitors of new products, significant acquisitions, strategic partnerships or
In addition, Section 203 of the Delaware General Corporation Law generally limits our ability to engage in any business
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divestitures;
changes in accounting standards, policies, guidance, interpretation or principles;
loss of external funding sources;
sales of our common stock, including sales by our directors, officers or significant stockholders;
additions or departures of key personnel; and
investor perception of litigation, investigation or other legal proceedings involving certain of our individual
shareholders or their family members.
Securities class action litigation is often instituted against companies following periods of volatility in their stock price.
This type of litigation could result in substantial costs to us and divert our management’s attention and resources.
Moreover, securities markets may from time to time experience significant price and volume fluctuations for reasons
combination with certain persons who own 15% or more of our outstanding voting stock or any of our associates or
affiliates who at any time in the past three years have owned 15% or more of our outstanding voting stock.
On November 19, 2012, our Board adopted a stockholder rights plan, which provides, among other things, that when
specified events occur, our stockholders will be entitled to purchase from us a newly created series of preferred
stock. The preferred stock purchase rights are triggered by the earlier to occur of (i) ten business days (or a later
date determined by our Board of Directors before the rights are separated from our common stock) after the public
announcement that a person or group has become an “acquiring person” by acquiring beneficial ownership of 10%
or more of our outstanding common stock or (ii) ten business days (or a later date determined by our Board before
the rights are separated from our common stock) after a person or group begins a tender or exchange offer that,
if completed, would result in that person or group becoming an acquiring person. The issuance of preferred stock
pursuant to the stockholder rights plan would cause substantial dilution to a person or group that attempts to acquire us
unrelated to operating performance of particular companies. For example, in July 2008, the securities markets in the
on terms not approved by our Board.
United States, China and other jurisdictions experienced the largest decline in share prices since September 2001.
These market fluctuations may adversely affect the price of our common stock and other interests in our company at a
time when you want to sell your interest in us.
Our shareholder rights plan and Provisions in our amended and restated certificate of incorporation
and bylaws or of Delaware law might discourage, delay or prevent a change of control of our
company or changes in our management and, therefore depress the trading price of the common
stock.
Upon stockholders’ approval on July 20, 2012, we have adopted amended and restated certificate of incorporation
and bylaws, which contained provisions that are intended to deter coercive takeover practices and inadequate takeover
bids by making such practices or bids unacceptably expensive to the raider and to encourage prospective acquirers to
negotiate with our Board rather than to attempt a hostile takeover.
These provisions include, among others:
We believe these provisions protect our stockholders from coercive or otherwise unfair takeover tactics by requiring
potential acquirers to negotiate with our Board and by providing our Board with more time to assess any acquisition
proposal. These provisions, however, may have the effect of entrenching our management team and may deprive you
of the opportunity to sell your shares to potential acquirers at a premium over prevailing prices. This potential inability to
obtain a control premium could reduce the price of our common stock.
We do not intend to pay dividends for the foreseeable future.
For the foreseeable future, we intend to retain any earnings to finance the development and expansion of our business,
and we do not anticipate paying any cash dividends on our common stock. Accordingly, investors must be prepared
to rely on sales of their common stock after price appreciation to earn an investment return, which may never occur.
Investors seeking cash dividends should not purchase our common stock. Any determination to pay dividends in the
future will be made at the discretion of our board of directors and will depend on our results of operations, financial
condition, contractual restrictions, restrictions imposed by applicable law and other factors our board deems relevant.
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the right of our Board to issue preferred stock without stockholder approval;
a Board of Directors that is divided into three classes with staggered terms;
ITEM 1B. UNRESOLVED STAFF COMMENTS.
elimination of the right of our stockholders to act by written consent;
We have no outstanding or unresolved comments from the SEC staff.
prohibiting stockholders from calling a special meeting of the stockholders;
rules regarding how stockholders may present proposals or nominate directors for election at stockholder
meetings; and
ITEM 2. PROPERTIES.
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requiring super majority stockholder vote to amend certain provisions of the amended and restated certificate of
incorporation and bylaws.
All land in China is owned by the government. Individuals and companies are permitted to acquire land use rights for
specific purposes. Industrial land use rights are granted for a period of 50 years. This period may be renewed at the
expiration of the initial and any subsequent terms. Granted land use rights are transferable and may be used as security
for borrowings and other obligations.
46
47
Form 10-KForm 10-KPART IPART I In July 2003, Shandong Taibang obtained certain land use rights of 43,663 square meters from the Tai’an municipal
In June 2007, Jie’an brought suit in the High Court of Guizhou province, China, against Guizhou Taibang and the
government consisting of manufacturing facilities, warehouses and office buildings in Tai’an City, Shandong Province.
three other original shareholders of Guizhou Taibang, alleging the illegality of the Equity Purchase Agreement. In its
Shandong Taibang is required to make payments totaling approximately $22,035 (RMB138,848) per year to Shandong
complaint, Jie’an claimed that it had a right to acquire the 18,200,000 shares offered to the strategic investors under the
Institute, for 50 year or until the Shandong Institute completes its privatization process. We recorded “land use rights”
Equity Purchase Agreement. In September 2008, the Guizhou High Court ruled against Jie’an and sustained the Equity
asset and a corresponding liability, “other payable – land use rights”, at the inception of the transaction determined
Purchase Agreement. In November 2008, Jie’an appealed the Guizhou High Court judgment to the People’s Supreme
using present value of annual payments over 50 years.
Court in Beijing. In May 2009, the People’s Supreme Court sustained the original ruling and denied the rights of first
refusal of Jie’an over the 18,200,000 shares.
In December 2013, Shandong Taibang obtained land use rights for a parcel of land totaling 25,275 square meters
in the Tai’an city, Shandong province from the Tai’an municipal government and is in the process of applying for land
During the second quarter of 2010, Jie’an requested that Guizhou Taibang register its 1.8 million shares of additional
use rights for additional parcels of land. Shandong Taibang plans to use this parcel of land to build a new production
capital injection with the local Administration for Industry and Commerce, or AIC, pursuant to the Equity Purchase
facility, before the current GMP for the production facility of Shandong Taibang expires in mid 2018.
Agreement, and such request was approved by the majority shareholders of Guizhou Taibang in a shareholders
In October 2007, Guizhou Taibang obtained certain land use rights of 34,556 square meters from the PRC municipal
ratification of the shareholders’ approval of Jie’an’s request, pending the outcome of the ongoing litigation. In March
government consisting of manufacturing facilities, warehouses and office buildings in Guiyang City, Guizhou Province.
2012, the Company received a subpoena that Jie’an brought suit in the People’s Court of Huaxi District, Guizhou
We believe that all of our properties have been adequately maintained, are generally in good condition, and are suitable
Guizhou Taibang register its 1.8 million shares of capital injection, pay dividends associated with these shares, as well
Province, against Guizhou Taibang, alleging Guizhou Taibang’s withholding of its request. Jie’an requested that
meeting held in the second quarter of 2010. However, the Board of Directors of the Company is withholding its required
and adequate for our business.
ITEM 3. LEGAL PROCEEDINGS.
as the related interest and penalty from May 2007 to December 2011 amounting to $3,967,500 (or RMB25,000,000) in
aggregate, and return the over-paid subscription of $228,528 (or RMB1,440,000), as well as the interest and penalty,
amounting to $1,587,000 (or RMB10,000,000) in aggregate. The People’s Court of Huaxi District, Guizhou Province, has
accepted Jie’an’s suit. In May 2012, Guizhou Taibang was informed by the court that the case was postponed upon the
request from Jie’an.
From time to time, we may become involved in various lawsuits and legal proceedings arising in the ordinary course of
business. However, litigation is subject to inherent uncertainties, and an adverse result in these, or other matters, may
In December 2013, Jie’an brought suit again in the People’s Court of Huaxi District, Guizhou Province, against
arise from time to time that may harm our business. Other than the legal proceedings set forth below, we are currently
Guizhou Taibang, again alleging Guizhou Taibang’s withholding of its request. The People’s Court of Huaxi District,
not aware of any such legal proceedings or claims that we believe will have a material adverse effect on our business,
Guizhou Province, has accepted Jie’an’s suit and heard the case on February 26, 2014. The Company is awaiting the
financial condition or operating results.
Dispute among Guizhou Taibang Shareholders over Raising Additional Capital
judgment as of the date of this report. If the Company decides to ratify the approval or the case is ruled in Jie’an’s
favor, Dalin’s ownership in Guizhou Taibang will be diluted from 54% to 52.54% and Jie’an may be entitled to receive
its pro rata share of Guizhou Taibang’s profits since the date of Jie’an’s capital contribution became effective. As this
case is closely tied to the outcome of the strategic investors’ dispute stated below, the Company does not expect
Jie’an to prevail. As of December 31, 2013, the Company had recorded, in its balance sheet, payables to Jie’an in
In May 2007, a 91% majority of Guizhou Taibang’s shareholders approved a plan to raise additional capital from private
the amounts of RMB5,040,000 (approximately $825,048) for the additional funds received in relation to the 1.8 million
strategic investors through the issuance of an additional 20,000,000 shares of Guizhou Taibang at RMB2.80 per share.
shares of capital infusion, RMB1,440,000 (approximately $235,728) for the over-paid subscription and RMB2,937,473
The plan required all existing Guizhou Taibang shareholders to waive their rights of first refusal to subscribe for the
(approximately $480,864) for the accrued interest.
additional shares. The remaining 9% minority shareholder of Guizhou Taibang’s shares, Guizhou Jie’an Company
(“Jie’an”), did not support the plan and did not waive its right of first refusal. In May 2007, the majority shareholders
As a result of this dispute, the strategic investors’ equity ownership in Guizhou Taibang and the related increase in
caused Guizhou Taibang to sign an Equity Purchase Agreement with certain investors, pursuant to which the investors
registered capital of Guizhou Taibang have not been registered with the local AIC. In January 2010, the strategic
agreed to invest an aggregate of $7,475,832 (or RMB50,960,000) in exchange for 18,200,000 shares, or 21.4%, of
investors brought suit in the High Court of Guizhou Province against Guizhou Taibang alleging Guizhou Taibang’s
Guizhou Taibang’s equity interests. At the same time, Jie’an also subscribed for 1,800,000 shares, representing its pro
failure to register their equity interest in Guizhou Taibang with the local AIC and requesting the distribution of their
rata share of the 20,000,000 shares being offered. The proceeds from all parties were received by Guizhou Taibang in
share of Guizhou Taibang’s dividends declared since 2007. Dalin was also joined as a co-defendant as it is the majority
accordance with the agreement.
shareholder and exercises control over Guizhou Taibang’s day-to-day operations.
48
49
Form 10-KForm 10-KPART IPART I In October, 2010, the High Court of Guizhou ruled in favor of the Company and denied the strategic investors’ right
as shareholders of Guizhou Taibang, as well as their entitlement to the dividends. In light of the Guizhou ruling, the
Company returned the proceeds of $1,699,040 (or RMB11,200,000) to one of the strategic investors in November
2010. In October 2010, the other strategic investors appealed to the PRC Supreme Court in Beijing on the ruling of the
High Court of Guizhou. The PRC Supreme Court overruled the decision of the High Court of Guizhou and remanded
the case to the High Court of Guizhou for retrial. In January 2012, the strategic investors re-filed their case to the
High Court of Guizhou requesting, in addition to the share distribution, the distribution of dividends and interest in the
amount of RMB18,349,345 (approximately $2,990,943) and RMB2,847,000 (approximately $464,061), respectively. In
December 2012, the High Court of Guizhou affirmed the judgment against the strategic investors. In January 2013, the
strategic investors appealed to the PRC Supreme Court on the ruling again and the appeal was accepted.
In September 2013, the PRC Supreme Court made the final judgment against the strategic investors and denied the
strategic investors’ right as shareholders of Guizhou Taibang and their claim for the related dividend distribution. In
November 2013, the strategic investors appealed to the PRC Supreme Court on the judgment and was rejected by
the PRC Supreme Court on January 17, 2014. As of December 31, 2013, Guizhou Taibang has made provision for
the strategic investors’ initial fund along with RMB17,174,807 (approximately $2,811,516) in accrued interest, and
RMB509,600 (approximately $83,422) for the 1% penalty imposed by the agreement for any breach in the event that
Guizhou Taibang is required to return their original investment amount to the strategic investors.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
Our common stock is traded on the Nasdaq Global Select Market under the symbol “CBPO.”
The following table sets forth, for the periods indicated, the high and low closing prices of our common stock. These
prices reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual
transactions.
Closing Prices(1)
Year Ended December 31, 2013
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
High
USD
28.93
27.67
29.21
30.30
10.78
10.16
11.00
16.85
Low
USD
14.71
21.35
23.08
26.76
8.44
7.90
8.85
9.41
In April 2013, the Company countersued the strategic investors in the Intermediate Court of Guiyang City alleging their
breach of the Security Law in the PRC and requested a damage of $6,064,800 (or RMB38,000,000) for the related
Year Ended December 31, 2012
expenses and losses, and Guizhou Intermediate Court accepted the case. The Company is awaiting the hearing of the
above case as of the date of this report.
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
(1)
The above table sets forth the range of high and low closing prices per share of our common stock as reported by
www.quotemedia.com for the periods indicated.
Approximate Number of Holders of Our Common Stock
As of March 12, 2014, there were approximately 443 holders of record of our common stock. This number excludes the
shares of our common stock owned by stockholders holding stock under nominee security position listings.
Dividend Policy
We have never declared dividends or paid cash dividends. Any future decisions regarding dividends will be made by
our board of directors. We currently intend to retain and use any future earnings for the development and expansion
of our business and do not anticipate paying any cash dividends in the foreseeable future. Our board of directors has
complete discretion on whether to pay dividends. Even if our board of directors decides to pay dividends, the form,
frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general
financial condition, contractual restrictions and other factors that the board of directors may deem relevant.
50
51
Form 10-KPART IIForm 10-KPART I
Securities Authorized for Issuance Under Equity Compensation Plans
ITEM 6. SELECTED FINANCIAL DATA.
The following table includes the information as of December 31, 2013 for each category of our equity compensation plan:
Plan category
Equity compensation
plans approved by
security holders
Equity compensation
plans not approved
by security holders
Total
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights (a) (1)
Weighted-average
exercise price of
outstanding options,
warrants and rights (b)
Number of securities remaining
available for future issuance under
equity compensation plans
(excluding securities reflected in
column (a)) (c)
-
1,882,376
1,882,376
-
$9.98
$9.98
-
1,752,125
1,752,125
The selected consolidated statement of comprehensive income data for the years ended December 31, 2013, 2012
and 2011 and the selected balance sheet data as of December 31, 2013 and 2012 are derived from our audited
consolidated financial statements included elsewhere in this report. The selected consolidated financial data for the
years ended December 31, 2010 and 2009 and the selected balance sheet data as of December 31, 2011, 2010 and
2009 are derived from our audited consolidated financial statements not included in this report.
The following selected historical financial information should be read in conjunction with our consolidated financial
statements and related notes and the information contained in Item 7 “Management’s Discussion and Analysis of
Financial Condition and Results of Operations.”
2013
USD
2012
USD
2011
USD
2010
USD
2009
USD
(1) Excludes shares of restricted stock granted pursuant to our 2008 Equity Incentive Plan. The 362,750 shares of unvested
Revenues
203,356,856
184,813,495
153,092,289
139,695,417
118,998,155
restricted stock at December 31, 2013 are issuable without the payment of any cash consideration by the grantee.
Income From Operations
86,932,518
74,489,160
32,217,468
68,568,299
60,477,367
Effective May 9, 2008, our Board of Directors adopted the China Biologic Products, Inc. 2008 Equity Incentive Plan,
or the 2008 Plan. The 2008 Plan provides for grants of stock options, stock appreciation rights, performance units,
restricted stock, restricted stock units and performance shares. A total of five million shares of our common stock may
be issued pursuant to the 2008 Plan. The exercise price per share for the shares to be issued pursuant to an exercise
of a stock option will be no less than the fair market value per share on the grant date, except that, in the case of an
incentive stock option granted to a person who holds more than 10% of the total combined voting power of all classes
of our stock or any of our subsidiaries, the exercise price will be no less than 110% of the fair market value per share on
the grant date. As of December 31, 2013, 362,750 shares of restricted stock and option to purchase 1,882,376 share of
our common stock are outstanding. No awards may be granted under the 2008 Plan after May 9, 2018, except that any
award granted before then may extend beyond that date.
Recent Sales of Unregistered Securities
We have not sold any equity securities during the 2013 fiscal year that were not previously disclosed in a quarterly
report on Form 10-Q or a current report on Form 8-K that was filed during the 2013 fiscal year.
Purchases of Equity Securities
On August 2, 2013, we entered into a repurchase agreement with Ms. Lin Ling Li, an individual shareholder of our
Company, and her spouse, pursuant to which we repurchased 1,479,704 shares of common stock held by Ms. Li for a
consideration of US$29,594,080. The transaction was completed on August 8, 2013.
On January 27, 2014, we entered into a repurchase agreement with Ms. Siu Ling Chan, an individual shareholder of our
Company, and her spouse, pursuant to which we repurchased 2,500,000 shares of common stock held by Ms. Chan for
a consideration of $70,000,000. The transaction was completed on February 27, 2014.
Net Income attributable
to China Biologic
Products, Inc.
54,601,551
45,222,189
18,181,710
31,542,883
2,208,126
Total Assets
403,781,207
311,047,150
248,892,575
220,921,794
172,611,483
Total Current Liabilities
Total Long Term Liabilities
Total Stockholders' equity
attributable to China
Biologic Products, Inc.
63,438,700
36,372,898
47,719,092
67,822,285
71,445,819
51,118,179
5,908,894
2,029,249
4,431,842
37,350,149
237,691,563
195,469,716
135,512,364
99,199,796
49,696,661
Total Equity
303,969,609
257,419,164
179,041,041
145,044,133
84,143,155
Capital Stock (excluding
long term debt)
2,734
2,663
2,560
2,435
2,305
Number of Shares Issued
27,341,744
26,629,615
25,601,125
24,351,125
23,056,442
Number of Shares
Outstanding
Net Income Per Share
Basic
Diluted
25,862,040
26,629,615
25,601,125
24,351,125
23,056,442
2.05
1.96
1.73
1.62
0.73
0.37
1.34
1.30
0.10
0.10
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following management’s discussion and analysis should be read in conjunction with our financial statements
and the notes thereto and the other financial information appearing elsewhere in this report. In addition to historical
information, the following discussion contains certain forward-looking information. See “Special Note Regarding
Forward Looking Statements” above for certain information concerning those forward looking statements. Our financial
statements are prepared in U.S. dollars and in accordance with United States generally accepted accounting principles.
52
53
Form 10-KForm 10-KPART IIPART II
Overview
In July 2013, Guizhou Taibang obtained the manufacturing approval certificate from CFDA for PCC. Guizhou Taibang
expects to obtain the GMP certification for the production facility of PCC from CFDA in April 2014 and commence
We are a biopharmaceutical company principally engaged in the research, development, manufacturing and sales
commercial production thereafter.
of human plasma-based pharmaceutical products in China. We have two majority owned subsidiaries, Shandong
In July 2013, Shandong Taibang obtained the manufacturing approval certificate from CFDA for human coagulation
Taibang, a company based in Tai’an, Shandong Province and Guizhou Taibang, a company based in Guiyang, Guizhou
factor VIII (300IU) and commenced the commercial production in late 2013.
Province. We also hold a minority equity interest in Huitian, a company based in Xi’an, Shaanxi Province. The human
plasma-based biopharmaceutical manufacturing industry in China is highly regulated by both provincial and central
In November 2013, Guizhou Taibang completed the GMP upgrade of its placenta polypeptide production facility. In
governments. Accordingly, the manufacturing process of our products is strictly monitored from the initial collection of
December 2013, the CFDA conducted an on-site inspection on the polypeptide production facility.In January 2014,
plasma from human donors to finished products.
Guizhou Taibang obtained the GMP certification from CFDA for the polypeptide production facility.
Our principal products are human albumin and immunoglobulin products. Albumin has been used for almost 50 years to
In June 2013, we suspended the plasma production and commenced a comprehensive upgrade to our Guizhou
treat critically ill patients by replacing lost fluid and maintaining adequate blood volume and pressure. Immunoglobulin is
Taibang’s plasma production facility. In January 2014, the upgrade was completed and the CFDA conducted an on-site
used for certain disease prevention and treatment by enhancing specific immunity. These products use human plasma
inspection on the upgraded plasma production facility. Guizhou Taibang expects to obtain the GMP certification and
as the principal raw material. Human albumin and human immunoglobulin for intravenous injection, or IVIG products,
resume commercial production at such production facility in April 2014.
are our top-selling products. Sales of human albumin products represented approximately 44.1%, 44.6% and 54.5%
of our total sales for each of the years ended December 31, 2013, 2012 and 2011, respectively. Sales of IVIG products
represented approximately 38.0%, 39.0% and 32.3% of our total sales for each of the years ended December 31, 2013,
Financial Performance Highlights
2012 and 2011, respectively. All of our products are prescription medicines administered in the form of injections.
We sell our products primarily to hospitals and inoculation centers in the PRC directly or through approved distributors.
We usually sign short-term contracts with customers and therefore our largest customers have changed over the years.
For the years ended December 31, 2013, 2012 and 2011, our top 5 customers accounted for approximately 11.0%,
10.8% and 13.2%, respectively, of our total sales. As we continue to diversify our geographic presence, customer base
and product mix, we expect that our largest customers will continue to change from year to year.
We operate and manage our business as a single segment. We do not account for the results of our operations on a
geographic or other basis.
Recent Development
In January 2013, Shandong Taibang established a wholly-owned subsidiary, Cao Xian Plasma Company, to operate a
plasma collection station in Shandong Province. Cao Xian Plasma Company obtained the operating permits on April 1,
2013 and commenced plasma collection thereafter.
On June 28, 2013, Shandong Taibang obtained the renewed Good Manufacturing Practice (“GMP”) certification from
the China Food and Drug Administration (“CFDA”) in respect of its plasma production facility. In order to expand its
production capacity, Shandong Taibang plans to construct a new production facility located in Tai’an City, Shandong
Province. Shandong Taibang has been in the process of applying for the land use rights for this new facility with local
government and expects to commence the construction of such facility in 2015.
The following are some financial highlights for the fiscal year ended December 31, 2013:
•
Sales: Sales increased by $18,543,361, or 10.0%, to $203,356,856 for the year ended December 31, 2013, from
$184,813,495 for the year ended December 31, 2012.
• Gross Profit: Gross profit increased by $11,895,206, or 9.4%, to $137,872,703 for the year ended December 31,
2013, from $125,977,497 for the year ended December 31, 2012. As a percentage of sales, gross profit remained
relatively stable at 67.8% and 68.2% in 2013 and 2012, respectively.
•
•
•
Income from operations: Income from operations increased by $12,443,358, or 16.7%, to $86,932,518 for the
year ended December 31, 2013, from $74,489,160 for the year ended December 31, 2012.
Net income attributable to Company: Net income attributable to Company increased by $9,379,362, or 20.7%, to
$54,601,551 for the year ended December 31, 2013, from $45,222,189 for the year ended December 31, 2012.
Fully diluted net income per share: Fully diluted net income per share was $1.96 for the year ended December
31, 2013, as compared to $1.62 for the year ended December 31, 2012.
Principal Factors Affecting our Financial Performance
The following are key factors that affect our financial condition and results of operations and we believe them to be
important to the understanding of our business:
54
55
Form 10-KForm 10-KPART IIPART II Raw Material Supply and Prices
capability and experience than we do. In our industry, we compete based upon product quality, product cost, ability to
produce a diverse range of products and logistical capabilities.
The primary raw material used in the production of our albumin and immunoglobulin products is human plasma. The
collection of human plasma in China is generally influenced by a number of factors such as government regulations,
We believe that we have a strong position in the marketplace with our 82.76% majority-owned operating subsidiary,
geographical locations of plasma collection stations, sanitary conditions of plasma stations, living standards of the
Shandong Taibang, 54% majority-owned operating subsidiary, Guizhou Taibang, and 35% equity interest in Huitian.
donors, and cultural and religious beliefs. If we experience any shortage of plasma supply, we may not be able to fully
Our profitability may be adversely affected if (i) competition intensifies; (ii) competitors drastically reduce prices;
utilize our production capacity. As of December 31, 2013, we operate ten plasma collection stations through Shandong
(iii) PRC government’s interference on prices of our products; or (iv) competitors develop new products or product
Taibang and two plasma stations through Guizhou Taibang. These plasma stations provide us with a stable source of
substitutes with comparable medicinal applications or therapeutic effects which are more effective or less costly than
plasma supply. Due to current market conditions, we have generally been able to pass substantially all cost increases in
those produced by us. Please refer to Item 1, “Business - Competition” for more information regarding this factor.
recent years on to our customers.
Prices of and Demand for Our Products
Taxation
The demand for our products is largely affected by the general economic conditions in China because the prices of our
States has been made as China Biologic has no taxable income.
products are still not affordable to many patients. A significant improvement in the economic environment in China will
likely improve consumer income which in turn would make our products more affordable and consequently increase
Taibang Biological was incorporated in the BVI, but is not subject to taxation in that jurisdiction.
the demand for our products. We have been able to expand our product range and consumer base by introducing new
products required by customers. We believe that our technical expertise is important in introducing products that are in
Taibang Holdings was incorporated in Hong Kong and under the current laws of Hong Kong, are subject to a Profits Tax
China Biologic is subject to United States tax at gradual rates of up to 35%. No provision for income taxes in the United
demand.
Production Capacity
of 16.5% on profits arising in Hong Kong. However, no provision for Hong Kong Profits Tax has been made as Taibang
Holdings has no taxable income.
According to the PRC’s central government policy, new or high technology companies will enjoy preferential tax
treatment of 15%, instead of 25% under the EIT Law. In February 2009, Shandong Taibang was recognized by the
Our sales volume is limited by our annual production capacity. As we grow our business in the future, our ability to fulfill
Chinese government as a “High and New Technology Enterprise” (“HNTE”) under the EIT law, which entitled it to the
additional and larger orders will depend on our ability to increase our production capacity. Our plan to expand our
preferential income tax rate of 15% from 2008 to 2010. In 2011, Shandong Taibang renewed its HNTE qualification,
production capacity will depend on, inter alia, the availability of capital to meet our needs of expansion or upgrading of
which entitled it to the preferential income tax rate of 15% from 2011 to 2013. Shandong Taibang will re-apply for the
production lines, and the availability of stable plasma supply.
HNTE qualification in the second half of 2014 and expects to continue enjoying the preferential income tax rate of 15%
for three years starting from 2014. According to CaiShui [2011] No. 58 dated July 27, 2011, Guizhou Taibang, being
As of December 31, 2013, the combined production capacity of Shandong Taibang and Guizhou Taibang was 1,100
a qualified enterprise located in the western region of PRC, enjoys a preferential income tax rate of 15% effective
metric tons per annum. We estimate that the production capacity of our major competitors ranges from 300 tons to 1,000
retroactively from January 1, 2011 to December 31, 2020. See Item 1 “Business – Regulation – Taxation” for a detailed
tons per annum. We suspended the plasma production at Guizhou Taibang and commenced a comprehensive upgrade
description of the EIT Law and tax regulations applicable to our PRC subsidiaries. All other subsidiaries of the Company
to our Guizhou Taibang’s plasma production facility in June 2013. We expect to obtain GMP certificate for the upgraded
are subjected to the regular rate of 25% for income tax.
facility and resume commercial production in April 2014. As the result, our total production capacity was reduced in
2013, and we expect such capacity reduction to continue until we obtain the GMP certification.
Competition
Results of Operations
The following table sets forth a summary of our consolidated statements of comprehensive income for the periods
indicated. Our historical results presented below are not necessarily indicative of the results that may be expected for
We are subject to intense competition. There are both local and overseas pharmaceutical enterprises that are engaged
any other future period.
in the manufacture and sale of potential substitute or similar biopharmaceutical products as our products in the PRC.
These competitors may have more capital, better research and development resources, manufacturing and marketing
56
57
Form 10-KForm 10-KPART IIPART II Year Ended December 31,
2013
2012
2011
$
% of
Total Sales
$
% of
Total Sales
$
% of
Total Sales
203,356,856
100.0
184,813,495
100.0
153,092,289
100.0
65,484,153
137,872,703
32.2
67.8
58,835,998
125,977,497
31.8
68.2
46,017,661
107,074,628
SALES
COST OF SALES
GROSS MARGIN
OPERATING EXPENSES:
General and administrative
expenses
Research and development
expenses
Impairment loss of goodwill
Loss on abandonment and
write off of long-lived assets
OTHER INCOME (EXPENSES):
Equity in income of equity
method investee
Change in fair value of
derivative liabilities
Interest expense
Interest income
EARNINGS BEFORE
INCOME TAX EXPENSE
INCOME TAX EXPENSE
NET INCOME
Less: Net income attributable
to non-controlling interest
NET INCOME ATTRIBUTABLE
TO COMPANY
NET INCOME PER SHARE
OF COMMON STOCK
BASIC
DILUTED
Selling expenses
10,643,149
5.2
14,421,258
7.8
14,595,794
36,073,871
17.7
34,034,360
18.4
31,519,824
4,223,165
2.1
3,032,719
1.6
3,978,233
Total operating expenses
50,940,185
INCOME FROM OPERATIONS
86,932,518
-
-
-
-
25.0
42.7
-
-
-
-
51,488,337
74,489,160
27.9
40.3
18,160,281
6,603,028
74,857,160
32,217,468
1,858,171
11,974,834
Other income (expenses), net
-
Total other income, net
5,468,847
2,170,473
1.1
2,665,881
-
-
1,769,140
1.4
1.0
(1,134,952)
(0.6)
(1,269,850)
(0.7)
(4,670,606)
4,433,326
92,401,365
15,540,301
76,861,064
22,259,513
2.2
-
2.7
45.4
7.6
37.8
10.9
2,910,297
570,511
6,645,979
1.6
0.3
3.6
1,356,950
(453,949)
10,065,400
81,135,139
43.9
42,282,868
15,163,147
65,971,992
8.2
35.7
10,899,513
31,383,355
20,749,803
11.2
13,201,645
54,601,551
26.9
45,222,189
24.5
18,181,710
11.9
2.05
1.96
1.73
1.62
0.73
0.37
30.1
69.9
9.5
20.6
2.6
11.9
4.3
48.9
21.0
1.2
7.8
(3.1)
0.9
(0.3)
6.6
27.6
7.1
20.5
8.6
Comparison of Fiscal Years Ended December 31, 2013 and 2012
Sales
Our total sales increased by 10.0%, or $18,543,361, to $203,356,856 for the year ended December 31, 2013, compared
to $184,813,495 for the year ended December 31, 2012. The increase in sales during 2013 was primarily attributable to
a mix of price and volume increases in certain of our plasma based products. In addition, foreign exchange translation
accounted for 2.0% of the sales increase.
The following table summarizes the breakdown of sales by major types of products
For the Years Ended December 31,
Change
2013
2012
$
%
$
%
Amount
%
Human albumin
89,671,619
44.1
82,450,825
44.6
7,220,794
Immunoglobulin products:
IVIG
77,341,616
38.0
72,005,196
Other immunoglobulin products
19,682,927
12,150,539
4,510,155
9.7
6.0
2.2
19,377,603
10,088,754
891,117
Placenta polypeptide
Others
Totals
39.0
10.5
5.5
0.4
5,336,420
305,324
2,061,785
3,619,038
203,356,856
100.0
184,813,495
100.0
18,543,361
8.8
7.4
1.6
20.4
406.1
10.0
During the year ended December 31, 2013 as compared to the year ended December 31, 2012:
•
the average price for our approved human albumin products, which contributed 44.1% to our total sales, increased
by approximately 10.1% and, excluding the foreign exchange translation effect, their average price in RMB term
increased by approximately 8.1%; and
•
the average price for our approved IVIG products, which contributed 38.0% to our total sales, increased by
approximately 1.3%, and excluding the foreign exchange translation effect, their average price in RMB term
remained relatively stable.
The price increase of human albumin products was mainly due to the increase of retail price ceiling announced by
NDRC in January 2013, which came into effect on February 1, 2013. This increased retail price ceiling provides us with
more flexibility in pricing our human albumin products and allows us to increase our ex-factory prices in certain regional
markets. NDRC also adjusted retail price ceilings for IVIG in September 2012, which came into effect on October 8,
2012. The new retail price ceilings for IVIG products are lower than the current prevailing market prices in some of
our regional markets. As a result, some of local governments revised tender price ceilings for IVIG products. We have
appealed to local governments for favorable pricing policy in selective regional markets and have successfully gained
support from certain provincial governments in lifting the tender price ceilings for IVIG products. Therefore, the average
price of our IVIG products remained relatively stable in 2013 as compared to 2012.
58
59
Form 10-KForm 10-KPART IIPART II
The sales volumes of our products in general depend on market demands and our production volumes. The production
The increase in cost of sales as a percentage of sales and the decrease of gross margin were mainly due to the
volumes of our IVIG and human albumin products depend primarily on general plasma supply. The production volumes
increase in cost of plasma paid to donors, which is the largest component of our cost of sales. In an effort to increase
of our hyper-immune products, which include human rabies immunoglobulin, human hepatitis B immunoglobulin and
plasma collection volume and expand our donor base, we increased the nutrition fees paid to donors in 2013 as
human tetanus immunoglobulin products, are subject to the availabilities of the specific vaccinated plasma and our
compared to 2012, which was in line with the industry practice. We expect the nutrition fees to be paid to donors
production capacity. The supply of vaccinated plasma in general requires several months of lead time. Our production
continue to increase as a result of improving living standards and the increasing trend of urbanization in China.
facility currently can only accommodate the production of one type of hyper-immune products at any given time and
Consequently, future improvements on margins will need to be derived from increases in product pricing, product mix,
we rotate the production of different types of hyper-immune products from time to time in response to market demand.
yields and manufacturing efficiency.
As such, the sales volume of any given type of hyper-immune products may vary significantly from period to period. In
addition, in light of the production suspension of Guizhou Taibang’s plasma production facility started from June 2013,
we decreased the sales volume of some of our products from the second quarter of 2013 in order to smooth out the
Operating expenses
impact of the reduced production volume and maintain our sales channels and customer relationship during the period
of Guizhou Taibang production suspension. We expect the plasma production facility at Guizhou Taibang to resume
commercial production in April 2014.
Sales volume for our human albumin products decreased by 1.2% in 2013 as compared to 2012. The decrease in
sales volumes of human albumin products was primarily due to the production suspension in Guizhou Taibang started
from June 2013. Sales volume for our IVIG products increased by 6.0% in 2013 as compared to 2012. In earlier 2013,
we strengthened our marketing efforts of IVIG promotion and engaged new distributors to sell IVIG in new territories.
Consequently, we experienced a 65.0% growth in IVIG sales volume for the first quarter of 2013 as compared to the
same quarter in 2012. However, such substantial growth in IVIG sales were partially offset by the impact of production
suspension of Guizhou Taibang’s plasma production facility started in June 2013.
For the Years Ended December 31,
Change
2013
2012
Amount
%
Operating expenses
$
50,940,185
$
51,488,337
$
(548,152)
as a percentage of total sales
25.0%
27.9%
(1.1%)
(2.9%)
Our total operating expenses decreased by $548,152, or 1.1%, to $50,940,185 for the year ended December 31, 2013,
from $51,488,337 for the year ended December 31, 2012. As a percentage of total sales, total expenses decreased
by 2.9% to 25.0% for the year ended December 31, 2013 from 27.9% for the year ended December 31, 2012. The
decrease of the total operating expenses was primarily due to the decrease of the selling expenses, partially offset by
the increase of the general and administrative expenses.
For the year ended December 31, 2013 as compared to 2012, the sales increase of other products was mainly
attributable to the newly-launched human coagulation factor VIII (200IU) in Shandong Taibang, which accounted for 2.1%
Selling expenses
of our total sales in 2013.
Cost of sales & gross profit
For the Years Ended December 31,
Change
2013
2012
Amount
%
Selling expenses
$
10,643,149
$
14,421,258
$
(3,778,109)
as a percentage of total sales
5.2%
7.8%
(26.2%)
(2.6%)
For the Years Ended December 31,
Change
2013
2012
Amount
%
Cost of sales
as a percentage of total sales
Gross Profit
Gross Margin
$
$
65,484,153
32.2%
137,872,703
$
$
67.8%
58,835,998
31.8%
125,977,497
68.2%
$
$
6,648,155
11.3%
$14,421,258 for the year ended December 31, 2012. As a percentage of total sales, our selling expenses for the
For the year ended December 31, 2013, our selling expenses decreased by $3,778,109, or 26.2%, to $10,643,149 from
11,895,206
0.4%
9.4%
(0.4%)
year ended December 31, 2012 decreased by 2.6% to 5.2% from 7.8% for the year ended December 31, 2012. The
decrease was mainly due to more stringent control on selling expenses since the second half of 2012.
Our total cost of sales was $65,484,153, or 32.2% of our sales, for the year ended December 31, 2013, as compared
to $58,835,998, or 31.8% of our sales for the year ended December 31, 2012. Our gross profit was $137,872,703 and
$125,977,497 for the years ended December 31, 2013 and 2012, respectively, representing gross margins of 67.8%
and 68.2%, respectively. In general, our cost of sales and gross margin are impacted by the volume and pricing of our
finished products, our raw material costs, production mix and respective yields, inventory provisions, production cycles
and routine maintenance costs.
60
61
Form 10-KForm 10-KPART IIPART II General and administrative expenses
as of December 31, 2011 to $8.55 and $9.22, respectively, as of the two warrants exercise dates. All warrants have
For the Years Ended December 31,
Change
2013
2012
Amount
%
General and administrative expenses
$
36,073,871
$ 34,034,360
$
2,039,511
as a percentage of total sales
17.7%
18.4%
6.0%
(0.7%)
For the year ended December 31, 2013, our general and administrative expenses increased by $2,039,511, or 6.0%,
to $36,073,871, from $34,034,360 for the year ended December 31, 2012. General and administrative expenses as
a percentage of total sales decreased by 0.7% to 17.7% for the year ended December 31, 2013 from 18.4% for the
year ended December 31, 2012. The increase in general and administrative expenses was mainly due to an increase
in expenses related to payroll and employee benefits as a result of general salary increases, and an increase in non-
recurring legal expenses.
Research and development expenses
been fully exercised by the end of June 2012.
Interest income
For the Years Ended December 31,
Change
2013
2012
Amount
%
Interest income
$
4,433,326
$
2,910,297
$
1,523,029
as a percentage of total sales
2.2%
1.6%
52.3%
0.6%
Our interest income increased by $1,523,029, or 52.3%, to $4,433,326 for the year ended December 31, 2013, from
$2,910,297 for the year ended December 31, 2012. The increase in interest income is primarily due to our investment in
certain short-term financial products with higher interest rates as well as the increase in our total cash deposit.
For the Years Ended December 31,
Change
2013
2012
Amount
%
Income tax expense
For the Years Ended December 31,
Change
2013
2012
Amount
%
Research and development expenses
$ 4,223,165
$ 3,032,719
$ 1,190,446
as a percentage of total sales
2.1%
1.6%
39.3%
0.5%
For the year ended December 31, 2013, our research and development expenses increased by $1,190,446, or 39.3%,
to $4,223,165, from $3,032,719 for the years ended December 31, 2012. As a percentage of total sales, our research
and development expenses increased by 0.5% to 2.1% for the year ended December 31, 2013 from 1.6% for the year
ended December 31, 2012. The increase of research and development expenses was primarily due to certain technical
support services we engaged to improve the production yields on certain hyper-immune products during the year
ended December 31, 2013. In addition, we started the clinical trial program on human fibrinogen in 2013.
Change in fair value of derivative liabilities
For the Years Ended December 31,
Change
2013
2012
Amount
%
Change in fair value of
derivative liabilities
as a percentage of total sales
$
-
-
$ 1,769,140
$ (1,769,140)
(100.0%)
1.0%
(1.0%)
Our warrants issued in June 2009 are classified as derivative liabilities carried at fair value. For the years ended
December 31, 2013 and 2012, we recognized a gain from the change in fair value of derivative liabilities in the amounts
of nil and $1,769,140, respectively. The recognized gain from the change in the fair value of derivative liabilities for the
year ended December 31, 2012 was mainly due to a decrease in the price of our common stock from $10.46 per share
Income tax expense
$
15,540,301
$
15,163,147
$
377,154
as a percentage of total sales
16.8%
18.7%
2.5%
(1.9%)
Our provision for income taxes increased by $377,154, or 2.5%, to $15,540,301 for the year ended December 31, 2013,
from $15,163,147 for the year ended December 31, 2012. Our effective income tax rates were 16.8% and 18.7% for the
years ended December 31, 2013 and 2012, respectively. Tax rate applicable to our major operating subsidiaries in the
PRC for 2012 and 2013 was 15%. The decrease of the effective income tax rate was mainly attributable to the decrease
of the dividend withholding income tax with respect to Shandong Taibang.
Net income attributable to Company
For the Years Ended December 31,
Change
2013
2012
Amount
%
Net income attributable to Company
$ 54,601,551
$ 45,222,189
$ 9,379,362
as a percentage of total sales
26.9%
24.5%
20.7%
2.4%
Our net income attributable to Company increased by $9,379,362 or 20.7%, to $54,601,551 for the year ended
December 31, 2013 from $45,222,189 for the year ended December 31, 2012. Net income attributable to Company as
a percentage of total sales was 26.9% and 24.5% for the years ended December 31, 2013 and 2012, respectively, as a
result of the cumulative effect of the foregoing factors
62
63
Form 10-KForm 10-KPART IIPART II Comparison of Fiscal Years Ended December 31, 2012 and 2011
Sales
Sales of placenta polypeptide products increased substantially in 2012 as compared to 2011. We began manufacturing
and selling placenta polypeptide products in December 2011. Prior to December 2011, we provided processing service
for Guizhou Eakan Co., Ltd. (“Eakan”), an affiliate of one of Guizhou Taibang’s non-controlling interest holders, for
placenta polypeptide products. The revenue we derived from the sales of placenta polypeptide products is substantially
Our total sales increased by 20.7%, or $31,721,206, to $184,813,495 for the year ended December 31, 2012, compared
higher than the processing fees we used to charge for these products.
to $153,092,289 for the year ended December 31, 2011. The increase in sales during 2012 was primarily attributable to
a mix of price and volume increases in certain of our plasma based products as well as substantial increase in sales of
placenta polypeptide products. In addition, foreign exchange translation accounted for 2.8% of the sales increase.
Cost of sales & gross profit
The following table summarizes the breakdown of sales by major types of products:
For the Years Ended December 31,
2012
2011
$
%
$
%
Change in
Amount
Change
in %
Human albumin
82,450,825
44.6
83,433,691
54.5
(982,866)
(1.2)
Immunoglobulin products:
IVIG
72,005,196
Other immunoglobulin products
19,377,603
Placenta polypeptide
Others
Totals
39.0
10.5
5.5
0.4
49,482,514
16,669,069
1,935,428
1,571,587
32.3
10.9
1.3
1.0
22,522,682
2,708,534
8,153,326
(680,470)
10,088,754
891,117
184,813,495
100.0
153,092,289
100.0
31,721,206
45.5
16.2
421.3
(43.3)
20.7
All of our approved plasma based products recorded price increases ranging from approximately 8.9% to 30.7%,
except for human hepatitis B immunoglobulin products, which decreased by approximately 45.0%. For 2012 as
compared to 2011, the average price for our approved human albumin products, which contributed 44.6% to our
total sales, increased by approximately 8.9% and, excluding the foreign exchange translation effect, their average
price in RMB term increased by approximately 6.3%; the average price for our approved IVIG products, which
contributed 39.0% to our total sales, increased by approximately 8.9%, and excluding the foreign exchange translation
effect, their average price in RMB term increased by approximately 6.4%. The general price increase of our human
albumin products and immunoglobulin products other than human hepatitis B immunoglobulin products was primarily
attributable to the shortage in supply of such products in 2012 as a result of the closure of several plasma collection
stations in Guizhou in 2011. The price decrease of human hepatitis B immunoglobulin products was mainly due to the
government program sponsored by PRC Ministry of Health with respect to these products in late 2011. The sales prices
of participating products in this program are generally lower than normal retail prices for public interest purposes.
Sales volume for our human albumin products decreased by 9.2% in 2012 as compared to 2011. The decrease in sales
volumes of human albumin products was primarily due to the decrease of its production volumes caused by the reduced
raw material supply as a result of the closure of several plasma collection stations in Guizhou. Sales volume for our IVIG
products increased by 33.6% in 2012 as compared to 2011. The increase in sales volumes of IVIG products was primarily
due to the increased market demand in 2012 and our increased inventory level in the later part of 2011 in anticipation of
such demand increase. The market demand for IVIG products increased due to its wide utilization for the prevention and
treatment of more diseases in 2012, which is in line with the medical practice in Europe and the United States.
For the Years Ended December 31,
Change
2012
2011
Amount
%
Cost of sales
as a percentage of total sales
Gross Profit
Gross Margin
$
$
58,835,998
31.8%
125,977,497
$
$
68.2%
46,017,661
30.1%
107,074,628
69.9%
$
$
12,818,337
18,902,869
27.9%
1.7%
17.7%
(1.7%)
Our total cost of sales was $58,835,998, or 31.8% of our sales, for the year ended December 31, 2012, as compared
to $46,017,661, or 30.1% of our sales for the year ended December 31, 2011. Our gross profit was $125,977,497 and
$107,074,628 for the years ended December 31, 2012 and 2011, respectively, representing gross margins of 68.2%
and 69.9%, respectively. In general, our cost of sales and gross margin are impacted by the volume and pricing of our
finished products, our raw material costs, production mix and respective yields, inventory provisions, production cycles
and routine maintenance costs.
The increase in cost of sales was largely in line with the increase of sales. The increase in cost of sales as a percentage
of sales and the decrease of gross margin were mainly due to the increase in cost of plasma paid to donors, which
is the largest component of our cost of sales. In an effort to increase plasma collection volume and expand our donor
base, we increased the nutrition fees paid to donors in 2012 as compared to 2011, which was in line with the industry
practice.
Operating expenses
For the Years Ended December 31,
Change
2012
2011
Amount
%
Operating expenses
$
51,488,337
$
74,857,160
$
(23,368,823)
as a percentage of total sales
27.9%
48.9%
(31.2%)
(21.0%)
Our total operating expenses decreased by $23,368,823, or 31.2%, to $51,488,337 for the year ended December 31,
2012, from $74,857,160 for the year ended December 31, 2011. We incurred an impairment loss of $24,763,309 in
2011, including both goodwill impairment and abandonment of long-lived assets as a result of the closure of several
plasma collection stations in Guizhou in August 2011. No impairment loss was recorded for the year ended December
31, 2012. As a percentage of total sales, total expenses decreased by 21.0% to 27.9% for the year ended December
31, 2012 from 48.9% for the year ended December 31, 2011.
64
65
Form 10-KForm 10-KPART IIPART II
Selling expenses
Impairment loss of goodwill
For the Years Ended December 31,
Change
2012
2011
Amount
%
Selling expenses
$
14,421,258
$
14,595,794
$
(174,536)
as a percentage of total sales
7.8%
9.5%
(1.2%)
(1.7%)
For the year ended December 31, 2012, our selling expenses decreased by $174,536, or 1.2%, to $14,421,258, from
$14,595,794 for the year ended December 31, 2011. As a percentage of total sales, our selling expenses for the year
ended December 31, 2012 decreased by 1.7%, to 7.8%, from 9.5% for the year ended December 31, 2011. We took
initiative to further control the selling expenses for the year ended December 31, 2012. The aforementioned factors
contributed to the decrease in selling expenses as a percentage of sales for the year ended December 31, 2012.
General and administrative expenses
For the Years Ended December 31,
Change
2012
2011
Amount
%
For the Years Ended December 31,
Change
2012
2011
Amount
%
Impairment loss of goodwill
$
as a percentage of total sales
-
-
$
18,160,281
$
(18,160,281)
(100.0%)
11.9%
11.9%
Following the closure of plasma collection stations of Guizhou Taibang due to the regulatory notice, we revised
our earnings guidance for the year of 2011 and experienced incremental decline in our stock price and market
capitalization in the third quarter of 2011. The occurrence of these events caused us to believe that the fair value of
our reporting unit would more likely than not be below its book value. Therefore, we performed a two-step goodwill
impairment test and concluded that, for the year ended December 31, 2011, a goodwill impairment loss of $18,160,281
was recognized in our single reporting unit since the carrying amount of the reporting unit was greater than the fair
value of the reporting unit (as determined based on the quoted market price) and the carrying amount of the reporting
unit goodwill exceeded the implied fair value of that goodwill. No impairment of goodwill has been recorded in the year
ended December 31, 2012.
General and administrative expenses
$
34,034,360
$ 31,519,824
$ 2,514,536
as a percentage of total sales
18.4%
20.6%
8.0%
(2.2%)
Loss on abandonment and write-off of long-lived assets
For the year ended December 31, 2012, our general and administrative expenses increased by $2,514,536, or 8.0%,
to $34,034,360, from $31,519,824 for the year ended December 31, 2011. General and administrative expenses as
a percentage of total sales decreased by 2.2% to 18.4% for the year ended December 31, 2012 from 20.6% for the
year ended December 31, 2011. The increase in general and administrative expenses was mainly due to an increase
in expenses related to payroll and employee benefits as a result of general salary increases and an increase in legal
expenses relating to the disputes among Guizhou Taibang shareholders. The decrease in general and administrative
expenses as a percentage of sales was primarily due to improvement of cost efficiency as a result of the economies of
the scale.
Research and development expenses
For the Years Ended December 31,
Change
2012
2011
Amount
%
Research and development expenses
$ 3,032,719
$
3,978,233
$
(945,514)
as a percentage of total sales
1.6%
2.6%
(23.8%)
(1.0%)
For the year ended December 31, 2012, our research and development expenses decreased by $945,514, or 23.8%,
For the Years Ended December 31,
Change
2012
2011
Amount
%
Loss on abandonment and write
off of long-lived assets
as a percentage of total sales
$ -
$ 6,603,028
$ (6,603,028)
(100.0%)
-
4.3%
(4.3%)
As a result of the closure of the plasma stations of Guizhou Taibang, certain equipment, office furniture, building
improvement and plasma collection permits were abandoned or written off during the third quarter of 2011. Loss on
abandonment of Guizhou Taibang’s long-lived assets of $6,603,028 was recognized for the year ended December 31,
2011. No loss on abandonment was recorded in the year ended December 31, 2012.
Change in fair value of derivative liabilities
For the Years Ended December 31,
Change
2012
2011
Amount
%
Change in fair value of derivative liabilities
$ 1,769,140
$ 11,974,834
$ (10,205,694)
as a percentage of total sales
1.0%
7.8%
(85.2%)
(6.8%)
to $3,032,719, from $3,978,233 for the year ended December 31, 2011. As a percentage of total sales, our research
Our warrants issued in June 2009 are classified as derivative liabilities carried at fair value. For the year ended December 31,
and development expenses decreased by 1.0% to 1.6% for the year ended December 31, 2012 from 2.6% for the years
2012, we recognized a gain of $1,769,140 from the change in the fair value of derivative liabilities, as compared to a gain of
ended December 31, 2011. The decrease in research and development expenses was primarily due to the completion
$11,974,834 for the year ended December 31, 2011. The gain from the change in the fair value of derivative liabilities in 2012
of the R&D tests on FVIII in early 2012.
was mainly due to a decrease in the price of our common stock from $10.46 per share as of December 31, 2011 to $9.22
per share upon the exercise of the warrants on June 6, 2012. All warrants have been exercised by the end of 2012.
66
67
Form 10-KForm 10-KPART IIPART II Interest expense
For the Years Ended December 31,
Change
2012
2011
Amount
%
Interest expense
$
(1,269,850)
$
(4,670,606)
$
3,400,756
as a percentage of total sales
(0.7%)
(3.1%)
(72.8%)
2.4%
Our interest expense decreased by $3,400,756, or 72.8%, to $1,269,850 for the year ended December 31, 2012, from
$4,670,606 for the year ended December 31, 2011. The decrease in interest expense was primarily due to the decrease
of the average loan balances for 2012 as compared to 2011.
Interest income
Our net income attributable to Company increased by $27,040,479, or 148.7%, to $45,222,189 for the year ended
December 31, 2012 from $18,181,710 for the year ended December 31, 2011. Net income attributable to Company as
a percentage of total sales was 24.5% and 11.9% for the years ended December 31, 2012 and 2011, respectively, as a
result of the cumulative effect of the foregoing factors.
Liquidity and Capital Resources
To date, we have financed our operations primarily through cash flows from operations, augmented by bank borrowings
and equity contributions by our stockholders. As of December 31, 2013, we had $144,138,487 in cash and cash
equivalents, primarily consisting of demand deposits.
The following table sets forth a summary of our cash flows for the periods indicated:
For the Years Ended December 31,
Change
2012
2011
Amount
%
Cash Flow
Interest income
$
2,910,297
$
1,356,950
$
1,553,347
as a percentage of total sales
1.6%
0.9%
114.5%
0.7%
Our interest income increased by $1,553,347, or 114.5%, to $2,910,297 for the year ended December 31, 2012, from
$1,356,950 for the year ended December 31, 2011. The increase in interest income is primarily due to our investment in
certain short-term financial products with higher interest rates as well as the increase in our total cash deposit.
Income tax expense
For the Years Ended December 31,
Change
2012
2011
Amount
%
Income tax expense
Effective income tax rate
$
15,163,147
$
10,899,513
$
4,263,634
18.7%
25.8%
39.1%
(7.1%)
Our provision for income taxes increased by $4,263,634, or 39.1%, to $15,163,147 for the year ended December 31,
2012, from $10,899,513 for the year ended December 31, 2011. Our effective income tax rates were 18.7% and 25.8%
for the years ended December 31, 2012 and 2011, respectively. The decrease of the effective income tax rate was
mainly attributable to the effect of the non-deductible impairment loss of goodwill and loss on abandonment and write-
off of long-lived assets recorded in the year ended December 31, 2011.
Net income attributable to Company
For the Years Ended December 31,
Change
2012
2011
Amount
%
Net income attributable to Company
$ 45,222,189
$ 18,181,710
$ 27,040,479
as a percentage of total sales
24.5%
11.9%
148.7%
12.6%
Year Ended December 31,
2013
2012
2011
Net cash provided by operating activities
$ 74,302,995
$ 71,097,317
$ 38,469,919
Net cash used in investing activities
Net cash used in financing activities
Effects of exchange rate change in cash
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of the year
( 25,567,595)
(38,524,650)
4,318,420
14,529,170
129,609,317
(26,753,193)
(7,127,252)
(5,104,076)
(10,076,504)
957,434
40,197,482
89,411,835
3,204,304
24,470,467
64,941,368
Cash and cash equivalents at end of the year
$ 144,138,487
$ 129,609,317
$ 89,411,835
Operating Activities
Net cash provided by operating activities was $74,302,995 for the year ended December 31, 2013, as compared to
$71,097,317 and $38,469,919 for the years ended December 31, 2012 and 2011, respectively. For the years ended
December 31, 2013, 2012 and 2011, our net income was $76,861,064, $65,971,992 and $31,383,355, respectively.
Our net non-cash operating expense was $10,354,864, $11,054,592 and $24,883,612, respectively, for the years
ended December 31, 2013, 2012 and 2011. Among the non-cash operating items, our depreciation and amortization
expense was $7,462,384, $8,880,738 and $7,648,469, respectively, our stock compensation expense was $5,050,796,
$4,544,927 and $4,896,232, respectively, the amortization of discount on convertible notes was nil, nil and $3,503,767,
respectively, and our income from change in fair value of derivative liabilities was nil, $1,769,140 and $11,974,834,
respectively, for the year ended December 31, 2013, 2012 and 2011. Additionally, the impairment loss for goodwill and
loss on abandonment and write-off of long-lived assets totaled nil, nil and $24,763,309, respectively, for the year ended
December 31, 2013, 2012 and 2011.
68
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Form 10-KForm 10-KPART IIPART II We had a net cash outflow of working capital of $12,912,933, $5,929,267 and $17,797,048 for the years ended
net cash used in financing activities in 2012 was mainly due to a $14,286,800 repayment of short-term bank loans
December 31, 2013, 2012 and 2011, respectively. Among these cash outflows, the increase in inventory for the years
and a dividend payment of $7,120,693 by our subsidiaries to a noncontrolling interest shareholder, partly offset by
ended December 31, 2013, 2012 and 2011 were $10,432,492, $3,750,200 and $17,079,263, respectively. As compared
cash provided by new short-term loans of $11,076,100 and proceeds from the exercises of stock option and warrants
to 2012, the increase of inventories was mainly attributable to increase of raw materials due to the continued supply
totaling $5,227,317. The net cash used in financing activities in 2011 was mainly attributable to a dividend payment of
of plasma, our primary raw material, by plasma stations of Guizhou Taibang while the production of plasma products
$10,489,504 by our subsidiaries to the non-controlling interest shareholders, payment for acquisition of noncontrolling
at Guizhou Taibang has been suspended since June 2013. The increase in accounts receivable for the year ended
interest of $7,635,000, repayment of short-term bank loan of $10,847,200, partly offset by short-term bank loans of
December 31, 2013 was 5,667,386. Such increase was in line with the expansion of our sales during this period.
$18,595,200 and proceeds of $300,000 from exercise of stock option.
Although we incurred higher accounts receivable balance, the accounts receivable turnover days decreased slightly
from 28 days in 2012 to 26 days in 2013. The decrease in accounts receivable for the year ended December 31, 2012
Management believes that the Company has sufficient cash on hand and continuing positive cash inflow from the sale
was $5,689,638, which was mainly due to measures we took to speed up the collection of the accounts receivable. The
of its plasma-based products in the PRC market for its operations.
increase in accounts receivable for the years ended December 31, 2011 was $6,126,742. As we increased our direct
sales to hospitals and inoculation centers that have longer credit terms in 2011, we experienced a slower turn-over with
our accounts receivable during the period.
Obligations Under Material Contracts
Investing Activities
Our use of cash for investing activities is primarily for the acquisition of property, plant and equipment and intangibles,
and purchase of time deposits.
Contractual Obligations
Total
Payments Due by Period
Less than
1 year
1-3 years
3-5 years
More than
5 years
The following table sets forth our material contractual obligations as of December 31, 2013:
Net cash used in investing activities for the year ended December 31, 2013 was $25,567,595, as compared to
$26,753,193 and $7,127,252 for the years ended December 31, 2012 and 2011, respectively. The investing activities
for the year ended December 31, 2013 mainly consisted of construction of new production facility for Factor VIII at
Shandong Taibang, office premise at Shandong Taibang, and upgrade of production facilities of placenta polypeptide
and plasma based products at Guizhou Taibang. We paid $20,492,159 for acquisition of property, plant and equipment
at Shandong Taibang and Guizhou Taibang in connection with these investing activities in the year ended December
31, 2013. During the years ended December 31, 2012 and 2011, we paid $13,866,045 and $7,968,870, respectively, for
construction and acquisition of property, plant and equipment, and acquisition of intangible assets and land use right
for Shandong Taibang and Guizhou Taibang. In addition, we made a refundable payment of $13,325,580 to the local
government in connection with our bid for a land use right in Guizhou Province in the year ended December 31, 2012,
of which $2,100,150 was refunded to us by the end of year 2013 due to the decrease of the land size to be provided
by the local government. Further, Guizhou Taibang made a time deposit of $6,608,612 in 2013 at an interest rate higher
than that in 2012.
Financing Activities
Net cash used in financing activities for the year ended December 31, 2013 totaled $38,524,650, as compared to
$5,104,076 and $10,076,504 for the years ended December 31, 2012 and 2011, respectively. The net cash used in
financing activities in 2013 mainly consisted of a payment of $29,594,080 for share repurchase and a dividend payment
of $16,931,149 by our subsidiaries to the noncontrolling interest shareholders, partially offset by proceeds of $5,394,070
from the exercise of the stock options and contribution of $2,891,422 from a noncontrolling interest shareholder. The
Short-term bank loans
Long-term bank loans
Interest on short-term and
long-term bank loans
Operating lease commitment
Capital commitment
Total
$ 9,822,000
9,822,000
-
30,000,000
-
30,000,000
1,238,467
1,158,836
1,203,963
4,619,975
472,528
4,173,336
79,631
546,652
446,639
-
-
-
-
-
-
11,689
173,094
-
-
$ 46,884,405
15,626,700
31,072,922
11,689
173,094
Seasonality of our Sales
Our operating results and operating cash flows historically have not been subject to seasonal variations. This pattern
may change, however, as a result of new market opportunities or new product introductions.
Inflation
Inflation does not materially affect our business or the results of our operations.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect
on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that are material to our investors.
70
71
Form 10-KForm 10-KPART IIPART II Critical Accounting Policies
The preparation of financial statements in conformity with United States generally accepted accounting principles, or U.S.
GAAP, requires our management to make assumptions, estimates and judgments that affect the amounts reported in
the financial statements, including the notes thereto, and related disclosures of commitments and contingencies, if any.
We consider our critical accounting policies to be those that require the more significant judgments and estimates in the
preparation of financial statements, including the following:
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates. Significant items subject to such
estimates and assumptions include the useful lives of fixed assets; the allowance for doubtful accounts; the fair value
determinations of financial and equity instruments and the valuation of share-based compensation, assets acquired
and liabilities assumed in a business combination, deferred tax assets and inventories; the recoverability of goodwill,
intangible asset, land use right and property, plant and equipment; and reserves for income tax uncertainties and other
contingencies. The current economic environment has increased the degree of uncertainty inherent in those estimates
and assumptions.
Revenue Recognition
• Level 1 Inputs: Unadjusted quoted prices for identical assets or liabilities in active markets accessible to the entity
at the measurement date.
• Level 2 Inputs: Other than quoted prices included in Level 1, inputs that are observable for the asset or liability,
either directly or indirectly, for substantially the full term of the asset or liability.
• Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable
inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or
liability at the measurement date.
The fair value measurement level of an asset or liability within the fair value hierarchy is based on the lowest level of any
input that is significant to the fair value measurement.
The fair values of the warrants that were exercised on June 6 and June 4, 2012, and outstanding as of December 31,
2011 were determined based on the Binominal option pricing model, using the following key assumptions:
June 6, 2012
June 4, 2012
December 31, 2011
Expected dividend yield
Risk-free interest rate
Time to maturity (in years)
Expected volatility
Fair value of underlying common shares (per share)
0%
0.05%
-
47.4%
$ 9.22
0%
0.04%
-
37.3%
$ 8.55
0%
0.05%
0.43
80.0%
$ 10.46
Revenue represents the invoiced value of products sold, net of value added taxes (VAT).
Accounts Receivable and Allowance for Doubtful Accounts
Revenue is recognized when persuasive evidence of an arrangement exists, delivery of the product has occurred and
Accounts receivable are recorded at the invoiced amount and do not bear interest. Amounts collected on trade
the customer takes ownership and assumes risk of loss, the sales price is fixed or determinable and collection of the
accounts receivable are included in net cash provided by operating activities in the consolidated statements of
relevant receivable is probable. The Company mainly sells human albumin and human immunoglobulin to hospitals,
cash flows. The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts
inoculation centers and pharmaceutical distributors. For all sales, the Company requires a signed contract or purchase
receivable portfolio. In establishing the required allowance, management considers historical losses, the customers’
order which specify pricing, quantity and product specifications. Delivery of the product occurs when customer
financial condition, the amount of accounts receivable in dispute, the accounts receivable aging and customers’
receives the product, which is when the risks and rewards of ownership have been transferred. Delivery is evidenced
payment patterns. The Company reviews its allowance for doubtful accounts monthly. Past due balances are reviewed
by signed customer acknowledgement. The Company’s sales agreements do not provide the customer the right of
individually for collectability. Account balances are charged off against the allowance after all means of collection have
return, unless the product is defective in which case the Company allows for an exchange of product or return. For the
been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet
periods presented, defective product returns were immaterial.
credit exposure related to its customers.
Fair Value Measurements
We generally ask our distributors to pay in advance before we deliver products, with few exceptions for a credit period
of no longer than 30 days. For hospitals and clinics, depending on the relationship and the creditability, we generally
We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs
grant a credit period of no longer than 90 days with exceptions to customers that we believe are credit worthy up to 6
to the extent possible. We determine fair value based on assumptions that market participants would use in pricing an
months. We have provided a bad debt allowance of $31,567 for the year ended December 31, 2013. Due to recovery of
asset or liability in the principal or most advantageous market. When considering market participant assumptions in
bad debt that we previously provided an allowance, the decrease in valuation allowance of bad debt was $1,904 and
fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs,
$19,611 respectively for the years ended December 31, 2012 and 2011.
which are categorized in one of the following levels:
72
73
Form 10-KForm 10-KPART IIPART II
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the weighted average method. Cost of
work in progress and finished goods comprise direct materials, direct production costs and an allocation of production
appraisals, as considered necessary. We recognized a loss on abandonment and write off of long-lived assets totaling
$6,603,028 for the year ended December 31, 2011 as described in Note 8 to our consolidated financial statements.
overheads based on normal operating capacity. Adjustments are recorded to write down the carrying amount of any
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
obsolete and excess inventory to its estimated net realizable value based on historical and forecasted demand.
We review the inventory periodically for possible obsolete goods and cost in excess of net realizable value to determine
if any reserves are necessary. For the year ended December 31, 2011, we wrote off $270,929 relating to obsolete
plasma that may not qualify for production due to the 90-day quarantine period rules implemented by CFDA.
Share-based Payment
Our operations are carried out in the PRC and we are subject to specific considerations and significant risks not
typically associated with companies in North America and Western Europe. Accordingly, our business, financial
condition and results of operations may be influenced by the political, economic and legal environments in the PRC,
and by the general state of the PRC economy. Our results may be adversely affected by changes in governmental
policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad,
and rates and methods of taxation, among other things.
We measures the cost of employee services received in exchange for an award of equity instruments based on the
grant-date fair value of the award and recognizes the cost over the period during which an employee is required to
Interest Rate Risk
provide service in exchange for the award, which generally is the vesting period.
The fair value of options granted for the year ended December 31, 2013, 2012 and 2011 are estimated on the
instruments to manage our interest rate risk exposure. We have not been exposed nor do we anticipate being exposed
respective dates of grant using the Black-Scholes option pricing model with the following major assumptions:
to material risks due to changes in interest rates. However, our future interest expenses may increase due to changes in
We are exposed to interest rate risk primarily with respect to our bank loans. We have not used any derivative financial
For the Years Ended
December 31, 2013
December 31, 2012
December 31, 2011
Expected volatility
Expected dividends yield
Expected term (in years)
Risk-free interest rate
104.00%
0%
5.38
0.72%
104.00%
0%
6.01
0.82%
69.43%
0%
5.00
1.92%
Fair value of underlying common stock (per share)
$ 10.48
$ 9.61
$ 15.28
The volatility of our common stock was estimated by us based on the historical volatility of our common stock. The risk
free interest rate was based on Treasury Constant Maturity Rates published by the U.S. Federal Reserve for periods
applicable to the estimated term of the options. The expected dividend yield was based on our current and expected
dividend policy.
Long-Lived Assets
Long-lived assets, such as property, plant and equipment, and purchased intangible asset subject to amortization, are
reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment,
we first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value.
If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an
impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through
various valuation techniques including discounted cash flow models, quoted market values and third-party independent
market interest rates.
A hypothetical 1.0% increase in the annual interest rates for all of our credit facilities under which we had outstanding
borrowings as of December 31, 2013 would decrease net income before provision for income taxes by approximately
$398,220 for the year ended December 31, 2013. Management monitors the banks’ prime rates in conjunction with our
cash requirements to determine the appropriate level of debt balances relative to other sources of funds. We have not
entered into any hedging transactions in an effort to reduce our exposure to interest rate risk.
Foreign Exchange Risk
While our reporting currency is the U.S. Dollar, all of our consolidated revenues and consolidated costs and majority
of expenses are denominated in RMB. All of our assets are denominated in RMB, except certain cash balances. All of
our liabilities are denominated in RMB, except certain loans denominated in U.S. Dollar. As a result, we are exposed to
foreign exchange risk as our revenues and results of operations may be affected by fluctuations in the exchange rate
between U.S. Dollars and RMB. If RMB depreciates against the U.S. Dollar, the value of our RMB revenues, earnings
and assets as expressed in our U.S. Dollar financial statements will decline. Assets and liabilities are translated at
exchange rates at the balance sheet dates and revenue and expenses are translated at the average exchange rates
during the period. Any resulting translation adjustments are not included in determining net income but are included in
determining other comprehensive income, a component of stockholder’s equity. In addition, if RMB depreciate against
the U.S. Dollar, our interest expense for our US Dollar denominated loans will increase in RMB terms. We have not
entered into any hedging transactions in an effort to reduce our exposure to foreign exchange risk.
74
75
Form 10-KForm 10-KPART IIPART II The value of the RMB against the U.S. dollar and other currencies is affected by, among other things, changes in
Quarterly Financial Results
China’s political and economic conditions. Since July 2005, the RMB has not been pegged to the U.S. dollar. Although
the People’s Bank of China regularly involved in the foreign exchange market to prevent significant short-term
The following table sets forth certain unaudited financial information for each of the eight quarters ended December 31,
fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against the U.S. dollar
2013. The consolidated financial statements for each of these quarters have been prepared on the same basis as the
or Euro in the medium to long term. Moreover, it is possible that in the future, PRC authorities may lift restrictions on
audited consolidated financial statements included in this annual report and, in the opinion of management, include all
fluctuations in RMB exchange rate and lessen involvement in the foreign exchange market.
adjustments necessary for the fair presentation of the results of operations for these periods. This information should
Account Balances
We maintain balances at financial institutions which, from time to time, may exceed Federal Deposit Insurance
Corporation insured limits for the banks located in the United States or may exceed Hong Kong Deposit Protection
Board insured limits for the banks located in Hong Kong. Balances at financial institutions or state-owned banks within
the PRC are not covered by insurance. Total cash at banks and deposits as of December 31, 2013 and December
31, 2012 amounted to $180,858,848 and $129,289,461 respectively, $679,022 and $76,101 of which are covered
by insurance, respectively. We have not experienced any losses in such accounts and we do not believe that we are
exposed to any significant risks on our cash in bank accounts.
Inflation
Inflationary factors such as increases in the cost of our sales and overhead costs may adversely affect our operating
results. Although we do not believe that inflation has had a material impact on our financial position or results of
operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current
levels of gross margin and selling, general and administrative expenses as a percentage of net sales if the selling
prices of our products do not increase with these increased costs.
be read together with our audited consolidated financial statements and the related notes included elsewhere in this
annual report.
(All amounts in thousands
of U.S. dollars)
Dec 31,
2013
Sep 30,
2013
Jun 30,
2013
Mar 31,
2013
Dec 31,
2012
Sep 30,
2012
Jun 30,
2012
Mar 31,
2012
Sales
Gross profit
Earnings before income
tax expense
Net income attributable
to Company
Basic earnings per share
Diluted earnings per
share
$ 42,592
$ 53,152
$ 53,581
$ 54,032
$ 33,996
$ 53,124
$ 50,466
$ 47,227
27,014
35,986
37,458
37,415
23,928
36,203
34,335
31,512
14,340
24,819
26,723
26,519
15,361
21,953
22,926
20,895
8,828
14,696
16,162
14,916
5,810
13,617
12,838
12,957
0.34
0.32
0.55
0.53
0.60
0.57
0.55
0.53
0.22
0.21
0.51
0.50
0.50
0.46
0.51
0.44
Earnings per share are computed independently for each of the quarters presented. Therefore, the sum of the quarterly
net earnings per share will not necessarily equal the total for the year.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
Market for Human Albumin and IVIG
Our two major products, human albumin and IVIG, accounted for 44.1% and 38.0% of the total sales for the year ended
ITEM 9A. CONTROLS AND PROCEDURES.
December 31, 2013, respectively. If the market demands for human albumin or IVIG cannot be sustained in the future or
Evaluation of Disclosure Controls and Procedures
if there is substantial price decrease in either or both products, our operating results could be materially and adversely
affected.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Consolidated Financial Statements
The full text of our audited consolidated financial statements as of December 31, 2013, 2012 and 2011 begins on page
F-1 of this report.
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) that are
designed to ensure that information that would be required to be disclosed in Exchange Act reports is recorded,
processed, summarized and reported within the time period specified in the SEC’s rules and forms, and that such
information is accumulated and communicated to our management, including to our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As required by Rule 13a-15(b) promulgated under the Securities Exchange Act, our management, with the participation
of our CEO and CFO, evaluated the design and operating effectiveness as of December 31, 2013 of our disclosure
controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act. Based on
this evaluation our CEO and CFO concluded that, as of December 31, 2013, our disclosure controls and procedures
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Form 10-KForm 10-KPART IIPART II were effective at the reasonable assurance level to enable the Company to record, process, summarize and report
Report of Independent Registered Public Accounting Firm
information required under the Securities and Exchange Commission’s rules in a timely manner.
Management’s Annual Report on Internal Control over Financial Reporting
Internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) refers to
the process designed by, or under the supervision of, our Chief Executive Officer and Acting Chief Financial Officer,
and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. Management is responsible for establishing and maintaining adequate
The Board of Directors and Stockholders
China Biologic Products, Inc.:
We have audited China Biologic Products, Inc.’s internal control over financial reporting as of December 31, 2013,
based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). China Biologic Products, Inc.’s management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control
over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial
internal control over financial reporting.
reporting based on our audit.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Management evaluated the effectiveness of our internal control over financial reporting as of December 31, 2013.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining
an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit
also included performing such other procedures as we considered necessary in the circumstances. We believe that our
In making this evaluation, management used the framework established in Internal Control - Integrated Framework
audit provides a reasonable basis for our opinion.
issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. The COSO framework
summarizes each of the components of a company’s internal control system, including (i) the control environment, (ii)
risk assessment, (iii) control activities, (iv) information and communication, and (v) monitoring. Based on our evaluation
we determined that our internal control over financial reporting was effective as of December 31, 2013.
Our internal control over financial reporting as of December 31, 2013 has been audited by our registered public
accounting firm as stated in their report which is included in Part II, Item 9A of this form 10-K.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on
the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, China Biologic Products, Inc. maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2013, based on criteria established in Internal Control – Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission.
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79
Form 10-KForm 10-KPART IIPART II We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
States), the consolidated balance sheets of China Biologic Products, Inc. and subsidiaries as of December 31, 2013
and 2012, and the related consolidated statements of comprehensive income, changes in equity and cash flows for
The information required by Item 10 of Part III is included in our Proxy Statement for our 2014 Annual Meeting of
each of the years in the three-year period ended December 31, 2013, and our report dated March 12, 2014 expressed
Stockholders and is incorporated herein by reference.
an unqualified opinion on those consolidated financial statements.
/s/ KPMG
Hong Kong, China
March 12, 2014
Changes in Internal Controls over Financial Reporting
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 of Part III is included in our Proxy Statement for our 2014 Annual Meeting of
Stockholders and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The information required by Item 12 of Part III is included in our Proxy Statement for our 2014 Annual Meeting of
Stockholders and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
AND DIRECTOR INDEPENDENCE.
The information required by Item 13 of Part III is included in our Proxy Statement for our 2014 Annual Meeting of
There were no changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(d) and
Stockholders and is incorporated herein by reference.
15d-15(f)) during the year ended December 31, 2013 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
We have no information to disclose that was required to be disclosed in a report on Form 8-K during the year ended
December 31, 2013, but was not reported.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by Item 14 of Part III is included in our Proxy Statement for our 2014 Annual Meeting of
Stockholders and is incorporated herein by reference.
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81
Form 10-KPART IIIForm 10-KPART II ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
Financial Statements and Schedules
The financial statements are set forth under Item 8 of this annual report on Form 10-K. Financial statement schedules
have been omitted since they are either not required, not applicable, or the information is otherwise included.
Exhibit List
The list of exhibits in the Exhibit Index to this Report is incorporated herein by reference.
SIGNATURES
In accordance with section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this Report on
Form 10-K to be signed on its behalf by the undersigned, thereto duly authorized individual.
Date: March 12, 2014
CHINA BIOLOGIC PRODUCTS, INC.
By: /s/ David (Xiaoying) Gao
David (Xiaoying) Gao
Chief Executive Officer
By: /s/ Ming Yang
Ming Yang
Chief Financial Officer
In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title
/s/ David (Xiaoying) Gao
David (Xiaoying) Gao
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date
March 12, 2014
/s/ Ming Yang
Ming Yang
/s/ Sean Shao
Sean Shao
/s/ Zhijun Tong
Zhijun Tong
/s/ Yungang Lu
Yungang Lu
/s/ Bing Li
Bing Li
/s/ Wenfang Liu
Wenfang Liu
/s/ Albert (Wai Keung) Yeung
Albert (Wai Keung) Yeung
/s/ Charles (Le) Zhang
Charles (Le) Zhang
/s/ David Hui Li
David Hui Li
Chief Financial Officer
(Principal Financial and Accounting Officer )
March 12, 2014
Director
Director
Director
Director
Director
Director
Director
Director
March 12, 2014
March 12, 2014
March 12, 2014
March 12, 2014
March 12, 2014
March 12, 2014
March 12, 2014
March 12, 2014
82
83
Form 10-KForm 10-KPART IV
CHINA BIOLOGIC PRODUCTS, INC.
AND SUBSIDIARIES
Contents
F-1
F-2
F-3
F-4
F-5
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Equity
Consolidated Statements of Cash Flows
F-7-F-34
Notes to Consolidated Financial Statements
84
Form 10-KPART IV
Form 10-K
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
China Biologic Products, Inc.:
We have audited the accompanying consolidated balance sheets of China Biologic Products, Inc. and subsidiaries (the
“Company”) as of December 31, 2013 and 2012, and the related consolidated statements of comprehensive income,
changes in equity and cash flows for each of the years in the three-year period ended December 31, 2013. These
consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of China Biologic Products, Inc. and subsidiaries as of December 31, 2013 and 2012, and the results of their
operations and their cash flows for each of the years in the three-year period ended December 31, 2013, in conformity
with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), China Biologic Products, Inc.’s internal control over financial reporting as of December 31, 2013, based on
criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO), and our report dated March 12, 2014 expressed an unqualified opinion on the
effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG
Hong Kong, China
March 12, 2014
CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
Current Assets
Cash and cash equivalents
Time deposit
Accounts receivable, net of allowance for doubtful accounts
Inventories
Prepayments and other current assets
Total Current Assets
Property, plant and equipment, net
Intangible assets, net
Land use rights, net
Deposits related to land use rights
Restricted cash and deposit
Equity method investment
Total Assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Short-term bank loans
Accounts payable
Due to related parties
Other payables and accrued expenses
Advance from customers
Income tax payable
Total Current Liabilities
Long-term bank loans
Deferred income
Other liabilities
Total Liabilities
Stockholders’ Equity
Common stock:
par value $0.0001;
100,000,000 shares authorized;
27,341,744 and 26,629,615 shares issued at
December 31, 2013 and 2012, respectively;
25,862,040 and 26,629,615 shares outstanding at
December 31, 2013 and 2012, respectively
Additional paid-in capital
Treasury stock: 1,479,704 and nil shares at December
31, 2013 and 2012, respectively, at cost
Retained earnings
Accumulated other comprehensive income
Total equity attributable to China Biologic Products, Inc.
Noncontrolling interest
Total Stockholders’ Equity
Commitments and contingencies
Total Liabilities and Stockholders’ Equity
Note
December 31,
2013
December 31,
2012
USD
USD
3
4
5
6
7
9
10
11
21
12
11
9
20
144,138,487
6,608,612
17,270,132
88,634,855
7,641,061
264,293,147
73,149,072
2,585,232
8,213,145
13,667,130
30,523,674
11,349,807
403,781,207
9,822,000
4,445,732
7,206,970
34,852,740
2,908,853
4,202,405
63,438,700
30,000,000
3,003,895
3,369,003
99,811,598
129,609,317
-
11,206,244
75,679,173
5,664,919
222,159,653
51,325,177
3,541,582
5,818,709
14,752,574
2,912,145
10,537,310
311,047,150
7,935,000
2,908,624
4,081,624
25,423,349
2,857,420
4,513,075
47,719,092
-
2,912,145
2,996,749
53,627,986
2,734
2,663
72,031,864
62,251,731
(29,594,080)
173,744,551
21,506,494
237,691,563
66,278,046
303,969,609
-
403,781,207
-
119,143,000
14,072,322
195,469,716
61,949,448
257,419,164
-
311,047,150
F-1
F-2
See accompanying notes to Consolidated Financial Statements.
Form 10-KForm 10-K
CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Sales
Cost of sales
Gross profit
Operating expenses
Selling expenses
General and administrative expenses
Research and development expenses
Impairment loss of goodwill
Loss on abandonment and write-off of long-lived assets
Income from operations
Other income (expenses)
Equity in income of an equity method investee
Change in fair value of derivative liabilities
Interest income
Interest expense
Other income (expense), net
Total other income, net
Earnings before income tax expense
Income tax expense
Net income
Less: Net income attributable to noncontrolling interest
Net income attributable to China Biologic Products, Inc.
Net income per share of common stock:
Basic
Diluted
Weighted average shares used in computation:
8
8
10
14
13
22
22
Basic
Diluted
Net income
Other comprehensive income:
Foreign currency translation adjustment,
net of nil income taxes
Comprehensive income
Less: Comprehensive income attributable
to noncontrolling interest
Comprehensive income attributable to
China Biologic Products, Inc.
For the Years Ended
Note
December 31,
2013
December 31,
2012
December 31,
2011
USD
USD
USD
19
203,356,856
184,813,495
153,092,289
65,484,153
58,835,998
46,017,661
137,872,703
125,977,497
107,074,628
10,643,149
36,073,871
4,223,165
14,421,258
34,034,360
3,032,719
-
-
-
-
14,595,794
31,519,824
3,978,233
18,160,281
6,603,028
86,932,518
74,489,160
32,217,468
2,170,473
-
4,433,326
2,665,881
1,769,140
2,910,297
1,858,171
11,974,834
1,356,950
(1,134,952)
(1,269,850)
(4,670,606)
-
570,511
(453,949)
5,468,847
92,401,365
15,540,301
76,861,064
22,259,513
54,601,551
6,645,979
10,065,400
81,135,139
42,282,868
15,163,147
10,899,513
15,163,147
10,899,513
20,749,803
13,201,645
45,222,189
18,181,710
2.05
1.96
1.73
1.62
0.73
0.37
26,410,819
27,572,111
76,861,064
26,153,540
26,839,723
25,028,796
26,654,662
65,971,992
31,383,355
9,126,218
1,735,492
6,846,721
85,987,282
67,707,484
38,230,076
23,951,559
21,163,655
15,320,805
62,035,723
46,543,829
22,909,271
See accompanying notes to Consolidated Financial Statements.
F-3
Form 10-K
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S
CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation
Amortization
(Gain) loss on sale of property, plant and equipment
Impairment loss of goodwill
Loss on abandonment and write-off of long-lived assets
Provision for (reversal of) allowance for doubtful accounts, net
Provision for (reversal of) doubtful accounts
- other receivables and prepayments
Write-down of obsolete inventories
Deferred tax expense (benefit)
Share-based compensation
Change in fair value of derivative liabilities
Amortization of deferred note issuance cost
Amortization of discount on convertible notes
For the Years Ended
December 31,
2013
USD
December 31,
2012
USD
December 31,
2011
USD
76,861,064
65,971,992
31,383,355
6,096,650
1,365,734
(123,777)
-
-
31,567
65,094
-
112,632
5,050,796
-
-
-
5,792,418
3,088,320
828,296
-
-
(1,904)
110,123
-
1,127,433
4,544,927
4,253,661
3,394,808
166,934
18,160,281
6,603,028
(19,611)
(10,254)
270,929
(2,595,103)
4,896,232
(1,769,140)
(11,974,834)
-
-
91,945
3,503,767
Equity in income of an equity method investee
(2,170,473)
(2,665,881)
(1,858,171)
Change in operating assets and liabilities:
Accounts receivable
Prepayment and other current assets
Inventories
Accounts payable
Other payables and accrued expenses
Advance from customers
Due to related parties
Income tax payable
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment for property, plant and equipment
(5,667,386)
(624,159)
5,689,638
(268,498)
(6,126,742)
(711,740)
(10,432,492)
(3,750,200)
(17,079,263)
1,621,917
2,534,476
(2,184,674)
(3,210,777)
(38,086)
(2,034,138)
66,349
(446,911)
734,037
(904,655)
74,302,995
71,097,317
431,836
6,061,066
1,140,386
-
(1,512,591)
38,469,919
(20,492,159)
(13,886,045)
(7,968,870)
Payment for intangible assets and land use rights
(1,327,148)
(14,059,397)
(424,971)
Refund of deposits related to land use right
2,100,150
-
-
Dividends received
Purchase of time deposit
Proceeds from sale of property, plant and equipment
565,425
1,109,115
1,209,880
(6,608,612)
194,749
-
83,134
-
56,709
Net cash used in investing activities
(25,567,595)
(26,753,193)
(7,127,252)
See accompanying notes to Consolidated Financial Statements.
F-5
Form 10-KForm 10-K
CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013, 2012 AND 2011
For the Years Ended
December 31,
2013
December 31,
2012
December 31,
2011
USD
USD
USD
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock option exercised
5,394,070
727,317
300,000
Proceeds from warrants exercised
Payment for share repurchase
-
4,500,000
(29,594,080)
-
-
-
Proceeds from short-term bank loans
9,693,000
11,076,100
18,595,200
NOTE 1 – DESCRIPTION OF BUSINESS AND SIGNIFICANT CONCENTRATIONS AND RISKS
China Biologic Products, Inc. (“CBP”) and its subsidiaries (collectively, the “Company”), through its subsidiaries in the
People’s Republic of China (the “PRC”), is a biopharmaceutical company that is principally engaged in the research,
development, manufacturing and sales of plasma-based pharmaceutical products in the PRC. The PRC subsidiaries
own and operate plasma stations that purchase and collect plasma from individual donors. The plasma is processed
into finished goods after passing through a series of fractionating processes. All of the Company’s plasma products
(8,014,000)
(14,286,800)
(10,847,200)
are prescription medicines that require government approval before the products are sold to customers. The Company
Repayment of short-term bank loans
Proceeds from long-term bank loans
30,000,000
Payment for deposit as security for long-term bank loans
(30,000,000)
Acquisition of noncontrolling interest
(1,963,913)
-
-
-
-
-
(7,635,000)
Dividends paid by subsidiaries to noncontrolling interest
(16,931,149)
(7,120,693)
(10,489,504)
Contribution from noncontrolling interest
2,891,422
-
-
Net cash used in financing activities
(38,524,650)
(5,104,076)
(10,076,504)
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH
4,318,420
957,434
3,204,304
NET INCREASE IN CASH AND CASH EQUIVALENTS
14,529,170
40,197,482
24,470,467
Cash and cash equivalents at beginning of year
129,609,317
89,411,835
64,941,368
Cash and cash equivalents at end of year
144,138,487
129,609,317
89,411,835
Supplemental cash flow information
Cash paid for income taxes
Cash paid for interest expense
Noncash investing and financing activities:
Convertible notes conversion
Transfer from prepayments and deposits
to property, plant and equipment
Land use right acquired with prepayments
made in prior periods
Acquisition of property, plant and
equipment included in payables
15,947,939
14,940,369
15,007,206
347,602
446,381
890,312
-
-
12,972,000
7,728,824
38,452
959,660
1,147,561
-
312,060
4,252,428
104,300
83,226
Exercise of warrants that were liability classified
-
3,641,279
Restricted cash spent for property, plant and equipment
2,928,421
-
-
-
See accompanying notes to Consolidated Financial Statements.
primarily sells its products to hospitals and inoculation centers directly or through distributors in the PRC.
Cash Concentration
The Company maintains cash balances at financial institutions which, from time to time, may exceed Federal Deposit
Insurance Corporation insured limits for its bank accounts located in the United States. Cash balances maintained at
financial institutions or state-owned banks in the PRC are not covered by insurance. Total cash at banks and deposits
as of December 31, 2013 and December 31, 2012 amounted to $180,858,848 and $129,289,461, respectively, of which
$679,022 and $76,101 are insured, respectively. The Company has not experienced any losses in uninsured bank
deposits and does not believe that it is exposed to any significant risks on cash held in bank accounts.
Sales Concentration
The Company’s two major products are human albumin and human immunoglobulin for intravenous injection (“IVIG”).
Human albumin accounted for 44.1%, 44.6% and 54.5% of the total sales for the years ended December 31, 2013, 2012
and 2011, respectively. IVIG accounted for 38.0%, 39.0% and 32.3% of the total sales for the years ended December
31, 2013, 2012 and 2011, respectively. If the market demands for human albumin and IVIG cannot be sustained in the
future or the price of human albumin and IVIG decreases, the Company’s operating results could be adversely affected.
Substantially all of the Company’s customers are located in the PRC. There were no customers that individually
comprised 10% or more of sales during the years ended December 31, 2013, 2012 and 2011. No individual customer
represented 10% or more of trade receivables as at December 31, 2013 and 2012. The Company performs ongoing
credit evaluations of its customers’ financial condition and, generally, requires no collateral from its customers.
F-6
F-7
Form 10-KForm 10-K
Purchase Concentration
Revenue Recognition
There were no suppliers that comprised 10% or more of the total purchases during the year ended December 31, 2013
Revenue represents the invoiced value of products sold, net of value added taxes (VAT).
and 2012, respectively. Two vendors comprised 10% or more of the Company’s total purchases during the year ended
December 31, 2011. There were no vendors that represented more than 10% of accounts payables as at December 31,
Revenue is recognized when persuasive evidence of an arrangement exists, delivery of the product has occurred and
2013. Two vendors individually represented more than 10% of accounts payables as at December 31, 2012.
the customer takes ownership and assumes risk of loss, the sales price is fixed or determinable and collection of the
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
relevant receivable is probable. The Company mainly sells human albumin and human immunoglobulin to hospitals,
inoculation centers and pharmaceutical distributors. For all sales, the Company requires a signed contract or purchase
order, which specify pricing, quantity and product specifications. Delivery of the product occurs when the customer
receives the product, which is when the risks and rewards of ownership have been transferred. Delivery is evidenced
by signed customer acknowledgement. The Company’s sales agreements do not provide the customer the right of
return, unless the product is defective in which case the Company allows for an exchange of product or return. For the
The accompanying consolidated financial statements of the Company have been prepared in accordance with
periods presented, defective product returns were immaterial.
generally accepted accounting principles in the United States of America (“GAAP”), and include the financial
statements of the Company and its majority owned subsidiaries. All significant intercompany balances and transactions
have been eliminated upon consolidation. The Company has no involvement with variable interest entities. The Company
Fair Value Measurements
accounts for investments over which it has significant influence but not a controlling financial interest using the equity
method of accounting.
Use of Estimates
The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of
unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market
participants would use in pricing an asset or liability in the principal or most advantageous market. When considering
market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between
observable and unobservable inputs, which are categorized in one of the following levels:
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and
• Level 1 Inputs: Unadjusted quoted prices for identical assets or liabilities in active markets accessible to the entity at
liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses
the measurement date.
during the reporting period. Actual results could differ from those estimates. Significant items subject to such
estimates and assumptions include the useful lives of fixed assets; the allowance for doubtful accounts; the fair value
determinations of financial and equity instruments and the valuation of share-based compensation, assets acquired
and liabilities assumed in a business combination, deferred tax assets and inventories; the recoverability of goodwill,
intangible asset, land use right and property, plant and equipment; and reserves for income tax uncertainties and other
contingencies. The current economic environment has increased the degree of uncertainty inherent in those estimates
and assumptions.
Foreign Currency Translation
The accompanying consolidated financial statements of the Company are reported in US dollar. The financial position
and results of operations of the Company’s subsidiaries in the PRC are measured using the Renminbi, which is the
local and functional currency of these entities. Assets and liabilities of the subsidiaries are translated at the prevailing
exchange rate in effect at each period end. Revenues and expenses are translated at the average rate of exchange
during the period. Translation adjustments are included in other comprehensive income.
• Level 2 Inputs: Other than quoted prices included in Level 1, inputs that are observable for the asset or liability,
either directly or indirectly, for substantially the full term of the asset or liability.
• Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable
inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or
liability at the measurement date.
The fair value measurement level of an asset or liability within the fair value hierarchy is based on the lowest level of any
input that is significant to the fair value measurement.
See Note 18 to the Consolidated Financial Statements.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and demand deposits. The Company considers all highly liquid
investments with original maturities of three-month or less at the time of purchase to be cash equivalents. Cash and
cash equivalents include $74,352,540 and $20,631,000 of certificates of deposit with an initial term of three months or
less at December 31, 2013 and 2012.
F-8
F-9
Form 10-KForm 10-K
As of December 31, 2013 and 2012, the Company maintained cash at banks in the following locations:
when the Company has an ownership interest in the voting stock between 20% and 50%, and other factors, such as
PRC, excluding Hong Kong
U.S.
Total
December 31, 2013
December 31, 2012
USD
143,047,540
679,022
143,726,562
USD
129,213,360
76,101
129,289,461
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the invoiced amount and do not bear interest. Amounts collected on trade
accounts receivable are included in net cash provided by operating activities in the consolidated statements of
cash flows. The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts
receivable portfolio. In establishing the required allowance, management considers historical losses, the customers’
financial condition, the amount of accounts receivables in dispute, the accounts receivables aging and the customers’
payment patterns. The Company reviews its allowance for doubtful accounts monthly. Past due balances are reviewed
individually for collectability. Account balances are charged off against the allowance after all means of collection have
been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet
credit exposure related to its customers.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the weighted average method. Cost of
work in progress and finished goods comprise direct materials, direct production costs and an allocation of production
overheads based on normal operating capacity. Adjustments are recorded to write down the carrying amount of any
obsolete and excess inventory to its estimated net realizable value based on historical and forecasted demand.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Repair and maintenance costs are expensed as incurred.
Depreciation on property, plant and equipment is calculated on the straight-line method over the estimated useful lives
of the assets. Estimated useful lives of the assets are as follows:
Buildings
Machinery and equipment
Furniture, fixtures, office equipment and vehicles
Equity Method Investment
30 years
10 years
5-10 years
Investment in an investee in which the Company has the ability to exercise significant influence, but does not have
representation on the board of directors and participation in policy-making processes, are considered in determining
whether the equity method of accounting is appropriate. Under the equity method of accounting, the Company’s share
of the investee’s results of operations is included in other income (expenses) in the Company’s consolidated statements
of comprehensive income. Deferred taxes are provided for the difference between the book and tax basis of the
investment. The Company recognizes a loss if it is determined that other than temporary decline in the value of the
investment exists. The process of assessing and determining whether an impairment on a particular equity investment
is other than temporary requires a significant amount of judgment. To determine whether an impairment is other-than-
temporary, management considers whether the Company has the ability and intent to hold the investment until recovery
and whether evidence indicating the carrying value of the investment is recoverable outweighs evidence to the contrary.
No impairment loss was recognized by the Company for the years ended December 31, 2013, 2012 and 2011.
Intangible Assets
Intangible assets are stated at cost less accumulated amortization. Amortization expense is recognized on the straight-
line basis over the assets’ estimated useful life, as the pattern in which the economic benefits of the intangible assets
are used up cannot be reliably determined. The estimated useful life is the period over which the intangible asset is
expected to contribute directly or indirectly to the future cash flows of the Company. The Company has no intangible
assets with indefinite useful lives. The estimate useful lives of intangible assets are as follows:
Permits and licenses
GMP Certificate
Long-term customer-relationship
Land Use Rights
10 years
5 years
4 years
Land use rights represent the exclusive right to occupy and use a piece of land in the PRC for a specified contractual
term. Land use rights are carried at cost, less accumulated amortization. Amortization is calculated using the straight-
line method over the contractual period of the rights ranging from 40 to 50 years.
Research and Development Expenses
Research and development costs are expensed as incurred. Research and development expenses for the years ended
December 31, 2013, 2012 and 2011 were $4,223,165, $3,032,719 and $3,978,233, respectively. These expenses
include the costs of the Company’s internal research and development activities.
Product Liability
The Company’s products are covered by two separate product liability insurances each with coverages of approximately
$3,274,000 (or RMB20,000,000) for the products sold by Shandong Taibang Biological Products Co., Ltd. (“Shandong
Taibang”) and Guizhou Taibang Biological Products Co., Ltd. (“Guizhou Taibang”), respectively. There were no product
a controlling interest is accounted for using the equity method. Significant influence is generally presumed to exist
liability claims as of December 31, 2013.
F-10
F-11
Form 10-KForm 10-K Income Taxes
securities since the holders of these securities participate in dividends on the same basis as common stockholders.
Diluted net income per share is calculated by dividing net income attributable to common stockholders as adjusted for
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized
the effect of dilutive common stock equivalent, if any, by the weighted average number of common stock and dilutive
for the future tax consequences attributable to differences between the financial statement carrying amounts of existing
common stock equivalent outstanding during the year. Potential dilutive securities are not included in the calculation of
assets and liabilities and their respective tax bases and tax loss and tax credit carryforwards. Deferred tax assets
diluted earnings per share if the impact is anti-dilutive.
and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the consolidated statements of comprehensive income in the period that includes
Segment Reporting
the enactment date. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered
more likely than not that some portion or all of the deferred tax assets will not be realized.
The Company has one operating segment, which is the manufacture and sales of human plasma products. Substantially
all of the Company’s operations and customers are located in the PRC, and therefore, no geographic information is
The Company recognizes the effect of income tax positions only if those positions are more likely than not of being
presented.
sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being
realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.
The Company records interest related to unrecognized tax benefits in interest expense and penalties in general and
Contingencies
administrative expenses.
Share-based Payment
In the normal course of business, the Company is subject to loss contingencies, such as legal proceedings and claims
arising out of its business, that cover a wide range of matters, including, among others, government investigations
and tax matters. An accrual for a loss contingency is recognized when it is probable that a liability has been incurred
and the amount of loss can be reasonably estimated. Legal costs incurred in connection with loss contingencies are
The Company measures the cost of employee services received in exchange for an award of equity instruments based
expensed as incurred.
on the grant-date fair value of the award and recognizes the cost over the period during which an employee is required
to provide service in exchange for the award, which generally is the vesting period.
NOTE 3 – ACCOUNTS RECEIVABLE
Long-lived Assets
Accounts receivable at December 31, 2013 and 2012 consisted of the following:
Long-lived assets, such as property, plant and equipment, and purchased intangible asset subject to amortization, are
reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment,
the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its
carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted
cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is
Accounts receivable
Less: Allowance for doubtful accounts
Total
December 31, 2013
December 31, 2012
USD
17,730,821
(460,689)
17,270,132
USD
11,621,851
(415,607)
11,206,244
determined through various valuation techniques including discounted cash flow models, quoted market values and
The activity in the allowance for doubtful accounts for the years ended December 31, 2013, 2012 and 2011 are as
third-party independent appraisals, as considered necessary. The Company recognized a loss on abandonment and
follows:
write-off of long-lived assets totaling $6,603,028 for the year ended December 31, 2011 as described in Note 8.
Net Income per Share
Basic net income per share of common stock is computed by dividing net income attributable to common stockholders
by the weighted average number of common stock outstanding during the year using the two-class method. Under
the two-class method, net income is allocated between common stock and other participating securities based on
their participating rights in undistributed earnings. The Company’s nonvested shares were considered participating
Beginning balance
Provisions
Recoveries
Write-offs
Foreign currency translation adjustment
Ending Balance
F-12
For the Years Ended
December 31, 2013
December 31, 2012
December 31, 2011
USD
414,092
-
(1,904)
-
3,419
415,607
USD
1,238,640
-
(19,611)
(837,975)
33,038
414,092
USD
415,607
31,567
-
-
13,515
460,689
F-13
Form 10-KForm 10-K NOTE 4 – INVENTORIES
NOTE 6 – INTANGIBLE ASSETS, NET
Inventories at December 31, 2013 and 2012 consisted of the following:
Intangible assets at December 31, 2013 and 2012 consisted of the following:
Raw materials
Work-in-process
Finished goods
Total
December 31, 2013
December 31, 2012
47,400,578
20,720,666
20,513,611
88,634,855
29,596,746
24,524,142
21,558,285
75,679,173
Raw materials mainly comprised of the human blood plasma collected from the Company’s plasma stations. Work-
in-process represented the intermediate products in the process of production. Finished goods mainly comprised
human albumin and immunoglobulin products. Provisions to write-down the carrying amount of obsolete inventory to
its estimated net realizable value amounted to nil, nil and $270,929 for the years ended December 31, 2013, 2012 and
2011, respectively, and were recorded as cost of sales in the consolidated statements of comprehensive income.
NOTE 5 – PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 2013 and 2012 consisted of the following:
Buildings
Machinery and equipment
Furniture, fixtures, office equipment and vehicles
Total property, plant and equipment, gross
Accumulated depreciation
Total property, plant and equipment, net
Construction in progress
Prepayment for property, plant and equipment
Property, plant and equipment, net
December 31, 2013
December 31, 2012
USD
31,714,173
36,919,094
8,141,993
76,775,260
USD
25,183,496
29,625,166
6,513,482
61,322,144
(25,658,760)
(24,356,752)
51,116,500
19,050,642
2,981,930
73,149,072
36,965,392
3,501,404
10,858,381
51,325,177
Depreciation expense for the years ended December 31, 2013, 2012 and 2011 was $6,096,650, $5,792,418 and
$4,253,661, respectively. No interest expenses were capitalized into construction in progress for the years ended
December 31, 2013, 2012 and 2011.
December 31, 2013
Weighted average
amortization
period
Gross carrying
amount
Accumulated
amortization
Net carrying
amount
USD
USD
USD
USD
Amortizing intangible assets:
Permits and licenses
GMP certificate
Long-term customer-relationship
10 years
5 years
4 years
Others
Total
5,144,788
2,605,253
7,756,106
365,754
(2,748,704)
(2,605,253)
(7,756,106)
(176,606)
15,871,901
(13,286,669)
2,396,084
-
-
189,148
2,585,232
December 31, 2012
Weighted average
amortization
period
Gross carrying
amount
Accumulated
amortization
Net carrying
amount
USD
USD
USD
USD
Amortizing intangible assets:
Permits and licenses
GMP certificate
Long-term customer-relationship
10 years
5 years
4 years
Others
Total
4,987,647
2,525,679
7,519,206
214,520
(2,119,622)
(1,955,360)
(7,519,206)
(111,282)
15,247,052
(11,705,470)
2,868,025
570,319
-
103,238
3,541,582
Aggregate amortization expense for amortizing intangible assets was $1,196,279, $3,011,560 and $3,270,131, for the
years ended December 31, 2013, 2012 and 2011, respectively. Estimated amortization expenses for the next five years
are $516,678 in 2014, $514,884 in 2015, $509,277 in 2016, $474,897 in 2017, and $431,726 in 2018.
NOTE 7 – DEPOSITS RELATED TO LAND USE RIGHTS
In 2012, Guizhou Taibang made a refundable payment of RMB83,400,000 (approximately $13,235,580) to the local
government in connection with the public bidding for a land use right in Guizhou Province. Given the decrease of the
land area to be provided by the local government, RMB13,000,000 (approximately $2,128,100) was refunded by the
end of 2013 accordingly. Further, additional RMB10,000,000 (approximately $1,637,000) was refunded in early 2014 by
the local government. The remaining deposits will be refunded within one year following the completion of the bidding
process.
F-14
F-15
Form 10-KForm 10-K NOTE 8 – GOODWILL
Guizhou Taibang to subsidize its technical upgrade in the existing production facilities to comply with a new Good
Manufacturing Practice (“GMP”) standard that has taken effect by the end of 2013. The agreement is valid for a three-
The changes in the carrying amount of goodwill for the years ended December 31, 2013, 2012 and 2011 were as follows:
year period. The usage of this fund is under the supervision of the Financial Bureau of Huaxi District and this fund
For the Years Ended
cannot be used for other purposes. During the year ended December 31, 2013, RMB17,888,952 (approximately
$2,928,421) was used in the technical upgrade in respect of the new GMP standard. At December 31, 2013, the
December 31, 2013
December 31, 2012
December 31, 2011
balance of restricted cash was RMB461,048 (approximately $75,474).
Balance as of January 1
Addition
Impairment loss
Foreign currency exchange difference
Balance as of December 31
USD
USD
-
-
-
-
-
-
-
-
-
-
USD
17,778,231
-
(18,160,281)
382,050
-
On August 7, 2013, the Company made a time deposit of RMB186,000,000 (approximately $30,000,000) with China
Merchants Bank Beijing Branch (“CMB BJ Branch”) as a security for an 18-month US$30,000,000 loan lent by China
Merchants Bank Co., Ltd., New York Branch (“CMB NY Branch”) (see Note 11).
On July 15, 2011, the Guizhou Provincial Health Department issued the revised “Plan for Guizhou Provincial Blood
Collection Institution Setting (2011-2014)”, which stipulates the number of counties that are permitted to set up plasma
The Company’s equity method investment as of December 31, 2013 and 2012 represented 35% equity interest
collection stations in Guizhou Province is limited to four counties (the “Guizhou Plan”). As a result of the implementation
investment in Xi’an Huitian Blood Products Co., Ltd. (“Huitian”).
of the Guizhou Plan, the licenses of four plasma collection stations and one inactive plasma collection station with
respect to Guizhou Taibang were not renewed upon their expiration on July 31, 2011. Therefore, the Company closed
In October 2008, Shandong Taibang entered into an equity purchase agreement with one of the equity owners of
these plasma collection stations on August 1, 2011. Following the closure, the Company revised its earnings guidance
Huitian (“Seller”) to acquire 35% equity interest in Huitian. In connection with this transaction, in October 2008, Taibang
for the year of 2011 and experienced incremental decline in its stock price and market capitalization in the third quarter
Biological Limited (“Taibang Biological”) entered into an entrust agreement (the “Entrust Agreement”) with Shandong
of 2011. Therefore the Company performed goodwill impairment test as of September 30, 2011 to identify if goodwill
Taibang and the noncontrolling interest holder of Shandong Taibang, pursuant to which, Taibang Biological would pay
NOTE 10 – EQUITY METHOD INVESTMENT
should be impaired.
the cash consideration, including interest, of $6,502,901 (or RMB44,327,887) to the Seller, and would bear the risks and
benefits as a 35% equity owner in Huitian. In addition, Taibang Biological would pay Shandong Taibang RMB120,000
A two step process is used to test for goodwill impairment. The first step is to determine if there is an indication
(approximately $19,644) per year as compensation for the administrative costs of Shandong Taibang’s holding of the
of impairment by comparing the estimated fair value of the reporting unit to its carrying value including existing
35% equity interest in Huitian on behalf of Taibang Biological. Such amount paid and received is eliminated upon
goodwill. Goodwill is considered impaired if the carrying value of a reporting unit exceeds the estimated fair value.
consolidation. Taibang Biological agreed to indemnify the noncontrolling interest holder of Shandong Taibang for
If an indication of impairment exists under the first step, a second step is performed to determine the amount of the
any loss arising from the Entrust Agreement and has pledged the Company’s equity interest in Shandong Taibang as
impairment. This involves calculating the implied fair value of goodwill by allocating the fair value of the reporting unit to
collateral against such loss.
all assets and liabilities other than goodwill and comparing it to the carrying amount of goodwill.
The fair value of the reporting unit for step one was determined based on the quoted market price of the Company’s
$2,722,915 at December 31, 2013 and 2012, respectively, which comprises fair value adjustments for property, plant
common stock. The first step of the impairment test concluded that the carrying value of the Company’s reporting unit
and equipment and land use right of $736,707 and $1,424,210 at December 31, 2013 and 2012, respectively, and
exceeded its fair value. As a result, the Company performed the second step of the goodwill impairment test for its
goodwill of $1,339,622 and $1,298,705 at December 31, 2013 and 2012, respectively. The fair value adjustments are
reporting unit. The Company determined that the implied fair value of goodwill was nil. Therefore, a goodwill impairment
amortized over the remaining useful lives of related assets. The equity method goodwill is not amortized; however, the
loss of $18,160,281 was recognized for the year ended December 31, 2011.
investment is reviewed for impairment.
The excess of carrying amount over the Company’s share of net assets of equity method investees is $2,076,329 and
As a result of the plasma collection stations closure, the Company also recognized a loss on abandonment of property,
plant and equipment of $1,410,379 and loss on the write off of collection permits and licenses totaling $5,192,649 for
the year ended December 31, 2011.
NOTE 9 – RESTRICTED CASH AND DEPOSIT
On November 1, 2012, Guizhou Taibang entered into an agreement with the Financial Bureau of Huaxi District, Guiyang
City. Pursuant to the agreement, the Financial Bureau of Huaxi District provided $2,912,145 (or RMB18,350,000) to
F-16
F-17
Form 10-KForm 10-K
NOTE 11 –BANK LOANS
(a) Short-term bank loans
The Company’s bank loans at December 31, 2013 and 2012 consisted of the following:
Loans
Maturity date
Annual
interest rate
December 31,
2013
December 31,
2012
Short-term bank loan, unsecured
August 1, 2013
Short-term bank loan, unsecured
September 3, 2013
Short-term bank loan, unsecured
September 3, 2013
Short-term bank loan, unsecured
May 12, 2014
Short-term bank loan, unsecured
December 22, 2014
6.00%
6.00%
6.00%
6.00%
6.00%
Total
USD
-
-
-
4,911,000
4,911,000
9,822,000
USD
3,174,000
3,174,000
1,587,000
-
-
7,935,000
Interest expense amounted to $347,602, $446,381 and $705,426 for the years ended December 31, 2013, 2012 and
2011, respectively.
The Company did not have any revolving line of credit as of December 31, 2013 and 2012.
(b) Long-term bank loans
On August 8, 2013, the Company entered into a credit facility agreement with CMB NY Branch to finance the share
repurchase (see Note 17). Pursuant to the facility agreement, CMB NY Branch lends to the Company an 18-month
US$30,000,000 loan bearing an interest rate of 3-month LIBOR plus 1.6% per annum and a facility fee of 0.7% per
annum. The loan is secured by a time deposit of RMB 186,000,000 (approximately $30,448,200) held at CMB BJ Branch.
In 2007, Guizhou Taibang received an aggregate amount of $7,506,408 (or RMB50,960,000) from certain potential
strategic investors in connection with their subscription to purchase shares in Guizhou Taibang. The registration
of the new investors as Guizhou Taibang’s shareholders and the related increase in registered capital of Guizhou
Taibang with the Administration for Industry and Commerce are pending due to shareholders dispute as described
in the legal proceeding section (see Note 20). In 2010, the Company refunded $1,699,040 (or RMB11,200,000) to
one of the potential investors.
NOTE 13 – INCOME TAX
The Company and each of its subsidiaries file separate income tax returns.
The United States of America
The Company is incorporated in the State of Delaware in the U.S., and is subject to U.S. federal corporate income tax at
gradual rates of up to 35%.
British Virgin Islands
Taibang Biological is incorporated in the British Virgin Islands. Under the current laws of the British Virgin Islands (BVI),
Taibang Biological is not subject to tax on income or capital gains. In addition, upon payments of dividends by Taibang
Biological, no British Virgin Islands withholding tax is imposed.
Hong Kong
Taibang Holdings (Hong Kong) Limited (“Taibang Holdings”, formerly known as “Logic Holdings (Hong Kong) Limited”)
is incorporated in Hong Kong and is subject to Hong Kong’s profits tax rate of 16.5% for the years ended December 31,
2013, 2012 and 2011. Taibang Holdings did not earn any income that was derived in Hong Kong for the years ended
December 31, 2013, 2012 and 2011. The payments of dividends by Hong Kong companies are not subject to any Hong
NOTE 12 – OTHER PAYABLES AND ACCRUED EXPENSES
Other payables and accrued expenses at December 31, 2013 and 2012 consisted of the following:
Kong withholding tax.
PRC
December 31, 2013
December 31, 2012
The PRC’s statutory income tax rate is 25%. The Company’s PRC subsidiaries are subject to income tax at 25% unless
Payables to potential investors (1)
Salaries and bonuses payable
Accruals for selling commission and promotion fee
Dividends payable to noncontrolling interest
Payables for construction work
Other tax payables
Others
Total
USD
9,403,649
8,217,129
3,566,693
1,411,094
4,427,423
2,119,024
5,707,728
34,852,740
USD
8,728,368
6,868,908
3,476,215
-
347,877
2,180,643
3,821,338
25,423,349
(1) The payables to potential investors comprise deposits received from potential strategic investors of $6,508,712 and
$6,309,912 as of December 31, 2013 and 2012, respectively, and related interest plus penalty on these deposits
totaling $2,894,937 and $2,418,456 as of December 31, 2013 and 2012, respectively.
otherwise specified.
On February 12, 2009, Shandong Taibang received the High and New Technology Enterprise certificate from the
Shandong provincial government. This certificate entitled Shandong Taibang to pay income taxes at a 15% preferential
income tax rate for a period of three years from 2008 to 2010. On October 31, 2011, Shandong Taibang obtained
a notice from the Shandong provincial government that the High and New Technology Enterprise qualification has
been renewed for an additional three years from 2011 to 2013. Subject to reapplication Shangdong Taibang’s High-
Tech Enterprise status will enable it to continue to enjoy the preferential income tax rate. Management believes that
Shandong Taibang meets all the criteria for the reapplication of High-Tech Enterprise status.
Guizhou Taibang was entitled to the preferential income tax rate of 15% under the 10-year Western Development Tax
Concession, which ended in 2010. According to CaiShui [2011] No. 58 dated July 27, 2011, Guizhou Taibang, being
F-18
F-19
Form 10-KForm 10-K
a qualified enterprise located in the western region of the PRC, enjoys a preferential income tax rate of 15% effective
The PRC tax rate has been used because the majority of the Company’s consolidated pre-tax earnings arise in the PRC.
retroactively from January 1, 2011 to December 31, 2020.
The components of earnings (losses) before income taxes by jurisdictions are as follows:
basis of assets and liabilities that gave rise to deferred taxes were principally related to the following:
As of December 31, 2013 and 2012, significant temporary differences between the tax basis and financial statement
PRC, excluding Hong Kong
U.S.
BVI
Hong Kong
Total
December 31, 2013
December 31, 2012
December 31, 2011
For the Years Ended
USD
98,401,673
(7,855,555)
2,116,243
(260,996)
92,401,365
USD
84,980,477
(6,314,398)
2,538,030
(68,970)
81,135,139
USD
42,616,865
(1,403,437)
1,645,364
(575,924)
42,282,868
Income tax expense for the years ended December 31, 2013, 2012 and 2011 represents current income tax expense
and deferred tax expense (benefit):
Current income tax expense
Deferred tax expense (benefit)
For the Years Ended
December 31, 2013
December 31, 2012
December 31, 2011
USD
15,427,669
112,632
15,540,301
USD
14,035,714
1,127,433
15,163,147
USD
13,494,616
(2,595,103)
10,899,513
The effective income tax rate based on income tax expense and earnings before income taxes reported in the
consolidated statements of comprehensive income differs from the PRC statutory income tax rate of 25% due to the
following:
For the Years Ended
December 31, 2013
December 31, 2012
December 31, 2011
(in percentage to earnings before income tax expense)
PRC statutory income tax rate
Non-taxable income
Non-deductible expenses:
Share-based compensation
Impairment loss on goodwill
Loss on write-off of long-lived assets
Others
Tax rate differential
Effect of change in tax rate on deferred tax
Effect of PRC preferential tax rate
Bonus deduction on research and
development expenses
Change in valuation allowance
PRC dividend withholding tax
Tax effect of equity method investment
Effective income tax rate
25.0%
(0.7)%
1.9%
-
-
0.4%
(1.2)%
-
(11.0)%
(1.3)%
0.7%
4.0%
0.9%
18.7%
25.0%
(2.3)%
3.9%
10.7%
0.8%
0.7%
1.6%
(1.8)%
(18.2)%
(1.2)%
2.0%
3.1%
1.5%
25.8%
25.0%
-
0.9%
-
-
0.7%
(1.0)%
-
(12.7)%
(1.4)%
1.7%
2.8%
0.8%
16.8%
F-20
Deferred tax assets arising from:
-Accrued expenses
-Tax loss carryforwards
Gross deferred tax assets
Less: valuation allowance
Net deferred tax assets
Deferred tax liabilities arising from:
- Intangible assets
- Property, plant and equipment
- Equity method investment
- Dividend withholding tax
Deferred tax liabilities
Classification on consolidated balance sheets:
Deferred tax assets – current, net (included in
prepayments and other current assets)
Deferred tax liabilities - non-current, net (included in other liabilities)
December 31, 2013
December 31, 2012
USD
USD
2,065,310
8,950,323
11,015,633
(7,558,590)
3,457,043
(548,651)
-
(1,391,733)
(2,467,760)
(4,408,144)
2,065,310
(3,016,411)
1,841,210
7,078,822
8,920,032
(5,887,981)
3,032,051
(498,987)
(198,443)
(1,190,841)
(1,955,186)
(3,843,457)
1,841,210
(2,652,616)
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which those temporary differences become
deductible and tax loss carryforwards are utilized. Management considers the scheduled reversal of deferred tax
liabilities (including the impact of available carryforwards periods), projected future taxable income, and tax planning
strategies in making this assessment.
The deferred tax assets of $8,950,323 for tax loss carry forwards as of December 31, 2013, of which $4,730,841 and
$4,219,482 relate to tax loss carryforwards of certain PRC subsidiaries and CBP, respectively. For PRC income tax
purposes, certain of the Company's PRC subsidiaries had tax loss carryforwards of $18,923,363, of which $1,153,544,
$5,220,932, $7,180,046 and $5,368,841 would expire by 2015, 2016, 2017 and 2018, respectively, if unused. For United
States federal income tax purposes, CBP had tax loss carryforwards of approximately $12,410,240, of which $1,268,307,
$614,982, $1,113,597, $1,405,718, $2,350,326, $3,382,154, $978,837 and $1,296,319 would expire by 2026,
2027, 2028, 2029, 2030, 2031, 2032 and 2033, respectively, if unused. In view of their cumulative losses positions,
management determined it is more likely than not that deferred tax assets of these PRC subsidiaries will not be realized,
and therefore full valuation allowances of $4,730,841 and $3,300,089 were provided as of December 31, 2013 and
2012, respectively. For deferred tax assets of CBP, management determined it is more likely than not that some portion
of the deferred tax assets of CBP will not be realized, and therefore valuation allowances of $2,827,749 and $2,587,892
were provided as of December 31, 2013 and 2012, respectively. The change in valuation allowance for the years ended
December 31, 2013, 2012 and 2011 was an increase of $1,588,875, a decrease of $1,280,005 and an increase of
$830,497, respectively. Management believes it is more likely than not that the Company will realize the benefits of the
deferred tax assets, net of the valuation allowances, as of December 31, 2013 and December 31, 2012.
F-21
Form 10-KForm 10-K
According to the prevailing PRC income tax law and relevant regulations, dividends relating to earnings accumulated
The summary of warrant activities is as follows:
beginning on January 1, 2008 that are received by non-PRC-resident enterprises from PRC-resident enterprises
are subject to withholding tax at 10%, unless reduced by tax treaties or similar arrangement. Dividends relating to
undistributed earnings generated prior to January 1, 2008 are exempt from such withholding tax. Further, dividends
received by the Company from its overseas subsidiaries are subject to the U.S. federal income tax at 34%, less any
qualified foreign tax credits. Based on the dividend policy the Company has provided the deferred tax liabilities of
$2,467,760 on undistributed earnings of $25 million, approximately 20% of Shandong Taibang’s total undistributed
earnings at December 31, 2013. Due to the Company’s plan and intention of reinvesting its earnings in its PRC
business, the Company has not provided for the related deferred tax liabilities on the remaining undistributed earnings
of the PRC subsidiaries totaling $162 million as of December 31, 2013.
As of January 1, 2011 and for each of the years ended December 31, 2011, 2012 and 2013, the Company and its
subsidiaries did not have any unrecognized tax benefits, and therefore no interest or penalties related to unrecognized
tax benefits were accrued. The Company does not expect that the amount of unrecognized tax benefits will change
significantly within the next 12 months.
The Company and each of its PRC subsidiaries file income tax returns in the United States and the PRC, respectively.
The Company is subject to U.S. federal income tax examination by tax authorities for tax years beginning in 2007.
According to the PRC Tax Administration and Collection Law, the statute of limitations is three years if the underpayment
of taxes is due to computational errors made by the taxpayer or the withholding agent. The statute of limitations is
extended to five years under special circumstances where the underpayment of taxes is more than RMB100,000
(approximately $15,000). In the case of transfer pricing issues, the statute of limitations is ten years. There is no
statute of limitations in the case of tax evasion. The PRC tax returns for the Company’s PRC subsidiaries are open to
examination by the PRC tax authorities for the tax years beginning in 2008.
January 1, 2011
Granted
Exercised
December 31, 2011
Granted
Exercised
December 31, 2012
Granted
Exercised
December 31, 2013
Warrants
Outstanding
USD
937,500
-
-
937,500
-
(937,500)
-
-
-
-
Weighted Average
Exercise Price
Average Remaining
Contractual Life
USD
4.80
-
-
4.80
-
4.80
-
-
-
-
USD
1.44
-
-
0.44
-
-
-
-
-
-
In June 2012, the warrants to purchase 937,500 shares of common stock of the Company were exercised and the
Company received proceeds of $4,500,000. There were no warrants outstanding thereafter.
The fair values of the warrants that were exercised on June 6 and June 4, 2012, and outstanding as of December 31,
2011 were determined based on the Binominal option pricing model, using the following key assumptions:
Expected dividend yield
Risk-free interest rate
Time to maturity (in years)
Expected volatility
June 6, 2012
June 4, 2012
December 31, 2011
0%
0.05%
-
47.4%
$ 9.22
0%
0.04%
-
37.3%
$ 8.55
0%
0.05%
0.43
80.0%
$ 10.46
NOTE 14 – WARRANTS, OPTIONS AND NONVESTED SHARES
Fair value of underlying common shares (per share)
Warrants
Change in fair value of derivative liabilities for the years ended December 31, 2011 and 2012 is set forth below:
In connection with the issuance of convertible notes in 2009, which were fully converted by December 31, 2011,
the Company issued warrants to purchase 1,194,268 and 93,750 shares of its common stock to the investors and
placement agent, respectively.
Fair value at
January 1, 2011
Decrease in fair
value for the
year ended
December 31, 2011
Fair value at
date of warrants
exercise
Fair value at
date of notes
conversion
Fair value
at December
31, 2011
USD
USD
USD
USD
Embedded conversion
option in the notes
Warrants issued
to investors
14,561,661
(6,289,661)
11,095,592
(5,685,173)
Total
25,657,253
(11,974,834)
-
-
-
USD
-
(8,272,000)
-
5,410,419
(8,272,000)
5,410,419
F-22
Warrants issued to investors
Total
Fair value at
January 1, 2012
USD
5,410,419
5,410,419
Decrease in fair
value for the
year ended
December 31, 2012
USD
(1,769,140)
(1,769,140)
F-23
Fair value at
date of warrants
exercise
Fair value at
December 31, 2012
USD
(3,641,279)
(3,641,279)
USD
-
-
Form 10-KForm 10-K
Options
The weighted average option fair value of $8.37 per share or an aggregate of $276,250 on the date of grant during the
year ended December 31, 2013, the weighted average option fair value of $7.58 per share or an aggregate of $6,817,649
Effective May 9, 2008, the Board of Directors adopted the China Biologic Products, Inc. 2008 Equity Incentive Plan, (“the
on the date of grant during the year ended December 31, 2012, and the weighted average option fair value of $8.95 per
2008 Plan”). The 2008 Plan provides for grants of stock options, stock appreciation rights, performance units, restricted
share or an aggregate of $1,566,250 on the date of grant during the year ended December 31, 2011, were determined
stock, restricted stock units and performance shares. A total of five million shares of the Company’s common stock may
based on the Black-Scholes option pricing model using the following weighted average assumptions:
be issued pursuant to the 2008 Plan. The exercise price per share for the shares to be issued pursuant to an exercise
of a stock option will be no less than the fair market value per share on the grant date, except that, in the case of an
incentive stock option granted to a person who holds more than 10% of the total combined voting power of all classes
of the Company’s stock or any of its subsidiaries, the exercise price will be no less than 110% of the fair market value
per share on the grant date. No awards may be granted under the 2008 Plan after May 9, 2018, except that any award
granted before then may extend beyond that date. All the options to be granted will have 10-year terms.
For the year ended December 31, 2011, stock options to purchase an aggregate of 175,000 common stock were
granted to directors and employees at exercise prices ranging from $5.97 to $17.00 per share with vesting periods of 1
year.
For the year ended December 31, 2012, stock options to purchase an aggregate of 900,000 common stock were
granted to directors and employees at exercise prices ranging from $9.16 to $9.85 per share with vesting periods
ranging from 1 year to 4 years.
December 31, 2013
December 31, 2012
December 31, 2011
For the Years Ended
Expected volatility
Expected dividends yield
Expected term (in years)
Risk-free interest rate
Fair value of underlying common
stock (per share)
104.00%
0%
5.38
0.72%
104.00%
0%
6.01
0.82%
69.43%
0%
5.00
1.92%
$ 10.48
$ 9.61
$ 15.28
The volatility of the Company’s common stock was estimated by management based on the historical volatility of the
Company’s common stock. The risk free interest rate was based on Treasury Constant Maturity Rates published by
the U.S. Federal Reserve for periods applicable to the estimated term of the options. The expected dividend yield was
based on the Company’s current and expected dividend policy.
For the year ended December 31, 2013, stock options to purchase an aggregate of 33,000 common stock were granted
to directors and employees at exercise prices ranging from $4.00 to $12.26 which vested immediately.
For the years ended December 31, 2013, 2012 and 2011, the Company recorded stock compensation expense of
$3,773,073, $4,335,595 and $4,896,232, respectively, in general and administrative expenses.
A summary of stock options activity for the years ended December 31, 2011, 2012 and 2013 is as follows:
As of December 31, 2013, approximately $3,654,022 of stock compensation expense with respect to stock options is to
be recognized over weighted average period of approximately 2.22 years.
Number of
Options
Weighted
Average
Exercise
Price
Weighted Average
Remaining
Contractual
Term in years
Aggregate
Intrinsic Value
USD
Nonvested shares
Outstanding as of January 1, 2011
Granted
Exercised
Forfeited and expired
Outstanding as of December 31, 2011
Granted
Exercised
Forfeited and expired
Outstanding as of December 31, 2012
Granted
Exercised
Forfeited and expired
Outstanding as of December 31, 2013
Vested and expected to vest as
of December 31, 2013
1,906,600
175,000
(75,000)
(12,000)
1,994,600
900,000
(90,990)
(155,001)
2,648,609
USD
8.50
15.28
4.00
12.26
9.24
9.61
7.99
9.69
9.39
33,000
10.48
(648,379)
(150,854)
1,882,376
1,882,376
8.32
6.78
9.98
9.98
Exercisable as of December 31, 2013
1,357,376
10.10
For the years ended December 31, 2012 and 2013, nonvested shares were granted to certain directors and employees
(collectively, the “Participant”). Pursuant to the nonvested share grant agreements between the Company and the
Participant, the Participant will have all the rights of a stockholder with respect to the nonvested shares. The nonvested
shares granted to directors generally vest in one or two years. The nonvested shares granted to employees generally
vest in four years.
8.55
15,039,114
(635,250)
7.71
5,197,076
(468,322)
7.65
18,374,422
(10,923,644)
35,518,897
35,518,897
25,450,897
7.20
7.20
6.69
F-24
F-25
Form 10-KForm 10-K
A summary of nonvested shares activity for the year ended December 31, 2013 is as follow:
Board of Directors may redeem the rights for $0.001 per right at any time before an event that causes the rights to
become exercisable. If not redeemed, the rights will expire on November 18, 2014.
Outstanding as of December 31, 2011
Granted
Vested
Forfeited
Outstanding as of December 31, 2012
Granted
Vested
Forfeited
Outstanding as of December 31, 2013
Number of
nonvested shares
Grant date weighted
average fair value
USD
-
120,000
-
-
120,000
306,500
(63,750)
-
362,750
-
9.85
-
-
9.85
22.94
9.85
-
20.91
NOTE 16 – STATUTORY RESERVES
The Company’s PRC subsidiaries are required to allocate at least 10% of its after tax profits as determined under
generally accepted accounting principal in the PRC to its statutory surplus reserve until the reserve balance reaches
50% of respective registered capital. The accumulated balance of the statutory reserve as of December 31, 2013 and
2012 was $30,796,531 and $30,772,993, respectively.
NOTE 17– SHARE REPURCHASE
For the year ended December 31, 2013 and 2012, the Company recorded stock compensation expense of $1,277,723
and $209,332 in general and administrative expenses, respectively.
On August 2, 2013, the Company entered into an agreement with one of its individual shareholders, pursuant to which
the Company repurchased 1,479,704 shares of common stock for a consideration of US$29,594,080. The transaction
As of December 31, 2013, approximately $6,724,915 of stock compensation expense with respect to nonvested shares
is to be recognized over weighted average period of approximately 3.21 years.
was completed on August 8, 2013.
NOTE 18 – FAIR VALUE MEASUREMENTS
NOTE 15 – STOCKHOLDER RIGHTS PLAN
On November 19, 2012, the Board of Directors adopted a stockholder rights plan (the “Rights Agreement”). Pursuant
to the Rights Agreement, the Board of Directors declared a dividend distribution of one right for each share of
common stock. Each right entitles the holder to purchase from the Company one one-thousandth of a share of Series A
Participating Preferred Stock at an initial exercise price of $60 per share. The Rights Agreement is intended to assure
Management used the following methods and assumptions to estimate the fair value of financial instruments at the
relevant balance sheet dates:
• Short-term financial instruments (including cash, time deposit, accounts receivable, other receivables, short-term
bank loans, accounts payable, other payables and accrued expenses, and amount due to related parties) – The
carrying amounts of the short-term financial instruments approximate their fair values because of the short maturity
that all of the Company’s stockholders receive fair and equal treatment in the event of any proposed takeover of the
of these instruments.
Company and to protect stockholders’ interests in the event the Company is confronted with coercive or unfair takeover
tactics. As of December 31, 2013, 1,000,000 shares of Series A Participating Preferred Stock were authorized and none
was issued or outstanding.
Rights become exercisable only upon the occurrence of certain events. More specifically, if a person or group acquires
10% or more of the Company (including through derivatives) while the stockholder rights plan remains in place, then the
rights will become exercisable by all rights holders (except the acquiring person or group) for shares of the Company’s
common stock having a then-current market value of twice the exercise price of a right. However, if a stockholder’s
beneficial ownership of the Company’s common stock as of the time of this announcement of the stockholder rights
• Restricted cash and deposit – The carrying amounts of the restricted cash and deposit approximate their fair value.
The fair value is estimated using discounted cash flow analysis based on the Company’s incremental borrowing
rates for similar borrowing.
•
Long-term bank loan – fair value is based on the amount of future cash flows associated with the long-term bank
loan discounted at the Company’s current borrowing rate for similar debt instruments of comparable terms. The
carrying value of the long-term bank loan approximate its fair value as the long-term bank loan carry variable
interest rate which approximate rate currently offered by the Company’s bankers for similar debt instruments of
plan and associated dividend declaration is at or above the 10% threshold, that stockholder’s existing ownership
comparable maturities.
percentage would be grandfathered, but the rights would become exercisable if at any time after this announcement
the stockholder increases its ownership percentage by 2% or more without the prior approval of the Company’s Board
of Directors. In addition, if after a person or group acquires 10% or more of the Company’s outstanding common
stock, the Company merges into another company, an acquiring entity merges into the Company or the Company sells
or transfers more than 50% of its assets, cash flow or earning power, then each right will entitle its holder to purchase,
for the exercise price, a number of shares of common stock of the person engaging in the transaction having a then-
current market value of twice the exercise price. The acquiring person will not be entitled to exercise these rights. The
F-26
F-27
Form 10-KForm 10-K NOTE 19 – SALES
Purchase Agreement. In November 2008, Jie’an appealed the Guizhou High Court judgment to the People’s Supreme
Court in Beijing. In May 2009, the People’s Supreme Court sustained the original ruling and denied the rights of first
The Company’s sales are primarily derived from the manufacture and sale of Human Albumin and Immunoglobulin
refusal of Jie’an over the 18,200,000 shares.
products. The Company’s sales by significant types of product for the years ended December 31, 2013, 2012 and 2011
are as follows:
Human Albumin
Immunoglobulin products:
Human Immunoglobulin for
Intravenous Injection
Other Immunoglobulin products
Placenta Polypeptide
Others
Total
December 31, 2013
December 31, 2012
December 31, 2011
For the Years Ended
USD
89,671,619
USD
82,450,825
77,341,616
72,005,196
19,682,927
12,150,539
4,510,155
203,356,856
19,377,603
10,088,754
891,117
184,813,495
USD
83,433,691
49,482,514
16,669,069
1,935,428
1,571,587
153,092,289
NOTE 20 – COMMITMENTS AND CONTINGENCIES
Capital commitments
During the second quarter of 2010, Jie’an requested that Guizhou Taibang register its 1.8 million shares of additional
capital injection with the local Administration for Industry and Commerce, or AIC, pursuant to the Equity Purchase
Agreement, and such request was approved by the majority shareholders of Guizhou Taibang in a shareholders
meeting held in the second quarter of 2010. However, the Board of Directors of the Company is withholding its required
ratification of the shareholders’ approval of Jie’an’s request, pending the outcome of the ongoing litigation. In March
2012, the Company received a subpoena that Jie’an brought suit in the People’s Court of Huaxi District, Guizhou
Province, against Guizhou Taibang, alleging Guizhou Taibang’s withholding of its request. Jie’an requested that
Guizhou Taibang register its 1.8 million shares of capital injection, pay dividends associated with these shares, as well
as the related interest and penalty from May 2007 to December 2011 amounting to $3,967,500 (or RMB25,000,000) in
aggregate, and return the over-paid subscription of $228,528 (or RMB1,440,000), as well as the interest and penalty,
amounting to $1,587,000 (or RMB10,000,000) in aggregate. The People’s Court of Huaxi District, Guizhou Province, has
accepted Jie’an’s suit. In May 2012, Guizhou Taibang was informed by the court that the case was postponed upon the
request from Jie’an.
In December 2013, Jie’an brought suit again in the People’s Court of Huaxi District, Guizhou Province, against
Guizhou Taibang, again alleging Guizhou Taibang’s withholding of its request. The People’s Court of Huaxi District,
Guizhou Province, has accepted Jie’an’s suit and heard the case on February 26, 2014. The Company is awaiting the
judgment as of the date of this report. If the Company decides to ratify the approval or the case is ruled in Jie’an’s
At December 31, 2013, commitments outstanding for the purchase of property, plant and equipment approximated
favor, Dalin’s ownership in Guizhou Taibang will be diluted from 54% to 52.54% and Jie’an may be entitled to receive
$4,619,975.
Legal proceedings
Dispute among Guizhou Taibang Shareholders over Raising Additional Capital
In May 2007, a 91% majority of Guizhou Taibang’s shareholders approved a plan to raise additional capital from private
its pro rata share of Guizhou Taibang’s profits since the date of Jie’an’s capital contribution became effective. As this
case is closely tied to the outcome of the strategic investors’ dispute stated below, the Company does not expect
Jie’an to prevail. As of December 31, 2013, the Company had recorded, in its balance sheet, payables to Jie’an in
the amounts of RMB5,040,000 (approximately $825,048) for the additional funds received in relation to the 1.8 million
shares of capital infusion, RMB1,440,000 (approximately $235,728) for the over-paid subscription and RMB2,937,473
(approximately $480,864) for the accrued interest.
strategic investors through the issuance of an additional 20,000,000 shares of Guizhou Taibang at RMB2.80 per share.
As a result of this dispute, the strategic investors’ equity ownership in Guizhou Taibang and the related increase in
The plan required all existing Guizhou Taibang shareholders to waive their rights of first refusal to subscribe for the
registered capital of Guizhou Taibang have not been registered with the local AIC. In January 2010, the strategic
additional shares. The remaining 9% minority shareholder of Guizhou Taibang’s shares, Guizhou Jie’an Company
investors brought suit in the High Court of Guizhou Province against Guizhou Taibang alleging Guizhou Taibang’s
(“Jie’an”), did not support the plan and did not waive its right of first refusal. In May 2007, the majority shareholders
failure to register their equity interest in Guizhou Taibang with the local AIC and requesting the distribution of their
caused Guizhou Taibang to sign an Equity Purchase Agreement with certain investors, pursuant to which the investors
share of Guizhou Taibang’s dividends declared since 2007. Dalin was also joined as a co-defendant as it is the majority
agreed to invest an aggregate of $7,475,832 (or RMB50,960,000) in exchange for 18,200,000 shares, or 21.4%, of
shareholder and exercises control over Guizhou Taibang’s day-to-day operations.
Guizhou Taibang’s equity interests. At the same time, Jie’an also subscribed for 1,800,000 shares, representing its pro
rata share of the 20,000,000 shares being offered. The proceeds from all parties were received by Guizhou Taibang in
In October, 2010, the High Court of Guizhou ruled in favor of the Company and denied the strategic investors’ right
accordance with the agreement.
as shareholders of Guizhou Taibang, as well as their entitlement to the dividends. In light of the Guizhou ruling, the
Company returned the proceeds of $1,699,040 (or RMB11,200,000) to one of the strategic investors in November 2010.
In June 2007, Jie’an brought suit in the High Court of Guizhou province, China, against Guizhou Taibang and the
In October 2010, the other strategic investors appealed to the PRC Supreme Court in Beijing on the ruling of the High
three other original shareholders of Guizhou Taibang, alleging the illegality of the Equity Purchase Agreement. In its
Court of Guizhou. The PRC Supreme Court overruled the decision of the High Court of Guizhou and remanded the
complaint, Jie’an claimed that it had a right to acquire the 18,200,000 shares offered to the strategic investors under the
case to the High Court of Guizhou for retrial. In January 2012, the strategic investors re-filed their case to the High Court
Equity Purchase Agreement. In September 2008, the Guizhou High Court ruled against Jie’an and sustained the Equity
of Guizhou requesting, in addition to the share distribution, the distribution of dividends and interest in the amount of
F-28
F-29
Form 10-KForm 10-K
RMB18,349,345 (approximately $2,990,943) and RMB2,847,000 (approximately $464,061), respectively. In December
2012, the High Court of Guizhou affirmed the judgment against the strategic investors. In January 2013, the strategic
investors appealed to the PRC Supreme Court on the ruling again and the appeal was accepted.
In September 2013, the PRC Supreme Court made the final judgment against the strategic investors and denied the
strategic investors’ right as shareholders of Guizhou Taibang and their claim for the related dividend distribution. In
November 2013, the strategic investors appealed to the PRC Supreme Court on the judgment and was rejected by
the PRC Supreme Court on January 17, 2014. As of December 31, 2013, Guizhou Taibang has made provision for
Prior to the signing of the agency contract with Guizhou Eakan, Guizhou Taibang provided processing services to Guizhou
Eakan. Guizhou Taibang’s total income from processing services to Guizhou Eakan amounted to nil, nil and $243,563 for the
years ended December 31, 2013, 2012 and 2011, respectively.
(2) Guizhou Taibang has payables to Guizhou Eakan Investing Corp., amounting to approximately $2,383,472 and $2,311,044 as
of December 31, 2013 and 2012, respectively. Guizhou Eakan Investing Corp. is one of the noncontrolling interest shareholders
of Guizhou Taibang. The Company borrowed this interest free advance for working capital purpose for Guizhou Taibang. The
balance is due on demand.
(3)
In December 2013, Guizhou Taibang received a contribution of $2,929,903 from Guizhou Eakan Investing Corp. pending for the
the strategic investors’ initial fund along with RMB17,174,807 (approximately $2,811,516) in accrued interest, and
registration with the local AIC.
(4) Guizhou Taibang has payables to Jie’an, a noncontrolling interest shareholder of Guizhou Taibang, amounting to approximately
$1,541,640 and $1,431,308 as of December 31, 2013 and 2012, respectively. In 2007, Guizhou Taibang received additional
contributions from Jie’an of $962,853 (or RMB6,480,000) to maintain Jie’an’s equity interest in Guizhou Taibang at 9%. However,
due to a legal dispute among shareholders over raising additional capital as discussed in the legal proceeding section (see
Note 20), the contribution is subject to be returned to Jie’an. During the second quarter of 2010, Jie’an requested that Guizhou
Taibang register its 1.8 million shares of additional capital contribution with the local AIC, pursuant to the Equity Purchase
Agreement, and such registration was approved by the majority shareholders of Guizhou Taibang in a shareholders’ meeting
held in the second quarter of 2010. However, the Board of Directors of the Company is withholding its required ratification of
the shareholders’ approval of Jie’an’s request until the completion of the ongoing litigations. If the Company decided to ratify
the approval, Dalin’s ownership in Guizhou Taibang will be diluted from 54% to 52.54% and Jie’an will be entitled to receive its
pro rata share of Guizhou Taibang’s profits since the date of Jie’an contribution became effective. As this case is closely tied to
the outcome of the strategic investors’ dispute stated above, the Company has recorded, in its balance sheet, payables to Jie’an
in the amounts of RMB5,040,000 (approximately $825,048) for the additional funds received in relation to the 1.8 million shares
of capital infusion, RMB1,440,000 (approximately $235,728) for the over-paid subscription and RMB2,937,473 (approximately
$480,864) for the accrued interest and penalty as of December 31, 2013.
RMB509,600 (approximately $83,422) for the 1% penalty imposed by the agreement for any breach in the event that
Guizhou Taibang is required to return their original investment amount to the strategic investors.
In April 2013, the Company countersued the strategic investors in the Intermediate Court of Guiyang City alleging their
breach of the Security Law in the PRC and requested a consideration of $6,064,800 (or RMB38,000,000) for the related
expenses and losses, and Guizhou Intermediate Court accepted the case. The Company is awaiting the hearing of the
above case as of the date of this report.
NOTE 21 – RELATED PARTY TRANSACTIONS
The material related party transactions undertaken by the Company with related parties for the years ended December
31, 2013, 2012 and 2011 are presented as follows:
Sales of products to related parties(1)
Commission expenses with related parties(1)
For the Years Ended
December 31, 2013
December 31, 2012
December 31, 2011
USD
-
3,620,335
USD
-
3,591,836
USD
243,563
747,372
The material related party balances at December 31, 2013 and 2012 are presented as follows:
Liabilities
Purpose
December 31, 2013
December 31, 2012
Other payable – a related party(1)
Other payable – a related party(2)
Other payable – a related party(3)
Other payable – related parties(4)
Total other payable – related parties
Commission
Loan
Contribution
Contribution
USD
351,955
2,383,472
2,929,903
1,541,640
7,206,970
USD
339,272
2,311,044
-
1,431,308
4,081,624
(1) During the year ended December 31, 2011, Guizhou Taibang signed an agency contract with Guizhou Eakan Co., Ltd. (“Guizhou
Eakan”), an affiliate of one of the Guizhou Taibang’s noncontrolling interest shareholders, pursuant to which Guizhou Taibang
would pay commission to Guizhou Eakan for the promotion of the product of Placenta Polypeptide. As of December 31, 2013
and 2012, Guizhou Taibang accrued commission payable of $351,955 and $339,272 for service rendered by Guizhou Eakan.
The commission expense for service rendered by Guizhou Eakan amounted to $3,620,335, $3,591,836, and $747,372 for the
years ended December 31, 2013, 2012 and 2011, respectively.
F-30
F-31
Form 10-KForm 10-K
NOTE 22 - NET INCOME PER SHARE
Condensed Balance Sheets:
December 31, 2013
December 31, 2012
The following table sets forth the computation of basic and diluted net income per share of common stock for the
periods indicated:
Net income attributable to China Biologic Products, Inc.
Earnings allocated to participating nonvested shares
Net income allocated to common stockholders used
in computing basic net income per common stock
Interest on the notes
Change in fair value of embedded
conversion option in the notes
Change in fair value of warrants issued
to investors and placement agent
For the Years Ended
December 31,
2013
USD
54,601,551
(456,261)
December 31,
2012
USD
December 31,
2011
USD
45,222,189
18,181,710
(69,624)
-
54,145,290
45,152,565
18,181,710
-
-
-
-
-
3,582,648
(6,289,661)
(1,769,140)
(5,685,173)
Cash
Prepayments and prepaid expenses
Property, plant and equipment, net
Investment in and amounts due from subsidiaries
Total Assets
Other payables and accrued expenses
Long-term loan
Total Liabilities
Total Equity
Total Liabilities and Equity
USD
679,022
87,548
544
270,595,266
271,362,380
3,670,817
30,000,000
33,670,817
237,691,563
271,362,380
Net income used in diluted net income per common stock
54,145,290
43,383,425
9,789,524
Condensed Statements of Comprehensive Income:
For the Years Ended
Weighted average shares used in computing
basic net income per common stock
Diluted effect of the notes
Diluted effect of warrants issued to investors
Diluted effect of stock option
Weighted average shares used in computing
diluted net income per common stock
Net income per common stock – basic
Net income per common stock – diluted
26,410,819
26,153,540
25,028,796
-
-
1,161,292
-
212,792
473,391
515,068
551,686
559,112
27,572,111
26,839,723
26,654,662
2.05
1.96
1.73
1.62
0.73
0.37
During the year ended December 31, 2013, no option was antidilutive and excluded from the calculation of diluted net
income per common stock. Further, rights issued pursuant to the stockholder rights plan (see Note 15) were excluded
Equity in income of subsidiaries
General and administrative expenses
Other expenses, net
Change in fair value of derivative liabilities
December 31,
2013
USD
December 31,
2012
USD
62,457,106
(7,460,763)
(394,792)
-
51,063,576
(8,048,993)
(34,543)
1,769,140
Earnings before income tax expense
54,601,551
44,749,180
Income tax benefit (expense)
Net Income
-
473,009
54,601,551
45,222,189
18,181,710
USD
76,101
95,486
2,575
198,689,734
198,863,896
3,394,180
-
3,394,180
195,469,716
198,863,896
December 31,
2011
USD
19,848,119
(9,669,494)
(3,708,776)
11,974,834
18,444,683
(262,973)
from the calculation of diluted net income per common stock since they were antidilutive.
Condensed Statements of Cash Flows:
For the Years Ended
During the year ended December 31, 2012, 1,938,009 options with an average exercise price of $11.34, and rights
issued pursuant to the stockholder rights plan, were excluded from the calculation of diluted net income per common
stock since they were antidilutive.
During the year ended December 31, 2011, 1,164,000 options with an average exercise price of $12.84 were excluded
from the calculation of diluted net income per share of common stock since they were antidilutive.
NOTE 23 – CHINA BIOLOGIC PRODUCTS, INC. (PARENT COMPANY)
The following represents condensed unconsolidated financial information of the Parent Company only:
December 31,
2013
USD
December 31,
2012
USD
December 31,
2011
USD
Net cash provided by (used in) operating activities
197,001
(160,272)
(165,551)
Net cash used in investing activities
Net cash provided by financing activities
Net increase (decrease) in cash
Cash at beginning of year
Cash at end of year
-
405,920
602,921
76,101
679,022
-
-
(160,272)
236,373
76,101
(1,970)
300,000
132,479
103,894
236,373
F-32
F-33
Form 10-KForm 10-K
NOTE 24 – SUBSEQUENT EVENT
EXHIBIT INDEX
On January 27, 2014, the Company entered into a redemption agreement with one of its individual shareholders, pursuant
to which the Company would repurchase 2,500,000 shares of common stock for a consideration of $70,000,000. The
transaction was completed on February 28, 2014.
Exhibit
No.
Description
To finance this share repurchase, the Company entered into a credit facility agreement with CMB NY Branch on
February 25, 2014. Pursuant to the facility agreement, CMB NY Branch lent to the Company a 24-month US$40,000,000
loan and an 18-month US$30,000,000 loan, secured by time deposits of RMB246,500,000 (approximately $40,352,050)
and RMB194,600,000 (approximately $31,856,020), respectively. Both loans bear an interest rate of 3-month LIBOR
plus 1.3% per annum and a facility fee of 1.2% per annum.
2.1
3.1
3.2
4.1
4.2
4.3
4.4
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
Share Exchange Agreement between the Company, Logic Express Limited and the selling stockholders
signatory thereto, dated as of July 18, 2006 (incorporated by reference to Exhibit 2 of the registration
statement on Form SB-2 filed by the Company on September 5, 2007)
Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1
of the quarterly report on Form 10-Q filed by the Company on August 9, 2012)
Second Amended and Restated By-Laws of the Company (incorporated by reference to Exhibit 3.2 of the
quarterly report on Form 10-Q filed by the Company on August 9, 2012)
Form of Registration Rights Agreement, dated June 5, 2009 (incorporated by reference to Exhibit 4.1 of the
Current Report on Form 8-K filed by the Company on June 5, 2009)
Form of 3.8% Convertible Senior Secured Note due 2011 (incorporated by reference to Exhibit 4.2 of the
Current Report on Form 8-K filed by the Company on June 5, 2009)
Form of Warrant (incorporated by reference to Exhibit 4.3 of the Current Report on Form 8-K filed by the
Company on June 5, 2009)
Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock of
China Biologic Products, Inc. (incorporated by reference to Exhibit 3.1 of the registration form on Form 8-A12B
filed by the Company on November 21, 2012)
China Biologic Products, Inc. 2008 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 of the
current report on Form 8-K filed by the Company on May 13, 2008)
Form of Stock Option Award Agreement of China Biologic Products, Inc. (incorporated by reference to
Exhibit 10.5 of the current report on Form 8-K filed by the Company on May 13, 2008)
Group Secondment Agreement, dated October 28, 2002, between Shandong Taibang Biological Products
Co., Ltd. and the Shandong Institute (English Translation) (incorporated by reference to Exhibit 10.1 of the
registration statement on Form SB-2/A filed by the Company on December 3, 2007)
Amended and Restated Joint Venture Agreement, between Logic Express Limited and the Shandong Institute,
dated as of March 12, 2006 (English Translation) (incorporated by reference to Exhibit 10.2 of the registration
statement on Form SB-2 filed by the Company on September 5, 2007)
Letter of Intent for Equity Transfer, between Logic Express Limited and the Shandong Institute, dated as of
June 10, 2006 (English Translation) (incorporated by reference to Exhibit 10.3 of the registration statement on
Form SB-2 filed by the Company on September 5, 2007)
Joint Venture and Cooperation Agreement between Mr. Fan Qingchun, Shandong Taibang Biological Products
Co., Ltd. and Shaanxi Power Construction Corporation, dated September 12, 2008 (incorporated by reference
to Exhibit 10.2 of the current report on Form 8-K filed by the Company on October 16, 2008)
Agreement on Equity Transfer, Acquisition, Joint Venture and Cooperation, among Shandong Taibang
Biological Products Co., Ltd., Shaanxi Power Construction Corporation and Mr. Fan Qingchun, dated
September 12, 2008 (incorporated by reference to Exhibit 10.3 of the current report on Form 8-K filed by the
Company on October 16, 2008)
(Shareholder) Agreement among Shandong Taibang Biological Products Co., Ltd., Logic Express Limited and
Biological Institute dated September 12, 2008 (incorporated by reference to Exhibit 10.4 of the current report
on Form 8-K, filed by the Company on October 16, 2008)
F-34
85
Form 10-KForm 10-K 10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
Equity Transfer Agreement, dated September 26, 2008, among Logic Express Limited, Chongqing Dalin
Biologic Technologies Co., Ltd. and certain shareholders of Chongqing Dalin Biologic Technologies Co., Ltd.
(incorporated by reference to Exhibit 10.1 of the current report on Form 8-K filed by the Company on October 2,
2008)
Equity Transfer Agreement, between Shandong Taibang Biological Products Co., Ltd. and Mr. Fan Qingchun,
dated October 10, 2008 (incorporated by reference to Exhibit 10.1 of the current report on Form 8-K filed by
the Company on October 16, 2008)
Supplemental Agreement, dated November 3, 2008, among Logic Express Limited, Fan Shaowen, as
representative of the shareholders of Chongqing Dalin Biologic Technologies Co., Ltd. and Chongqing Dalin
Biologic Technologies Co., Ltd. (English Translation) (incorporated by reference to Exhibit 10.2 of the current
report on Form 8-K filed by the Company on November 7, 2008)
Second Supplemental Agreement, dated November 14, 2008, among Logic Express Limited, Fan Shaowen as
representative of the shareholders of Chongqing Dalin Biologic Technologies Co., Ltd. and Chongqing Dalin
Biologic Technologies Co., Ltd. (English Translation) (incorporated by reference to exhibit 10.3 of the current
report on Form 8-K filed by the Company on November 20, 2008)
Amended Equity Transfer Agreement, dated December 12, 2008, among Logic Express Limited, Chongqing
Dalin Biologic Technologies Co., Ltd., and certain shareholders of Chongqing Dalin Biologic Technologies
Co., Ltd. (English Translation) (incorporated by reference to exhibit 10.4 of the current report on Form 8-K filed
by the Company on December 18, 2008)
Equity Transfer and Entrustment Agreement, dated April 6, 2009, among Logic Express, Shandong Taibang
Biological Products Co., Ltd. and the Shandong Institute of Biological Products (English Translation)
(incorporated by reference to Exhibit 10.6 of the current report on Form 8-K filed by the Company on April 13,
2009)
Asset Purchase Agreement, between Xia Jin An Tai Plasma Collection Co., Ltd. and Xia Jin County Plasma
Collection Station, dated as of October 20, 2006 (English Translation) (incorporated by reference to Exhibit
10.15 of the registration statement on Form SB-2/A filed by the Company on December 3, 2007)
Asset Purchase Agreement, between Liao Cheng An Tai Plasma Collection Co., Ltd. and Yang Gu County
Plasma Collection Station, dated as of November 3, 2006 (English Translation) (incorporated by reference to
Exhibit 10.16 of the registration statement on Form SB-2/A filed by the Company on December 3, 2007)
Asset Purchase Agreement, between Qi He An Tai Plasma Collection Co., Ltd. and Qi He County Plasma
Collection Station, dated as of November 9, 2006 (English Translation) (incorporated by reference to Exhibit
10.14 of the registration statement on Form SB-2/A filed by the Company on December 3, 2007)
Asset Purchase Agreement, between He Ze An Tai Plasma Collection Co., Ltd and Yun Cheng County Plasma
Collection Station, dated as of December 15, 2006 (English Translation) (incorporated by reference to Exhibit
10.22 of the registration statement on Form SB-2/A filed by the Company on December 3, 2007)
Asset Purchase Agreement, between Zhang Qiu An Tai Plasma Collection Co., Ltd. and Zhang Qiu Plasma
Collection Station, dated as of December 31, 2006 (English Translation) (incorporated by reference to Exhibit
10.12 of the registration statement on Form SB-2/A filed by the Company on December 3, 2007)
Asset Purchase Agreement, between Guang Xi Huan Jiang Missile Plasma Collection Co., Ltd. and Huan
Jiang Maonan Autonomous County Plasma Collection Station, dated as of April 24, 2007 (English Translation)
(incorporated by reference to Exhibit 10.13 of the registration statement on Form SB-2/A filed by the Company
on December 3, 2007)
Asset Purchase Agreement, between Fang Cheng Plasma Collection Co., Ltd. and Fang Cheng Plasma
Company, dated as of April 30, 2007 (English Translation) (incorporated by reference to Exhibit 10.21 of the
registration statement on Form SB-2/A filed by the Company on December 3, 2007)
Asset Purchase Agreement, between Guang Xi Huan Jiang Missile Plasma Collection Co., Ltd. and Huan
Jiang Maonan Autonomous County Plasma Collection Station, dated as of August 5, 2007 (English Translation)
(incorporated by reference to Exhibit 10.13 of the registration statement on Form SB-2/A filed by the Company
on December 3, 2007)
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
14
21
Trademark Licensing Agreement, dated as of February 27, 2007 (English Translation) (incorporated by
reference to Exhibit 10.17 of the registration statement on Form SB-2/A filed by the Company on December 3,
2007)
Loan Agreement, dated as of November 30, 2006, among Shandong Taibang and the Shandong Institute and
Logic Express (English Translation) (incorporated by reference to Exhibit 10.18 of the registration statement
on Form SB-2/A filed by the Company on December 3, 2007)
Supplementary Agreement, dated as of September 1, 2007, among Shandong Taibang Biological Products
Co., Ltd., the Shandong Institute and Logic Express Limited (English Translation) (incorporated by reference
to Exhibit 10.19 of the registration statement on Form SB-2/A filed by the Company on December 3, 2007)
Employment Agreement, between David (Xiaoying) Gao and the Company, dated as of May 11, 2012
(incorporated by reference to Exhibit 10.1 of the current report on Form 8-K filed by the Company on May 11,
2012)
Employment Agreement, between Ming Yang and the Company, dated August 31, 2012 (incorporated by
reference to Exhibit 10.1 of the current report on Form 8-K filed by the Company on September 7, 2012)
Form of Director’s Employment Agreement (incorporated by reference to Exhibit 10.8 of the registration
statement on Form SB-2 filed by the Company on September 5, 2007)
Form of Independent Director Agreement (incorporated by reference to Exhibit 10.1 of the current report on
Form 8-K filed by the Company on July 30, 2008)
Form of Indemnity Agreement (incorporated by reference to Exhibit 10.2 of the current report on Form 8-K
filed by the Company on July 30, 2008)
Form of Guarantee and Pledge Agreement, dated June 10, 2009 (incorporated by reference to Exhibit 10.2 of
the current report on Form 8-K filed by the Company on June 5, 2009).
Form of Indemnification Agreement, dated June 10, 2009 (incorporated by reference to Exhibit 10.3 of the
current report on Form 8-K filed by the Company on June 5, 2009).
Preferred Shares Rights Agreement, dated as of November 20, 2012 (incorporate by reference to Exhibit 4.1
of the registration form on Form 8-A12B filed by the Company on November 21, 2012).
Code of Ethics (incorporated by reference to Exhibit 14 of the annual report on Form 10-KSB filed by the
Company on March 28, 2008)
Subsidiaries of the Company (incorporated by reference to Exhibit 21 of the annual report on Form 10-K, filed
by the Company on March 31, 2011)
23.1*
Consent of KPMG, an independent registered public accounting firm
31.1*
Certifications of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certifications of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101*
Interactive data files pursuant to Rule 405 of Regulation S-T (furnished herewith).
*Filed herewith.
86
87
Form 10-KForm 10-K Exhibit 23.1
Exhibit 31.1
Consent of Independent Registered Public Accounting Firm
CERTIFICATIONS
The Board of Directors
China Biologic Products, Inc.:
We consent to the incorporation by reference in registration statements (No. 333-171069 and 333-182624) on Form
S-3 and the registration statement (No. 333-151263) on Form S-8 of China Biologic Products, Inc. of our reports dated
March 12, 2014, with respect to the consolidated balance sheets of China Biologic Products, Inc. and subsidiaries
as of December 31, 2013 and 2012, and the related consolidated statements of comprehensive income, changes in
equity and cash flows for each of the years in the three-year period ended December 31, 2013, and the effectiveness
of internal control over financial reporting as of December 31, 2013, which reports appear in the December 31, 2013
annual report on Form 10-K of China Biologic Products, Inc.
/S/ KPMG
Hong Kong, China
March 12, 2014
I, David (Xiaoying) Gao, certify that:
1.
I have reviewed this annual report on Form 10-K of China Biologic Products, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize
and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant’s internal control over financial reporting.
Date: March 12, 2014
/s/ David (Xiaoying) Gao
David (Xiaoying) Gao
Chief Executive Officer
(Principal Executive Officer)
88
89
Form 10-KForm 10-K
Exhibit 31.2
Exhibit 32.1
I, Ming Yang, certify that:
CERTIFICATIONS
1.
I have reviewed this annual report on Form 10-K of China Biologic Products, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize
and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant’s internal control over financial reporting.
Date: March 12, 2014
/s/ Ming Yang
Ming Yang
Chief Financial Officer
(Principal Financial and Accounting Officer)
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
The undersigned, David (Xiaoying) Gao, the Chief Executive Officer of CHINA BIOLOGIC PRODUCTS, INC. (the
“Company”), DOES HEREBY CERTIFY that:
1. The Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013 (the “Report”), fully
complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. Information contained in the Report fairly presents, in all material respects, the financial condition and results of
operation of the Company.
IN WITNESS WHEREOF, the undersigned has executed this statement this 12th day of March, 2014.
/s/ David (Xiaoying) Gao
David (Xiaoying) Gao
Chief Executive Officer
(Principal Executive Officer)
A signed original of this written statement required by Section 906 has been provided to China Biologic Products, Inc.
and will be retained by China Biologic Products, Inc. and furnished to the Securities and Exchange Commission or its
staff upon request.
The forgoing certification is being furnished to the Securities and Exchange Commission pursuant to § 18 U.S.C. Section
1350. It is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to
be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless
of any general incorporation language in such filing.
90
91
Form 10-KForm 10-K
EXHIBIT 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
FOR THE YEAR ENDED DECEMBER 31, 2013,2012,2011,2010 AND 2009
The undersigned, Ming Yang, the Chief Financial Officer of CHINA BIOLOGIC PRODUCTS, INC. (the “Company”),
For the years ended
Appendix: Reconciliation of Non-GAAP financial measures
DOES HEREBY CERTIFY that:
1. The Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013 (the “Report”), fully
complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. Information contained in the Report fairly presents, in all material respects, the financial condition and results of
operation of the Company.
IN WITNESS WHEREOF, the undersigned has executed this statement this 12th day of March, 2014.
/s/ Ming Yang
Ming Yang
Chief Financial Officer
(Principal Financial and Accounting Officer)
A signed original of this written statement required by Section 906 has been provided to China Biologic Products, Inc.
and will be retained by China Biologic Products, Inc. and furnished to the Securities and Exchange Commission or its
staff upon request.
The forgoing certification is being furnished to the Securities and Exchange Commission pursuant to § 18 U.S.C. Section
1350. It is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to
be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless
of any general incorporation language in such filing.
Adjusted Net Income
Attributable to the
Company - Non GAAP
Non-cash employee
stock compensation
Impairment loss of goodwill
Loss on abandonment
of long-lived assets
attributable to
controlling interest
Written-off of raw material
attributable to controlling
interest due to closure
of plasma stations
Interest on the Notes
Gain (loss) from
change in fair value of
embedded conversion
option in the Notes
Gain (loss) from change
in fair value of warrants
Loss upon issuance
of the Notes
Net Income Attributable
to the Company
December 31,
2013
December 31,
2012
December 31,
2011
December 31,
2010
December 31,
2009
$ 58,974,178
$ 47,997,976
$ 36,502,178
$ 38,967,447
$
31,487,745
$ (4,372,627)
$
(4,544,927)
$ (4,896,232)
$ (2,341,783)
-
$ (18,160,281)
$
-
-
$ (3,565,635)
$
-
$
-
$
(90,506)
$
-
$
$
$
(62,281)
-
-
-
-
$ (3,582,648)
$ (1,849,493)
$
(302,010)
-
$
6,289,661
$ (1,793,254)
$ (15,575,928)
$
$
$
$
$
-
-
-
-
-
-
$
1,769,140
$
5,685,173
$ (1,440,034)
$ (12,514,139)
$
-
$
-
$
-
$ 54,601,551
$ 45,222,189
$ 18,181,710
$ 31,542,883
$
$
(825,261)
2,208,126
92
153
Form 10-K
Stockholder
Information
China Biologic Products, Inc.
Legal Counsel
18th Floor, 19 Chaoyang Park Road
Wilson Sonsini Goodrich & Rosati
Independent Auditor
KPMG
IR Agent
ICR LLC
Bill Zima, Managing Director
China: +86 10 6583 7511
U.S.: +1 646 405 5191
William.Zima@icrinc.com
Chaoyang District, Beijing 100125
People’s Republic of China
China: +86 10 6598 3099
ir@chinabiologic.com
Market Data
Exchange: NASDAQ
Ticker: CBPO
Website
www.chinabiologic.com
Transfer Agent
Securities Transfer Corporation
2591 Dallas Parkway,
Suite #102,
Frisco, Texas, 75034
Tel: 469-633-0101
Address: 18th Floor, 19 Chaoyang Park Road
Chaoyang District, Beijing 100125
People’s Republic of China
China: +86 10 6598 3099
ir@chinabiologic.com
Web site: www.chinabiologic.com
China Biologic Products, Inc.
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